The convergence of futures and cash prices at maturity: experience of KLSE Composite Index Futures and KLIBOR Futures / Nazleen Ismail

The main objective of this project paper is lo get better understanding on financial futures market activity with reference to the convergence to cash and futures price ion KLSE Composite Index Futures and KLIBOR Futures. This study tens to determine the convergence of cash and sutures price at maturity using the basis. From that, the efficiency of the market will be determined Besides that, this study will explore on the
arbitraging activity that exists due ion mispricing. The theoretical model of fair value is applied on the monthly basis for Composite index and quarterly basis for KLIPOR in order to establish an arbitrage opportunely. The data of Composite Index prices cover the
period from 15 December 1995 to 31 December 1999 and for KLIBOR paces cover iron 1996 to 1999. The landings show that what ire graders experience in practice actuality doesn't really correlate with the theory staled. This statement is made due lo the value of basis
between cash and futures whereby the cash and futures prices do not converge at all at maturity. The price discrepancies between cash and futures give an opportunity to an arbitrageur to do arbitrage This study conclude that the prces of cash and luiures do not convergeal malurily as what if Is stated in the theory but the market is still eflicient if the value of the bas1s falls in the stated range and there is also an arbitrage opportunity tor an arbitrageur.