The Hindu Business Line : Index futures catches on

A COMBINATION of growing volatility in the stock market and institutional investors' attempts to hedge their investments has shifted trading activity in the derivatives market towards index futures. The shift has come largely at the expense of stock options trading.

An increase in the extent of ups and downs in the indices over the last few months has given investors the opportunity to profit from index futures, said market analysts. While futures trades on individuals stocks have long been the most popular segment of the market, there is a feeling that it may be less risky to second guess an index's swings, said an analyst.

The changing views of investors showed up in the form a rise in the market share of trades in index futures. In July 2003, index futures made up 13 per cent of the total derivatives market in the National Stock Exchange.

By February 2004, index futures cornered 32 per cent of the total market in NSE. Index futures are not viewed only as an investment opportunity.

According to Mr Mukul Pal, derivatives analyst at Edelweiss Capital, one of the reasons for the rise in the volume is the significant amount of hedging operations carried out by institutions.

He said that about a quarter of the volume came from foreign institutional investors who used index futures to cushion other investments in the stock market.