Arbitrage strategies involve buying a lower priced asset in one market and selling the same asset at a higher price in another market. In derivatives (F&O segment), this typically involves shorting an overpriced futures contract and going long on the underlying stock in multiples of the permitted lot size. We have discussed this strategy previously in this column. But arbitrage opportunities fade fast, as traders exploit such price differences. This week, we discuss how you can arbitrage between futures and spot prices based on your opportunity cost, allowing for more frequent arbitrage set-ups.

Price convergence

There are two elements to spot-futures arbitrage trade based on the opportunity cost principle. First, you must identify a futures contract that is overpriced in relation to you

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