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Virendra Verma

Mumbai , Sept. 7

AFTER investing aggressively into the cash market, FIIs have also started doing arbitrage between the cash and derivatives market, according to brokers. This is evident from the increased investment of FIIs in the derivatives market in the last few months, they said.

The increased activity of FIIs in the derivatives market is seen from their total gross market position in the derivative segment of NSE rising from around 7 per cent in June this year to 14.24 per cent on September 4. During the last few months, the volumes on the NSE derivatives segment have also increased from average of Rs 4,500 crore to over Rs 6,000 crore.

Brokers said FIIs have been actively doing the arbitrage between the cash and derivatives market due to the profits they are sure to make in the rising market.

A derivatives dealer at a leading domestic broking firm said, "By doing the arbitrage, FIIs are making returns between 15 and 24 per cent on an annualised basis." He said, "This kind of returns is excellent compared to returns in other market. Moreover, the returns are considered good as their cost of borrowings is between 1.5-2.5 per cent annually."

The modus operandi of FIIs is that they buy a stock in the cash market and sell the futures of the same stock in the derivatives. In the current booming market, the futures of most of the stocks are trading at a premium to the underlying stock. Moreover, just before the expiry of the monthly contracts, these FIIs rollover the month-end contract with the next month contract.

For example, if Reliance stock in the cash market is trading at Rs 400 and its September futures is trading at Rs 407, the FIIs buy Reliance stock in the cash market and sell in the futures market. This way they make a profit of Rs 7 per share (excluding the transaction charges) and make a return of 175 per cent, which on an annualised basis works out to 21 per cent.

Broker said FIIs have started actively trading in the derivatives mainly due to these kind of sure profits. Most of the brokers said in this kind of activity the possibility of loss is low.

The local brokers also are into arbitrage, but their real profits are not as high as FIIs due to the high cost of the funds of around 7-8 per cent.

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