1) The document discusses arbitrage opportunities in long and short futures contracts for Cummins India between August 28th and November 26th. For long futures, a profit of Rs. 20,784 can be made by buying at a cheaper theoretical price and selling at a higher actual price. 2) For short futures contracted on November 12th, a profit of Rs. 3,600 can be earned by selling at a higher price. 3) It also discusses the cost of carry over the 3 month contract period, which gradually decreases from Rs. 4.17 per share to zero as the expiry date approaches.

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CUMMINS INDIA
ARBITRAGE (Contract period 28th
Aug to 26th
Nov)
Long Futures:
As we have decided to Hedge our long future contract as of date 18th
Sept
When we say we need to Hedge a long
future contract we must know that we need
to Buy at Cheap and need to sell that at
Expensive price to get the benefit of that
arbitrage transaction.
Here as we calculate the arbitrage between
actual future contract and theoretical future
contract price. As we are buying, the price will be negative and also the loss of dividend yield
will be added in the final payoff and we receive 17.32rs per share.
As the lot size for 1 future contract of cummins india ltd consist of 1200 shares. So by making
this transaction we can make a profit of 20,784 Rs (1200*17.32) of total profit.
Short Futures:
As we decide to short future contract on
12th
Nov.
As we disscused for the long futures, in
order to make arbitrage in short futures
we need to sell the actual futures at higher
price. By conducting the transaction we
can earn a profit of 3 rs per share, which
make a total profit of (1200*3) 3,600 Rs.

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Cost of Carry:
As we discussed above the arbitrage in both types of future contract, we should also understand
the cost of carry with the 3 month time period of contract.
Cost of carry is basically, If I defer to my decision of buying or selling someone else will bear
the cost of my decision. So considering this we get a downward sloping graph. As the day gets
closer to the expiry of 3month contract we get to see a lower cost of carry to the transaction.
At 28th
aug when the contract is brought to birth where we have 90 days remaining to the
expiry, someone has to bear a cost of 4.17rs which keeps on gradually decreasing till we are on
expiry date of 3month contract.
Basis Risk:
We can see a heavy variation in the graph of the basis risk as due to variation in the market
which is caused by the various factors to the company. Also it is a difference of Actual Future
price and Spot price of the company’s share. So at the expiry date we see price converging and
basis risk is zero.