Readings: CXO on Options, Dorsch on Shanghai market, Derivatives trading in India
- CXO Advisory Group: Consistently Expensive Types of Equity Options
Using stock and option prices and associated firm fundamental data for 1,402 firms over the period 1/96-12/04, they conclude that:
- Options on stock indexes are generally more expensive than options on individual stocks.
- A hedge strategy (dispersion trading) that is long a portfolio of equity options and short a portfolio of index options generates, after transaction costs, a Sharpe ratio more than four times greater than that of the broad equities market. This strategy substantially outperforms one of simply shorting index options.
- Options on small and value stocks are more expensive than options on large and growth stocks, respectively.
The Peoples’ Bank of China (PBoC) prints massive amounts of yuan each day, in exchange for the foreign currency flowing into the country. As a result, China’s M2 supply is 18% higher from a year ago. China’s bulging trade surplus has swelled the country’s foreign exchange reserves to $1.4 trillion, although a “small sum of hot money also sneaks into the financial system through various means.
. . . there would be over $120 billion of hot money that has entered China so far this year, equivalent to 45% of the rise in the central bank’s foreign exchange reserves in the first half of 2007. Hot money flows might be inflating Shanghai red-chips to huge premiums over their dually listed shares in Hong Kong.
- Businessworld: Taking An Option For The Future
The frenzy in derivatives trading has grown as dramatically, to an average daily traded amount of Rs 53,644 crore in September 2007, a 147 per cent increase from October 2005.
Index options, particularly Nifty options, have seen their share rise steadily from 7 per cent in 2005-06 to 11 per cent in 2006-07.
Another significant dynamic that has fuelled the growth of the derivatives market is the participation of FIIs, whose share in F&O trading has gone up from 7.5 per cent to 14.4 per cent in the past two years (see table ‘Make-up of Derivatives Players’).
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