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Bajaj Finserv offers reverse arbitrage opportunity

ICICIdirect Research 13 Sep 2022 DISCLAIMER

What's Arbitrage

 Arbitrage strategy is the simultaneous buying and selling of shares in different markets in order to profit from the mispricing opportunity available between the futures and cash prices of the same underlying. One can buy or sell stocks in spot and assume opposite position in futures of the same stock to capture the difference between both prices. For this, the difference between spot and futures prices has to be reasonably high so that one can not only cover the transaction costs but also earn profit. Towards expiry, prices of spot and futures converge and unwinding can be done at the same price. Hence, the initial difference will be locked in at the time of initiating the whole transaction. This difference yields risk-free return since it will be independent of the price movement.

What's Reverse Arbitrage

Whenever futures are trading at a substantial discount to spot, a reverse arbitrage opportunity arises. Minimum one lot of the underlying future is bought and the delivery of the same number of shares is sold in cash to lock in the price difference. 

Corporate action

Bajaj Finserv announced stock split and issue of bonus shares in the ratio of 1:5 and 1:1, respectively, i.e. existing equity share with face value of Rs 5 will be split into five equity shares with a face value of Rs 1 and one new bonus equity share each for every one post-split equity shares. Ex-split and bonus date is today i.e. September 13 and record date is September 14. 

How to execute: 

 

One can benefit from selling 500 shares of Bajaj Finserv from demat holding and simultaneously buying one lot of September futures. During settlement, one should reverse the positions to capture the prevailing price difference.

 Note: One needs to consider the cost associated while executing the strategy.

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