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

Gold spot is Rs 60,000 per 10 grams. A jeweller buys spot and sells a 3-month futures at Rs 61,800. Total cost of carry (financing plus storage and insurance) for 3 months is 2.5% of spot. Ignoring other costs, what is the position?

There is an arbitrage profit of Rs 300 per 10 grams. The 2.5% carry cost on Rs 60,000 is Rs 1,500, so fair futures price is Rs 61,500. Futures at Rs 61,800 is overpriced, so buy spot and sell futures to earn the Rs 300 difference.

  1. AArbitrage profit of Rs 300 per 10 grams, since fair price is Rs 61,500Correct
  2. BArbitrage loss of Rs 300 per 10 grams, since fair price is Rs 62,100
  3. CNo arbitrage, since fair price equals Rs 61,800
  4. DArbitrage profit of Rs 1,800 per 10 grams, since carry cost is ignored

Explanation

Carry cost = 2.5% x 60,000 = Rs 1,500, so fair futures = Rs 61,500. Futures trades at 61,800, which is Rs 300 above fair. Buying spot and selling futures locks in 61,800 - 61,500 = Rs 300 per 10 grams. Rs 1,800 ignores carry cost.

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