In this video we will discuss another investment style. These are the arbitrage funds. So let's see what arbitrage funds. arbitrage fund is a mutual fund that works by exploiting the price differential between the cash market and the futures market. The cash markets you must be familiar with bigger cash market is the one which is also known as a spot market where a purchase of a stock is made and the transaction is completed within t plus two number of days. However, futures market we can buy a stock at a defined price at a future date.
We will see a little bit more discussion on the futures market shortly. When we trade in the stock market, we purchase stocks we try to purchase at the lowest possible price and then wait for the price to go up and up when the price goes up. We try to sell the stock does making a profit from that particular stock arbitrage fund manager repurchases the stock in the cash market. However, cells that interest interest in the future Now if you are still unfamiliar with futures market, don't worry, we will discuss it very shortly in the next slide. For those who are unfamiliar with futures market, here's a short introduction. A futures exchange or a futures market is a central financial exchange, where people can trade analyze future contracts.
A future contract is a is a contract to buy specific quantities of a commodity or a financial instrument at a specific price is the delivery date set at a specific time in the future. These contracts are also known as derivatives. This is the opposite of the spot markets, because in the spot markets like we just discussed, trade occurs immediately. That is in t plus two number of business days after the transaction agreement has been made. In the futures market, the trade happens at a predefined time in the future. The future instruments are priced according to the movement of the underlying stocks.
The aforementioned category is named derivatives because the value of the instrument is derived from another asset class. futures trading can be done through two options. One is known as a call option and one is known as the put option. The call option is a financial contract between two parties the buyer and the seller of the type of option. The buyer of the call option has the right but not the obligation to buy or agreed contract called agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time. For a certain price, the seller is obligated to sell the commodity or financial instrument to the buyer.
If the buyer decides to do so, the buyer pays a fee called a premium for this right. the put option is a stock market device which gives the owner the right but not the obligation to sell an asset at a specific price at a predefined date to a given party. The purchase of a would have a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term put comes from the fact that the owner has the right to put up for sale, the stock or the index. I hope this discussion gives a brief picture of what the futures market is all about. Given Here are some examples of the arbitrage funds available in India.
Thank you for listening. See you in the next lecture.