Scribd Logo
Upload

Welcome to Scribd!

  • Cummins India - Group 6

    Uploaded by

    priya thacker
    27 views2 pages
    The document discusses arbitrage opportunities in long and short futures contracts for Cummins India stock from August 28th to November 26th. For long futures, buying at a cheaper theoretical price and selling at a higher actual price would yield a profit of Rs. 17.32 per share, or Rs. 20,784 for a contract of 1200 shares. Shorting futures at a higher actual price and buying them back at a lower theoretical price would yield Rs. 3 per share, or Rs. 3,600 per contract. The cost of carry for deferring a buying or selling decision gradually decreases from Rs. 4.17 per share initially to zero on the expiry date. Basis risk, the difference between

    Original Description:

    Original Title

    Cummins India_Group 6

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The document discusses arbitrage opportunities in long and short futures contracts for Cummins India stock from August 28th to November 26th. For long futures, buying at a cheaper theoretical price and selling at a higher actual price would yield a profit of Rs. 17.32 per share, or Rs. 20,784 for a contract of 1200 shares. Shorting futures at a higher actual price and buying them back at a lower theoretical price would yield Rs. 3 per share, or Rs. 3,600 per contract. The cost of carry for deferring a buying or selling decision gradually decreases from Rs. 4.17 per share initially to zero on the expiry date. Basis risk, the difference between

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    27 views2 pages

    Cummins India - Group 6

    Uploaded by

    priya thacker
    The document discusses arbitrage opportunities in long and short futures contracts for Cummins India stock from August 28th to November 26th. For long futures, buying at a cheaper theoretical price and selling at a higher actual price would yield a profit of Rs. 17.32 per share, or Rs. 20,784 for a contract of 1200 shares. Shorting futures at a higher actual price and buying them back at a lower theoretical price would yield Rs. 3 per share, or Rs. 3,600 per contract. The cost of carry for deferring a buying or selling decision gradually decreases from Rs. 4.17 per share initially to zero on the expiry date. Basis risk, the difference between

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    CUMMINS INDIA

    ARBITRAGE (Contract period 28th Aug to 26th Nov)

    Long Futures:
    As we have decided to Hedge our long future contract as of date 18th Sept
    When we say we need to Hedge a long
    future contract we must know that we need
    to Buy at Cheap and need to sell that at
    Expensive price to get the benefit of that
    arbitrage transaction.
    Here as we calculate the arbitrage between
    actual future contract and theoretical future
    contract price. As we are buying, the price will be negative and also the loss of dividend yield
    will be added in the final payoff and we receive 17.32rs per share.
    As the lot size for 1 future contract of cummins india ltd consist of 1200 shares. So by making
    this transaction we can make a profit of 20,784 Rs (1200*17.32) of total profit.

    Short Futures:
    As we decide to short future contract on
    12th Nov.
    As we disscused for the long futures, in
    order to make arbitrage in short futures
    we need to sell the actual futures at higher
    price. By conducting the transaction we
    can earn a profit of 3 rs per share, which
    make a total profit of (1200*3) 3,600 Rs.

    Page | 1
    Cost of Carry:
    As we discussed above the arbitrage in both types of future contract, we should also understand
    the cost of carry with the 3 month time period of contract.
    Cost of carry is basically, If I defer to my decision of buying or selling someone else will bear
    the cost of my decision. So considering this we get a downward sloping graph. As the day gets
    closer to the expiry of 3month contract we get to see a lower cost of carry to the transaction.
    At 28th aug when the contract is brought to birth where we have 90 days remaining to the
    expiry, someone has to bear a cost of 4.17rs which keeps on gradually decreasing till we are on
    expiry date of 3month contract.

    Basis Risk:
    We can see a heavy variation in the graph of the basis risk as due to variation in the market
    which is caused by the various factors to the company. Also it is a difference of Actual Future
    price and Spot price of the company’s share. So at the expiry date we see price converging and
    basis risk is zero.

    Page | 2

    You might also like