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Arbitrage in India: Past, Present and Future

Arbitrage in India: Past, Present and Future

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Published by: tushartutu on Jan 25, 2010
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10/28/2010

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Arbitrage in India: past, present and future
Ashok Jogani and Kshama FernandesOctober 11, 2002
1
 
Contents
1 Introduction 42 The science of arbitrage 4
2.1 Efcient markets hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.2 Impediments to arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.3 Operational issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3 History of arbitrage in India 6
3.1 Line operators (Inter city) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.2 NSE BSE (Manual traders) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4 Existing arbitrage opportunities 8
4.1 Nifty spot Nifty futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84.2 Nifty futures SGX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.3 Spot Futures Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.4 Dividend arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5 Potential arbitrage opportunities 15
5.1 Index Exchange Traded Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155.2 ADR/GDR underlying shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165.3 Globally listed stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175.4 Quantitative trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6 Risks in arbitrage in India 18
6.1 Execution lags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186.2 Interest rate uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196.3 Trading restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7 Impediments to arbitrage in India 19
7.1 Short sales constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197.2 Lack of liquidity and depth in the spot market . . . . . . . . . . . . . . . . . . . . . 197.3 Capital intensive nature of arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . 202
 
7.4 Anomalies in regulation and taxation of arbitrage trades . . . . . . . . . . . . . . . . 207.5 Absence of hedge funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207.6 Inadequate IT infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207.7 Lack of knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8 Conclusion 21
3

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