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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities

A trader holds Rs 10 crore of copper exposure through futures. Spot copper is Rs 800 per kg and the 3-month futures is Rs 812 per kg. Interest and storage costs for 3 months total Rs 10 per kg, and no convenience yield applies. Which statement is correct?

Futures at Rs 812 exceed the fair value of Rs 810 (spot Rs 800 plus carry Rs 10), so they are overpriced by Rs 2 per kg. A cash-and-carry arbitrage of buying spot and selling futures locks in that gain.

  1. AFutures are overpriced by Rs 2 per kg versus fair value of Rs 810, so a cash-and-carry arbitrage (buy spot, sell futures) is profitableCorrect
  2. BFutures are underpriced by Rs 2 per kg, so a reverse cash-and-carry is profitable
  3. CFutures are at fair value, so no arbitrage exists
  4. DFutures are overpriced by Rs 12 per kg, as carry costs are ignored in fair value

Explanation

Fair futures = 800 + 10 = Rs 810. Actual is 812, so futures are rich by Rs 2. An arbitrageur buys spot, finances and stores it, and sells futures, locking in Rs 2 per kg. Rs 12 ignores carry costs, which is the error in the last option.

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