Volumes dip on long-term maturities

Anup Menon

OVERALL Trends: The stock markets continued to slide during the first week of August.

The cash markets (Sensex and Nifty) registered a decline of 2.2 per cent and 1.1 per cent respectively during the week. The weakness in the market has been partly due to pressure from the sliding rupee.

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Apart from this, the cash markets are also feeling a little jittery on account of the expected performance of some key sectors such as automobiles. Over the week, the August maturities on the Sensex and the Nifty lost around 1.4 per cent and 1.5 per cent respectively.

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The National Stock Exchange has announced that it has waived transaction fees for all trades in the futures markets till December 31, 2000. This may help in improving interest in the Nifty contracts since the no-arbitrage range after accounting for transaction costs is likely to be narrower.

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Trading statistics: Trading statistics for the week indicates that activity in the market was subdued as compared to some of the previous weeks. Overall, volumes in the market have fallen on a week-on-week basis. Total volumes in the Sensex contracts for the week stood at 1,071 contracts as against 2,185 contracts the week before.

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The fall in volumes can be attributed to the lack of interest in the long-term maturities where volumes have shrunk. The near term, August maturity contract continued to show active trading interest with around 1,022 contracts traded on the Sensex and 756 contracts on the Nifty.

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Nifty August: Trading interest in the Nifty August maturity continued to be on the higher end. The contracts were trading close to their fair value. The implied cost of carry based on Friday's close works out to around 10 per cent. The low spread between the risk free rate and the implied cost of carry implied that there is very little scope for arbitrage. Volatility over the week reduced drastically from 2.4 per cent to around 0.5 per cent. Investors can avoid taking fresh positions at current valuations.

Nifty September/October: Activity in the September and October maturities have been on the lower end. Volumes during the week dropped to around 72 contracts (both inclusive) as compared to 442 contracts traded last week.

Investors seem to be wary of taking exposures given that the maturities are a long way off. The implied cost of carry on the September contract works out to around 16 per cent. Though the valuation is at a significant spread over the risk free rate, post-transaction costs, institutional investors may have a small window of opportunity. Investors with a penchant for risk can consider a short position in the contract at present levels. Activity in the October contracts was virtually absent. Given the lack of liquidity, the contract can be avoided for the time being.

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Sensex August: Trading in the Sensex August contract was more in line with the cash market. Valuations in the Sensex contract indicate an opportunity for arbitrage. The implied cost of carry based on Friday's close works out to around 13 per cent. The spread in terms of index points between the actual futures price and the cash index works out to around 40 points. Investors can consider selling the contract short at present levels.

Sensex September/October: The trends in the longer term maturities have reverted back to their past with volumes falling drastically. Total traded volumes during the week worked out to around 49 contracts (both inclusive) as compared to 905 contracts in the previous week. The cost of carry on the two-month contract works out to around 7 per cent. The October contract was not traded throughout the week. Investors need not consider taking fresh positions in both the September and October maturities.