The Hindu Business Line : FIIs turn net sellers in derivatives market

WHILE the FIIs have kept steady the inflows into the cash market in 2004, they have turned net sellers in the derivatives market over the last 10 trading sessions (since December 29 last). The net selling by FIIs in the derivatives is over Rs 1,000 crore during this period.

A look at the trading pattern of FIIs in the derivatives segment shows that they have been net sellers continuously since December 29, 2003.

However, during this period, FIIs were continuously buying in the cash market.

Derivatives analysts said this trend (net selling in derivatives market) is seen for the first time since FIIs started investing in this segment.

By doing this they are hedging their positions - that is buy in the cash market and sell in the derivatives market. "With hedging, FIIs are able to have returns of around 1.5 per cent to 2 per cent per month, which works out to 18-24 per cent annually," said a dealer with a foreign broking firm.

Normally, there is a premium in the derivatives market over the spot market whether it is index futures or stock futures. FIIs buy at lower price in the cash market and sell in the derivatives market and the premium between the two markets is profit for them.

He said hedging is being done by FIIs as NSE has removed the ad-hoc margins imposed on outstanding positions. "With the removal of these ad hoc margins, the returns for FIIs have again turned attractive," he added.

In middle of 2003 also FIIs were active in hedging their positions with returns ranging between 18 per cent and 24 per cent.

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