Arbitrage is the process of buying stocks or shares in one market and selling it in another to exploit the price difference. An Arbitrage fund is a type of hybrid fund which aims to capitalise on proļ¬table arbitrage opportunities (price differential in a stock) between cash and derivatives segments of the equity market. Thus opportunity lies in generating a good return between these differences.
So how do arbitrage funds work?
These funds will initiate an arbitrage position by buying a stock in the cash segment and selling simultaneously equal quantities of the stock in the futures segment of the market. The positions thus initiated are to be reversed before or during the expiry of the futures series.
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