A Note On Currency And Index Futures
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TRADING USING INDEX FUTURES Contd..
On March 10, 2003, the securities of the portfolio and Nifty traded are as
follows:
|
No. Of Shares
|
Security
|
25-Feb
|
10-Mar
|
Profit/(Loss) |
|
|
|
|
|
|
|
100
|
Grasim
|
110
|
94.7
|
1530 |
|
200
|
Andhra Bank
|
48.25
|
26.5
|
4350 |
|
100
|
Pfizer
|
875.5
|
742
|
13350 |
|
200
|
Infosys
|
150.5
|
112.5
|
7600 |
|
200
|
BPL
|
245
|
212
|
6600 |
|
|
PORFOLIO
|
187,300
|
153,870
|
33430 |
|
|
NIFTY
|
1124
|
961.02
|
|
Gain on Nifty = 162.98 X 200 = Rs. 32596
On March 10 Ketan offsets his position by buying back futures. His
profit on the futures contract is Rs. 32,596 and his loss on the
portfolio was Rs. 33,430. Thus the net loss is Rs. 834. If he had not
hedged he would have lost Rs. 33,430.
• Have Funds, Buy Index Futures
It is a common belief that index futures are used for hedging against a
fall in the market index. However, it is equally important to use index
futures to hedge against a rise in the index. Holding money in hand,
when it is to be invested in securities may result in a lost opportunity
for profit if the index rises. An investor having funds may not invest
in equities for the following reasons:
a) It takes time to research and select securities to invest. During
this time, the investor is exposed to the risk of losing out on the
opportunity if the index rises.
b) Even if a person has selected a portfolio of securities, and placing
purchase orders in the market involves large ‘impact costs'.
|
|
The alternatives the investor has
are:
a) To buy liquid securities.
b) To hold money and suffer the notional risk of lost opportunity.
c) To buy index futures and obtain the desired equity exposure immediately.
An investor who expects to realize Rs. 3 million from the sale of a house
would take a long position on index futures worth Rs. 3 million. The market
for index futures is more liquid than individual securities; hence it
involves lower impact cost, at the same time allowing large positions.
Later, the investor can select securities after detailed research, and as
and when the shares are purchased, the long position on index futures can be
scaled down correspondingly. This strategy provides the investor with the
time to pick the securities carefully after research and analysis.
At times investors feel that market is expected to rise (in a bull phase).
To benefit from such a scenario, investors have two alternatives:
a) To buy securities which move in tandem with the index and offload at a
time when investor feels he has realized the profit.
b) To buy the index portfolio and sell at a later date.
The first alternative uses certain securities as a proxy for the index.
However, it is subject to company specific risks and may generate losses, as
it is only a proxy for the index and not the index itself. The second
alternative involves large transaction costs and is therefore expensive.
A way out to this is to take a position on the index. It is effortless and
is not costly as the entire index can be bought or sold as a single
security. If a person is long on the index, he gains if the index rises, and
vice versa.
To adopt this strategy, an investor can take a long position on the index by
buying market lots. Suppose, the market lot is 200 Nifties and Nifty is
trading at 1860, it will involve an outlay of Rs. 372,000. But he is only
taking a position and will therefore be required to pay only the initial
margin, say, Rs. 25000.
CONCLUSION
EXHIBIT I DIFFERENCE BETWEEN FUTURES AND FORWARDS CONTRACTS
EXHIBIT II A NOTE ON ANALYZING FUTURES PRICES
ADDITIONAL READINGS AND REFERENCES
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