InvestorQ : What is arbitrage and how can we do arbitrage using futures?
Rishita Das made post

What is arbitrage and how can we do arbitrage using futures?

Answer
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shrinidhi Rajan answered.
2 years ago


There are two types of arbitrage in India. First is the arbitrage between the BSE price and the NSE price. With online trading and smart order routing (SOR), these price anomalies have virtually vanished from the market. The only other arbitrage left is the cash futures arbitrage. How does that work? Futures normally quote at a premium to the cash market price and this spread is called the basis. The basis is a function of interest rates because instead of buying in cash you are buying in futures which are like margin funding. By buying shares in the spot market and selling in the futures market, you can lock in the spread. Normally, this spread is slightly higher than the prevailing interest rates and becomes a kind of an assured return product for you. There are many arbitrage funds launched by mutual funds which do exactly this. Many of the large FII prop books are heavily into arbitrage trading in India and they use high end algos to execute these to perfection.