Cash & Futures Arbitrage

learningcurve · #1 18th August 2007, 07:32 AM

Dear traderji , creditviolet , ivanboesky & senior members I have following doubts in cash & futures arbitrage can you help me to solve them

1) “it is said that future price converge with spot price on expiry/settlement day.”
is it still happening in NSE today also because when you look at the newspapers on the expiry/settlement day the closing price of the future for the current month is different from the closing price of spot on the expiry / settlement day?
Please enlighten me on this aspect.

2) if the future price converge with the spot price on the expiry day , then at what
time of the day does it take place ?

3) how to sell in the spot market & buy in the future market simultaneously on the
expiry / settlement day to take advantage of cash & future arbitrage that developed earlier to expiry ?

ivanboesky · #2 18th August 2007, 08:20 AM

1. The settlement of all outstanding futures contracts happens at the underlying spot price. So, though the closing prices (last 30 min VWAP) may be different for the stocks and futures, all futures are settled at the cash price. If the futures prices are far from the cash price, arbitrage is possible.

2. Futures prices start converging a few days before expiry. Actual convergence happens on expiry day. Arbitrage ensures this happens.

3. If futures are trading below the spot price, you have to sell the stock and buy the futures. But this is not possible since short selling is not allowed in India. This is one of the reasons that futures trade at a discount to spot for long periods of time.

learningcurve · #3 19th August 2007, 07:26 AM

Thanks ivanboesky for your informative & fantastic advice but what I am still not clear is :

1) what is the time of expiry on the expiry day ( i.e, whether it is at 3.p.m. or at 3.30 p.m.)?

2) How do I sell in the cash market on the shares that I have purchased earlier and buy in the future market on the futures that I have sold earlier simultaneously on the expiry to take advantage of cash &future arbitrage?

3) what do you mean by “ last 30 min VWAP” ? what is the full form of “VWAP”?

with regards,

learningcurve

ivanboesky · #4 19th August 2007, 08:25 AM

1. The time of expiry is 3.30pm. However, the expiry price is the VWAP over the last 30 mins (from 3pm to 3.30pm).

2. Assume in the morning on expiry day, the cash is at 100 and the futures are at 101. You buy the cash and sell the futures. At 3pm, the cash and futures are both at 100. You have two options: one, is to sell the stock and buy back the futures simultaneously. Second is to sell the stock over the last 30 mins. Since the futures will expire at the underlying stock price, you only have to ensure that you sell the stock at the closing price (or higher).

3. VWAP is Volume weighted Average Price. Calculated by multiplying the number of shares traded at each price by the price and dividing this by the total number of shares traded.

prashant909 · #5 28th August 2007, 07:56 PM

Is Short selling allowed INDIA??????????????????????????

ivanboesky · #6 28th August 2007, 08:20 PM

No!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

prashant909 · #7 28th August 2007, 08:46 PM

wat r the basic features provided by the trading interface of brokers????????

Himadri de · #8 28th August 2007, 09:08 PM

Is it enough to trade with Rs 3,00,000/- in cash with future trading?

Himadri de · #9 28th August 2007, 09:12 PM

Quote:

Originally Posted by ivanboesky

1. The time of expiry is 3.30pm. However, the expiry price is the VWAP over the last 30 mins (from 3pm to 3.30pm).

2. Assume in the morning on expiry day, the cash is at 100 and the futures are at 101. You buy the cash and sell the futures. At 3pm, the cash and futures are both at 100. You have two options: one, is to sell the stock and buy back the futures simultaneously. Second is to sell the stock over the last 30 mins. Since the futures will expire at the underlying stock price, you only have to ensure that you sell the stock at the closing price (or higher).

3. VWAP is Volume weighted Average Price. Calculated by multiplying the number of shares traded at each price by the price and dividing this by the total number of shares traded.

is it enough to start in f&O segment with rs 3,00,000/- mainly in future & cash trading?

aca_trader · #10 29th August 2007, 06:12 PM

Quote:

Originally Posted by Himadri de

is it enough to start in f&O segment with rs 3,00,000/- mainly in future & cash trading?

Yes it's enough if you follow the MM principles.
As a Rule a thumb, Use Rs. 50K margin for one lot of Futures while trading intraday and Rs. 1 Lac or Exchange Margin, whichever is higher for carrying positions.

The logic is to use a leverage of not more than 6:1 intraday and 3:1 for positions. Usually the contract size is approx. Rs. 3 lacs and that is how the rule of thumb has been designed. However, In every trade, check if your risk size is within a defined %age of your capital.

Best Regards,
--Ashish

Similar Threads for: Cash & Futures Arbitrage
Thread	Thread Starter	Forum	Replies	Last Post
Intraday Calls In Cash /futures	renu daga	Equities	617	Today 10:44 AM
software please(nse cash & Futures)	gopu	Software	3	30th January 2007 08:50 PM
Arbitrage on nifty futures	swagat86	Derivatives	17	17th September 2006 03:54 PM
cash futures	sanky	Commodities	0	19th January 2006 05:42 PM
Cash Futures Divergence (CFD)	nautilus	Technical Analysis	5	29th November 2005 08:03 PM