Arbitrage

 Arbitrage is the simultaneous purchase and sale of the same

asset in different markets in order to profit from tiny differences in
the asset's listed price.

 The spot price is the current price in the marketplace at which a

given asset—such as a security, commodity, or currency—can be
bought or sold for immediate delivery.

 Futures are derivative financial contracts obligating the buyer to

purchase an asset or the seller to sell an asset at a
predetermined future date and set price.
 In simple terms, to go short when trading futures means
speculating that an asset’s price will drop. You will make profits,
provided the price falls during the period of the contract, and you
close your position on time. Opening a short position can also be
referred to as being bearish on an asset.
 In plain language, going long when trading futures means
speculating that an asset’s price will increase. You make a profit
from the trade if your speculation of the direction of the price is
accurate. Opening a long position can also be referred to as being
bullish on an asset.
 Overvalued-Short,Undervalued-Buy

Assignment:30th AUGUST (CASH AND Carry aribitrage)

Q. Identify arbitrage opportunities from the future and cash markets.

Minimum 5 opportunities having a return of more than 6%pa.Calculate the
arbitrage using the hypothetical value on expiry.
9th September,2022

Options:

a) Call: Calls give the buyer the right, but not the obligation, to buy the
underlying asset at the strike price specified in the option contract. Investors
buy calls when they believe the price of the underlying asset will increase and
sell calls if they believe it will decrease.
Seller askes for Premium (upfront payment)
b) Put: Puts give the buyer the right, but not the obligation, to sell the underlying
asset at the strike price specified in the contract. The writer (seller) of the put
option is obligated to buy the asset if the put buyer exercises their option.
Investors buy puts when they believe the price of the underlying asset will
decrease and sell puts if they believe it will increase.

Questions: Tata Steel is trading at Rs100. Its call option is available at a

premium of Rs15 at a strike price (Contract Price) of Rs100.Calculate the
profit or loss if the expected spot price on expiry is as follows:

Expected Spot Price Call Option Buyer Call Option Seller/writer

90 Not Exercisable- -15
95 NE, -15
98 NE,-15
100 NE,-15
110 E, -15+10=-5
120 E, -15+20=5
130 E, -15+30=15
150 E, -15+50=35

As the price goes up beyond the strike price it is exercisable.

 Unlimited Return Potential

Pay Off Diagram:

Limited downside Risk

limited Return Potential

Pay Off Diagram:

Un-limited downside
Risk
“Call option premium or the share price have the direct relationship”

Put option: Contract(to sell) of two parties in which the buyer of the put
option has the right to sell but not an obligation to sell.

Feels the price of stock would go down so he buys the put options by paying
the premium and took the right to sell when price will go down

Spot price :100

Strike Price: 100

90,

SBI share is trading at 500 put option premium is Rs 10 at a strike price of Rs

500.

Expected Spot Price Put Option Buyer Put Option Seller/writer

480 Exercisable- -15
500 Exercisable, -10+20=10
520 NE,-10
530 NE,-10

UnLimited upside Risk

460 480 490 500 Limited downside Risk

460 480 490 500 Limited downside Risk