CMM Assignment 3 EX-MBA 2010-13 Roll No.

2010G22

Futures Markets and Cost of Carry Analysis

Prepared and Submitted by:

Samir Dhamelia(2010G22)

Capital and Money Market

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CMM Assignment 3 EX-MBA 2010-13 Roll No. 2010G22

Executive Summary
To understand concept of Cost of Carry with help of futures Markets data. Cost of Carry is calculated in assignment using difference of Spot Price and Future Price. These analysis is done using actual data available on NSE site. The alternate way to calculate Cost of Carry theoretically would be using concepts of Risk-Free interest rate and Dividend yield. Analysis is done for 13 Manufacturing sector companies and represented with help of graphs. Introduction: Cost of Carry is the cost of CARRYING or HOLDING a position. Its model expresses the forward price as a function of the spot price and the cost of carry, where F is the forward price, S is the spot price, e is the natural logarithms, r is the risk free interest rate, s is the storage cost, c is the convenience yield, and t is the time to delivery of the forward contract. The theoretical way of pricing any Future is to factor in the current price and holding costs or cost of carry. Futures Price = Spot Price + Cost of Carry Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue which may result in this period. The costs typically include interest in case of financial futures (also insurance and storage costs in case of commodity futures). The revenue may be dividends in case of index futures. Apart from the theoretical value, the actual value may vary depending on demand and supply of the underlying at present and expectations about the future. These factors play a much more important role in commodities, especially perishable commodities than in financial futures. In general, the Futures price is greater than the spot price. In special cases, when cost of carry is negative, the Futures price may be lower than Spot prices. Methodology used for Calculation: From NSE data on futures, Spot Price as Underlying price, and Future Price as Settlement Price of contract, and then on the basis of the equation calculated the Cost of Carry. When cost of carry is positive, i.e. when spot price is less than future price, that can be called as CONTANGO MARKET. And, on the other side when cost of carry is negative, i.e. when future price is less than spot price, can be called as BACKWARDATION MARKET. Close price (Future Price) Spot Price = Cost of Carry

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CMM Assignment 3 EX-MBA 2010-13 Roll No. 2010G22

Cost Of Carry Analysis

Capital and Money Market

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Interpretation: Cost of carry is an indicator of the demand-supply forces in the Futures market. It basically means the annualized interest cost players decide to pay (receive) for buying (selling) a respective contract. A higher carry cost is indicative of buying pressure and lower cost of carry is indicative of selling pressure. Carry Cost is a widely used parameter not only because it is more interpretable being an annualized figure, as compared to basis (Cash netted for Futures) but also because it works well with the trio of Price, Volume and Open Interest in highlighting the market trend.

Capital and Money Market

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CMM Assignment 3 EX-MBA 2010-13 Roll No. 2010G22

Bibliography
To Filter Stocks http://www.bseindia.com/stockscanner/stockscanner.aspx Carry of Cost concepts http://www.traderji.com/futures/14663-understanding-cost-carry.html http://en.wikipedia.org/wiki/Cost_of_carry http://www.investopedia.com/terms/c/carryingcostofinventory.asp Historical information on Futures Data http://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm

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