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Good Morning Future...

Jun 9, 2000

Today India witnessed its’ first Index futures being traded with the launch of BSE Sensex Futures on The Stock Exchange, Mumbai. The markets were thinly traded with volumes of around Rs 30 to Rs 40 million. A reason for the low volume could be attributed to the fact that some brokers were still testing the trading and control systems in a live trading atmosphere with them entering into trades only on their own account. The index futures started with the launch of three series of the Sensex futures –the June, July and August series respectively. June futures witnessed the maximum trades numbering some hundred plus. July witnessed very few, just about ten to twelve trades. August futures witnessed just 2 trades. The trend in the prices for the day has been as follows

  High Low Close
Sensex – Spot 4,797.0 4,716.0 4,729.0
June Futures 4,820.0 4,740.0 4,783.0
July Futures 4,900.0 4,800.0 4,830.0
August Futures 4,870.0 4,800.0 4,835.0

Throughout the day, the bid - ask spread was very wide with the June future at a Rs 35 spread and the spread widening to Rs 65 in the case of August future. This is characteristic of a market that is very low in liquidity. The liquidity is expected to increase as more and more players come into the market on a very active and on a day to day basis.

The bid – ask spread was especially wide for the spread trading that is buying a particular month contract and selling another month contract. Being just the beginning days, people are yet to get to a level of comfort vis-ŕ-vis these products the understanding of which come after understanding the basic product of an Index future.

Early morning saw a very good arbitrage opportunity in August futures. These were selling at levels of 5,100 when the Sensex was quoting at 4737 in the spot market implying returns of 33.69%. They quickly corrected themselves and were quoting at levels of around 4830 – 4889 for the rest of the day.

A price check done at 2:45 when the index quoted at 4,716 revealed the following spreads in the cash and futures markets

Series Bid Price Returns
June 4,769.00 20.5%
July 4,825.00 17.6%
August 4,830.00 10.6%

Therefore, here we saw that the August futures have been under priced for most of the day. A person having a positive view of the markets for the next two months might prefer buying August futures as that is available at a lesser in-built cost vis-ŕ-vis the June and the July futures. We therefore notice that when August futures are available at a lesser cost to sell, we cannot take advantage of the situation because of the very wide spread between the bid and the ask quotes. With the liquidity improving, such arbitrage and punting on the spreads will increase, making the futures market interesting, intriguing and dynamic.

Welcome to the Brave New World of Index Futures!!


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