Indian Stock Market News and Views.
What is Stock Arbitrage ?
Usually an Arbitrage refers to a strategy to take advantage of the difference in price of a product in different markets. An arbitrageur earns money by buying asset at a lower price from a low price market and sells it off at a higher price with an high priced market. This type of situation only applies to goods whose prices shows different prices with different markets. Arbitrageurs use different products which are ranked with a difference in their trading prices. Some of the ways of executing arbitrages are merger arbitrage, convertible bond arbitrage and reverse arbitrage.
Merger arbitrage is when one buys the shares of a target company and shorts the companies shares, which is going to be acquired. Arbitrageurs play with the spread between the market price that is prevailing of the target company and the expected offer price from the accruing company. The future price of an asset would be higher than the spot price but at times they trend lower and the arbitrageurs sell the shares in spot and buys from the future market, this is called as Reverse arbitrage. In general conditions the risk is low but with the change in certain situations can bring the traders huge losses. eg can be said that if one has taken position with a merger in mind and that does not work out then the loss would be huge. Investors arbitrage by buying in shares from one stock market and sell it over the other to take the price difference advantage, this difference in prices will not be held for a longer period of time and the person should be quick enough to clear off with the positions as fast as possible to get away from the losses.
The present condition is that the investors are looking for financial instruments which carry lower risk due to the uncertainty that surround the current market conditions. The arbitrage funds has also attracted good performance and investments when compared. The funds have out performed the broader equity Index, Sensex. If we take the last year we can see that the Sensex has fallen 40% whereas most of the funds that carry arbitrage have posted growth around 8-10%.
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