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SEBI proposes new derivative products

Mini contracts on the Nifty and the Sensex would provide higher liquidity at a lower transaction cost, reports MC Vaijayanthi.

business Updated: Dec 17, 2007 21:07 IST
MC Vaijayanthi
MC Vaijayanthi
Hindustan Times

The Securities and Exchange Board of India (SEBI) has moved a step ahead to introduce new derivatives products in the equity, bond and currency segments.

The introduction of mini contracts on index futures and options, options with longer tenure, introduction of volatility index to address the equity markets have been proposed by the regulator. The introduction of options contracts on futures and bond index and F&O contract to energise bond market and allow exchange traded currency Futures & Options (F&O) have also been suggested. These are likely to enhance liquidity, bring down the cost of transactions and increase the range of hedging instruments for investors.

Mini contracts on the Nifty and the Sensex would provide higher liquidity at a lower transaction cost. "Global experience has been encouraging in mini contracts. It is noted that overall market liquidity and participation generally increases with introduction of mini contracts," said the SEBI note.

For instance, Nifty futures are currently traded in a lot size of 50. A single lot would cost approximately Rs 2,80,000 and the margin to hold a position on it intra-day one would need around Rs 50,000. Options with one, two, three-month expiry are currently traded in the Indian markets. Long-term options with up to 5 years expiry not only for individual stocks but also for equity indexes have now been proposed. This would help investors take a long-term view and the necessary instruments to take a position to conform with that.

"The Volatility Index is considered to be an indicator of investor sentiment, with high values implying pessimism and low values implying optimism. A negative correlation in often noticed between the index and market movement. The Volatility Index provides a series of snapshots of expected stock market volatility over a specified time period," the note explains.