This presentation is about arbitrage through use of various financial products.

1. Financial Arbitrage

2. • Its an opportunity to buy an asset at a low price then immediately selling it on
a different market for a higher price.
• An investment practice that attempts to profit from inefficiencies in price by
making transactions that offset each other
• In economics, arbitrage is the practice of taking advantage of a price
difference between two or more markets, the profit being the difference
between the market prices.

3. Arbitrage is possible when one of three conditions is met:
•The same asset does not trade at the same price in all markets.
•An asset with a known price in the future does not today trade at its future
price discounted at the risk-free interest rate .
•Two assets with identical cash flows do not trade at the same price.

4. 1) Example :
• Assume on some given day at some point of time SBI is trading in NSE @2400
& on BSE @ 2403.
• Simultaneous buying of SBI Stock @2400 in NSE and selling it on BSE @ 2403.
2) Example :
• Assume SBI Future (lot size 125) for current month is trading at 2400 as
against cash market of 2390.
• Buy 125 SBI stock in cash market @ 2390
• Sell one lot of SBI future @ 2400
• Reverse the position on future settlement date.
3) Example :
• Buy Rice from Kakinada Hyderabad @ Rs 28per/ kg and sell it in Kashmir @ Rs
40/kg.
4) Example :
• Buy Nifty future in SGX Nifty @ 7950 and sell in NSE @ 7960
• Unwind both positions when the gap becomes narrow.

5. • Arbitrage has the effect of causing prices in different markets to
converge. As a result of arbitrage, the currency exchange rates, the
price of commodities, and the price of securities in different
markets tend to converge.
• Arbitrage tends to reduce price discrimination by encouraging
people to buy an item where the price is low and resell it where
the price is high.

6. Buyers credit Vs Working Capital
Case : XYZ is a importer and it has imported a machinery from Germany for
$100000/- The payment for this is due today.
As it is a import of capital goods, company can avail buyers credit up to 3 years
instead of paying the cost immediately.
Lets assume company has taken buyers credit for 1 year.
Working Capital Buyers credit
Rate of Interest 14% 6M Libor + 100
Forward Premium for 6
2.50
Months
Today spot 60.44
Forward premium in % 8.27% p.a.
6 Month Libor 0.33%
LOC Charges 2.1%
Total Cost 14% 11.7%
An arbitrage of 2.3%

7. FCNB (DL) Vs Working Capital
XYZ is a domestic company with no foreign exchange exposure. It has a working
capital limit of Rs 100crore.
The Minimum debit balance at any time is Rs 45 crore.
Company XYZ will convert this Rupee exposure to foreign currency exposure by
availing fully hedged FCNB (DL) and will get a safe arbitrage.
Working Capital FCNB (DL)
Interest Rate 14% 6M Libor + 300 **
6 Months forward
8.27%
premium
6 Months Libor 0.33%
Other cost (Processing /
cash spot etc)
0.50% (assume)
Total Cost 14% 12.1%
Safe arbitrage of 1.90%

8. PCFC vs Rs EPC
XYZ is an exporter and it regularly avails PCFC for execution of its export orders
Q . Why XYZ is availing PCFC and not rupee Loan ?
A. 1) To reduce cost
2) To hedge its future receivables.
PCFC Rs EPC
Cost 6M Libor + 200 10%
6 M Libor 0.33%
Forward Premium for 6
Months
(-)8.27%
Interest Subsidy (-)3%
Total Cost 2.33% (-)1.27%
** ##

9. Rupee-Dollar Swap
XYZ is a exporter and it has taken a Rupee Term loan of Rs 60crore@13%. The receivables
of XYZ co is in USD & liabilities are in Rupee.
XYZ wants to convert its Rupee Term Loan to USD, reasons could be
1.Asset Liability mismatch.
2. Foreign Exchange conversion risk.
3.Arbitrage Opportunity.
XYZ will convert its Rupee loan to USD loan by dollarizing its exposure and in the process
will receive a positive carry of lets assume 6%.
Benefits:
•Now the companies receivables are in USD and Payables are also in USD
•Company has effectively reduced its cost from 13% to (13-6%) i.e.7%.
Risks :
• If INR depreciates than the available arbitrage will come down and on INR depreciating
beyond cut off , company will loose notionally on locking their receivables at lower
conversion rates. (opportunity loss).
•Company cannot convert its assigned receivable at prevailing higher market rates.

10. Spot rate : 60
Loan Amount : Rs 60 Crore
Fixed rupee interest rate : 13%
12 Half Yearly repayment : Rs 5 Cr
$833333/-
XYZ PVT LTD SBI
Rs 5.0 crore
Interest @ 6%
Pay to ICICI Rs 5.0 cr
+ Interest @13%
SBI will sell the USD in forward
market and receive a forward
premium of @ 7%

11. Thank you
Raj Kumar Sharma