If Tisco is trading at Rs.400 in the cash segment. In the beginning of the new futures contract, it may be trading at Rs.404. The investor who buys at Rs.404 has the full month to hold the position and has the option to roll it over to the next month at any time before expiry.

The arbitrageur to take advantage of this, buys Tisco in the cash segment and simultaneously sells in the futures segment getting a profit of Rs.4 (Gross returns). For calculation of net returns, different charges like brokerage, transaction cost, stamp duty, STT (Securities Transaction Tax) etc should be deducted.

Whether the price of Tisco moves up or down, he is secured with his return. In the normal course, the gap decreases towards the end of the month and the arbitrageur will either reverse the position in both segments or rollover the futures position to the next month if the new gap is acceptable to him.

The return is calculated on the amount of funds deployed for the fixed time period to expiry. If the gaps come down before expiry the arbitrageur can exit the position and enter into a new stock where the gap is better.

The arbitrage return is higher as the arbitrageur keeps on reversing the favorable positions and entering into the new positions.