Arbitrage is different from regular trading in the sense that it would lock the buying and selling prices, hence eliminating the risk associated with fluctuations in the future.

I would treat the problems in this way:

1) I will try to see if the futures price and adjusted spot price (adjusted for future's expiry date, using time value & risk free rate) has any difference?

2) If there is any difference, buy the one which is cheaper and sell the one which is expensive?

3) However, in these cases we have to consider other costs (storage and dividend respectively). So make sure that these costs are less than the difference, and we are good to go for the arbitrage? What do you think ?

Answer rating: 100% (QA)

What do you think Yes that is a correct approach to arbitrage All three options listed would be step... View the full answer