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BSE pitches its new F&O contract for Budget play

This article was posted on Jan 23, 2010 and is filed under Market News

The Union Budget is a few weeks away and entities across sectors are busy drafting their wishlists. Officials of the Bombay Stock Exchange (BSE), Asia’s oldest, are busy, too, but to get the exchange’s almost dormant equity derivatives segment in order by the Budget eve.

BSE officials are busy meeting market participants, especially derivatives strategists, to pitch for a product they launched around two months ago —mid-month expiry contracts. It hasn’t excited many so far, but BSE feels the Budget eve is a good time to push it. It says it will give investors a better opportunity to place directional bets based on expected Budget announcements.

For, the Budget is likely to be presented on February 26, Friday, the last working day of the month. The February contracts of the National Stock Exchange (NSE) will expire on the last Thursday of the month, the 25th. The next series (March) will begin only on the day of the Budget and expire on March 25. On the other hand, BSE’s March series expires on March 11.

The pricing formula for derivatives products factors in the expiry date. The nearer the expiry, the lesser is the cost of carry. This, in turn, brings down the overall price of the contract.

“BSE’s mid-month expiry contract is a cleaner instrument to express Budget sentiments without worrying about roll-week issues. A smaller carry component will cause less distortion in F&O (futures and options) pricing. This will also provide a lot of arbitrage opportunities,” said Sayee Srinivasan, who heads product strategy at BSE.

He is confident that the mid-month contracts will find takers, especially during the Budget. “For long, market players did not have any option. This is the first time they have a choice to take a shorter-term bet based on an important event like the Budget,” he said.

According to Srinivasan, if an investor is comfortable with liquidity on BSE, he will buy put options on BSE instead of NSE. “Both contracts provide protection against the same risk, but the product difference in the form of the expiry date will lead to different prices,” he said.

Derivatives strategists, however, are taking this with a pinch of salt. “Theoretically, this is possible. Practically, it will not happen,” said Siddarth Bhamre, fund manager (derivatives), Angel Broking. He said the cost of carry of the BSE’s contract would be lower but absence of liquidity would push up the impact cost. BSE has been trying hard to gain a foothold in the derivatives segment, where NSE has a near monopoly. While in the recent past, BSE has been registering some trades on its F&O platform, it is nothing compared to its rival.

Interestingly, BSE officials are aware of the issue and agree that liquidity is the biggest block in their plan. “There is a lot of product differentiation. BSE contracts have a bigger tick size, mid-month expiry and active-passive pricing structure. Liquidity will take some time but will definitely be there,” said Srinivasan. BSE recently increased the tick size for Sensex futures and options from Rs 0.05 to Rs 1. It also announced a rebate for traders placing passive orders.

source: Business-Standard

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