This paper examines whether there is a violation of the spot-futures parity theorem in the case of NSE Nifty futures, and tries to find out the different factors behind such violation. The factors, which have been considered as the determinants of arbitrage profits, are the time to maturity; whether violation is more in rising markets or in declining markets; whether violation is more when theoretical futures price exceeds actual futures price or when actual futures price exceeds theoretical futures price; the number of contracts traded; and the change in open interest. The results indicate that there is a violation of the spot-futures parity relationship for many futures of the NSE Nifty. The results further indicate that arbitrage profits are more for far month futures contracts than for near month futures contracts; for undervalued futures market (relative to the spot market) than for overvalued futures market (relative to the spot market); for high liquid futures than for less liquid futures; and when new contracts are added than when outstanding contracts are settled. The results do not support higher or lower arbitrage profits in declining or in rising markets.

Futures have remained the most important segment of the Indian derivatives market since the inception of derivatives trading in June 2000. In June 2000, the Securities and Exchange Board of India (SEBI) permitted two stock exchanges—the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)—and their clearing houses to commence derivatives trading with the introduction of index futures contracts based on S&P NSE Nifty Index and BSE-30 (Sensex) Index. This was followed by the introduction of trading in options based on these two indices, options on individual securities and futures on individual securities. Though it is less than six years since a derivative trading was introduced in the Indian stock market, there has been spectacular growth in the Indian derivatives market.

The futures and options (F&O) segment of NSE reported a total turnover of Rs. 2,547,053 cr during 2004-05 as against Rs. 2,130,649 cr during 2003-04, Rs. 439,863 cr during 2002-03, Rs. 101,925 cr during 2001-02 and only Rs. 2365 cr in 2000-01. The turnover in the first ten months (April-January) of 2005-06 was Rs. 3,596,669 cr. Although futures on individual securities are more popular than those on indices, there has been massive growth in the turnover of index futures. The F&O segment of NSE reported an index futures turnover of Rs. 772,174 cr during 2004-05 as against Rs. 554.462 cr during 2003-04, Rs. 43,951 cr during 2002-03, Rs. 21,482 cr during 2001-02 and only Rs. 2365 cr during 2000-01. The index futures turnover in the first ten months (April-January) of 2005-06 was Rs. 1,165,355 cr.

Applied Finance Journal, Arbitrage Opportunities, Indian Stock Markets, National Stock Exchange, NSE, Bombay Stock Exchange, BSE, Indian Derivatives Market, Securities and Exchange Board of India, SEBI, Regression Technique, Hedger, Arbitrager, Speculator, Stock Index Futures Markets,