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BSE to launch ‘cash future spread’ to derisk arbitrage

The trial runs for this first of its kind product will start from August 1.

Written by Press Trust Of India | Ahmedabad |
July 29, 2012 1:22:10 am

With a view to derisking arbitrage between future and cash segments of stock,the Bombay Stock Exchange (BSE) will soon launch a new derivative product,‘cash-future spread’ (CFS).

The trial runs for this first of its kind product will start from August 1. CFS will be in operation from August 6 and will be made available for all stocks in BSE’s derivative segment,a top official said here.

“Having a single product for cash-future trade that eliminates execution risk has an interesting outcome for the investors by offering them an interest rate type of product. It shall be launched on August 6,” BSE Interim CEO Ashishkumar Chauhan said.

“Presently,it is usually done by way of doing cash and future trades separately,but there is an execution risk there when you trade in such a way,” he said.

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Cash leg of the trade under CFS will be settled by delivery on T+2 days,as prevalent now. The futures leg,if open till expiry,will be settled by delivery on the expiry +3 days,an official statement said.

Currently,those wanting to take advantage of the spread between cash and futures have to enter four different trades — they buy in futures and sell in cash and then reverse the trade to square off the position,he said.

Cash futures arbitrage is a combination of short/long position in an asset such as a stock and its future contract,which seeks to exploit pricing inefficiencies for the same underlying stock in the cash (or spot) and futures markets in order to make riskless profits.

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