International Arbitrage

Podcast Duration: 05:54

A few weeks ago, I bought sitaphal from a very kind phalwala. When I went back a week later, he was nowhere to be seen. Lekin 2 din ke baad, when i returned, woh vapas aa gaya tha. Toh maine un se pucha: chacha aap 2 din pehle nahi the; kidhar gaye the? He said to me: arre hafte mein 2 din ya 3 din hum thoda mehnat kar ke, bandra mein sitaphal bechne jaate hain. Idhar jo Rs 25 per sitaphal ka rate hai na, udhar Rs 80 per sitaphal ka rate hai.

Yeh akalmann phalwala Mumbai ke alag alag suburbs aur in suburbs ke alag alag markets ke alag alag rates, se faayda mil raha tha. He was earning basically because in some neighborhoods, people are willing to shell out more.

Arbitrage bilkul same tareeke se chalaya jata hai. The idea is to capitalize on rate discrepancies.

Index arbitrage specifically refers to rate discrepancies jo index se related hai. An index is a measure of a basket of selected securities and can vary include just a few (like 30 or 50 stocks) or can even include thousands of stocks.

Kai different approaches hai:

Approach # 1 Trader 2 indexes ke rate discrepancies se earnings milne ka koshish kar leta hai. Yeh approach large financial institutions ke liye most suitable hai.

Approach # 2 Kabhi kabhi trader same index, two exchanges pe trade kar leta hai aur exchanges ke rate discrepancy se, he may try to earn.

Approach # 3 ...Teesra option hai, capitalizing on discrepancies between the rates of different instruments that track the index. Basically the trader will look at where the rate discrepancy is and trade accordingly. This approach is often favored by individual day traders

Whatever the approach chosen arbitrage ka goal clear hai... aur yeh goal hai benefitting from rate discrepancies related to two indexes. Traders look to buy shares (nahi toh any given security) at a lower rate and sell at a higher rate (at the same time) due to these rate discrepancies.

Note karna ke these discrepancies should not be there lekin to profit on the discrepancies, in other words to carry out arbitrage, is absolutely legal. In fact, arbitrage ko "necessary force for the stock market" bola jata hai.

To index arbitrage ke liye kya sab chahiye?:

Index arbitrage chalane ke liye trader ko automated systems ka zaroorath hota hai kyunki yeh discrepancies in rates jo hai, they get corrected within seconds or even milliseconds. Trader ko jald se jald yeh discrepancies pe act karna padtha hai, before they expire or get corrected.

You need to have time in hand to sit around and watch out for rate discrepancies so that they can be acted upon immediately.

Realistic expectations bhi hona zaroori hai kyunki yeh discrepancies jo hai very minute rahega. You need to carry out a ton of index arbitrage to make an even decent-sized profit

Index arbitrage is typically a day-trading strategy. Yeh day traders ke liye hi kaafi suitable hai kyunk day traders systems, time required and mindset index arbitrage ke liye sahi hai. Agar aap long term investor ho lekin arbitrage mein invest karna chahte ho, toh therefore ways… aage suniye … long term investor ke liye bhi hum ne example of how to trade arbitrage nikaal rakha hai.

Index arbitrage aapke liye sahi hai especially if you are a day trader looking to diversify your portfolio. But that's not to say that you cannot invest in arbitrage if you prefer to invest in mutual funds - we have an investment route for mutual fund investors looking to invest in arbitrage… stay tuned...

Ab chaliye dekhte hai examples of index arbitrage as promised:

Agar koi trader ke dyaan mein aa jata hai that index ka rate futures contract ke rate se kaafi mehenga hai, toh trader can enter short (yaani ke he can sell with the goal to buy back later) by purchasing an exchange traded fund. Aur woh futures contract ke sakta hai to buy at a lower rate, taki yeh price difference se in ko earnings mil jaye.

Financial institutions (jin ke paas bahut capital rehte hai) index mein jitne stocks listed hai, saare ke saare stocks khareedh lete hai when there is a price discrepancy lekin chote investors ke liye pehla example zyaada possible aur affordable hai.

Individual investors aur khaas mutual fund investors ke liye ek aur option hai. They can choose to buy funds jis me index ke saare stocks, same proportion mein hold kiya jata hai.

Dost arbitrage is popular kyuki it is seen as a low risk stock market investment option, aur yeh sahi hai because traders only act when there is a discrepancy. Lekin one needs to keep in mind that these discrepancies are now increasingly rare because of increased automation. The same technology that makes tracking these discrepancies possible, also reduces the number of discrepancies that happen.

Traders must also keep in mind the cost of investing in index arbitrage. Index arbitrage ko chalane mein jo programs aur technology mein invest karna hota hai woh cost bhi factor-in karna hota hai. Add it to the cost of buying the security aur phir honestly check kar lo - earnings asal mein tha ki nahi?

Taxes bhi yeh cost mein consider karna important baat hai. Ensure me yeh sab deductibles ke baad you will actually earn something by your investment in index arbitrage.

Remember dost everything very lucrative on the stock market, often comes with some form of corresponding risks. In the case of index arbitrage the risks are related to high cost of investment and the possibility of lacking or missed opportunities. Of course, there is no denying the earnings potential and therefore it is important to consider your risk appetite before investing.

Happy trading!