Nifty Value Calculation

I have one big doubt about NIFTY value calculation.

I know that Nifty value is calculated using one formula involving Free Float Market Cap of 50 stocks.But my doubt is, value of all 50 stocks vary based on trading occurring in exchange.

But nifty is also a tradable item in market,so its value is also determined by trading activity in market.

Definitely there must be some gap between mathematically calculated Value of Nifty and Traded Value of Nifty.

How this gap is adjusted???

Traded value of Nifty are the Nifty futures, and there is Nifty actual index. Aribitrageurs ensure that these two remain in sync.

Check out how futures are priced: http://zerodha.com/varsity/chapter/futures-pricing/

Whenever there is a deviation arb guys come in and take positions in such a way that it dissapears.

So for example, if Nify is at 8000 and Nifty this month futures suddenly becomes 8100 (which is clearly overpriced). You can buy all the Nifty 50 stocks in the same % proportion as how index is created to synthetically create a long Nifty index affect and at same time short Nifty futures at 8100. There will be many people who will come and keep doing this until that gap dissapears.

In this world of technology and High frequency trading, such gaps get adjusted in seconds if not milli/micro seconds.

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