Where do the derivatives come in?
Let’s say the market sentiment is very good, prices are rising and everyone is sure they will go higher. Ideally, in such a booming market, any stock derivative will quote at a premium (higher price) compared to its price in the cash (spot) market. Conversely, when markets are going downhill, derivatives will quote at a discount (lower price) compared to their spot prices. This happens because future expectations play a crucial role in determining future prices. Now, JMEDF can buy any stock in the spot market and simultaneously enter into a sales contract in the derivatives market for the same stock. For instance, on February 3, TISCO was quoting at Rs 392.55 in the cash market, but at Rs 395.20 in the Futures market. The arbitrage: a cool profit of Rs 2.65 per share. March 1, 2005: JMEDF buys TISCO for Rs 390. Simultaneously sells a TISCO Futures for Rs 395. It does so because it believes the price of TISCO will rise to this amount, and it can make a profit of Rs 5 per share. On the d
