Agriculture, Bullion and Metal commodities witness difference in their prices in spot and future markets. Price may also vary in different contracts of futures market expiring on different dates. This price variation may result into a profit opportunity by trading simultaneously in two different contract with position opposite to each other, which is known as arbitrage transaction.
Arbitrage transactions are market neutral transaction as it is not entered into with any view on direction of price of the underlying commodity. If the underlying arbitrage opportunity makes commercial sense from expected return on investment point of view, positions are built.
Client buys physical commodity from Mandi or Exchange and simultaneously hedges it by selling the near month futures contract on commodity exchange such as NCDEX or MCX.
Future contract is rolled over to subsequent months before expiry of near month contract subject to availability of arbitrage opportunity.
If arbitrage opportunity does not exist, both positions are unwound by selling physical commodity in market/exchange and buying of futures contract.