Cash & Futures Arbitrage

[trader_ks]

No. Only MTM will be adjusted and future position will be closed. Cash and futures are all together different products .

 

[curiousv]

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.

@ivanboesky - What are the risk of this arbitrage strategy? You said futures will expire at the underlying stock price but at what price future will expire ..will it expire at vwap price of last 30 mins (in other words close price) or last traded price (which is price at 3.30 sharp) @Tejas Khoday

 

[curiousv]

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.

Can you please explain the second point in which you said - 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). - if you can give an example ..it would be great.
What I understood ..- for example I bought divislab which is 200 lot size in the morning when future price was little higher than spot lets say 5 Rs. higher than spot ..so for example spot is 3800 Rs. and future is 3805 Rs. ..now you are saying start selling cash holding at 3 pm and continue every 5 mins until 3.29 ? What about future ..when do we square off future ?

What is the risk in doing this ?How do I make sure stock I sell every 5 mins - is higher than or at the closing price?