Derivative Classroom -Series
Reverse Cash and Carry arbitrage opportunity arises when future is quoting at adiscount to cash price.Profit = (Cash price of stock – Future price of Stock) * Qty.
Suppose Mr. Mehta has 1500 shares of Sesa Goa. Currently Sesa Goa is quotingat a discount of Rs.10.00. Following trade can be executed
Action Scrip TypeInitiationPriceReversalPriceYield(%) DaysBuy
LT Futures 335.00 290.00
LT Cash 345.00 290.00 24.18 30.00
Difference 10.00 0.00
Long on stock, sell a call optionView: Neutral/ moderately bullish
III-Pair Strategy Arbitrage
Buying a lower strike Call and sellinghigher strike callView: Bullish
II- Reverse Cash and Carry Arbitrage
As a trading strategy, statistical arbitrage is a quantitative and computationalapproach to equity trading. It involves data mining and statistical methods.Pair trading strategy is one of the statistical arbitrage, in which stocks are putinto pairs based on quantitative simulation or market-based similarities. Whenone stock in a pair outperforms the other, the poorer performing stock is boughtlong with the expectation that it will climb towards its outperforming partner,the other is sold short.Example:1.
Buy Tata Steel- Sell Sail2.
Buy Infosys-Sell Wipro3.
Buy HDFC – Sell Rel Capital
IV-Corporate Action based Arbitrage
Corporate action like Open Offer, Buy back, Mergers and Acquisition too providevarious arbitrage opportunities. In open offer and buy back risk – reward isdetermined based on acceptance ratio and we can hedged the likely unacceptedshares using futures contract. Profitability varies depending on the purchaseprice of shares, days for acceptance and acceptance ratio.