Financial Daily from THE HINDU group of publications
Tuesday, Dec 09, 2003
Financial Daily from THE HINDU group of publications Tuesday, Dec 09, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook negative on NIIT, IPCL B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segment on the NSE: NIIT: The stock closed at Rs 234 in the spot market. The outlook on this stock is negative. The downside price target is Rs 200. Consider shorting the January futures contract on the stock. Initiate the position with buy stop at Rs 246. This exposes the position to an 8-point risk. This risk cannot be hedged with horizon-matching calls because the farther-month contracts are not traded yet. If the stock declines to Rs 200 at the horizon, the short January futures will generate 35 points per unit (1,500 units per contract). If the stock triggers the initial buy stop of Rs 246, the position will lose 8 points per unit. The position has to be traded with dynamic buy stops. The margin requirement is approximately 50 per cent of the contract value. The margin is high because the open interest position as a percentage of the market-wide limit is close to 80 per cent. IPCL: The stock closed at Rs 218 in the spot market. The outlook on this stock is negative. The downside price target is Rs 190. Consider shorting the December futures on the stock. Initiate the short futures position with buy stop at Rs 230. This exposes the position to an initial risk of 12 points. This risk cannot be cost-effectively hedged. If the stock declines to Rs 190 at the horizon, the short December futures will generate 28 points per unit (2,200 units per contract). If the stock triggers the buy stop of Rs 230, the position will lose 12 points per unit. The position has to be traded with dynamic buy stops. The December futures contract can be rolled over after the next month contract becomes active; the roll over cost may be about 5 points. The margin requirement is approximately 20 per cent of the contract value.
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