What are Arbitrage Funds? How do Arbitrage Funds work?

By | January 27, 2018

There are many types of funds in mutual fund which makes the selling and purchasing profits securities on various exchange. Rather buying a stock and sell it after some time. So that the price will go up here in this post we will learn what Arbitrage funds are and how it works to give proper profits to its investors. So below let us know everything about it.

What are Arbitrage Funds?

Arbitrage is counting advantage practice of a difference prices between one or more than two markets. It will be done with different parasitic prices of a product or asset or Financial Security at one time selling and buying this in various markets. This opportunity is the very short time trading opportunity.

Now understand the Arbitrage concept with easy example.

Mr. X has a popular restaurant and he can serve there are South Indian fast food and the restaurant is very popular for Dosa. And he sells Dosa at per piece Rs. 50. One Dosa’s cost price is Rs. 37. His total profit is Rs. 13 (Rs 50 – 47= 13) for each Dosa sold. But he is unhappy with that amount of net profit. He needs an increment in the net profit without rising the Dosa selling price.

But one day Mr. X has tasted a Dosa in their near-by canteen. And he will realise that the taste and quality are equal but they can sell each Dosa is only Rs 25. So, he decided that he will buy Dosa from the near-by canteen in Rs 25 and sell this on their restaurant at Rs 50 per piece. In this situation, he can get net profit at Rs. 25 (Rs. 50 – 25= 25).

How do Arbitrage Funds work?

The process to purchase from a market and then sell it to another market with by slightly rising the price is called Arbitrage opportunity.

These type of opportunities in trading or investment will exist in the financial market. The securities in the finance such as the stock could be purchased in the cash market in the form of derivatives it could be sold with a bit of higher rates.

Take as an example the price of ABC Company could be at 1000 INR to each share in the cash market of NSE and their is a amount of rupees 1000 with each share in future and option market in the coming month. Therefore an investor will purchase share of ABC of 1000 rupees and on the exact time it will be sold ABC in F&O in rupees 1010. On the date of settlement the investor will make a gain of rupees 10.

The arbitrage Fund is the one that will bring the pricing imbalance that are their in the derivative market and the cash. The fund of the arbitrage strategies to do trade on derivative and cash with a target to generate the returns of fund.

The above mentioned are the explanation of Arbitrage funds and the working process of it. So now as you know everything about it, invest through this process and earn profits.

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