⚖️ Cash & Futures Prices
Arbitrage Spread Breakdown
Cash-Futures Arbitrage Guide
How Cash-Futures Arbitrage Works
During bull markets, futures contracts trade at a premium to cash spot prices. You buy 1000 shares in cash and short 1 futures contract. On expiry day, both prices converge, locking in a risk-free profit.
Equity Tax Benefit Over Bank FDs
Arbitrage Funds & cash-futures positions are taxed as Equity Funds (12.5% LTCG above ₹1.25L). Bank FD interest is taxed at your full slab rate (30%), making arbitrage far superior after tax!
💡 Pro Hack: Rollover Spread Bonus
On expiry Thursday, if the next month's futures contract continues to trade at a premium, roll over your short futures position to extend your risk-free yield for another month!
⚡ Expiry Price Convergence
NSE regulations mandate that futures settlement price equals the cash closing price on expiry. Convergence is 100% guaranteed by law.
🛡️ Zero Market Direction Risk
Whether the market crashes 50% or surges 50%, your cash gain balances your futures loss (or vice versa), yielding exact locked-in profit.
⚠️ 3 Common Cash-Futures Arbitrage Mistakes
- • Mismatched Quantity: Buying 500 shares in cash while shorting a 1,000 lot futures contract leaves you exposed to unhedged market risk.
- • Forgetting STT & Transaction Fees: Transaction charges (STT on buy/sell) eat 0.1%-0.2% of the spread. Ensure the spread is wide enough (>0.6%).
- • Shorting at a Discount (Backwardation): Attempting cash-futures arbitrage when futures trade lower than cash spot creates a guaranteed loss!
Cash-Futures Arbitrage Cost of Carry & Yield Components
| Yield & Expense Element | Standard Rate / Slab | Impact on Gross Spread | Risk & Mitigation |
|---|---|---|---|
| Gross Futures Premium Basis | 0.6% - 1.2% per month | + Generates gross arbitrage return | Locked-in on execution date; market neutral. |
| Securities Transaction Tax (STT) | 0.1% on Cash delivery + 0.02% on Futures sale | − Deducted on transaction value | Statutory cost; amortized across contract holding period. |
| Exchange Turnover & GST | ₹3.5 per Cr (NSE) + 18% GST | − Operational friction | Negligible on large ticket institutional sizes. |
| Net Annualized Pre-Tax Yield | 7.5% - 9.5% p.a. | Consistently beats Liquid / Overnight Funds | Zero directional price risk if held until final monthly settlement. |