Hindalco - Spot Prices 1-Oct-2005 to 26-Oct-2006 Spot Prices: The spot prices of Hindalco started on 3rd Oct’05 at

250
151 have seen the lows of 114 and high of 243 during the one
year period of 1st Oct 2005 to 26th Oct 2006. During this period
230
it has generated the returns of 24%. After touching the low of
210 114 on 31st Oct’05 we can observe a bull run till 11th May’06
190
when it reached high of 243. This Bull Run was followed by the
sudden fall due to the global meltdown. In the next two days the
170
script shed 30 points and then within next one month it shed
150 100 points in total. After reaching 143 on 14th Jun’06 again the
130 script has been moving north with certain hiccups and
reached 187 by 26th Oct’06.
110
10/3/05

11/3/05

12/3/05

1/3/06

2/3/06

3/3/06

4/3/06

5/3/06

6/3/06

7/3/06

8/3/06

9/3/06

10/3/06
Futures Prices: Data for the period 1st Oct’05 to 26th Oct’06 was
collected. The data was arranged in a format where for every
date there were three contracts were active. If we talk about
liquidity in futures then it was observed as highest activity took
Futures Contract - Expiry 28-Sep-06
place in the near month (M0) contract followed by the next
month (M1) contract and then farthest month (M2) contract. As
much of the data for the farthest month contract had no turnover 187
only the M0 and M1 contracts were studied.
182
For example in the graph adjoining, we can see that for the
futures contract expiring on 28-Sep-06, the Spot and M0 prices 177
converge when the time to maturity becomes zero. Where as
there exist a spread between spot and M1 prices.
172
Having a look at the basis and days to expiry for all the contracts
it was observed that barring few cases, in all the cases the basis 167
was strengthening as the contract reached maturity. When 27 24 23 22 21 20 17 16 15 14 13 10 9 8 7 6 3 2 1 0
the script was at its peaks the volatility in the basis was very
Spot M 0 (Active Month) M 1 (Next month)
high. The basis for the active month has never been greater
than 2% of the spot price. Theoretical cost of futures obtained
Futures Contract - Expiry 31-Aug-06
by using cost of carry model and the actual futures prices
0 showed the correlation of 99.9%. Thus it can be fairly concluded
that the cost of carry model is applicable to this script. The
34

30

28

24

22

20

15

13

-0.2
limitations while applying the model is that the interest rate that
-0.4
is assumed (3 Month T-Bills) is not the rate at which the funds
are available in the market. This increases the cost of carry and
-0.6 reduces the effective spread between the theoretical futures
Basis

prices and spot prices. In practice there are various market

-0.8
imperfections like transaction costs; differential borrowing
-1 and lending rates, restrictions on short selling that prevent
complete arbitrage. Thus, the futures price in fact varies within
-1.2 arbitrage boundaries around the theoretical price. Based on the
-1.4
cost of carry model if one tries to find an arbitrage in this script
Days To Expiry
one can observe that for around 69% of the times the script is
over valued and for the remaining time it is undervalued. But the
arbitrage opportunities are not big enough to be exploited
always. Highest opportunities are not more than 2% of the % of Undervaluation
futures price. This being the daily data, if at all there exist any
exploitable opportunity it gets adjusted when the market 2.5
opens the next day. Thus it can be fairly concluded that there
aren’t many arbitrage opportunities in this script. Another reason 2
can be that being a very active script in spot as well as in
futures market, it is highly tracked leaving no room for 1.5
exploitable opportunities.
1
%

th
If we have a look at the contract that expires on 24 Nov’05 we 0.5
can see that the futures price is undervalued by 2% on 11th Nov
compared to its futures price calculated using Cost of Carry 0
Model. This happens to be the highest exploitable arbitrage
3-Nov

6-Nov

9-Nov

12-Nov

15-Nov

18-Nov

21-Nov

24-Nov
28-Oct

31-Oct

opportunity in this script. -0.5

1
 Time value Call Option - 31-Aug-06 Strike Price 170 Call Option: Data for the period 1st Oct’05
to 26th Oct’06 was collected. During this
period data for all strike prices was
10 collected. It can be observed that the
9 volatility has been highest in the
8 contract of Nov’05 where one can
Time Value (Rs)

7 observe 23 strike prices active, where

as least volatility can be observed in
6
Feb’06 contract which had only 8 strike
5 prices active. In all the 14 contracts active
4 during the study of the time value was
3 found to be volatile but the
2 characteristic similarity was that the
time value was approaching to zero
1 with the time to maturity.
0
For Example in the graph adjoining we can
44
42
38
36
34
30
28
24
22
20
15
13

9
7
3
1
see time value of call option (expiry 31-
Days to Expiry Aug-06 at the strike price of 170) plotted
against the days to expiry and the decay in
time value is strikingly visible.

Decay in time value was seen to approach zero in the case where the spot price is approaching the strike price at
the end of the contract. In the cases where the strike price is more than the spot price approaching expiry the time value
is positive, where as in the other case where the strike price is less than the spot price the time value become negative.

Put Option: In case of put options also

the data is collected for the period 1st Time value Put Option - 28-Sep-06 Strike Price 160
Oct’05 to 26th Oct’06. During this period
data for all strike prices were collected. All 6
the contracts for each and every particular
strike price were studied. Volatility was
5
there throughout the contracts during the
Time Value (Rs)

period of study but the highest turnovers

4
were in the month of April, August,
September, and October. Turnovers
3
were highest at the strike price of 170.
2
For Example in the graph adjoining we can
see the time value of a put option (expiry
28-Sep-06 at the strike price of 160) 1
plotted against the day to expiry and the
decay in time value is striking the visible. 0
36

34

30

28

24

22

20

16

14

10

Time Decay can be defined as the ratio of

the change in an option price to the Days to Expiry
decrease in time to expiration. As options
are a wasting asset, their value declines over time. As an option approaches its expiry date without being in the
money, its time value declines since the probability of that option being profitable (in the money) is reduced.

It was observed that the Time decay of an option began to accelerate in the last 60 to 30 days before expiry. The
greater was the certainty about an option's expiry value; the lower was the time value. Conversely, the greater was the
uncertainty about an option's expiry value, the greater was the time value.

Company: Hindalco
st th
Period Studied: 1 Oct 2005 to 26 Oct 2006

Analyzed by: Sheetal D. Todarwal (05 bs 2887)

Disclaimer: Entire analysis is an academic assignment and is the opinion of the author and should not be construed as an
investment advice. The author is not responsible for any positions taken in the market based on the above analysis.

Source: www.nseindia.com, www.rbi.org.in