Query about arbitrage?

[balaj78]

Arbitrage between Cash and futures market

Here is a simple explanation:

Suppose you own 600 shares of Satyam. One trading day you notice that Satyam is trading at 505.00 on the BSE and 500.00 on the NSE. You sell your 600 shares on the BSE at 505.00 and simultaneously buy back the 600 shares on the NSE at 500.00.

You profit in this case is 600*5.00 = 3000.00 less brokerages if any.

Generally in the west, large institutions have automated trading programs that scan different markets across the globe to take advantage of arbritrage opportunities as small as a fraction of a point. Because of their volumes and almost no brokerage these institutions make profits out of these.

hi,
Can experts please clarify my douts in Arbitage between Cash and futures market.
For eg today
Vsnl July Cashmarket is Rs 337.90
Vsnl July future market is Rs 346.65

Difference between (Future - Cash)(346.65 - 337.90) = Rs 8.75
Now iam buying Vsnl in Cash market and simaltaneously selling Vsnl future Contracts.
Next what to do .i have to square of both the postions in Cash and future markets. or i have to leave it to expiry to book the profits.
Suppose during expiry Vsnl cash is Rs 320 and Vsnl future is 321. this will be a loss when i square the postions in cash and futures.

In this Case how to do arbitrage to make the profit . Clarify me with clear cut examples.

 

[gopii]

Dear Traderji
if i need to SELL FUTURE (30DAYS) and BUY Shares for getting the benefit of arbit,
please guide me:
1) i am trading on icicidirect: will they allow me to SELL the future first, without me having bought them.

2) presently on the icicidirect there are 120 companies listed for future trading and many of them give a good arbit value.

3) very important we have to consider the brokerage
a) sell the future
b) buy the share
c) buy the future to close at the end of expiry

hence when selling the future, make sure of the cost of carry this should be high.

it is advisable to do the calculation to determine the fair value of the future before selling.

please Traderji could you guide me on the (1)

thks
b rgds
gopii

 

[ivanboesky]

Yes, ICICIdirect will allow you to sell the futures first. You will only have to put up the margin money.

 

[gopii]

Hi Ivan
thks for the reply, let me try with icici, but someone has been advicing me refco as good brokers for this activity
also i dont know how much they will be charging but can be negotiated

anyway
the fair value of the future:
F=S+{S x (R-D) x (T/365)}

S=spot price
R=rate of interest ......if rate of interest is 10% enter 0.10
D=dividends
T= days to expiry

for eg: from above we get F=200 and the future price avaliable is 210, this means the future is expensive and so we can sell it, simulteanously buy the stock.

Ivan any suggestion on the above.

b rgds
gopii

 

[ivanboesky]

Yes, 210 on the futures is definitely overpriced as compared to a cash price of 200. I prefer using the continuous time model to calculate the cost of carry.
F = S * e^(r*T/365)
Rearrange the above equation to find r.
r = ln(F/S) * (365/T)
If the r is greater than 10% annualised, then its a good proposition, after brokerage, STT etc.

 

[gopii]

Dear Ivan
thks for the formula, it gives the same result as the formula i use, however could you guide me, : are u trading on the icici direct for this strategy? and what are the expenses eg: brokerage etc u consider (considering u buy on margin)
thks
gopii

 

[nautilus]

Just to add to Traderji's above comment - arbitrageurs on a global basis are normally very large traders (mostly banks or financial institutions) all they are interested in are opportunities (price differences) that are normally very small and occure for a very brief period of time lasting literally for seconds (as the market is considered efficient) and they strike very quickly with very large sums of money - as this is normally classified as almost a risk free trade - a sure bet in other words. The transaction process as Traderji has said previously is mostly automated.

Nautilus

 

[ivanboesky]

gopii,
it is possible to do this on icicidirect, but i am not sure about the costs you would have to bear. you also have to consider the prices at which the trade gets executed. this may be significantly different from the price you wished to trade at, since the order is routed to the exchange. if only one leg of the transaction is executed, you would have an unhedged position, which may result in a significant gain/ loss. also, most players keep their cash position intact and carry their position forward for many months by rolling over their futures positions, as long as they get a desired rate of return. this reduces their cash outflow as the costs incurred in equity trading are far higher than trading futures.

 

[gopii]

Dear Ivan
Thks for the reply, actually i had these thoughts coming, but i was quite confused on this, with yr reply now they are quite clear, and specially with icici (or any online broker for that matter)the execution price could be much much different (specially for this kind of trade),
however few people have been refering me to refco as good brokers for thiskind of dealing. (according to them most funds do this trade thru refco).
i had written to them but no reply
also the charges to be nego and margin calls
just for yr information, few days back essoil future to expiry 17 days cost of carry worked out at 29.30% p.a. this was fantastic what u say

also ivan, this gap is avaliable more in countries like india which has a very limited future trading by retail investors, also futures are avaliable for only about 120 companies ( according to icici) and one more thing, rarely are they avaliable for 90 days expiry!!!!!

have u tried to offer for sell the 90 days future ( at yr price) !!!!!

by the way ivan my email add is: [email protected]

thks
b rgds
gopii

 

[ivanboesky]

Gopii,
There is no way you can sell a 90 day future at the price you desire!! The bid-ask spreads are tooo large, so the arbitrage has to be initiated by selling the near month futures, and rolling over the position if opportunities exist toward expiry.