Page 1 of 29

DRM Assignment
Name Harsh
ID No. 2015A3PS0302H
Serial No. 42
Instrument Name CUMMINSIND

Section-1 (Underlying Asset-Equity)

1.) Write the underlying equity asset introduction on the following items
i.) Nature of the business (Banking, software, manufacturing etc.)
Cummins India Limited is a manufacturing company that is among the
leading manufacturers of Engines and Power Systems and is also actively
involved in distribution.

ii.) Public or private ownership

Cummins India Limited is a Public company.
iii.) When it is started and under what circumstances
Cummins India Limited is a part of a Cummins Inc, which itself is a $19.2
company. It was started in 1962. It was started in order to expand their
business in Indian markets.
iv.) Industry it belongs? And its importance in the industry?
It belongs to Engine and Power System manufacturing and maintenance
industry. This industry is the backbone of many vital industries like
automobiles, transportation, defense to name a few. This company has a
large market share in these sectors.
v.) Overall greatness of the company
 Page 2 of 29

Cummins India Limited had an overall turnover of about Rs. 4952.16 crores
in the year 2015-16. The net profit after tax in the same period was Rs.
751.85 crores.

2.) Calculate the sample returns (Mean, Max, Min and Standard Deviation of the
returns) on daily, weekly and monthly frequency.

Returns max min Standard Deviation Mean

Daily 6.186775 -7.729145 1.655123 0.083869
Weekly 7.44346 -7.53623 2.926224 0.34422
Monthly 7.5254 -7.09027 5.579639 0.836298

3.) Adjust these returns with risk (Sharpe ratio) on daily, weekly and monthly
frequency. You need the T-bill rates, they are available in a separate excel sheet T-
Bill. These are returns (not the prices), so you do not have to calculate the returns.
You can use them directly.
Frequency Sharp ratio
Daily 0.039888
Weekly 0.073568
Monthly 0.050892

Here since the Sharpe Ratio is positive for all daily, weekly as well as monthly it would
be better to invest in stocks, rather than some risk-free asset.
 Sharpe Ratio Sharpe Ratio

-3
-2
-1
0
1
2
3
-6
-5
-4
-3
-2
-1
0
1
2
4
5

Date 3 Date
09-08-16
8/7/2016 19-08-16
8/21/2016 30-08-16
9/4/2016 09-09-16
21-09-16
9/18/2016 30-09-16
10/2/2016 13-10-16
24-10-16
10/16/2016
03-11-16
10/30/2016 15-11-16
11/13/2016 24-11-16
05-12-16
11/27/2016
14-12-16
12/11/2016 23-12-16
12/25/2016 03-01-17
12-01-17
1/8/2017
23-01-17
Date

1/22/2017 02-02-17

Week
Sharpe Ratio

Sharpe Ratio
2/5/2017 13-02-17
22-02-17
2/19/2017 06-03-17
3/5/2017 16-03-17
3/19/2017 27-03-17
06-04-17
4/2/2017 18-04-17
4/16/2017 27-04-17
09-05-17
4/30/2017
18-05-17
5/14/2017 29-05-17
5/28/2017 07-06-17
16-06-17
6/11/2017
28-06-17
6/25/2017 07-07-17
7/9/2017 18-07-17
27-07-17
Page 3 of 29
 Page 4 of 29

Sharpe Ratio.
1.5

0.5
Sharpe Ratio

0
Date 31-07-16 31-08-16 30-09-16 31-10-16 30-11-16 31-12-16 31-01-17 28-02-17 31-03-17 30-04-17
-0.5

-1

-1.5
Month

Find out the sample returns (Mean, Max, Min and Standard Deviation of the returns)
on daily, weekly and monthly frequency

Adjusted
max min Standard Deviation Mean
Returns
Daily 6.169224601 -7.747528529 1.654928943 0.066011405
Weekly 7.319152031 -7.669153884 2.926441846 0.215291025
Monthly 6.968732981 -7.610851961 5.57555383 0.283752916

4.) The economic interpretation of the difference between risk adjusted and risk-
unadjusted returns on daily, weekly and monthly frequency and conclude. Plot the
daily, weekly and monthly returns.
 Adjusted Returns Returns

-10
-8
-6
-4
-2
0
2
4
6
-10
-8
-6
-4
-2
0
2
4
6
8

8
Date Date
09-08-16 09-08-16
19-08-16 19-08-16
30-08-16 30-08-16
09-09-16 09-09-16
21-09-16 21-09-16
30-09-16 30-09-16
13-10-16 13-10-16
24-10-16 24-10-16
03-11-16 03-11-16
15-11-16 15-11-16
24-11-16 24-11-16
05-12-16 05-12-16
14-12-16 14-12-16
23-12-16 23-12-16
03-01-17 03-01-17
12-01-17 12-01-17
23-01-17 23-01-17
Returns

Date

02-02-17

Date
02-02-17
13-02-17 13-02-17

Adjusted Returns
22-02-17 22-02-17
06-03-17 06-03-17
16-03-17 16-03-17
27-03-17 27-03-17
06-04-17 06-04-17
18-04-17 18-04-17
27-04-17 27-04-17
09-05-17 09-05-17
18-05-17 18-05-17
29-05-17 29-05-17
07-06-17 07-06-17
16-06-17 16-06-17
28-06-17 28-06-17
07-07-17 07-07-17
18-07-17 18-07-17
27-07-17 27-07-17
Page 5 of 29
 Adjusted Returns Returns

-10
-8
-6
-4
-2
0
2
4
6
8
-10
-8
-6
-4
-2
0
2
4
6
8
10

10
Date Date
8/7/2016 8/7/2016
8/21/2016 8/21/2016
9/4/2016 9/4/2016
9/18/2016 9/18/2016
10/2/2016 10/2/2016
10/16/2016 10/16/2016
10/30/2016 10/30/2016
11/13/2016 11/13/2016
11/27/2016 11/27/2016
12/11/2016 12/11/2016
12/25/2016 12/25/2016
1/8/2017 1/8/2017
Returns

1/22/2017 1/22/2017

Week
Week

2/5/2017 2/5/2017

Adjusted Returns
2/19/2017 2/19/2017
3/5/2017 3/5/2017
3/19/2017 3/19/2017
4/2/2017 4/2/2017
4/16/2017 4/16/2017
4/30/2017 4/30/2017
5/14/2017 5/14/2017
5/28/2017 5/28/2017
6/11/2017 6/11/2017
6/25/2017 6/25/2017
7/9/2017 7/9/2017
7/23/2017 7/23/2017
Page 6 of 29
 Page 7 of 29

Returns
10
8
6
4
Returns

2
0
Date 31-07-16 31-08-16 30-09-16 31-10-16 30-11-16 31-12-16 31-01-17 28-02-17 31-03-17 30-04-17 31-05-17
-2
-4
-6
-8
Month

Adjusted Returns
8
6
4
Adjusted Returns

2
0
Date 31-07-16 31-08-16 30-09-16 31-10-16 30-11-16 31-12-16 31-01-17 28-02-17 31-03-17 30-04-17 31-05-17
-2
-4
-6
-8
-10
Month

Interpretation:
It can be clearly seen that adjusted returns and returns have similar shape but have
different amplitudes. These adjustments that have come here is mainly due to Sharpe
Ratio.
It can be clearly seen that there is a lot of noise present in daily data graph due to presence
of large number of readings in daily data set. According to the above graphs the lowest
 Page 8 of 29

peak is observed in October 2016 and the highest peak is observed in February 2017 and
started falling after March

Section-2 (Equity Futures Instrument)

5.) Write the Equity Futures Instrument introduction on the following items
i.) When it is started
CumminsInd was listed into NSE on 29-Mar-1995 and its futures equity instrument
started in year 2000, the year in which equity futures started in INDIA.

ii.) Lot size and contract specifications.

Lot Size = 600
Contract specifications
Instrument type FUTSTK (futures stock)
Trading cycle 3 Months (Near, Middle, Far)
Expiry date Last Thursday of month of expiry
Tick price 0.05
Price bands Operating ranges between +/-10%

iii.) Overall greatness of the Equity Futures Instrument.

Volatility of underlying security in last 6 months

Maximum volatility: 2.91

Minimum volatility: 1.07
Average volatility: 1.68

Since the volatility is quite high, it automatically implies that the company is liquid in
nature
 Page 9 of 29

6.) Calculate the sample returns (Mean, Max, Min and Standard Deviation of the
returns) on daily, weekly and monthly frequency.

Standard
frequency max Min mean
Deviation
Near Daily 5.97382783 -7.97266515 0.08138384 1.64634329

Near Weekly 7.489224 -8.094787 0.312627 2.833767

Near Monthly 10.02154577 -7.949912638 0.854729779 6.153073461

MIDDLE DAILY 11.20574279 -12.06317982 0.063061807 2.19241779

MIDDLE WEEKLY 9.563207203 -12.06317982 0.216835333 4.040428694

MIDDLE
12.67605634 -7.255265985- 0.32549114 5.0340422048
MONTHLY
FAR DAILY 8.110227986 -8.92382104 0.039458906 1.221389284

FAR WEEKLY 8.110227986 -8.92382104 0.188274763 2.707751646

FAR MONTHLY 6.677079266 -8.76332099 0.705011682 4.829003983

7.) Adjust these returns with risk (Sharpe ratio) on daily, weekly and monthly
frequency. You need the T-bill rates, they are available in a separate excel sheet T-
Bill. These are returns (not the prices), so you do not have to calculate the returns.
You can use them directly.

Frequency Sharp ratio

Near daily 0.038631638

Near weekly 0.064213

Near monthly 0.04914

Middle daily 0.02065

 Sharpe Ratio

-6
-5
-3
-2
-1
1
2
3
5

-4
0
4
Sharpe Ratio
Date

-4
-3
-2
-1
0
1
2
3
09-08-16
Week 19-08-16

Near daily
8/8/2016 - 30-08-16
8/22/2016 - 09-09-16
21-09-16
9/5/2016 -
30-09-16
Far daily

Far weekly

9/19/2016 -
Far monthly
13-10-16
Middle weekly

Middle monthly

10/3/2016 - 24-10-16
10/17/2016 - 02-11-16
11-11-16
10/31/2016 -
23-11-16
11/14/2016 - 02-12-16
11/28/2016 - 13-12-16
12/12/2016 - 22-12-16
02-01-17
12/26/2016 -
11-01-17
1/9/2017 - 20-01-17
01-02-17

Date
1/23/2017 -

Week
Sharpe Ratio

2/6/2017 - 10-02-17

Sharpe Ratio
21-02-17
2/20/2017 -
03-03-17
3/6/2017 - 15-03-17
3/20/2017 - 24-03-17
4/3/2017 - 05-04-17
17-04-17
4/17/2017 -
26-04-17
0.0316
0.0218

0.02192
0.01775
-0.04516

5/1/2017 - 08-05-17
5/15/2017 - 17-05-17
5/29/2017 - 26-05-17
06-06-17
6/12/2017 -
15-06-17
6/26/2017 - 27-06-17
7/10/2017 - 06-07-17
7/24/2017 - 17-07-17
26-07-17
Page 10 of 29
 Sharpe Ratio Sharpe Ratio

-8
-6
-4
-2
0
2
4
6
-2
-1
0
0.5
1
1.5
2

-1.5
-0.5
TIMESTAMP
10-08-16
Near weekly

Middle Daily
23-08-16

Near monthly
Month
02-09-16
16-09-16
Aug
28-09-16
10-10-16
Sep

24-10-16
03-11-16
16-11-16
Oct

28-11-16
08-12-16
Nov

20-12-16
30-12-16
11-01-17
Dec

23-01-17

Date
03-02-17
Month
Sharpe Ratio

Sharpe Ratio
Jan

15-02-17
28-02-17
10-03-17
Feb

23-03-17
05-04-17
Mar

18-04-17
28-04-17
11-05-17
Apr

23-05-17
02-06-17
May

14-06-17
27-06-17
07-07-17
Jun

19-07-17
Page 11 of 29
 Sharpe Ratio Sharpe Ratio

-4
-3
-2
-1
0
1
2
3

-2
-1
0
0.5
1
1.5
2
2.5
3

-1.5
-0.5
Time
8/8/2016 -

Month
8/22/2016 -

Middle Weekly

Middle Monthly
9/5/2016 -

Aug
9/19/2016 -
10/3/2016 -

Sep
10/17/2016 -
10/31/2016 -

Oct
11/14/2016 -
11/28/2016 -
12/12/2016 -

Nov
12/26/2016 -
1/9/2017 -

Dec
1/23/2017 -
Week

Month
2/6/2017 -
Sharpe Ratio

Sharpe Ratio

Jan
2/20/2017 -
3/6/2017 -

Feb
3/20/2017 -
4/3/2017 -

Mar
4/17/2017 -
5/1/2017 -
Apr 5/15/2017 -
5/29/2017 -
6/12/2017 -
May

6/26/2017 -
7/10/2017 -
Jun

7/24/2017 -
Page 12 of 29
 Axis Title Sharpe Ratio

-4
-3
-2
-1
0
1
2
3
4
-8
-6
-4
-2
0
2
4
6
8

-10

Far Daily
Week TIMESTAMP

Far Weekly
8/8/2016 - 8/10/2016
8/22/2016 - 8/23/2016
9/2/2016
9/5/2016 -
9/16/2016
9/19/2016 - 9/28/2016
10/3/2016 - 10/10/2016
10/17/2016 - 10/24/2016
10/31/2016 - 11/3/2016
11/16/2016
11/14/2016 -
11/28/2016
11/28/2016 -
12/8/2016
12/12/2016 - 12/20/2016
12/26/2016 - 12/30/2016
1/9/2017 - 1/11/2017
1/23/2017
1/23/2017 -
Date

Week
2/3/2017
Sharpe Ratio

2/6/2017 - Sharpe Ratio 2/15/2017

2/20/2017 - 2/28/2017
3/6/2017 - 3/10/2017
3/20/2017 - 3/23/2017
4/5/2017
4/3/2017 -
4/18/2017
4/17/2017 -
4/28/2017
5/1/2017 - 5/11/2017
5/15/2017 - 5/23/2017
5/29/2017 - 6/2/2017
6/12/2017 - 6/14/2017
6/27/2017
6/26/2017 -
7/7/2017
7/10/2017 - 7/19/2017
Page 13 of 29

7/24/2017 -
 Page 14 of 29

1.5 Sharpe Ratio

1

0.5
Sharpe Ratio

0
Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
-0.5

-1

-1.5

-2

-2.5
Month

Far Monthly

Find out the sample returns (Mean, Max, Min and Standard Deviation of the returns)
on daily, weekly and monthly frequency

Standard
frequency max Min mean
Deviation
Near Daily 5.956277142 -7.99104871 0.06359904 1.646294148

Near Weekly 7.364916446 -8.227709807 0.180231294 2.806765308

Near Monthly 9.482462438 -8.470495972 0.302184325 6.149038579

MIDDLE DAILY 11.18878389 -12.08028393 0.045277003 2.192502888

MIDDLE WEEKLY 9.439957203 -12.1830452 0.087905969 4.040316132

MIDDLE
12.11938967 -7.798181652 -0.227054314 5.027483589
MONTHLY
FAR DAILY 8.091151273 -8.942045697 0.021674103 1.221332394

FAR WEEKLY 7.97707414 -9.052859501 0.059345399 2.70729361

FAR MONTHLY 6.120412599 -9.285915432 0.152466228 4.825591136

 Adjusted Returns Returns

NEAR

-10
-8
-6
-4
0
2
4
6
8
-10
-8
-6
-4
-2
0
2
4
6
8

-2
Date Date
09-08-16 09-08-16
19-08-16 19-08-16
30-08-16 30-08-16
09-09-16 09-09-16
21-09-16 21-09-16
30-09-16 30-09-16
13-10-16 13-10-16
24-10-16 24-10-16
02-11-16 02-11-16
11-11-16 11-11-16
daily, weekly and monthly returns.

23-11-16 23-11-16
02-12-16 02-12-16
13-12-16 13-12-16
22-12-16 22-12-16
02-01-17 02-01-17
11-01-17 11-01-17
20-01-17 20-01-17
Returns

01-02-17

Date
01-02-17

Date

Adjusted Returns
10-02-17 10-02-17
21-02-17 21-02-17
03-03-17 03-03-17
15-03-17 15-03-17
24-03-17 24-03-17
05-04-17 05-04-17
17-04-17 17-04-17
26-04-17 26-04-17
08-05-17 08-05-17
17-05-17 17-05-17
26-05-17 26-05-17
06-06-17 06-06-17
15-06-17 15-06-17
27-06-17 27-06-17
unadjusted returns on daily, weekly and monthly frequency and conclude. Plot the
8.) The economic interpretation of the difference between risk adjusted and risk-
Page 15 of 29

06-07-17 06-07-17
17-07-17 17-07-17
26-07-17 26-07-17
 Adjusted Returns Returns

-10
-8
-6
-4
-2
0
2
4
6
8
10

-10
-8
-6
-4
-2
0
2
4
6
8
10
Week
Week 8/8/2016 -
8/8/2016 - 8/22/2016 -
8/22/2016 - 9/5/2016 -
9/5/2016 - 9/19/2016 -
9/19/2016 - 10/3/2016 -
10/3/2016 - 10/17/2016 -
10/17/2016 -
10/31/2016 -
10/31/2016 -
11/14/2016 -
11/14/2016 -
11/28/2016 -
11/28/2016 -
12/12/2016 -
12/12/2016 -
12/26/2016 -
12/26/2016 -
1/9/2017 -
1/9/2017 -
1/23/2017 -
Returns

1/23/2017 -
Week

2/6/2017 -

Week
2/6/2017 -
2/20/2017 -
Adjusted Returns

2/20/2017 -
3/6/2017 -
3/6/2017 -
3/20/2017 -
3/20/2017 -
4/3/2017 - 4/9/2017
4/3/2017 -
4/17/2017 -
4/17/2017 -
5/1/2017 - 5/1/2017 - 5/7/2017

5/15/2017 - 5/15/2017 -
5/29/2017 - 5/29/2017 -
6/12/2017 - 6/12/2017 -
6/26/2017 - 6/26/2017 -
7/10/2017 - 7/10/2017 -
7/24/2017 - 7/24/2017 -
Page 16 of 29
 Page 17 of 29

Returns
12
10
8
6
4
Returns

2
0
-2 Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
-4
-6
-8
-10
Month

Adjusted Returns
12
10
8
6
Adjusted Returns

4
2
0
-2 Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
-4
-6
-8
-10
Month

MIDDLE
 Returns Adjusted Returns Returns

-15
-10
-5
0
5
10
15
-15
-10
-5
0
10
15
-15
-10
-5
0
5
10
15

5
Time TIMESTAMP TIMESTAMP
10-08-16 10-08-16
8/8/2016 -
23-08-16 23-08-16
8/22/2016 -
02-09-16 02-09-16
9/5/2016 - 16-09-16 16-09-16
9/19/2016 - 28-09-16 28-09-16
10/3/2016 - 10-10-16 10-10-16
10/17/2016 - 24-10-16 24-10-16
03-11-16 03-11-16
10/31/2016 -
16-11-16 16-11-16
11/14/2016 - 28-11-16
28-11-16
11/28/2016 - 08-12-16 08-12-16
12/12/2016 - 20-12-16 20-12-16
12/26/2016 - 30-12-16 30-12-16
11-01-17 11-01-17
1/9/2017 -
23-01-17 23-01-17
Returns

Returns
1/23/2017 -
Date

Date
03-02-17

Week
03-02-17
2/6/2017 - 15-02-17 15-02-17
Adjusted Returns

2/20/2017 - 28-02-17 28-02-17

3/6/2017 - 10-03-17 10-03-17
3/20/2017 - 23-03-17 23-03-17
05-04-17 05-04-17
4/3/2017 -
18-04-17 18-04-17
4/17/2017 - 28-04-17
28-04-17
5/1/2017 - 11-05-17 11-05-17
5/15/2017 - 23-05-17 23-05-17
5/29/2017 - 02-06-17 02-06-17
14-06-17 14-06-17
6/12/2017 -
27-06-17 27-06-17
6/26/2017 -
07-07-17 07-07-17
7/10/2017 - 19-07-17
19-07-17
Page 18 of 29

7/24/2017 -
 Adjusted Returns Returns Adjusted Returns

-10
-5
0
5
10
15
-10
-5
0
5
10
15
-15
-10
-5
0
5
10
15

Time

Month

Month
8/8/2016 -
8/22/2016 -

Aug

Aug
9/5/2016 -
9/19/2016 -

Sep

Sep
10/3/2016 -
10/17/2016 -

Oct

Oct
10/31/2016 -
11/14/2016 -
11/28/2016 -

Nov

Nov
12/12/2016 -
12/26/2016 -

Dec

Dec
1/9/2017 -
Returns

1/23/2017 -

Month

Month
Week

Jan

Jan
2/6/2017 -
Adjusted Returns

Adjusted Returns
2/20/2017 -
3/6/2017 -

Feb

Feb
3/20/2017 -
Mar 4/3/2017 -

Mar
4/17/2017 -
5/1/2017 -
Apr

Apr
5/15/2017 -
5/29/2017 -
May

6/12/2017 -

May
6/26/2017 -
7/10/2017 -
Jun

Jun
Page 19 of 29

7/24/2017 -
 FAR
Adjusted Returns Returns

-10
-8
-6
-4
-2
0
2
6
8
10

4
-10
-8
-6
-4
-2
0
2
4
6
8
10
TIMESTAMP
8/9/2016 TIMESTAMP
8/19/2016 8/9/2016
8/30/2016 8/19/2016
9/9/2016 8/30/2016
9/21/2016 9/9/2016
9/30/2016 9/21/2016
10/13/2016 9/30/2016
10/24/2016 10/13/2016
11/2/2016 10/24/2016
11/11/2016 11/2/2016
11/23/2016 11/11/2016
12/2/2016 11/23/2016
12/13/2016 12/2/2016
12/22/2016 12/13/2016
1/2/2017 12/22/2016
1/11/2017 1/2/2017
1/20/2017 1/11/2017
Returns

1/20/2017

Date
2/1/2017
Date

2/10/2017 2/1/2017
Adjusted Returns
2/21/2017 2/10/2017
3/3/2017 2/21/2017
3/15/2017 3/3/2017
3/24/2017 3/15/2017
4/5/2017 3/24/2017
4/17/2017 4/5/2017
4/26/2017 4/17/2017
5/8/2017 4/26/2017
5/17/2017 5/8/2017
5/26/2017 5/17/2017
6/6/2017 5/26/2017
6/15/2017 6/6/2017
6/27/2017 6/15/2017
7/6/2017 6/27/2017
7/17/2017 7/6/2017
Page 20 of 29

7/26/2017 7/17/2017
7/26/2017
 Page 21 of 29

Returns
10
8
6
4
2
Returns

0
-2
-4
-6
-8
-10
Week

Adjusted Returns
10
8
6
Adjusted Returns

4
2
0
-2
-4
-6
-8
-10
Week
 Page 22 of 29

Returns
8
6
4
2
Returns

0
-2 Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

-4
-6
-8
-10
Month

Adjusted Returns
8
6
4
Adjusted Returns

2
0
-2 Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
-4
-6
-8
-10
-12
Month

INTRPRTATION
The adjusted and unadjusted returns as well as standard deviation of given equity futures
varies slightly in daily but varies more in monthly. The weekly returns as well as standard
deviation lies between the two.
In all the 3 daily, weekly and monthly the mean of equity futures returns is positive in
most of the cases except in the case of middle monthly.
As the difference between the max and the min value is quite high here, it can be
concluded that there is high fluctuation in returns.
 Page 23 of 29

9.) Similarly, calculate the sample risk adjusted returns and unadjusted returns of the
middle and far month. Compare with the near month returns and also with the
underlying asset returns also.

monthly Unadjusted returns Adjusted returns

Near 0.854729779 0.302184325
Middle 0.32549114 -0.227054314
Far 0.705011682 0.152466228
equity 0.836298371 0.283752916

Section-3

10.) Find out the required return on the assigned instrument. Use the CAPM model.

Equity Returns y = 0.875x + 0.029

R = 0.1327
8

0
-3 -2 -1 0 1 2 3
-2

-4

-6

-8

-10

Equation
Y=0.875x+0.029
 Page 24 of 29

Jensons Alpha= 0.005566001

Beta= 0.874988667
R Squared=0.1327

Section-4

11.) Compare the underlying risk adjusted and risk-unadjusted returns with Futures
instruments risk adjusted and risk-unadjusted returns and discuss on compared
returns on daily, weekly and monthly frequency. Also comment on the liquidity
conditions of the underlying assets, futures instrument (near month, middle
month and far month).

Comparison
daily unadjusted Adjusted
Near 0.081383844 0.06359904
Middle 0.063061807 0.045277003
Far 0.039458906 0.021674103
equity 0.083868505 0.066011405

weekly unadjusted Adjusted

Near 0.312626644 0.180231294
Middle 0.216835333 0.087905969
Far 0.188274763 0.059345399
equity 0.344220389 0.215291025
monthly unadjusted Adjusted
Near 0.854729779 0.302184325
Middle 0.32549114 -0.227054314
Far 0.705011682 0.152466228
equity 0.836298371 0.283752916

The daily, weekly and months returns are correlated which implies that the peaks in all
the 3 are approximately coinciding with each other. This also correlates to high standard
deviations obtained in the previous exercises.
 Page 25 of 29

Secondly the maxima in the graph is followed by a minimum soon. In rest of the places
the variance is less.
Thirdly, since the standard deviation is greater in monthly than in weekly which is
followed by daily it suggests high volatility.
LIQUIDITY CONDITIONS:
In near month futures open interest is very high, that is number of outstanding
contracts is very high.
In middle month open interest is higher than that of far month, that is more people
tries to enter into the contract. The liquidity condition in middle futures is moderate.
In far month futures the open interest is very low, that is the number of outstanding
contacts is low. Also, the no of contracts traded per day is very low. If a person wants to
enter into contract he may or may not have the opposite position to trade. This shows
the liquidity of the given equity futures in far month is very low.

Section-5
12.) Does the futures instrument exhibits contango or backwardation? Explain why?

Near:
 Page 26 of 29

Near Monthly Vs Equity Monthly

12
10
8
6
4
2
0
-2 Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
-4
-6
-8
-10

Adjusted Returns Equity Returns

Here Equity Returns leads futures most of the times. Therefore, this is a case of
backwardation.

Middle:

Middle Monthly Vs Equity Monthly

15

10

0
Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
-5

-10

Adjusted Returns Equity Returns

Here sometimes equity leads futures and sometimes opposite happens. Here we cant
say if it is a case of backwardation or contango.

Far:
 Page 27 of 29

Far Monthly Vs Equity Monthly

8
6
4
2
0
-2 Month Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
-4
-6
-8
-10
-12

Adjusted Returns Adjusted Returns Equity Returns

Here sometimes equity leads futures and sometimes opposite happens. Here we
cant say if it is a case of backwardation or contango.

Backwardation
Normal backwardation, is the market condition in which the price of a forward or
futures contract is trading blow the expected spot price at maturity of the
contract.
Contango
It is a situation where the forward price of a commodity is greater than the
spot price.
For CUMMINSIND it can be clearly seen above equity instrument outperforms
futures in near futures, hence it is showing Backwardation.
For the other two cases sometimes, equity instrument outperforms futures
but sometimes the opposite happens, so in both middle and far futures, we
cannot predict if this is a case of Contango or Backwardation.

13.) Does the frequency matter?

Equity derivative:
 Page 28 of 29

Frequency Risk Unadjusted Return Mean

Near Daily 0.081383844
Near Weekly 0.312626644
Near Monthly 0.854729779
Middle Daily 0.063061807
Middle Weekly 0.216835333
Middle Monthly 0.32549114
Far Daily 0.039458906
Far Weekly 0.188274763
Far Monthly 0.705011682

Equity:

Frequency Risk Unadjusted Return Mean

Daily 0.083868505
Weekly 0.344220389
Monthly 0.836298371

It is observed that the returns have different values in near, middle and far all the 3
daily, weekly and monthly frequencies. It helps us to conclude the importance of
frequency and the type of investor a person should become, whether a long one or
a short one.
Daily frequency should not be preferred since there is a lot of noise present of all
the 3 near, middle, far data values. Instead of using daily data, monthly data should
be used. The standard deviation is also very high in monthly as compared to daily
and weekly. For long observational periods monthly data must be used but for short
weekly data must be preferred.

Conclusion:

Required Return: 0.056894581

Jensons alpha: 0.005566001
Beta: 0.874988667

For long term trading monthly data should be taken into account but for short term
trading weekly data must be taken. Further daily trading should be avoided due to
presence of large amount of noise.
 Page 29 of 29

For good returns an investor should invest in both equity as well as near futures
since both provide a very good return