Can anyone explain the meaning of third part and how to do it?
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Hey Krishna!
Basis = Spot – Future price
Usually Future price is greater than spot, giving negative basis and such market is called Contango Market.
Sometimes Spot exceeds future price, giving positive basis and such market is called Backwardation (aptly named).
I think Spot price is coming 2376 and futures price on 1st is given as 2400. So Basis = 2376 – 2400 = -24.
Thus maximum contango is Rs 24.
I hope your doubt is clear. Refer page 8.5 of SFM PM if you want to read it for yourself. All the best! :))
Thanks, but I have one more doubt, why have we divided to calculate Nifty sensex in part 2
Basically, Contango refers to a situation where Futures Price is greater than Spot Price & Backwardation is a scenario completely opposite.
In the given question,
Future Price = 2400
Spot Price = 2376
Hence, it is a case of Contango. Now, in the third part I believe ICAI is asking us to calculate Basis i.e. Future Price – Spot Price = 2400 -2376 = 14
I have attached the complete solution above. Let me know if it’s correct.
Thanks, but I have one more doubt, why have we divided to calculate Nifty sensex in part 2