Financial Daily from THE HINDU group of publications
Tuesday, Dec 16, 2003
Financial Daily from THE HINDU group of publications Tuesday, Dec 16, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge PNB: Outlook negative, short January futures B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segment on the NSE: SCI: The stock closed at Rs 164 in the spot market. The outlook on the stock appears positive. Consider buying the January futures on the stock. Initiate the position with sell stop at Rs 158. The reason is that the outlook on the stock could turn negative, if the stock triggers this price level. Note that the long futures position cannot be cost-effectively hedged with options. Initiating the position with sell stop level is the optimal strategy. If the stock rises to Rs 198 at the horizon, the long January futures will generate 34 points per unit (3,200 units per contract). If the stock triggers the sell stop level of Rs 158, the position will lose 6 points per unit. The margin requirement is approximately 40 per cent of the contract value. The high margin is due to the high open interest position, which is above 80 per cent of the market-wide limit. The trading horizon is 26 days. PNB: The stock closed at Rs 184 in the spot market. The outlook on this stock is negative. Consider shorting the January futures on the stock. Initiate the position with buy stop at Rs 190. This exposes the position to 6-point risk. Note that the January futures trade at one-point premium to the spot, though the underlying carries an interim dividend. If the stock declines to Rs 170 at the horizon, the January futures will generate 14 points per unit (1,200 units per contract). If the stock triggers the buy stop of Rs 190, the position will lose 6 points per unit. The margin requirement is approximately 55 per cent of the contract value. This because the open interest position as a percentage of the market-wide limit is above 90 per cent. The trading horizon is 16 days.
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