Now, trade US indices locally

Indian traders who wish to bet on the US indices need not burn the midnight oil anymore. The National Stock Exchange has launched trading in futures on the Dow Jones Industrial Average and the S&P 500 and options on S&P 500 from August 29. These instruments provide an easy route through which domestic traders can gain exposure to US equities.

Big brother

Tracking the movement of global equity markets has become second nature to Indian traders. With the growing influence of foreign institutional investors, Indian stock market has been increasingly swaying to the same tune as other global markets. And it is no secret that US market acts as the big brother in determining the trajectory of the broader trend in most global markets.

A 200 point plunge in the Dow or 25 points decline in S&P 500 on any day causes a domino-like ripple to pass through other global markets with Australia first taking a dive, followed by Asia and then Europe. Such trends are mostly reversed only when the equity in the US recover on the back of some domestic economic or corporate data.

The economic data emanating out of US is perused just as eagerly by the rest of the world since the US economy, due to its sheer size dominates others. Most technical analysts also keep a watchful eye on the charts of the Dow and the S&P 500 to watch for a break-out or a reversal in these charts. Such an event is mostly followed by similar moves in the charts of other benchmarks as well.

The nitty-gritty

These futures and options will be denominated in rupees. This removes the foreign exchange risk that is associated with trading in these instruments. For instance, if an Indian trader makes $100 profit on a purchase of the Dow future listed on CME and rupee depreciates 2 per cent against the dollar between the time the transaction is closed and money repatriated to India, the profit can get eroded by $2.

Transacting with our friendly local broker over chai-biscuit removes such forex risk. It is also less daunting than dealing with faceless overseas intermediaries. With NSE waiving transaction cost on these products till February 2012, transaction costs are going to be far more favourable for the domestically-listed Dow and S&P futures and option. The fact that Indian and US markets operate in different time-zones would not matter too much since the Dow and S&P futures are traded around the clock, even when the US sleeps. The S&P futures are traded on the Chicago Mercantile Exchange (CME). S&P options are traded on the Chicago Board Options Exchange (CBOE). On the other hand, Dow futures are traded on CME and Chicago Board of Trade (CBOT). The NSE in its press release says that it is the first time these instruments are listed in an exchange outside the US.

There is little doubt that Indian investors and traders will take to these instruments easily. Those wishing to take a directional call on the movement in US equities can buy or sell these instruments. They can also be used to hedge exposure in the domestic market against contrary moves in the overseas markets. Pair strategy with Nifty and Dow or S&P is also a good idea especially at times when the correlation of Indian market with its US counterpart is low.

There could be some hiccup initially due to their different settlement calendar. While other derivative products are settled on the last Thursday of every month, these futures and options are settled on the third Friday of every month. But Indian traders are likely to get adjusted to that soon.

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