{"id":77116,"date":"2026-08-31T16:11:38","date_gmt":"2026-08-31T10:41:38","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=77116"},"modified":"2026-08-31T16:37:31","modified_gmt":"2026-08-31T11:07:31","slug":"the-futures-pricing","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/the-futures-pricing\/","title":{"rendered":"The Futures Pricing"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"77116\" class=\"elementor elementor-77116\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"23ba90b\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 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data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/introduction-to-derivatives\/\">Introduction To Derivatives<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/derivatives-market\/\">Derivatives Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/forwards-contract\/\">Forwards Contract<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/futures-contract\/\">Futures Contract<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/the-futures-trade\/\">The Futures Trade<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/leverage-and-payoff\/\">Leverage and Payoff<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/margin-and-m2m\/\">Margin and M2M<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/margin-calculator\/\">Margin Calculator<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/all-about-shorting\/\">All About Shorting<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/the-nifty-futures\/\">The Nifty Futures<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/the-futures-pricing\/\">The Futures Pricing<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/hedging-with-futures\/\">Hedging With Futures<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/open-interest\/\">Open Interest<\/a><\/li><\/ul><\/div><\/div><div class=\"chapters_toggle\" title=\"chapters\"><a title=\"chapters\" href=\"#\" id=\"open_chapters\"><span>View Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><a title=\"chapters\" href=\"#\" id=\"close_chapters\" style=\"display:none;\"><span>Hide Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><\/div>\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery('.chapters_toggle #open_chapters').click(function(e){\n\t\t\t\te.preventDefault();\n\t\t\t\tjQuery('.desktop_chapters').css(\"left\",\"0px\");\n\t\t\t\tjQuery('#open_chapters').css(\"display\",\"none\");\n\t\t\t\tjQuery('#close_chapters').css(\"display\",\"block\");\n\t\t\t\t\/\/jQuery('.chapters_toggle').css(\"width\",\"200px\");\n\t\t\t})\n\t\t\tjQuery('.chapters_toggle 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          \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                    \n                                  <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='The-Futures-Pricing-Formula' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.1 <b>The Futures Pricing Formula<\/b><\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-77080 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula.png\" alt=\"The Futures Pricing Formula\" width=\"997\" height=\"953\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula.png 997w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-300x287.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-768x734.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-50x48.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-100x96.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-150x143.png 150w\" sizes=\"(max-width: 997px) 100vw, 997px\" \/><\/p>\r\n<p>Most traditional courses in derivatives begin by presenting the formula for pricing futures. But here we have opted to talk about it later. The reason is pretty simple, if you are trading futures mostly using technical analysis, you don&#8217;t have to calculate fair values every day. But if you are going to be using quantitative strategies such as calendar spreads or index arbitrage, then it is critical to know how futures are priced. This chapter prepares you for those advanced strategies.<\/p>\r\n<p>We know that a futures contract derives its value from the underlying asset and typically moves with it. If the underlying goes up, the futures price goes up.\u00a0If the spot price goes down, the futures price goes down. But the futures price is not the same as the spot price. The difference between the two is known as the spread or basis.<\/p>\r\n<p>For instance, let\u2019s say the Nifty Index is trading at 19,850 in the spot market while the current month Nifty Futures contract is trading at 19,865. Here the spread is 15 points. This difference is explained by the so-called spot-futures parity which takes into account factors such as interest rates, dividends and time to expiration.<\/p>\r\n<p>The general formula for futures pricing is:<\/p>\r\n<p>Futures Price =Spot Price*[1+r<sub>f\u00a0<\/sub>* x\/365 &#8211; d]<\/p>\r\n<p>Where:<\/p>\r\n<ul>\r\n<li>= risk-free rate (annualized)<\/li>\r\n<li>= dividend yield expected during the contract period<\/li>\r\n<li>= number of days to expiry<\/li>\r\n<\/ul>\r\n<p>The risk-free rate is often taken from short-term government securities, such as the RBI\u2019s 91-day Treasury bill yield.<\/p>\r\n<p><strong><b>Example: Calculating Fair Value<\/b><\/strong><\/p>\r\n<p>Let us assume Reliance Industries trading at the spot market at 2,450 and there are 10 days to expiry. The risk-free rate is 7% per annum, and no dividend is expected during this period.<\/p>\r\n<p>Futures Price = 2450 * [1+0.07*10\/365]<\/p>\r\n<p>=2450 *(1+0.0019)=2454.65<\/p>\r\n<p>So the fair value of Reliance Futures is \u20b92,454.65. .If the actual market price of the futures contract is \u20b9 2,456, the small difference can be attributed to transaction cost, taxes or short term supply demand imbalance.<\/p>\r\n<p><strong><b>Mid-Month and Far-Month Contracts <\/b><\/strong><\/p>\r\n<p>The longer the time to expiry, the larger the spread between spot and futures. For example:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Mid-month contract (30 days to expiry):<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>2450 * [1+0.07*30\/365] =2464.10<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Far-month contract (75 days to expiry):<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>2450 *[1+0.07 *75\/365]=2485.24<\/p>\r\n<p>Notice how the futures price increases with more days to expiry,(\u20b92,454.70 for 10 days \u2192 \u20b92,464.10 for 30 days \u2192 \u20b92,485.24 for 75 days), reflecting the cost of carry.\u00a0<\/p>\r\n<p><strong><b>Discount &amp; Premium<\/b><\/strong><\/p>\r\n<ul>\r\n<li>If futures trade above the spot price, the market is said to be at a premium. This is what is often called a contango in commodity markets.<\/li>\r\n<li>If futures trade below the spot price, the market is said to be at a discount i.e. in commodities, backwardation.<\/li>\r\n<\/ul>\r\n<p>When Nifty Futures across the series are continuously trading at a higher price than the Nifty spot, the Futures are said to be trading at a premium. But futures and spot prices will always converge as expiry approaches. The futures contract expires and is closed out at the spot price.<\/p>\r\n<p><strong><b>Things to Remember<\/b><\/strong><\/p>\r\n<ol>\r\n<li>The spot-futures spread is wider at the start of the series and narrows as expiry approaches.<\/li>\r\n<li>Futures and spot prices always converge on expiry day.<\/li>\r\n<li>Premium and discount are natural consequences of cost of carry and market forces.<\/li>\r\n<\/ol>\r\n<p>Fair value is a theoretical yardstick and the actual market price reflects real world frictions such as taxes, margins and liquidity.<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='Practical-Application-of-the-Future-Pricing-Formula' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.2 <\/strong><strong><b>Practical Application of the Futures Pricing Formula<\/b><\/strong><\/h2>\r\n<p>\u00a0<img decoding=\"async\" class=\"aligncenter wp-image-77081 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula.png\" alt=\"Practical Application of the Futures Pricing Formula\" width=\"1011\" height=\"786\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula.png 1011w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-300x233.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-768x597.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-50x39.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-100x78.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-150x117.png 150w\" sizes=\"(max-width: 1011px) 100vw, 1011px\" \/><\/p>\r\n<p>Before we finish this chapter, let\u2019s see how we can apply the futures pricing formula in practice. This is particularly useful when you move beyond simple directional trades and get into quantitative strategies, such as calendar spreads or index arbitrage, as discussed before. What follows is merely a preview \u2013 later modules on trading strategies will cover these techniques in greater depth.<\/p>\r\n<p><strong><b>Example: Reliance Industries<\/b><\/strong><\/p>\r\n<p>Suppose the following data is available:<\/p>\r\n<ul>\r\n<li>Reliance Spot Price = \u20b92,450<\/li>\r\n<li>Risk-Free Rate (Rf) = 7%<\/li>\r\n<li>Days to Expiry (x) = 20<\/li>\r\n<li>Dividend (d) = 0<\/li>\r\n<\/ul>\r\n<p>Using the futures pricing formula:<\/p>\r\n<p>Futures Price = 2450 * [1+0.07 *20\/365]-0<\/p>\r\n<p>=2450 * (1+0.0038)= 2459.3<\/p>\r\n<p>So, the fair value of Reliance Futures should be around \u20b92,459.<\/p>\r\n<p><strong><b>Market Imbalance<\/b><\/strong><br \/>The actual futures contract is trading at 2,490 and the difference between the spot and futures should be 9 points but here the gap has widened to 40 points.<\/p>\r\n<p>This is an opportunity to put on a spread trade.The futures are trading above their fair value and are considered to be expensive relative to the spot. The spot price looks cheap relative to the futures.<\/p>\r\n<p><strong><b>Executing the Trade<\/b><\/strong><\/p>\r\n<p>The thumb rule in spread trading is simple: buy the cheaper asset and sell the expensive one.<\/p>\r\n<ul>\r\n<li>Buy Reliance in the spot market at \u20b92,450<\/li>\r\n<li>Sell Reliance in the futures market at \u20b92,490<\/li>\r\n<\/ul>\r\n<p>On expiry, both spot and futures prices will converge to the same level. Let\u2019s assume a few possible convergence points:<\/p>\r\n<ul>\r\n<li>If both converge at \u20b92,470 \u2192 Profit = (Futures Sell \u2013 Futures Buy) + (Spot Sell \u2013 Spot Buy) = (2490 \u2013 2470) + (2470 \u2013 2450) = \u20b940<\/li>\r\n<li>If both converge at \u20b92,430 \u2192 Profit = (2490 \u2013 2430) + (2430 \u2013 2450) = \u20b960 \u2013 \u20b920 = \u20b940<\/li>\r\n<li>If both converge at \u20b92,510 \u2192 Profit = (2490 \u2013 2510) + (2510 \u2013 2450) = \u2013\u20b920 + \u20b960 = \u20b940<\/li>\r\n<\/ul>\r\n<p>No matter where the market settles, the spread of 40 points is locked in.<\/p>\r\n<p><strong><b>Cash &amp; Carry Arbitrage<\/b><\/strong><\/p>\r\n<p>This type of trade, where you simultaneously buy in the spot market and sell in the futures market to capture the spread, is known as Cash &amp; Carry Arbitrage. The beauty of this strategy is that once executed, the profit is essentially guaranteed, provided you hold the positions until expiry.<\/p>\r\n<p>Of course, in practice, it is wise to square off just before expiry to avoid settlement complexities. But the principle remains the same: arbitrage opportunities arise when futures prices deviate significantly from their fair value, and traders can exploit this by balancing positions in both spot and futures markets.<\/p>\r\n<p><strong><b>Example: Cash &amp; Carry<\/b><\/strong><\/p>\r\n<p>To get a real sense of the mechanics of arbitrage, we\u2019ll walk through the full cycle of a Cash &amp; Carry trade, from identifying the mispricing to unwinding the positions at expiry.<\/p>\r\n<ol>\r\n<li><strong><b> Recognising Mispricing<\/b><\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n<li>Spot price of Reliance Industries is at Rs 2,450.<\/li>\r\n<li>Fair Value (Based on formula) : \u20b92,459<\/li>\r\n<li>Actual Futures Price in market: \u20b92,490<\/li>\r\n<\/ul>\r\n<p>The futures are 31 points above fair value here. This gap is much bigger than expected indicating a mispricing. Here the arbitrageur sees an opportunity: futures are high, spot looks low.<\/p>\r\n<ol start=\"2\">\r\n<li><strong><b> Trade Execution<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>The thumb rule: Buy the cheap one, sell the expensive one.<\/p>\r\n<ul>\r\n<li>Buy Reliance in the Spot Market: Buy 250 shares (lot size) @ \u20b92,450.<\/li>\r\n<li>Sell Reliance Futures: Sell one futures contract at Rs 2,490.<\/li>\r\n<li>This locks in the 40 point (2,490 \u2013 2,450) spread.<\/li>\r\n<\/ul>\r\n<ol start=\"3\">\r\n<li><strong><b> Period of Holding<\/b><\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n<li>The arbitrageur holds the Reliance shares in the demat account during the contract period.<\/li>\r\n<li>Simultaneously the futures short position is still open.<\/li>\r\n<li>No hidden risk as carrying cost (interest on capital used to buy spot shares) is already incorporated in the fair value calculation.<\/li>\r\n<\/ul>\r\n<ol start=\"4\">\r\n<li><strong><b> Maturity Convergence<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>Futures and spot prices are expected to converge on expiry day. The captured spread is intact no matter where Reliance lands.<\/p>\r\n<p><strong><b>Scenario A: Settlement of \u20b9 2,470<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Spot: Sell shares @ \u20b92,470 \u2192 Profit = \u20b920 x 250 = \u20b95,000<\/li>\r\n<li>Futures Bought back at Rs. 2,470 (after selling at Rs. 2,490) Profit = Rs. 20 \u00d7 250 = Rs. 5,000<\/li>\r\n<li>Total Profit = Rs.10,000<\/li>\r\n<\/ul>\r\n<p><strong><b>Scenario B: Settlement at Rs 2,430<\/b><\/strong><\/p>\r\n<p>Spot: Sell shares @ \u20b92,430 * Loss = \u20b920 \u00d7 250 = \u2013\u20b95,000<\/p>\r\n<p>Futures \u2013 Sell at \u20b92,490 and buy at \u20b92,430 \u2192 Profit = (\u20b92,490 \u2013 \u20b92,430) x 250 = \u20b915,000<\/p>\r\n<p>Total profit = Rs. 10,000<\/p>\r\n<p><strong><b>Scenario C: Settlement at Rs. 2,510<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Spot: Sell shares at \u20b92,510 \u2192 Profit = \u20b960 \u00d7 250 = \u20b915,000<\/li>\r\n<\/ul>\r\n<p>Futures: Sell at \u20b92,490, Buy back at \u20b92,510 \u2192 Loss = \u20b920 \u00d7 250 = \u2013\u20b95,000<\/p>\r\n<p>Total Profit = Rs.10,000<\/p>\r\n<p>The arbitrageur makes a risk-free \u20b910,000, no matter where Reliance settles.<\/p>\r\n<ol start=\"5\">\r\n<li><strong><b> Changing the Position<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>When\u00a0that expires (or just before to avoid settlement problems) the arbitrageur unwinds both legs:<\/p>\r\n<ul>\r\n<li>Sell the shares at spot.<\/li>\r\n<li>Square off short futures.<\/li>\r\n<\/ul>\r\n<p>The realised profit is the locked-in spread.<\/p>\r\n<p><strong><b>Why It\u2019s Risk Free<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Convergence principle Futures and spot prices must converge at expiry<\/li>\r\n<li>Hedged Position: The long spot and short futures position hedges the directional risk.<\/li>\r\n<li>Guaranteed Spread: The first mispricing guarantees a profit regardless of the direction of the market.<\/li>\r\n<li>This is the perfect example of the beauty of Cash &amp; Carry Arbitrage. When done properly, you lock in the profit and it is not affected by the market movements.<\/li>\r\n<\/ul><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Calendar-Spreads' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2><strong>11.3 <b>Calendar Spreads<\/b><\/strong><b><\/b><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77082 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads.png\" alt=\"Calendar Spreads\" width=\"1080\" height=\"1080\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-300x300.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-1024x1024.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-150x150.png 150w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-768x768.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-100x100.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-96x96.png 96w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/p>\r\n<p>A calendar spread is a strategy where a trader buys and sells futures contracts on the same underlying asset with different expirations. The idea is to make money in the difference in prices between the near month contract and the mid\/far month contract. It\u2019s seen as safer than outright directional bets because it\u2019s hedged\u2014you are long one contract and short another.<\/p>\r\n<p><strong><b>Why Calendar Spreads Work <\/b><\/strong><\/p>\r\n<p>In pricing futures contracts, things like interest rates, dividends and time to expiry are considered. Therefore, longer-dated contracts tend to trade at slightly higher prices than near-term contracts. But market imbalances can sometimes lead to one contract diverging significantly from its fair value, while the other remains close to theoretical pricing. This lets you capture the spread.<\/p>\r\n<p><strong><b>For example, Infosys Future<\/b><\/strong><\/p>\r\n<p>Spot Price of Infosys= Rs 1,480<\/p>\r\n<p>Current Month Futures (25 days to expiry) \u2013 Fair Value= Rs 1,485<\/p>\r\n<p>Current Month Futures \u2013 Market Price (Actual) = \u20b91,510<\/p>\r\n<p>Mid-Month Futures (60 days to expiry) \u2013 Fair Value = \u20b91,492<\/p>\r\n<p>Mid-Month Futures &#8211; Actual Market Price = \u20b91,493<\/p>\r\n<p>The current month contract is trading well above its fair value here and the mid-month contract is trading in line with its estimate. This imbalance indicates that the current month contract is overpriced and the mid-month contract is fairly priced.<\/p>\r\n<p><strong><b>Trade Set-up Explained<\/b><\/strong><\/p>\r\n<p>The principle of spread trading is simple, buy the cheaper contract and sell the expensive one.<\/p>\r\n<p>Sell Infosys Current Month Futures @ Rs 1510<\/p>\r\n<p>Infosys Mid-Month Futures Buy @ \u20b91,493<\/p>\r\n<p>The difference between the two contracts is:<\/p>\r\n<p>1510-1493=17 pts<\/p>\r\n<p>This is the spread that the trader is trying to capture. This is a trade on the same underlying stock but with different expiries so it is considered hedged and the margin requirement is lower.<\/p>\r\n<p>The locking in of profits<\/p>\r\n<p>At expiration, current month futures and spot prices converge. The mid-month contract however will remain close to its fair value. \u00a0Here are some expiry scenarios to consider:<\/p>\r\n<p><b><\/b><strong><b>If Infosys settles at \u20b91,500:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Mid-Month Long = 1,500 \u2013 1,493 = +7<\/li>\r\n<li>Current Month Short = 1,510 \u2013 1,500 = +10<\/li>\r\n<li>Net Profit = +17<\/li>\r\n<\/ul>\r\n<p><b><\/b><strong><b>If Infosys settles at \u20b91,470:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Mid-Month Long = 1,470 \u2013 1,493 = \u201323<\/li>\r\n<li>Current Month Short = 1,510 \u2013 1,470 = +40<\/li>\r\n<li>Net Profit = +17<\/li>\r\n<\/ul>\r\n<p><b><\/b><strong><b>If Infosys settles at \u20b91,520:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Mid-Month Long = 1,520 \u2013 1,493 = +27<\/li>\r\n<li>Current Month Short = 1,510 \u2013 1,520 = \u201310<\/li>\r\n<li>Net Profit = +17<\/li>\r\n<\/ul>\r\n<p>The spread is fixed at 17 points. The spot price will be whatever it is. That is the beauty of calendar spreads, the profit is not dependent on the direction of the underlying but the relative pricing between contracts.<\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>Hedged Position<\/b><\/strong>&#8211; You are long and short on the same underlying asset. This lowers the risk relative to outright futures trading.<\/li>\r\n<li><b><\/b><strong><b>Smaller Margins<\/b><\/strong>: Exchanges consider calendar spreads to be hedged, so the margin requirements are much smaller.<\/li>\r\n<li><b><\/b><strong><b>Buy an asset that is mispriced: <\/b><\/strong>You don\u2019t need to predict if the stock is going up or down. It takes advantage of price inefficiencies between contracts, instead.<\/li>\r\n<li><b><\/b><strong><b>Convergence Principle<\/b><\/strong><strong><b>: <\/b><\/strong>At expiry, near month futures converge to the spot price, realising the spread.<\/li>\r\n<li><b><\/b><strong><b>Practical Exit: <\/b><\/strong>You can hold the trade to expiration, but most traders close out before expiration to avoid the problems of settlement.<\/li>\r\n<li><b><\/b><strong><b>Market Realities:<\/b><\/strong>Trading is near fair value for most mid-month contracts, so the assumption is not unreasonable.<\/li>\r\n<\/ol><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Spread-as-a-Trading-Signal' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.4 <\/strong><strong><b>Spread as a Trading Signal<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77083 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal.png\" alt=\"Spreads as Trading Signal\" width=\"1025\" height=\"1000\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal.png 1025w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-300x293.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-768x749.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-100x98.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-150x146.png 150w\" sizes=\"(max-width: 1025px) 100vw, 1025px\" \/><\/p>\r\n<p>In earlier sections, we defined the spread (also called the basis) as the difference between the spot price and the futures price. Traditionally, this is explained as a result of the cost of carry\u2014interest rates, dividends, and time to expiry. But for active traders, the spread is more than just an accounting detail. It\u2019s a real-time signal that can reveal arbitrage opportunities and market inefficiencies.<\/p>\r\n<p><strong><b>What Is the Spread Telling You?<\/b><\/strong><\/p>\r\n<p>The spread should ideally reflect the fair value difference between spot and futures. But when it deviates significantly from this theoretical value, it signals one of two things:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Market imbalance<\/b><\/strong>: Excess demand or supply in either spot or futures.<\/li>\r\n<li><b><\/b><strong><b>Arbitrage opportunity<\/b><\/strong>: A chance to lock in risk-free profits by exploiting mispricing.<\/li>\r\n<\/ul>\r\n<p><strong><b>Trading the Spread: Basis as a Signal<\/b><\/strong><\/p>\r\n<p>Let\u2019s revisit the Reliance example:<\/p>\r\n<ul>\r\n<li>Spot Price = \u20b92,450<\/li>\r\n<li>Fair Value (via formula) = \u20b92,459<\/li>\r\n<li>Actual Futures Price = \u20b92,490<\/li>\r\n<li>Spread = \u20b940 (actual) vs \u20b99<\/li>\r\n<\/ul>\r\n<p>This \u20b931 excess spread is not just a pricing anomaly\u2014it\u2019s a trading signal.<\/p>\r\n<p><strong><b>Strategy: Cash &amp; Carry Arbitrage<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Buy Reliance in the spot market (cheaper asset)<\/li>\r\n<li>Sell Reliance Futures (expensive asset)<\/li>\r\n<li>Hold both positions untill expiry<\/li>\r\n<li>Profit = Locked-in spread, independent of market direction<\/li>\r\n<\/ul>\r\n<p>This strategy works because of the convergence principle: futures and spot prices always meet at expiry.<\/p>\r\n<p><strong><b>When the Spread Narrows or Reverses<\/b><\/strong><\/p>\r\n<p>A narrowing spread may indicate:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Approaching expiry<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Reduced volatility<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Market normalization<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>A negative spread (futures below spot) may signal:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Bearish sentiment<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Dividend expectation<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Liquidity crunch in futures<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>In each case, the spread offers directional clues and timing signals for traders.<\/p><\/div>\n<div id='text_slider_slide05' class='sa_hover_container' data-hash='Key-Takeaways' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.5 <\/strong><strong><b>Key Takeaways<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-76026 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3.png\" alt=\"Key Takeaways\" width=\"444\" height=\"418\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3.png 444w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-300x282.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-50x47.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-100x94.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-150x141.png 150w\" sizes=\"(max-width: 444px) 100vw, 444px\" \/><\/p>\r\n<ol>\r\n<li>Futures get their value from the underlying asset: The price changes are generally similar to the spot market, but not identical.<\/li>\r\n<li>Pricing is governed by spot\u2013futures parity: Futures Price = Spot Price \u00d7 [1 + (Risk-Free Rate \u00d7 Days to Expiry \/ 365) \u2013 Dividend Yield].<\/li>\r\n<li>Basis\/Spread is the difference between spot and futures: This spread reflects cost of carry (interest rates, dividends, time to expire).<\/li>\r\n<li>Fair Value vs Market Price: Fair value is a theoretical value whereas actual future prices may differ due to taxes, transaction costs, imbalances in supply and demand.<\/li>\r\n<li>Premium and Discount \u2022 Futures trading above spot = premium (contango).<\/li>\r\n<li>\u00fcPremium (contango) = futures trading above spot.<\/li>\r\n<li>Convergence Principle: Futures and spot prices always converge on the expiry day (theoretical and practical).<\/li>\r\n<li>Longer expiry = larger spread: Mid-month and far-month contracts are trading at higher prices than near-month due to cost of carry.<\/li>\r\n<li>Arbitrage Opportunities: A price difference between spot and futures creates cash-and-carry arbitrage opportunities.<\/li>\r\n<li>Calendar Spreads lower risk: Traders buy one expiry and sell another expiry of same stock. They make money from cash and carry arbitrage and not directional moves.<\/li>\r\n<li>Hedged &amp; Margin Efficient Strategy: Calendar spreads are known as hedged trades and hence require lower margins and offer safer exposure.<\/li>\r\n<\/ol><\/div>\n<div id='text_slider_slide06' class='sa_hover_container' data-hash='Fun-Activity' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.5 Fun Activity<\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77010 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity.png\" alt=\"Fun-Activity\" width=\"974\" height=\"837\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity.png 974w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-300x258.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-768x660.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-50x43.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-100x86.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-150x129.png 150w\" sizes=\"(max-width: 974px) 100vw, 974px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>Reliance Industries is trading at \u20b92,450 in the spot market.<\/p>\r\n<ul>\r\n<li>Risk-Free Rate = 7% per annum<\/li>\r\n<li>Dividend = 0<\/li>\r\n<li>Days to Expiry = 15<\/li>\r\n<li>Lot Size = 250 shares<\/li>\r\n<\/ul>\r\n<p>Your task: Calculate the fair value of the futures contract using the formula:<\/p>\r\n<p>Futures Price =Spot Price *<\/p>\r\n<p><strong><b>Step-by-Step<\/b><\/strong><\/p>\r\n<ol>\r\n<li>Plug in the values:<\/li>\r\n<\/ol>\r\n<p>\u00a0 \u00a0 \u00a0 =2450 * (1+ 0.07 *15\/365)<\/p>\r\n<ol start=\"2\">\r\n<li>Simplify:<\/li>\r\n<\/ol>\r\n<p>\u00a0 \u00a0 \u00a0 =2450 * (1+0.0029)=2450 *1.0029<\/p>\r\n<ol start=\"3\">\r\n<li>Result: Fair Value \u2248 \u20b92,457.10<\/li>\r\n<li>Profit\/Loss Check<\/li>\r\n<\/ol>\r\n<ul>\r\n<li>If actual futures trade at \u20b92,470, they are expensive (possible arbitrage opportunity).<\/li>\r\n<li>If they trade at \u20b92,450, they are cheap (discount).<\/li>\r\n<\/ul><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 1,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = jQuery('#text_slider');\n\t\tjQuery('.text_slider_goto1').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 0);\n\t\t});\n\t\tjQuery('.text_slider_goto2').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 1);\n\t\t});\n\t\tjQuery('.text_slider_goto3').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 2);\n\t\t});\n\t\tjQuery('.text_slider_goto4').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 3);\n\t\t});\n\t\tjQuery('.text_slider_goto5').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 4);\n\t\t});\n\t\tjQuery('.text_slider_goto6').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 5);\n\t\t});\n\t\tvar resize_77076 = jQuery('.owl-carousel');\n\t\tresize_77076.on('initialized.owl.carousel', function(e) {\n\t\t\tif (typeof(Event) === 'function') {\n\t\t\t\twindow.dispatchEvent(new Event('resize'));\n\t\t\t} else {\n\t\t\t\tvar evt = window.document.createEvent('UIEvents');\n\t\t\t\tevt.initUIEvent('resize', true, false, window, 0);\n\t\t\t\twindow.dispatchEvent(evt);\n\t\t\t}\n\t\t});\n\t});\n<\/script>\n<\/p>                    <\/div>\n\t\t        \n                    <div id=\"slides-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"slides-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='The-Futures-Pricing-Formula' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.1 <b>The Futures Pricing Formula<\/b><\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-77080 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula.png\" alt=\"The Futures Pricing Formula\" width=\"997\" height=\"953\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula.png 997w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-300x287.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-768x734.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-50x48.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-100x96.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/The-Futures-Pricing-Formula-150x143.png 150w\" sizes=\"(max-width: 997px) 100vw, 997px\" \/><\/p>\r\n<p>Most traditional courses in derivatives begin by presenting the formula for pricing futures. But here we have opted to talk about it later. The reason is pretty simple, if you are trading futures mostly using technical analysis, you don&#8217;t have to calculate fair values every day. But if you are going to be using quantitative strategies such as calendar spreads or index arbitrage, then it is critical to know how futures are priced. This chapter prepares you for those advanced strategies.<\/p>\r\n<p>We know that a futures contract derives its value from the underlying asset and typically moves with it. If the underlying goes up, the futures price goes up.\u00a0If the spot price goes down, the futures price goes down. But the futures price is not the same as the spot price. The difference between the two is known as the spread or basis.<\/p>\r\n<p>For instance, let\u2019s say the Nifty Index is trading at 19,850 in the spot market while the current month Nifty Futures contract is trading at 19,865. Here the spread is 15 points. This difference is explained by the so-called spot-futures parity which takes into account factors such as interest rates, dividends and time to expiration.<\/p>\r\n<p>The general formula for futures pricing is:<\/p>\r\n<p>Futures Price =Spot Price*[1+r<sub>f\u00a0<\/sub>* x\/365 &#8211; d]<\/p>\r\n<p>Where:<\/p>\r\n<ul>\r\n<li>= risk-free rate (annualized)<\/li>\r\n<li>= dividend yield expected during the contract period<\/li>\r\n<li>= number of days to expiry<\/li>\r\n<\/ul>\r\n<p>The risk-free rate is often taken from short-term government securities, such as the RBI\u2019s 91-day Treasury bill yield.<\/p>\r\n<p><strong><b>Example: Calculating Fair Value<\/b><\/strong><\/p>\r\n<p>Let us assume Reliance Industries trading at the spot market at 2,450 and there are 10 days to expiry. The risk-free rate is 7% per annum, and no dividend is expected during this period.<\/p>\r\n<p>Futures Price = 2450 * [1+0.07*10\/365]<\/p>\r\n<p>=2450 *(1+0.0019)=2454.65<\/p>\r\n<p>So the fair value of Reliance Futures is \u20b92,454.65. .If the actual market price of the futures contract is \u20b9 2,456, the small difference can be attributed to transaction cost, taxes or short term supply demand imbalance.<\/p>\r\n<p><strong><b>Mid-Month and Far-Month Contracts <\/b><\/strong><\/p>\r\n<p>The longer the time to expiry, the larger the spread between spot and futures. For example:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Mid-month contract (30 days to expiry):<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>2450 * [1+0.07*30\/365] =2464.10<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Far-month contract (75 days to expiry):<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>2450 *[1+0.07 *75\/365]=2485.24<\/p>\r\n<p>Notice how the futures price increases with more days to expiry,(\u20b92,454.70 for 10 days \u2192 \u20b92,464.10 for 30 days \u2192 \u20b92,485.24 for 75 days), reflecting the cost of carry.\u00a0<\/p>\r\n<p><strong><b>Discount &amp; Premium<\/b><\/strong><\/p>\r\n<ul>\r\n<li>If futures trade above the spot price, the market is said to be at a premium. This is what is often called a contango in commodity markets.<\/li>\r\n<li>If futures trade below the spot price, the market is said to be at a discount i.e. in commodities, backwardation.<\/li>\r\n<\/ul>\r\n<p>When Nifty Futures across the series are continuously trading at a higher price than the Nifty spot, the Futures are said to be trading at a premium. But futures and spot prices will always converge as expiry approaches. The futures contract expires and is closed out at the spot price.<\/p>\r\n<p><strong><b>Things to Remember<\/b><\/strong><\/p>\r\n<ol>\r\n<li>The spot-futures spread is wider at the start of the series and narrows as expiry approaches.<\/li>\r\n<li>Futures and spot prices always converge on expiry day.<\/li>\r\n<li>Premium and discount are natural consequences of cost of carry and market forces.<\/li>\r\n<\/ol>\r\n<p>Fair value is a theoretical yardstick and the actual market price reflects real world frictions such as taxes, margins and liquidity.<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='Practical-Application-of-the-Future-Pricing-Formula' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.2 <\/strong><strong><b>Practical Application of the Futures Pricing Formula<\/b><\/strong><\/h2>\r\n<p>\u00a0<img decoding=\"async\" class=\"aligncenter wp-image-77081 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula.png\" alt=\"Practical Application of the Futures Pricing Formula\" width=\"1011\" height=\"786\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula.png 1011w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-300x233.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-768x597.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-50x39.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-100x78.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Practical-Application-of-the-Futures-Pricing-Formula-150x117.png 150w\" sizes=\"(max-width: 1011px) 100vw, 1011px\" \/><\/p>\r\n<p>Before we finish this chapter, let\u2019s see how we can apply the futures pricing formula in practice. This is particularly useful when you move beyond simple directional trades and get into quantitative strategies, such as calendar spreads or index arbitrage, as discussed before. What follows is merely a preview \u2013 later modules on trading strategies will cover these techniques in greater depth.<\/p>\r\n<p><strong><b>Example: Reliance Industries<\/b><\/strong><\/p>\r\n<p>Suppose the following data is available:<\/p>\r\n<ul>\r\n<li>Reliance Spot Price = \u20b92,450<\/li>\r\n<li>Risk-Free Rate (Rf) = 7%<\/li>\r\n<li>Days to Expiry (x) = 20<\/li>\r\n<li>Dividend (d) = 0<\/li>\r\n<\/ul>\r\n<p>Using the futures pricing formula:<\/p>\r\n<p>Futures Price = 2450 * [1+0.07 *20\/365]-0<\/p>\r\n<p>=2450 * (1+0.0038)= 2459.3<\/p>\r\n<p>So, the fair value of Reliance Futures should be around \u20b92,459.<\/p>\r\n<p><strong><b>Market Imbalance<\/b><\/strong><br \/>The actual futures contract is trading at 2,490 and the difference between the spot and futures should be 9 points but here the gap has widened to 40 points.<\/p>\r\n<p>This is an opportunity to put on a spread trade.The futures are trading above their fair value and are considered to be expensive relative to the spot. The spot price looks cheap relative to the futures.<\/p>\r\n<p><strong><b>Executing the Trade<\/b><\/strong><\/p>\r\n<p>The thumb rule in spread trading is simple: buy the cheaper asset and sell the expensive one.<\/p>\r\n<ul>\r\n<li>Buy Reliance in the spot market at \u20b92,450<\/li>\r\n<li>Sell Reliance in the futures market at \u20b92,490<\/li>\r\n<\/ul>\r\n<p>On expiry, both spot and futures prices will converge to the same level. Let\u2019s assume a few possible convergence points:<\/p>\r\n<ul>\r\n<li>If both converge at \u20b92,470 \u2192 Profit = (Futures Sell \u2013 Futures Buy) + (Spot Sell \u2013 Spot Buy) = (2490 \u2013 2470) + (2470 \u2013 2450) = \u20b940<\/li>\r\n<li>If both converge at \u20b92,430 \u2192 Profit = (2490 \u2013 2430) + (2430 \u2013 2450) = \u20b960 \u2013 \u20b920 = \u20b940<\/li>\r\n<li>If both converge at \u20b92,510 \u2192 Profit = (2490 \u2013 2510) + (2510 \u2013 2450) = \u2013\u20b920 + \u20b960 = \u20b940<\/li>\r\n<\/ul>\r\n<p>No matter where the market settles, the spread of 40 points is locked in.<\/p>\r\n<p><strong><b>Cash &amp; Carry Arbitrage<\/b><\/strong><\/p>\r\n<p>This type of trade, where you simultaneously buy in the spot market and sell in the futures market to capture the spread, is known as Cash &amp; Carry Arbitrage. The beauty of this strategy is that once executed, the profit is essentially guaranteed, provided you hold the positions until expiry.<\/p>\r\n<p>Of course, in practice, it is wise to square off just before expiry to avoid settlement complexities. But the principle remains the same: arbitrage opportunities arise when futures prices deviate significantly from their fair value, and traders can exploit this by balancing positions in both spot and futures markets.<\/p>\r\n<p><strong><b>Example: Cash &amp; Carry<\/b><\/strong><\/p>\r\n<p>To get a real sense of the mechanics of arbitrage, we\u2019ll walk through the full cycle of a Cash &amp; Carry trade, from identifying the mispricing to unwinding the positions at expiry.<\/p>\r\n<ol>\r\n<li><strong><b> Recognising Mispricing<\/b><\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n<li>Spot price of Reliance Industries is at Rs 2,450.<\/li>\r\n<li>Fair Value (Based on formula) : \u20b92,459<\/li>\r\n<li>Actual Futures Price in market: \u20b92,490<\/li>\r\n<\/ul>\r\n<p>The futures are 31 points above fair value here. This gap is much bigger than expected indicating a mispricing. Here the arbitrageur sees an opportunity: futures are high, spot looks low.<\/p>\r\n<ol start=\"2\">\r\n<li><strong><b> Trade Execution<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>The thumb rule: Buy the cheap one, sell the expensive one.<\/p>\r\n<ul>\r\n<li>Buy Reliance in the Spot Market: Buy 250 shares (lot size) @ \u20b92,450.<\/li>\r\n<li>Sell Reliance Futures: Sell one futures contract at Rs 2,490.<\/li>\r\n<li>This locks in the 40 point (2,490 \u2013 2,450) spread.<\/li>\r\n<\/ul>\r\n<ol start=\"3\">\r\n<li><strong><b> Period of Holding<\/b><\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n<li>The arbitrageur holds the Reliance shares in the demat account during the contract period.<\/li>\r\n<li>Simultaneously the futures short position is still open.<\/li>\r\n<li>No hidden risk as carrying cost (interest on capital used to buy spot shares) is already incorporated in the fair value calculation.<\/li>\r\n<\/ul>\r\n<ol start=\"4\">\r\n<li><strong><b> Maturity Convergence<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>Futures and spot prices are expected to converge on expiry day. The captured spread is intact no matter where Reliance lands.<\/p>\r\n<p><strong><b>Scenario A: Settlement of \u20b9 2,470<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Spot: Sell shares @ \u20b92,470 \u2192 Profit = \u20b920 x 250 = \u20b95,000<\/li>\r\n<li>Futures Bought back at Rs. 2,470 (after selling at Rs. 2,490) Profit = Rs. 20 \u00d7 250 = Rs. 5,000<\/li>\r\n<li>Total Profit = Rs.10,000<\/li>\r\n<\/ul>\r\n<p><strong><b>Scenario B: Settlement at Rs 2,430<\/b><\/strong><\/p>\r\n<p>Spot: Sell shares @ \u20b92,430 * Loss = \u20b920 \u00d7 250 = \u2013\u20b95,000<\/p>\r\n<p>Futures \u2013 Sell at \u20b92,490 and buy at \u20b92,430 \u2192 Profit = (\u20b92,490 \u2013 \u20b92,430) x 250 = \u20b915,000<\/p>\r\n<p>Total profit = Rs. 10,000<\/p>\r\n<p><strong><b>Scenario C: Settlement at Rs. 2,510<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Spot: Sell shares at \u20b92,510 \u2192 Profit = \u20b960 \u00d7 250 = \u20b915,000<\/li>\r\n<\/ul>\r\n<p>Futures: Sell at \u20b92,490, Buy back at \u20b92,510 \u2192 Loss = \u20b920 \u00d7 250 = \u2013\u20b95,000<\/p>\r\n<p>Total Profit = Rs.10,000<\/p>\r\n<p>The arbitrageur makes a risk-free \u20b910,000, no matter where Reliance settles.<\/p>\r\n<ol start=\"5\">\r\n<li><strong><b> Changing the Position<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>When\u00a0that expires (or just before to avoid settlement problems) the arbitrageur unwinds both legs:<\/p>\r\n<ul>\r\n<li>Sell the shares at spot.<\/li>\r\n<li>Square off short futures.<\/li>\r\n<\/ul>\r\n<p>The realised profit is the locked-in spread.<\/p>\r\n<p><strong><b>Why It\u2019s Risk Free<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Convergence principle Futures and spot prices must converge at expiry<\/li>\r\n<li>Hedged Position: The long spot and short futures position hedges the directional risk.<\/li>\r\n<li>Guaranteed Spread: The first mispricing guarantees a profit regardless of the direction of the market.<\/li>\r\n<li>This is the perfect example of the beauty of Cash &amp; Carry Arbitrage. When done properly, you lock in the profit and it is not affected by the market movements.<\/li>\r\n<\/ul><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Calendar-Spreads' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2><strong>11.3 <b>Calendar Spreads<\/b><\/strong><b><\/b><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77082 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads.png\" alt=\"Calendar Spreads\" width=\"1080\" height=\"1080\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-300x300.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-1024x1024.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-150x150.png 150w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-768x768.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-100x100.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Calendar-Spreads-96x96.png 96w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/p>\r\n<p>A calendar spread is a strategy where a trader buys and sells futures contracts on the same underlying asset with different expirations. The idea is to make money in the difference in prices between the near month contract and the mid\/far month contract. It\u2019s seen as safer than outright directional bets because it\u2019s hedged\u2014you are long one contract and short another.<\/p>\r\n<p><strong><b>Why Calendar Spreads Work <\/b><\/strong><\/p>\r\n<p>In pricing futures contracts, things like interest rates, dividends and time to expiry are considered. Therefore, longer-dated contracts tend to trade at slightly higher prices than near-term contracts. But market imbalances can sometimes lead to one contract diverging significantly from its fair value, while the other remains close to theoretical pricing. This lets you capture the spread.<\/p>\r\n<p><strong><b>For example, Infosys Future<\/b><\/strong><\/p>\r\n<p>Spot Price of Infosys= Rs 1,480<\/p>\r\n<p>Current Month Futures (25 days to expiry) \u2013 Fair Value= Rs 1,485<\/p>\r\n<p>Current Month Futures \u2013 Market Price (Actual) = \u20b91,510<\/p>\r\n<p>Mid-Month Futures (60 days to expiry) \u2013 Fair Value = \u20b91,492<\/p>\r\n<p>Mid-Month Futures &#8211; Actual Market Price = \u20b91,493<\/p>\r\n<p>The current month contract is trading well above its fair value here and the mid-month contract is trading in line with its estimate. This imbalance indicates that the current month contract is overpriced and the mid-month contract is fairly priced.<\/p>\r\n<p><strong><b>Trade Set-up Explained<\/b><\/strong><\/p>\r\n<p>The principle of spread trading is simple, buy the cheaper contract and sell the expensive one.<\/p>\r\n<p>Sell Infosys Current Month Futures @ Rs 1510<\/p>\r\n<p>Infosys Mid-Month Futures Buy @ \u20b91,493<\/p>\r\n<p>The difference between the two contracts is:<\/p>\r\n<p>1510-1493=17 pts<\/p>\r\n<p>This is the spread that the trader is trying to capture. This is a trade on the same underlying stock but with different expiries so it is considered hedged and the margin requirement is lower.<\/p>\r\n<p>The locking in of profits<\/p>\r\n<p>At expiration, current month futures and spot prices converge. The mid-month contract however will remain close to its fair value. \u00a0Here are some expiry scenarios to consider:<\/p>\r\n<p><b><\/b><strong><b>If Infosys settles at \u20b91,500:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Mid-Month Long = 1,500 \u2013 1,493 = +7<\/li>\r\n<li>Current Month Short = 1,510 \u2013 1,500 = +10<\/li>\r\n<li>Net Profit = +17<\/li>\r\n<\/ul>\r\n<p><b><\/b><strong><b>If Infosys settles at \u20b91,470:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Mid-Month Long = 1,470 \u2013 1,493 = \u201323<\/li>\r\n<li>Current Month Short = 1,510 \u2013 1,470 = +40<\/li>\r\n<li>Net Profit = +17<\/li>\r\n<\/ul>\r\n<p><b><\/b><strong><b>If Infosys settles at \u20b91,520:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Mid-Month Long = 1,520 \u2013 1,493 = +27<\/li>\r\n<li>Current Month Short = 1,510 \u2013 1,520 = \u201310<\/li>\r\n<li>Net Profit = +17<\/li>\r\n<\/ul>\r\n<p>The spread is fixed at 17 points. The spot price will be whatever it is. That is the beauty of calendar spreads, the profit is not dependent on the direction of the underlying but the relative pricing between contracts.<\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>Hedged Position<\/b><\/strong>&#8211; You are long and short on the same underlying asset. This lowers the risk relative to outright futures trading.<\/li>\r\n<li><b><\/b><strong><b>Smaller Margins<\/b><\/strong>: Exchanges consider calendar spreads to be hedged, so the margin requirements are much smaller.<\/li>\r\n<li><b><\/b><strong><b>Buy an asset that is mispriced: <\/b><\/strong>You don\u2019t need to predict if the stock is going up or down. It takes advantage of price inefficiencies between contracts, instead.<\/li>\r\n<li><b><\/b><strong><b>Convergence Principle<\/b><\/strong><strong><b>: <\/b><\/strong>At expiry, near month futures converge to the spot price, realising the spread.<\/li>\r\n<li><b><\/b><strong><b>Practical Exit: <\/b><\/strong>You can hold the trade to expiration, but most traders close out before expiration to avoid the problems of settlement.<\/li>\r\n<li><b><\/b><strong><b>Market Realities:<\/b><\/strong>Trading is near fair value for most mid-month contracts, so the assumption is not unreasonable.<\/li>\r\n<\/ol><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Spread-as-a-Trading-Signal' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.4 <\/strong><strong><b>Spread as a Trading Signal<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77083 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal.png\" alt=\"Spreads as Trading Signal\" width=\"1025\" height=\"1000\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal.png 1025w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-300x293.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-768x749.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-100x98.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2026\/08\/Spreads-as-Trading-Signal-150x146.png 150w\" sizes=\"(max-width: 1025px) 100vw, 1025px\" \/><\/p>\r\n<p>In earlier sections, we defined the spread (also called the basis) as the difference between the spot price and the futures price. Traditionally, this is explained as a result of the cost of carry\u2014interest rates, dividends, and time to expiry. But for active traders, the spread is more than just an accounting detail. It\u2019s a real-time signal that can reveal arbitrage opportunities and market inefficiencies.<\/p>\r\n<p><strong><b>What Is the Spread Telling You?<\/b><\/strong><\/p>\r\n<p>The spread should ideally reflect the fair value difference between spot and futures. But when it deviates significantly from this theoretical value, it signals one of two things:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Market imbalance<\/b><\/strong>: Excess demand or supply in either spot or futures.<\/li>\r\n<li><b><\/b><strong><b>Arbitrage opportunity<\/b><\/strong>: A chance to lock in risk-free profits by exploiting mispricing.<\/li>\r\n<\/ul>\r\n<p><strong><b>Trading the Spread: Basis as a Signal<\/b><\/strong><\/p>\r\n<p>Let\u2019s revisit the Reliance example:<\/p>\r\n<ul>\r\n<li>Spot Price = \u20b92,450<\/li>\r\n<li>Fair Value (via formula) = \u20b92,459<\/li>\r\n<li>Actual Futures Price = \u20b92,490<\/li>\r\n<li>Spread = \u20b940 (actual) vs \u20b99<\/li>\r\n<\/ul>\r\n<p>This \u20b931 excess spread is not just a pricing anomaly\u2014it\u2019s a trading signal.<\/p>\r\n<p><strong><b>Strategy: Cash &amp; Carry Arbitrage<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Buy Reliance in the spot market (cheaper asset)<\/li>\r\n<li>Sell Reliance Futures (expensive asset)<\/li>\r\n<li>Hold both positions untill expiry<\/li>\r\n<li>Profit = Locked-in spread, independent of market direction<\/li>\r\n<\/ul>\r\n<p>This strategy works because of the convergence principle: futures and spot prices always meet at expiry.<\/p>\r\n<p><strong><b>When the Spread Narrows or Reverses<\/b><\/strong><\/p>\r\n<p>A narrowing spread may indicate:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Approaching expiry<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Reduced volatility<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Market normalization<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>A negative spread (futures below spot) may signal:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Bearish sentiment<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Dividend expectation<\/b><\/strong><\/li>\r\n<li><b><\/b><strong><b>Liquidity crunch in futures<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>In each case, the spread offers directional clues and timing signals for traders.<\/p><\/div>\n<div id='text_slider_slide05' class='sa_hover_container' data-hash='Key-Takeaways' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.5 <\/strong><strong><b>Key Takeaways<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-76026 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3.png\" alt=\"Key Takeaways\" width=\"444\" height=\"418\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3.png 444w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-300x282.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-50x47.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-100x94.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-3-150x141.png 150w\" sizes=\"(max-width: 444px) 100vw, 444px\" \/><\/p>\r\n<ol>\r\n<li>Futures get their value from the underlying asset: The price changes are generally similar to the spot market, but not identical.<\/li>\r\n<li>Pricing is governed by spot\u2013futures parity: Futures Price = Spot Price \u00d7 [1 + (Risk-Free Rate \u00d7 Days to Expiry \/ 365) \u2013 Dividend Yield].<\/li>\r\n<li>Basis\/Spread is the difference between spot and futures: This spread reflects cost of carry (interest rates, dividends, time to expire).<\/li>\r\n<li>Fair Value vs Market Price: Fair value is a theoretical value whereas actual future prices may differ due to taxes, transaction costs, imbalances in supply and demand.<\/li>\r\n<li>Premium and Discount \u2022 Futures trading above spot = premium (contango).<\/li>\r\n<li>\u00fcPremium (contango) = futures trading above spot.<\/li>\r\n<li>Convergence Principle: Futures and spot prices always converge on the expiry day (theoretical and practical).<\/li>\r\n<li>Longer expiry = larger spread: Mid-month and far-month contracts are trading at higher prices than near-month due to cost of carry.<\/li>\r\n<li>Arbitrage Opportunities: A price difference between spot and futures creates cash-and-carry arbitrage opportunities.<\/li>\r\n<li>Calendar Spreads lower risk: Traders buy one expiry and sell another expiry of same stock. They make money from cash and carry arbitrage and not directional moves.<\/li>\r\n<li>Hedged &amp; Margin Efficient Strategy: Calendar spreads are known as hedged trades and hence require lower margins and offer safer exposure.<\/li>\r\n<\/ol><\/div>\n<div id='text_slider_slide06' class='sa_hover_container' data-hash='Fun-Activity' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>11.5 Fun Activity<\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77010 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity.png\" alt=\"Fun-Activity\" width=\"974\" height=\"837\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity.png 974w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-300x258.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-768x660.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-50x43.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-100x86.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-150x129.png 150w\" sizes=\"(max-width: 974px) 100vw, 974px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>Reliance Industries is trading at \u20b92,450 in the spot market.<\/p>\r\n<ul>\r\n<li>Risk-Free Rate = 7% per annum<\/li>\r\n<li>Dividend = 0<\/li>\r\n<li>Days to Expiry = 15<\/li>\r\n<li>Lot Size = 250 shares<\/li>\r\n<\/ul>\r\n<p>Your task: Calculate the fair value of the futures contract using the formula:<\/p>\r\n<p>Futures Price =Spot Price *<\/p>\r\n<p><strong><b>Step-by-Step<\/b><\/strong><\/p>\r\n<ol>\r\n<li>Plug in the values:<\/li>\r\n<\/ol>\r\n<p>\u00a0 \u00a0 \u00a0 =2450 * (1+ 0.07 *15\/365)<\/p>\r\n<ol start=\"2\">\r\n<li>Simplify:<\/li>\r\n<\/ol>\r\n<p>\u00a0 \u00a0 \u00a0 =2450 * (1+0.0029)=2450 *1.0029<\/p>\r\n<ol start=\"3\">\r\n<li>Result: Fair Value \u2248 \u20b92,457.10<\/li>\r\n<li>Profit\/Loss Check<\/li>\r\n<\/ol>\r\n<ul>\r\n<li>If actual futures trade at \u20b92,470, they are expensive (possible arbitrage opportunity).<\/li>\r\n<li>If they trade at \u20b92,450, they are cheap (discount).<\/li>\r\n<\/ul><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 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function(e) {\n\t\t\tif (typeof(Event) === 'function') {\n\t\t\t\twindow.dispatchEvent(new Event('resize'));\n\t\t\t} else {\n\t\t\t\tvar evt = window.document.createEvent('UIEvents');\n\t\t\t\tevt.initUIEvent('resize', true, false, window, 0);\n\t\t\t\twindow.dispatchEvent(evt);\n\t\t\t}\n\t\t});\n\t});\n<\/script>\n<\/p>                    <\/div>\n\t\t        \n                    <div id=\"videos-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"videos-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-11528 size-full\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t                    <\/div>\n        <\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Study Slides Videos 11.1 The Futures Pricing Formula Most traditional courses in derivatives begin by presenting the formula for pricing futures. But here we have opted to talk about it later. The reason is pretty simple, if you are trading futures mostly using technical analysis, you don&#8217;t have to calculate fair values every day. But &#8230; <a title=\"The Futures Pricing\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/the-futures-pricing\/\" aria-label=\"Read more about The Futures Pricing\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":21115,"menu_order":9,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-77116","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/77116","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=77116"}],"version-history":[{"count":8,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/77116\/revisions"}],"predecessor-version":[{"id":77145,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/77116\/revisions\/77145"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/21115"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=77116"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=77116"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}