[Nitin Bhatia]

As Nifty Futures is a derivative therefore, technically it is believed by the traders or investors that the value of Nifty Futures is derived from it’s underlying i.e. Nifty Index Spot or CASH segment.

However, It is not correct in real trading. In the stock market, there are large no of traders/investors who take advantage of arbitrage opportunity which is a very safe, secure, risk-free, and easiest way to make money. They take advantage of the price difference between the Futures and spot price thus if the gap between the two increases, these arbitrage traders will ensure the price equilibrium between futures and the spot price.

Now take an example of Nifty. Assuming, there is NO BUYING in the cash segment and market is flat or range-bound. Now, to take the market up some BIG Player or SMART Money will start buying the index futures contract. It will increase the GAP between Index Futures and SPOT Price. The Arbitrage traders will take advantage and simultaneously start SELLING the Index Futures & buying in CASH (Basket of index stocks in the proportion of weightage). By doing this, they will lock & fix their profit. Buying in CASH will push the SPOT price UP and Selling in Index Futures will help to maintain price equilibrium & gradually vanish the arbitrage opportunity. Thus, in this case, the Index futures price is deriving the index SPOT value which is the reverse of theoretical definition.

The reverse is also true i.e. to pull the market down, Smart money starts selling Index Futures. Arbitrage traders simultaneously start buying index futures and selling in CASH to take advantage of arbitrage opportunities.

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