Futures price discount to spot price and its implications

Discussion in 'Futures' started by scorpicity, Jul 10, 2007.

  1. scorpicity

    scorpicity New Member

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    Hi all,

    First of all thanks to this wonderful forum where I have learned so much.

    I have a doubt in futures derivative. Have noticed that sometime the futures price say for example XYX stock, is at 100rs but the actually spot price is 120RS for the same,,, obviously at a discount.

    Now I want to know what are the implications for this.

    For example, even though the spot price is 120rs, I buy a contract lot for 100rs and later sell it for a higher price say 150rs... now my doubt is will my profit margin be 150 (sell price) - 100 (futures buying price) = 50 or will it be 150 - 120 (spot price)... basically would request anyone here to clarify these implications owing to the price discount.

    thanks a ton guys.
     
  2. swagat86

    swagat86 Active Member

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    discount is a clear indication of the market participants being bearish or hedged at points where they feel markets cud go down.

    If u buy @ Futures and sell at futures, u get the difference thats all.Spot prices hav to do nothin with futures.(apart from being the underlying)

    Futures are marked to makret, ie settled everyday at the settlement prices. u can find the settlement price at NSE website.


    thanks
     
  3. SavantGarde

    SavantGarde Well-Known Member

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    A Lot Of Times Discount Also Occurs Due To The Declared Dividend For The Stock....& Ususally Corrects Itself After The Ex-Date

    Happy & Safe Trading

    SavantGarde
     
  4. scorpicity

    scorpicity New Member

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    thxs a lot guys...
     
  5. rajneesh_mailbox

    rajneesh_mailbox Member

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    though logically when buyers exceed seller discounts should go and premium should come and vice versa. but i have been seriously noting that discount or premium not giving exact picture .infact it was mostly opposite case discount led a bull move and vice versa. one thing is clear there is something else in move may be market movers squeezing bulls or bears on the wrong side. i do'nt know.
    but one thing is clear discount or premium mostly contradict the movement expected.

    rajneesh
    we can share individual experience henceforth here
     
  6. swagat86

    swagat86 Active Member

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    hi rajnesh,

    as i said it can be bearishness or hedged positions.

    So it may not predict falls. But it always gives warning signals.

    U can try this. If u have nifty futs data and Niftys spot data plot them on the same chart and then check out where the discounts were and where premium was?
     

  7. Laksh

    Laksh Active Member

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    In theory future price should reflect the cost of carry and under normal circumstances should be higher than spot price. In that case a discount to the spot price in futures reflect bearishness. However, I have observed that even during raging bull market nifty future had been trading at a doscount most of the time and it reflected some premium only near the expiration date. In fact I have observed that trading at a premium portends a short-term top. Any one can observe this by putting the spot and future price of nifty side by side. So its my contention that though the theory of discount portending bearishness seems logically correct, there must be some other factors, at least in the Indian markets, which distort this theoretical proposition. I had read an article in ET where it said that the lack of facility for short selling in the reason for this distortion. Could somebody throw some further light on this.
     
  8. Asia Etrader

    Asia Etrader Member

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    Supply and demand will negate the natural index arbitrage equation F=S(1+r)^t but generally for commodities. This shouldnt happen in financial futures however as its only cash settlement. But in the case of India because you cant sell short is definitely the largest contributing factor. This will change though eventually. If you are interested to read a bit more about pricing futures check out the Education page on my website under futures http://www.asia-etrading.com/electronic_trading_education.php
     
  9. TraderRavi

    TraderRavi Well-Known Member

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    Thanks SG :)
     
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