Arbitrage exploits temporary price differences of the same asset across markets. In efficient markets, arbitrage opportunities are rare and close quickly as arbitrageurs' activity aligns prices.
Types in Indian Markets
- Cash-Futures Arbitrage: Buy stock in spot market + sell same stock's futures (if futures > spot + cost of carry)
- Exchange Arbitrage: Buy stock on NSE and sell on BSE simultaneously if prices differ
- Dividend Arbitrage: Structure positions around ex-dividend date
Arbitrage Funds are mutual funds that exploit cash-futures mispricing. They are treated as equity funds for taxation (>65% in equity) but carry low risk since both legs are hedged.