What is DR Arbitrage?

DR Arbitrage :
Depository Receipts may trade in the international markets at a discount or mium to the
price of the underlying shares in the domestic market. This may be due to various factors
such as time differences, market news, sentiments etc. This provides an arbitrage
opportunity, where one buys the DR abroad and sells the corresponding shares in India at
a higher price (the difference being the profit) or vice-versa, lithe DRs are traded during
Indian market hours then such situations offer a live arbitrage opportunity. However if the
DR’s are traded in different time zones then the probability of price variation and exchange
rate change needs to be factored into the trading decision. Such arbitrage transactions
help in equalisation of DR prices with the price of the underlying shares. Such arbitrage
opportunities are however available only to non-resident investors.
The costs involved in such transactions are :
1. Foreign brokerage.
2. Local brokerage.
3. Custodian charge for conversion of securities (local and global).
4. Bank charges for fund transfers.
5. Fund manager charges.