NIFTY BANK

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

Short Futures:
As we decide to short future contract on 25th Nov.
Spot Price on 25th Nov 29196.40
Expected Future Price on 25th Nov 29200.86
Future Price on 25th Nov 29,208.70

Here as we calculate the arbitrage between actual future contract and theoretical
future contract price. 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 7.5 Rs per share, which make a total profit of (25*7.5) Rs 187.5
Hedging Short Futures
Arbitrage Action Price Payoff
Short Futures Buy 29,208.70 29,208.70
Long Asset (buy today the asset) Sell 29196.40 -29196.40
Earn Interest -4.7998
Net Payoff 7.50

Cost of Carry:
As we discussed above the arbitrage 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.
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.

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