Does trading in Dow, S&P futures make sense?

A day after the National Stock Exchange (NSE) announced its tie-up with the Chicago Mercantile Exchange (CME) to enable individuals to trade in futures contracts based on the Dow Jones Industrial Average and the S&P 500 indices in rupee terms on the NSE, we look at the move’s impact on three types of investors:

Those who already have a position in the index thro-ugh exchange traded funds or direct equity holdings:

The Reserve Bank of India, under its liberal remittance scheme, does not allow Indian investors to invest more than $200,000 abroad. Moreover, remittance from India for margins or margin calls to overseas exchanges/ overseas counterparty is not allowed. Now, with Dow and S&P 500 instruments, they will be able hedge their position without moving their capital outside the country.

“There will be a lot of interest from retail investors. If they have a view on the indices, they can take a position in India itself,” said R Venkataraman, executive director, India Infoline.

Those who have an interest in Indian companies that have exposure to US firms:

Consider a person who holds shares of an IT company that is dependent on US markets for its business. He can take a short position on the Dow and S&P 500 to hedge against any adverse impact of a weak US economy.

“This offers more choice to cross-hedge investments,” said Jitendra Panda, senior vice-president at Motilal Oswal Financial Services.

Experienced speculators who wish to try their skills on the Dow:
Since the underlying stocks themselves are traded only later in the day, such a speculator will have to keep a constant eye on global news and events.

Experts also suggest that lesser volatility of the index might make it slightly less attractive for the average trader.

“There is les volatility on the Dow unless there is a major event. It is unlikely that there would be large-scale participation from the speculator’s perspective outside of select institutions,” said Karun Mutha, head, derivatives, HSBC Invest Securities.
Over the last one year, for example, there is an average difference of 2.52% between the daily highs and lows of the Nifty. The Dow Jones Index showed a difference of 1.81% while the figure for the S&P 500 was 1.91% in the period.

There are also some differences in the way futures contracts on the Dow and S&P 500 are traded which might very well influence the shape of the contracts in India.

The products in US are different from those traded in India in terms of contract period and expiry date.    

In the US, the S&P and Dow Jones futures have a contract period of 3 months leading to four expirations per year —March, June, September and December. Contract expiry is on the third Friday of the expiration month, with rollov-ers happening on the second Thursday of that month, i.e.8 days prior to expiry date.

In India, contract period is for one month with expiry on last Thursday of every month.