Hi,
Arbitrage is the simultaneous purchase and sale of an asset in the market to profit from discrepancies in their prices. The moment an arbitrageur spots an arbitrage opportunity, he would initiate arbitrage to eliminate this opportunity. Arbitrage occupies a prominent position in the futures world as a mechanism that keeps futures prices aligned with the prices of the underlying assets.
Arbitrage in the futures market is typically of three types:
1. Cash and Carry arbitrage
It refers to a long position in the cash or underlying market and a short position in the futures market.
Example
2. Reverse cash and carry arbitrage
It refers to a long position in the futures market and a short position in the cash market.
Example
3. Inter-Exchange arbitrage
It entails 2 positions on the same contract in 2 different markets/exchanges.