Podcast
Questions and Answers
What is the primary objective of cash-and-carry arbitrage?
What is the primary objective of cash-and-carry arbitrage?
In cash-and-carry arbitrage, what is done after purchasing the underlying asset in the cash market?
In cash-and-carry arbitrage, what is done after purchasing the underlying asset in the cash market?
What is the minimum average daily turnover required during the review period?
What is the minimum average daily turnover required during the review period?
What is the minimum average daily open interest required for consideration during the review period?
What is the minimum average daily open interest required for consideration during the review period?
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How is the fair futures price calculated in cash-and-carry arbitrage?
How is the fair futures price calculated in cash-and-carry arbitrage?
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What happens if the stock price rises to Rs. 1580 in the cash-and-carry arbitrage scenario?
What happens if the stock price rises to Rs. 1580 in the cash-and-carry arbitrage scenario?
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How long must an index be excluded before it can be considered for re-inclusion?
How long must an index be excluded before it can be considered for re-inclusion?
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What is the net arbitrage gain when the stock falls in the provided scenario?
What is the net arbitrage gain when the stock falls in the provided scenario?
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Which of the following corporate actions does NOT generally require a strike price adjustment?
Which of the following corporate actions does NOT generally require a strike price adjustment?
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What factor is used to calculate the adjustment factor for bonus shares?
What factor is used to calculate the adjustment factor for bonus shares?
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What characterizes a straddle option strategy?
What characterizes a straddle option strategy?
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What is a key risk management tool mentioned that can be used along with calendar spreads?
What is a key risk management tool mentioned that can be used along with calendar spreads?
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What is the primary goal of adjustments for corporate actions in stock options?
What is the primary goal of adjustments for corporate actions in stock options?
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When are adjustments conducted for corporate actions?
When are adjustments conducted for corporate actions?
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In the cash-and-carry arbitrage example given, what cost is calculated when holding the shares?
In the cash-and-carry arbitrage example given, what cost is calculated when holding the shares?
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Which corporate action is not typically associated with adjustments for positions?
Which corporate action is not typically associated with adjustments for positions?
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What is the primary expectation placed on brokers that offer algorithmic trading services?
What is the primary expectation placed on brokers that offer algorithmic trading services?
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Which piece of information indicates when a derivatives contract will expire?
Which piece of information indicates when a derivatives contract will expire?
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What does the term 'Open Interest' refer to in futures contracts?
What does the term 'Open Interest' refer to in futures contracts?
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Which option type signifies a European-style call option?
Which option type signifies a European-style call option?
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How do modern trading platforms primarily provide pricing information?
How do modern trading platforms primarily provide pricing information?
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What does the 'Strike Price' refer to in options trading?
What does the 'Strike Price' refer to in options trading?
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What is calculated by multiplying open positions by the notional value in options contracts?
What is calculated by multiplying open positions by the notional value in options contracts?
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What is the primary objective of the Settlement Guarantee Fund (SGF)?
What is the primary objective of the Settlement Guarantee Fund (SGF)?
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What does the 'High Price' represent for a trading contract?
What does the 'High Price' represent for a trading contract?
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Which type of clearing member primarily clears and settles trades for other trading members?
Which type of clearing member primarily clears and settles trades for other trading members?
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Which term refers to the total number of contracts traded during a specific day?
Which term refers to the total number of contracts traded during a specific day?
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What does the Put/Call Ratio (PCR) provide information about?
What does the Put/Call Ratio (PCR) provide information about?
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Which of the following indicates the top gainers in the futures market?
Which of the following indicates the top gainers in the futures market?
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Which task is NOT a responsibility of clearing members?
Which task is NOT a responsibility of clearing members?
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What information does the Futures OI Losers list provide?
What information does the Futures OI Losers list provide?
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Which type of member clears and settles trades only for themselves or their clients?
Which type of member clears and settles trades only for themselves or their clients?
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Which of the following describes the 'Corporate Action Level'?
Which of the following describes the 'Corporate Action Level'?
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How does the SGF contribute to risk mitigation during the settlement process?
How does the SGF contribute to risk mitigation during the settlement process?
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Which segment of the market has its own Core SGF designed for specific settlement risks?
Which segment of the market has its own Core SGF designed for specific settlement risks?
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What is the role of the Investor Protection Fund (IPF) in case of a trading member's default?
What is the role of the Investor Protection Fund (IPF) in case of a trading member's default?
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What additional objectives does the IPF have beyond compensating investors?
What additional objectives does the IPF have beyond compensating investors?
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How are derivative contracts initially recorded according to fair value?
How are derivative contracts initially recorded according to fair value?
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What process is used to reassess the value of a derivative contract at the end of each trading day?
What process is used to reassess the value of a derivative contract at the end of each trading day?
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What does the SGF ensure regarding investors during the settlement process?
What does the SGF ensure regarding investors during the settlement process?
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Study Notes
Cash-and-Carry Arbitrage
- Exploits price differences between spot and futures markets when futures contracts are overpriced
- Involves buying an underlying asset in the spot market and selling the futures contract for the same asset
- Profit is made by capturing the price difference between the spot market and futures market
- The arbitrageur benefits from the difference between the cost of carrying the underlying asset in the spot market and the futures price
- When the futures price is higher than the cost of carry, arbitrageurs profit from the difference
Calendar Spread
- A strategy that involves buying and selling futures contracts for the same underlying asset but with different expiration dates.
- This strategy takes advantage of pricing inefficiencies between futures contracts with different maturities
Fair Futures Price Calculation
- Fair Price = Spot Price * e^(cost of carry * time to maturity)
- Cost of carry includes factors like storage costs, interest rates, and insurance premiums
- Arbitrageurs seek to exploit deviations between the actual futures price and the fair futures price
- When the futures price is higher than the fair price, it is considered overpriced
Types of Clearing Members
- Self-Clearing Member: Clears and settles only their own trades
- Trading Member-Cum-Clearing Member: Clears and settles both own trades and those of other members
- Professional Clearing Member: Focuses on clearing trades for other trading members but does not trade on their own account
Responsibilities of Clearing Members
- Clearing: They calculate the net obligations of trading members and determine settlement requirements
- Settlement: Ensure the transfer of funds and securities between parties
- Risk Management: Monitor and manage risks, ensuring that trading members maintain sufficient margins to cover potential losses
Settlement Guarantee Fund (SGF)
- Guarantees the settlement of trades in various segments of the stock exchange
- Funds the obligations of a clearing member in case of default
- Acts as a safety net, reducing the risk of default by clearing members
Investor Protection Fund (IPF)
- Compensates investors if the assets of defaulting members are insufficient to meet claims
- Aims to protect investors and promote investor education and awareness
- Administered through a registered Trust
Accounting for Equity Derivatives
- Initial Recognition: Derivatives are recorded at their fair value on the trade date
- Subsequent Measurement: Values are reassessed daily using mark-to-market (MTM) accounting
- Mark-to-Market (MTM): The change in value from the previous day is recorded as a gain or loss
- This ensures that financial statements reflect the current market value of derivatives
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Description
This quiz explores the concepts of cash-and-carry arbitrage and calendar spreads in the futures market. It covers strategies for exploiting price differences and calculating fair futures prices. Test your understanding of how arbitrageurs can profit from market inefficiencies.
