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Derivatives management in India

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  1. Introduction
  2. What is making money in the market?
  3. What is dividend arbitrage?
    1. Modern theory
  4. The arbitrage between the NIFTY spot and the index futures market
  5. An overview of exchange traded funds
  6. Market situation: analysis
  7. Underlying shares of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs)
  8. Conclusion

One of the greatest rules of making money in the market is to buy low and sell high. No matter what one does, this rule underlies all investments made in any market, be it product or capital. From this rule stems one of the greatest modern means of making money: Arbitrage. The concept, as such, is quite a simple one: If the price of the same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices (Sharpe & Alexander 1990). So, you end up buying low and simultaneously selling high in a different market, thus, creating an opportunity to make money.

[...] IN SUCH A SCENARIO, IT BECOMES IMPERATIVE FOR AN INVESTOR TO SPOT SUCH OPPORTUNITIES AS SOON AS THEY ARISE. IN THIS REPORT, WE HAVE TRIED TO FIND OUT SOME SUCH OPPORTUNITIES OURSELVES AND SUGGESTED STRATEGIES TO TAKE THEIR ADVANTAGE IN A REAL MARKET SITUATION. WHILE SOME OF THESE ARE RECURRING OPPORTUNITIES IN THE MARKET, OTHERS ARE INSTANCES WHEN SUCH OPPORTUNITIES HAVE ARISEN AND PROVIDED A PROFITABLE OPPORTUNITY FOR THE INVESTORS. NIFTY SPOT NIFTY FUTURES THERE ARE VARIOUS WAYS TO ARBITRAGE BETWEEN THE SPOT AND THE INDEX FUTURES MARKET. [...]


[...] AS WE CAN SEE, THERE IS A CLEAR PREMIUM AVAILABLE IN THE ADS MARKET TO THE LATTER SCRIP. ARBITRAGE OPPORTUNITY IN CASE OF MERGER & ACQUISITIONS OFTEN, M&A TRANSACTIONS ARE SETTLED THROUGH SHARE SWAP AGREEMENTS. AT TIMES, PRICE ANOMALIES CAN OCCUR HERE WHICH COULD LEAD TO ANOMALIES IN PRICING LEADING TO ARBITRAGE OPPORTUNITIES. ONE RECENT EXAMPLE OF THIS IS FOUND IN THE ONGOING RIL TAKEOVER OF IPCL. THE SWAP RATIO DECIDED FOR IPCL SHARE HOLDERS IS 1 FOR I.E., FOR EVERY FIVE SHARES HELD BY THEM, THEY WOULD GET ONE RIL SHARE. [...]


[...] THE RETURN IN THIS STRATEGY DEPENDS ON THE VALUE OF WHICH SHOULD BE AS LOW AS POSSIBLE AND SHOULD, IN FACT, BE NEGATIVE FOR SAME STRIKE PRICE IF THE OPTIONS PRICING IS IN ACCORDANCE WITH BLACK-SCHOLES OPTIONS PRICING MODEL AND ?X-S' SHOULD BE POSITIVE THAT IS OUR BASIC ASSUMPTION AS PRICES IN FUTURES MARKET FOR UNDERLYING SECURITIES ARE LESS THAN THE PRICES IN OPTIONS MARKET. THE RISK-FREE RETURN WOULD BE AS FOLLOWS: RISK-FREE RETURN = + M1]/[M1 + ADR/GDR UNDERLYING SHARES IN TWO?WAY FUNGIBILITY, DEPOSITORY RECEIPTS CAN BE CONVERTED INTO UNDERLYING DOMESTIC SHARES AND LOCAL SHARES CAN BE RE?CONVERTED INTO DEPOSITORY RECEIPTS. [...]

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