Reverse arbitrage opportunity in Ambuja Cement: ICICIdirect

ICICIdirect.com has come out with its report on Ambuja Cement. According to the research firm, one can buy one lot Ambuja Cement June futures at Rs 145.8 and sell 2000 shares (demat holding) at Rs 150.10.

Reverse Arbitrage:
Arbitrage is the simultaneous purchase and sale of shares in order to profit from mispricing available between the futures and cash prices of the same underlying. One can buy or sell stocks in spot and assume opposite position in futures of the same stock to capture the difference between both prices. For this, the difference between spot and futures prices has to be reasonably high so that one can not only cover the transaction costs but also earn profit. Towards expiry, prices of the spot and the futures converge and unwinding can be done at same price. Hence, the initial difference will be locked in at the time of initiating the whole transaction. This difference yields the risk-free return since it will be independent of the price movement.

Whenever futures are trading at a substantial discount to spot, a reverse arbitrage opportunity arises. Minimum one lot of the underlying future is bought and the delivery existing of the same number of shares is sold in cash to lock-in the price difference.

Ambuja Cement:
Currently, Ambuja Cement June future price is trading at a discount of Rs 4.3 per share to cash price. This amounts to a discount of (4.3*10000/150) = 286 bps.

We can lock in the difference of 286 bps at current prices. This will result in risk-free profit of Rs 4.3 per share including brokerage and transaction cost.

Probable dividend expected in the stock is Rs 1.8, which is yet to be announced. Historically, the stock has observed ex-dividend dates in August. Hence, in the worst case scenario, even if the dividend is announced and ex-date falls in June series itself, one can still lock in the difference of 165 bps. However, in the first quarter, no dividend was announced. Even if an interim dividend is announced for a six-month period, there are more chances that the ex-date would fall in July or August.

How to execute:
Buy one lot Ambuja Cement June futures at Rs 145.8 and sell 2000 shares (demat holding) at Rs 150.10. Execute the arbitrage with minimum difference of Rs 4.3 per share.

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