The Telegraph
Since 1st March, 1999
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FIIs cash in on futures

Mumbai, Sept. 15: A clutch of foreign funds and some local bulge-bracket investors have hit upon a novel strategy that gives them risk-free returns of 15-18 per cent per annum on their stock investments.

They have bought shares of blue-chips in the cash market only to plan them off in the futures segment at a premium of 1-1.5 per cent. The difference works out to an annual return of 15-18 per cent, brokers say.

“It has become a lucrative proposition,” says Venkatesh Iyer of R. K. Chari Stock Broking. The daily volumes on NSE’s derivatives segment are around Rs 7700 crore. The cumulative FII exposure in terms of total gross position is around 13.7 per cent, analysts say.

While the derivatives segment is used primarily as a hedging mechanism to safeguard interests, the bull rally has given these investors an opportunity to cash in on the disparity in the cash and derivative sections.

In a rising market, shares in the futures segment quote at a small premium on their values in the cash section. This happens mainly because shares, or even index futures, are normally expected to appreciate in future.

FIIs buy the blue-chips in the cash market, take a put option immediately and square off the transaction without taking any risk on their financial profile. The put is an option to sell. It means the market deals struck now, will be completed at some agreed date in the future.

Having bought the shares, they eliminate all risks by selling long. Even if it gains, they are committed to a contract price, which is higher than the cost of buying them.

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