By Rajendra
Sep 7, 2022
Buying & selling of an asset in two different market simultaneously to earn a price differential is called Arbitrage.
Equal assets usually show a minor price difference, which is less than the transaction costs of an arbitrage trade.
Spread or basis refers to the price difference.
Arbitrage funds are hybrid schemes that seek to profit on price gaps between same underlying assets in various market segments.
Arbitrage may occur if the following conditions are met:
-Asset price imbalance
-Different markets, same asset is traded at different prices
-Assets with similar cash flows are traded at different prices
-Future price currently traded at a price different from the expected value
Large financial institutions typically take advantage of arbitrage.
Because, recognize the chances and carry out the deals, substantial resources are needed.
Why Arbitrage Fund?
-No counterpart risk
-Potential of getting superior returns than saving interest
-Advantage equity taxation
Risk Factor in Arbitrage
-35% invest in Debt fund, so carry credit risk.
-Returns depends on market conditions
Investment Horizon
– Investors need to sufficiently long investment horizons; at least 1 month for arbitrage funds.