Cash and Carry Arbitrage

Podcast Duration: 05:32

Hello friends, and welcome to this podcast by Angel One!

Is podcast mein hum ek bahut cool aur efficient trading strategy ke baare mein baat karne jaa rahe hain. Par usse pehle, let’s check out Shalini’s story.

Shalini is an investor aur woh markets mein actively trade karti hai. Being a working mom, use socialize karne ka time hi nahi milta. Lekin yesterday, her daughter Rini went to play with her friends in the neighbourhood. Rini ne ek bahut interesting cheez ki. Usne apne friend arun se ek pencil exchange ki, for one chocloate, aur Jolly ko wahi pencil do chocolates ke badle de di.

Arun’s mom was surprised! Yahi batane ke liye usne Shalini ko bulaya, aur itne me woh apne careers ke baare mein baat karne lage. Jab Shalini ne apni recently adopted trading strategy ke baare mein bataya, toh Arun’s mom started laughing - she said ki aapki beti aapke professional footsteps ko follow kar rahi hai. Shalini was impressed!

Toh friends, jo Rini ne apne friends ke saath kiya, woh aap stock markets par toh nahi kar sakte, kyunki chocolates lene ke liye aapko kahin aur jaana padega. Lekin, you can definitely pick Rini’s brain - in fact, cash and carry arbitrage is a strategy that is very similar to Rini’s trade.

Toh chaliye explore karte hain is strategy ko, after doing a quick primer on arbitrage.

Markets theory mein efficient hote hain, lekin real world main markets are inefficient. Is inefficiency se demand aur supply gaps fill hone mein time lagta hai, and consequently ek security ki price do alag markets mein different ho sakti hai. Is difference ko arbitrage bolte hain, aur jo log is gap mein trading karte hain, unko arbitrage traders bolte hain. And the process, my friends, is called arbitrage trading.

Simple, right?

Toh now we can move onto cash and carry arbitrage strategy.

Basically, is strategy mein investor cash aur derivative markets ke futures mein existing price inefficiencies ko exploit karte hain. Toh in cash and carry arbitrage strategy, investor usually cash markets mein long position purchase karte hain, aur isko combine karte hain with a short position in the derivatives market.

Too much to swallow? Then let’s simplify it a little bit.

Cash market basically refers to an exchange, jispar security trade ho rahi hai. Is market mein security ki current price ko bolte hain spot price.

Simple, isn’t it?

Derivatives market ki workings toh aap jaante hi honge.

Essentially, aap ek contract purchase karte ho, jo aapko koi security future date par ek agreed price par buy ya sell karne ka option deti hai.

Cash and carry arbitrage mein short position purchase ki jaati hai. Jab aap cash market mein long position purchase karte ho, toh the trade is basically complete at that point, lekin only from a price and predictability perspective.

In reality, aapko ye strategy execute karne mein cash market se purchased security ko hold karna padta hai, aur expiry date par delivery karni hoti hai.

Ye isstrategy ka interesting feature hai, and this is what makes it almost risk-free. Trade execute karne ke time par aap apne profits lock kar dete ho - you know how much returns you get, before the trade has been completed. How does this work? Let's check out the trade process more closely.

Suppose aap NSE par koi stock purchase karte ho, at Rs 150. Derivatives market mein, is stock ke one month futures contract ki price hai Rs 156. Is price difference ko exploit karne mein aapko kuch paise dene pad sakte hain.

But these charges are limited to cost of insurance and financing, jo aapko woh long position purchase karne mein pay karna padenge. For example, you might have purchased the long position through margin funding. Aise scenario mein ye costs aapke calculation ko affect karengi.

Similarly, agar aapne 500 barrels oil purchase kiya hai, to iski storage costs bhi equation ko affect karengi. Inko carry costs bolte hain.

Toh, in our previous example, maan lijiye ki aapne ye 6 rupees ka price gap exploit karne ka decision liya. Agar aapki financing aur insurance costs 2 rs hain, toh with cash and carry arbitrage strategy, aap basically ek risk free trade execute kar sakte ho, at a profit of Rs. 4.

Ye process complicated appear hota hai, lekin in reality, it is not only simple, it is also risk free.

Well not exactly risk free, lekin pretty close.

In fact, the only risk involved in this strategy is this: agar aapka broker koi charges mein revisions introduce karta hai, toh isse aapke returns affect honge. Lekin these changes are neither predictable, nor very frequent, isliye is strategy ko risk free label milta hai.

With sufficient market research, agar aap koi markets real time mein follow karte ho, toh cash and carry arbitrage strategy bahut simple hoti hai.

Aap bhi is strategy ko leverage karke trade kar sakte ho, with Angel One. To learn more about this, don’t forget to visit our website

Friends, that is all we had for today’s podcast. Angel One se aapko alvida, aur next podcast mein mulakaat hone tak we wish you happy investing!