Skip to content

NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

Nifty futures with a fair value of 22,000 trade in the market at 22,150. Ignoring transaction costs, which action would capture an arbitrage profit, and why?

Buy the underlying and sell the futures. Futures at 22,150 are above the fair value of 22,000, so selling them and holding the underlying locks in roughly 150 points as prices converge at expiry, a cash-and-carry arbitrage.

  1. ABuy futures and sell the underlying, because futures are overpriced
  2. BBuy the underlying and sell futures, because futures are overpriced relative to cost of carryCorrect
  3. CBuy the underlying and sell futures, because futures are underpriced
  4. DSell both the underlying and futures, because spot is overvalued

Explanation

Futures at 22,150 exceed fair value of 22,000, so they are overpriced. Cash-and-carry arbitrage buys the underlying and sells the expensive futures, locking in about 150 points at expiry when prices converge. The reverse trade applies when futures are underpriced.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Forwards and Futures shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Forwards and FuturesFree diagnostic mock

More Introduction to Forwards and Futures questions