Cash-and-Carry in a Stock Future: Fair Value, Ban List and Delivery Mechanics
On 4 June, shares of ABC Ltd trade at ₹1,040 in the cash market while the 29 June futures trade at ₹1,058. The lot size is 1,000 and ABC is expected to pay a dividend of ₹8 per share with the ex-date on 16 June, well before expiry. A broker quotes a borrowing rate of 9% for the 25-day funding requirement and charges ₹100 per leg as brokerage. STT applies at 0.1% on the cash purchase and 0.0125% on the sale of futures; stamp duty and exchange charges are about ₹40 in total, and market impact is roughly ₹0.30 per share on each leg. On the same day the exchange's F&O ban list shows ABC's open interest at 97% of its market-wide position limit. The client can deploy ₹15 lakh.
1. Compute the no-arbitrage futures price and the gross and net profit of a cash-and-carry trade for one lot, listing every cost you include.
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Fair value = S + S × r × t − D = 1,040 + (1,040 × 0.09 × 25/365) − 8 = 1,040 + 6.41 − 8 = ₹1,038.41. Actual futures at 1,058 → overpriced by 19.59 points = ₹19,590 per lot gross.
Costs:
- STT on cash purchase: 0.1% × ₹10,40,000 = ₹1,040
- STT on futures sale: 0.0125% × ₹10,58,000 = ₹132
- Brokerage: ₹200 (two legs)
- Impact: ₹0.30 × 1,000 × 2 = ₹600
- Stamp duty and exchange charges: ₹40 Total ≈ ₹2,012 → net ≈ ₹17,578 per lot.
Capital used ≈ ₹10.4 lakh for shares + about ₹1.2 lakh futures margin = ₹11.6 lakh, within the ₹15 lakh available. Net return ≈ 1.5% over 25 days, about 22% annualised. The 9% funding cost is already embedded in fair value; if the client uses own cash, it is an opportunity cost rather than a cash outflow.
2. Is the ₹19.59 premium a genuine mispricing? Explain how the ban-list status and the dividend assumption affect execution and fair value.
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It is a genuine premium only if it can be captured. The ban-list status is the first check: when open interest is at 97% of the market-wide position limit, fresh futures positions are not permitted - only reductions. A cash-and-carry requires selling a new futures contract, so the trade cannot be initiated at all. The premium may persist precisely because arbitrageurs are blocked from shorting the future; a trader seeing only the price would misread a regulatory constraint as free money.
The dividend assumption is the second check. If ₹8 is not confirmed, fair value is 1,040 + 6.41 = ₹1,046.41, leaving only ₹11.59 of premium. If the ex-date slips past 29 June, the short futures loses the benefit of the price drop and the trade earns only the smaller residual. If the dividend is a special or larger amount, fair value falls further and the premium rises - so the trader must confirm the record date, amount and tax treatment before sizing the trade.
3. If the trade is put on despite the issues, work through the practical mechanics at expiry and the main risks that could turn a locked profit into a loss.
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Mechanics: buy 1,000 shares in the cash market (₹10.4 lakh, T+1 settlement), simultaneously sell one June future at 1,058 and post about ₹1.2 lakh margin. Hold both legs to 29 June. On expiry the short future is physically settled: deliver 1,000 shares from demat against the position and receive 1,058 × 1,000 = ₹10.58 lakh. The ₹8 dividend (₹8,000) is received on the ex-date, subject to TDS and slab taxation.
Risks: (i) mark-to-market - if ABC rallies, the short future loses daily and margin calls can force an unwind before convergence; (ii) ban/position limits - if the ban is imposed after entry, exiting may be restricted to reductions, trapping the position; (iii) dividend risk - a cut or omission removes ₹8 of expected benefit; (iv) delivery risk - shares must be in demat by the settlement cut-off, otherwise auction purchase and short-delivery penalty apply; (v) liquidity and lot-size changes; (vi) tax - dividend is taxed at slab, reducing the net edge. Only the convergence of futures to spot is locked; everything else is execution risk.