The price of futures is usually above the duration of the spot price, the useful life of the contract, but converges with the spot price at maturity. That means that the difference in value between the price of futures and their spot price must gradually reduce time and become zero at maturity. Previously in this column, we discuss that this loss of value can be attributed to the component of interest for financial future. This week, we discuss whether you can take advantage of the duration of the component of fading interest of the life of the future nearby, as it does with the time of decomposition in the options.
Long -term position
To take advantage of the convergence of prices, you must follow the underlying and shorts in your futures contract, if they are expensive, with the aim of maintaining the position until the expiration. The difference between the underlying spot price and its futures price at the time of starting the contract is the maximum gain that it can generate in the position.
What happens if you close the long -term position before beating to capture the component of interest that fades? The position will gain if the difference between the price of the futures and the spot price is narrower than when you set the position. He is betting on the value of money from the time that fades, assuming that the interest rate does not change the life of the contract; The interest factor will decrease with each day that passes and will become zero at maturity.
There are two factors to consult. The risk is that a greater demand for futures close to the man-and-ANFY can result in his price increase is greater than that of the ingenious ETF when the ingenious index increases. This risk is magnified because the NIFTY index is not a negotiable asset and, therefore, must be long in an ETF. To manage this risk, a contract of futures close to men and the best size of lot 75) could be cut against, say, 1.5 times the number of ETF units eligible for the benefit of the cross margin of NSE. For ingenious bees, there will be 11250 units, which 1,5 times 7500 units. The potential yield is small compared to the commercial capital required for the position. Of course, the position can sacrifice approximately seven percent annualized return. But that does not capture the true economic potential, since it is possible that you do not have the opportunity to configure the position during all months. Its commercial capital can be better applied to strategies that capture the decomposition time on heritage and index options.
Optional reading
Assuming that he feels comfortable with the compensation of risk return in the long position of future shorts of ETF, it would be optimal to establish the position after the average month contract becomes the almost month contract. You must configure the position only if the theoretical price of futures (using the continuous compound model) is lower than the real price of futures. The use of futures of a single existence in the future of future mills to capture the component of fading interest may require larger capital; because the position will attract the highest margins closer to the expiration because or the risk of delivery.
(The author offers training programs for people to administer their personal investments)
Posted on April 26, 2025
