In economics, arbitrage is the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state. A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives and currencies.
If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage free market. An arbitrage equilibrium is a precondition for a general economic equilibrium.
Attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets is arbitrage.
for e.g. If the price of Reliance Industries is 1120 in Cash Market and 1140 in Futures market, a person with money will go in to buy in cash and sell in FNO, thereby gaining 20Rs per share for each lot and gain the profits. Again there are reverse arbitrageurs. Those who had ONGC delivery on hand were provided opportunity for the last 5-6 months by market which gave them 10-20Rs over and above the FNO rates. One could have sold in Cash segment and Bought in FNO segment still making that money and could have restored the position in the last week or so wherein the FNO is again quoting at a premium of 4-7 Rs making a cool profit of approx Rs 50/- for the last 6 months(deducting brokerages and all).
These are various opportunities presenting themselves in various markets and these vultures sit and wach for such situations to exploit to their advatage.
If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage free market. An arbitrage equilibrium is a precondition for a general economic equilibrium.
Attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets is arbitrage.
for e.g. If the price of Reliance Industries is 1120 in Cash Market and 1140 in Futures market, a person with money will go in to buy in cash and sell in FNO, thereby gaining 20Rs per share for each lot and gain the profits. Again there are reverse arbitrageurs. Those who had ONGC delivery on hand were provided opportunity for the last 5-6 months by market which gave them 10-20Rs over and above the FNO rates. One could have sold in Cash segment and Bought in FNO segment still making that money and could have restored the position in the last week or so wherein the FNO is again quoting at a premium of 4-7 Rs making a cool profit of approx Rs 50/- for the last 6 months(deducting brokerages and all).
These are various opportunities presenting themselves in various markets and these vultures sit and wach for such situations to exploit to their advatage.
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