Simultaneous purchase and sale of an asset in order to profit from a difference in the price is called Arbitrage. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.
DGCX provides SDMA setup for large corporate clients where a client can have API connections with exchange and co-locate their server with DGCX for a better connectivity and faster trade execution.
Indian Rupee vs. US Dollar is a favorite arbitrage product at DGCX.
INR/Dollar contract which is also known as DINR is traded on DGCX (Dubai Gold & Commodities Exchange). This contract is a Future contract and has all the specifications as any Exchange Traded Instrument. Same INR/Dollar contract is also traded in NDF Market (Non Deliverable Forward Market) which is basically an OTC (Over the counter) market based in Singapore and Hong Kong.
In the strategy, an arbitrage is created between these two contracts.
Say, on a particular day, rates in both the markets are as following:
In such a scenario, the trader would sell the contract in DGCX and buy the same in NDF Markets, and thus locking a profit of 10 paisa.
Now, if this difference comes down, the trader can reverse the position i.e. Buy in DGCX and Sell in NDF and thus can square-off the position or he can simply wait for the Expiry as Settlement would take place at RBI reference rate in both the markets and thus can realize the locked profit on Expiry.
Assuming margin of 5% in both the contracts, this locked difference translates into a return of 1.75%. In practice, the trades would take place as and when an opportunity comes and would be squared off at small profits. This would be done a number of times in a month so as to capture annualized returns of 8 – 12 % net of expenses.
Thus, the strategy is basically a near risk free arbitrage strategy.