hi..
loads of confusion regarding arbitrage. I'll give u a simple eg.
lets say xyz is quotng at 500 in cash mkt and 505 in futures. A person buys in the cash mkt and simultaneously sells in the futures mkt. this way he locks in 5 rs. profit. but his aim is not just earning 5 rs. as this would just give him 12% annual return. he would be watching xyz every minute and whenever he finds any inconsistancy in the cash and futures price, he would trade. for instance,assuming there is large buy order in the cash mkt.and fr a few moments the difference bet. the cash & futures contracts to 4.25 ,he would immidiately square off his original position. now he has locked in .75 profit.when the buying finishes in the cash mkt, the spread would again go to rs 4.75, he again puts on the original position. in volatile mkts., these spreads keep on contracting & expanding. an arbitrager is basically trying to take advantage of such situations.
