Example 1

1. Spot Price of gold as on 1.10 = Rs.2100/g.

2. The expected future spot price of gold for a future contract expiring in 3 months on
31st December=Rs.2200/g (Future expected price at the end of three month)

3. The future price of gold for a future contract expiring in 3 months on 31st December
is Rs.2260/g.(K)

What should be the speculators strategy?

Speculators Strategy-

➢ Sell gold future contract at Rs.2260

➢ On 31st Dec, he will buy (borrow)in the spot market at Rs.2200/g(the spot
price expected to prevail at that time.)

➢ He will deliver the Gold against the gold future contract and collect
Rs.2260/g.

➢ Earn a profit of Rs.60 /g

Point to note:
i. If contracted futures price is greater than the calculated futures price,
arbitrage will take place. Such arbitrage is known as Cash – and carry –
arbitrage.
 Example-2

1 Spot Price of gold as on 1.10.20 = Rs.2100/g.

2. The expected future spot price of gold for a future contract expiring in 3 months
on 31st December=Rs.2200/g (Future expected price at the end of three month)

3. The future price of gold for a future contract expiring in 3 months on 31 st

December is Rs.2170/g.(K)

What should be the speculators strategy?

Speculators Strategy-(sell the underlying asset & lend)

✓ Buy Future Contract @ Rs.2170

✓ On 31st December, take delivery of gold under future contract @ Rs.2170/g.

✓ Sell Gold immediately in the spot market @ Rs.2200/g

✓ Earn profit of Rs.30/gm

Point to note:
ii. If negotiated (contracted) futures price is less than the calculated
futures price, arbitrage will take place. Such arbitrage is known as
Reverse cash & Carry arbitrage

Point of Comparison
Fund Management
Transaction
Future Contract
Delivery
Cash and Carry Strategy Reverse Cash and carry
Strategy
Borrow funds equal to Lend funds out of sale
the Spot Price proceeds
Buy Asset & Store Sell the assets and lend
the the sale proceeds
Sell Futures Buy Future
Delivery against Futures Accept delivery set at
expiration