Page 166 - DCOM510_FINANCIAL_DERIVATIVES

Unit 10: The Trader Workstation

10.4.1 Market Spread/Combination Order Entry Notes

The NEAT F&O trading system also enables to enter spread/combination trades. Figure 10.8
shows the spread/combination screen. This enables the user to input two or three orders
simultaneously into the market. These orders will have the condition attached to it that unless
and until the whole batch of orders finds a counter match, they shall not be traded. This facilitates
spread and combination trading strategies with minimum price risk. The combinations orders
are traded with an IOC attribute whereas spread orders are traded with ‘day’ order attribute.



Caselet Market Spread and Arbitrage

r. Nitin Joshi is an arbitrager in the commodity market. Mr. Joshi enters into a
commodity futures transaction when he sees any risk less profit opportunity in
Mthe market. In May 2011, he implements cash and carry arbitrage transaction in
silver in the following manner:
In May 2011, Mr. Nitin Joshi buys 30 MT of turmeric at the spot price of ` 1950 per quintal
by borrowing ` 585000 @ 10% p.a for two months (at simple interest) and simultaneously
sells 3 turmeric June futures contract of 10 MT each at a price of ` 1975 per quintal. On the
maturity of the contract, he takes possession of turmeric for one month.
Then after a month, he closes out the futures position on the contract expiration day by
giving delivery of the turmeric purchased in May 2011.

The transaction yields a profit of ` 2625. {592500 – (`585000 + 4875 (interest) }
From the amount of ` 592500 in hand, Mr. Joshi returns the borrowed amount of ` 585000
along with an interest of ` 4875. He also incurs a storage cost of ` 1000 on 30 MT. Mr. Nitin
Joshi earns an arbitrage profit of ` 1625 after deducting interest payments and storage cost.

Source: Kulkarni B. (2011). “Commodity Markets & Derivatives”. Excel Books.
10.4.2 Basket Trading

In order to provide a facility for easy arbitrage between futures and cash markets, NSE introduced
basket-trading facility. This enables the generation of portfolio offline order files in the derivatives
trading system and its execution in the cash segment. A trading member can buy or sell a
portfolio through a single order, once he determines its size. The system automatically works
out the quantity of each security to be bought or sold in proportion to their weights in the
portfolio. Figure 10.9 shows the basket trading screen.

Self Assessment

Fill in the blanks:

14. Proprietary orders should be identified as………………., and those of clients should be
identified as ………………..
15. The futures market is a zero sum game i.e. the total number of long in any contract always
equals the total number of ……………………………in any contract.

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