Cash Arbitrage Future Strategy English

Cash Future Arbitrage Strategy

Cash future arbitrage strategy involves simultaneously buying a stock in the cash market and selling its future contracts, exploiting price differences between them. It’s a low-risk strategy aiming for profits when futures converge to the spot price at expiry, capitalizing on market inefficiencies.

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Cash Future Arbitrage

Cash future arbitrage exploits the price difference between a stock’s current market price and its future contract. Traders buy the stock at a lower cash price and sell futures at a higher price, aiming to profit as prices converge at the futures contract’s expiration.

Cash future arbitrage capitalizes on price differences between a stock’s spot price in the cash market and its futures price. Traders buy the stock at a lower cash price, aiming to benefit from this discrepancy.

As the futures contract nears expiry, the prices typically converge. Traders then sell the futures at a higher price, profiting from the spread. This strategy is low-risk, exploiting market inefficiencies for potential gains.

For Example: Suppose a stock is priced at Rs. 150 in the cash market but its future is trading at Rs. 155. You buy the stock for Rs. 150 and sell the future for Rs. 155. As the futures expiry approaches and prices converge, you profit from the Rs. 5 spread.

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Cash Futures Arbitrage Example

In cash future arbitrage, if a stock trades at Rs. 100 in the cash market but at Rs. 105 in the futures market, an investor buys the stock for Rs. 100 and simultaneously sells a futures contract at Rs. 105, aiming to profit from the Rs. 5 difference.

How To Do Cash Future Arbitrage?

To execute, identify a stock with a price gap between the cash market and futures market. Buy the stock in the cash market at a lower price and simultaneously sell futures contracts at a higher price, aiming to profit from the spread as it narrows.

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Cash Future Arbitrage Strategy –  Quick Summary

  • Cash future arbitrage takes advantage of the price gap between a stock’s market price and its future contract. Traders purchase at lower cash prices and sell at higher futures prices, profiting from the convergence at contract expiration.
  • To perform cash future arbitrage, find a stock with a price difference between cash and futures markets. Purchase it cheaper in the cash market and sell futures at a higher price, profiting as the gap closes.

Cash Future Arbitrage – FAQs

What Is Futures Arbitrage Strategy?

Futures arbitrage strategy involves exploiting price discrepancies between a futures contract and its underlying asset. Traders buy the cheaper and sell the more expensive, aiming to profit from the price difference as it eventually narrows.

How Does Futures Arbitrage Work?

Futures arbitrage works by capitalizing on mispricing between a futures contract and its underlying asset. Traders simultaneously buy the undervalued and sell the overvalued, aiming to profit when the prices converge at or before the contract’s expiry.

What Is The Formula For Future Arbitrage?

The formula for future arbitrage is: Future Price = Spot Price × (1 + r – d), where ‘r’ is the risk-free interest rate and ‘d’ is the dividend yield. Profits arise from discrepancies in this relationship.

What Are The Returns On Cash Futures Arbitrage?

Returns on cash futures arbitrage depend on the price gap between the cash market and futures market. Typically, they are modest, aligning with low-risk, short-term interest rates, as the strategy targets small, consistent gains.

Yes, arbitrage trading is legal in India. It’s a common strategy among traders, especially in the stock and futures markets. Regulatory bodies like SEBI oversee these activities to ensure fair and transparent market practices.

Is Arbitrage A Good Strategy?

Arbitrage can be a good strategy as it usually involves lower risk and provides opportunities for profit by exploiting market inefficiencies. However, it requires speed, market expertise, and often significant capital to be effectively executed.

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