Profit when future is at premium/discount

#1
Just saw the news on http://www.capitalmarket.com/
1. Reliance Industries (RIL) June 2009 futures were at premium at 2,232.10 compared to the spot closing of 2,220.55.

2. Bharti Airtel June 2009 futures were at premium at 798 compared to the spot closing of 795.90.

3. Larsen & Toubro June 2009 futures were at discount at 1,336 compared to the spot closing of 1,345.70.

Now my query is:

Today is 28th May 2009 and May contract expired.
Can we make profit in case of Reliance/Airtel if we take the foolwing position :
Sell RIL/Airtel at 2232.10 in Future and buy at spot at 2220 and pocket risk free profit of Rs 12 per share.

For LT, sell at spot at 1336 and buy at 1336 at future market?

The profits are risk free, is it correct or some other consideration are there?
Please explain.
 

AW10

Well-Known Member
#2
Thats what it looks at first glance. But if you analyse the opportunity cost of financing these 2 trasnaction then yr 12 rs of profit will turn into loss.

June future is above current spot price because of the "Cost of Carry" (just google it to read more about it).
From your trading perspective, take care of following points and see if u are still making 12 rs of profit
- When u sell June futures, margin amount is blocked. What is the return on that money if you use it somewhere else
- When u are buying spot today, your account is debit .. What is the return the same money will give u, if u invest it somewhere else
- what will be brokerage on these 2 transaction

Happy Trading.
 

AW10

Well-Known Member
#4
I have to make some assumptions to clarify it.
- When u sell June futures, margin amount is blocked. What is the return on that money if you use it somewhere else
Taking RIL as example, lot size = 300, future price = 2232. Assume 15% of value is blocked as margin..so amt blocked as margin = 300*2232*15% = 100440.
If you take even 0.25% return (i.e. 3% annual interest rate on bank deposit), the interest for 1 month would have been = 0.25%*100440 = 251

- When u are buying spot today, your account is debit .. What is the return the same money will give u, if u invest it somewhere else
Amount required to buy 300 Reliance in spot = 300*2220 = 666000. If this money is place in FD, at 0.25% monthly interest you would have got = 0.25%*666000 = 1665

- what will be brokerage on these 2 transaction
If you take 1% brokerage on futures transaction (both buy and sell leg) that give brokerage for futures txn = 1%* 300*2232 = 6696
If you take 2% brokerage on Spot transaction (both buy and sell leg) that give brokerage for spot buy txn = 2%* 300*2220 = 13320

Now you shd be able to calculate your cost /opportunity cost of executing this transaction and find out if it really makes sense or not ?

Note - I might be little bit off in my calculation but intention here is to direct our thought process in right direction. Please correct if I have made any wrong calculation.

Happy Trading
 

Similar threads