Financial Daily from THE HINDU group of publications
Tuesday, Oct 21, 2003
Financial Daily from THE HINDU group of publications Tuesday, Oct 21, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook positive on Canara Bank, MTNL B. Venkatesh
THE following strategies are based on Monday's trading in the derivatives segment on the NSE: Equity options Canara Bank: The outlook on this stock is positive. The upside price target is Rs 161. The downside risk level is Rs 137. Note that the exposure limit for futures and options on the stock will be increased by 15 per cent from October 21. At present, the open interest position as a percentage of the market-wide limit is above 50 per cent. Consider buying the November futures on the stock. The position will be subject to 10-point risk. This risk cannot be hedged with puts because the farther month contracts are not yet traded. The position cannot be initiated with stop-loss limits because the stock is likely to see high volatility in line with the broad market. If the stock rises to Rs 161 at the horizon, the long November futures will generate 14 points per unit (1,600 units per contract). If the stock declines to Rs 137, the position will lose 10 points. The margin requirement is approximately 20 per cent of the contract value. The trading horizon is six days. MTNL: The outlook on this stock is positive. The upside price target is Rs 140. The downside risk level is Rs 106. Note that the stock has not participated in the current rally in the same way as other index constituents. The open interest position as a percentage of the market-wide limit is above 50 per cent. Consider buying the November futures on the stock. At the current levels, the position will be subject to 10-point risk. This risk cannot be hedged with horizon-matched puts because the farther-month contracts are not yet traded. If the stock rises to Rs 140 at the horizon, the long November futures will generate 24 points per unit (1,600 units per contract). If the stock declines to Rs 106, the position will lose 10 points per unit. The margin requirement is approximately 12 per cent of the contract value. The trading horizon is 10 days.
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