1. One can consider a stock say MTNL is trading at Rs.175 in the cash market, and at the beginning of the new futures contract it may be trading at Rs.180. The investor who buys at Rs.180 has the full month to hold the position and has the option to roll it over to the next month at any time before expiry.
2. The arbitrageur is to be quick to take advantage of this available opportunity who buys Wipro in the cash market and simultaneously sells the said stock in the futures market locking in a profit of Rs.5 (before charges).
3. Now whether the price of the stock moves up or down he/she is secured with his return.
4. In the normal course of events the gap decreases towards the end of the month and the arbitrageur will either reverse the position in both markets or rollover the futures position to the next month if the new gap is acceptable to him.
5. The return is generally calculated on the amount of funds deployed for the fixed time period to expiry.
6. If the gaps comes down before expiry the arbitrageur can exit the position and enter into a new stock where the gap is better.
7. Thus the individual using this strategy has to continuously scan the data to find the right opportunity providing returns.
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2. The arbitrageur is to be quick to take advantage of this available opportunity who buys Wipro in the cash market and simultaneously sells the said stock in the futures market locking in a profit of Rs.5 (before charges).
3. Now whether the price of the stock moves up or down he/she is secured with his return.
4. In the normal course of events the gap decreases towards the end of the month and the arbitrageur will either reverse the position in both markets or rollover the futures position to the next month if the new gap is acceptable to him.
5. The return is generally calculated on the amount of funds deployed for the fixed time period to expiry.
6. If the gaps comes down before expiry the arbitrageur can exit the position and enter into a new stock where the gap is better.
7. Thus the individual using this strategy has to continuously scan the data to find the right opportunity providing returns.
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