1. Domestic Arbitrage opportunity exits due to difference in prices in the cash and futures markets prevalent at a given time.
2. When one takes positions in the cash market one has to either pay or give deliveries at the end of the day for any outstanding position.
3. The position one takes in the futures market can be carried forward till the expiry of the contract on the last Thursday of the month and the person who buys or sells shares in the futures market has to only pay a margin of approx 20-40% (in normal times) of the total value of the position so he/she is getting leverage on the position that he/she is taking.
4. Therefore in bull market investors are willing to pay a slight premium to the underlying cash price in the futures market as one expects the stock to rise in the short term and is thus willing to pay the premium (discounts do also happen at times of dividend and bearishness in the stocks and thus no arbitrage would exist unless one previously held the underlying stock).
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2. When one takes positions in the cash market one has to either pay or give deliveries at the end of the day for any outstanding position.
3. The position one takes in the futures market can be carried forward till the expiry of the contract on the last Thursday of the month and the person who buys or sells shares in the futures market has to only pay a margin of approx 20-40% (in normal times) of the total value of the position so he/she is getting leverage on the position that he/she is taking.
4. Therefore in bull market investors are willing to pay a slight premium to the underlying cash price in the futures market as one expects the stock to rise in the short term and is thus willing to pay the premium (discounts do also happen at times of dividend and bearishness in the stocks and thus no arbitrage would exist unless one previously held the underlying stock).
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