Futures contract on S&P 500 and Dow Jones Industrial Average (DJIA) through NSE trading platform

NSE has got SEBI approval to offer futures contracts on S&P 500 and Dow Jones Industrial Average (DJIA) after it signed cross licensing agreement with Chicago Mercantile Exchange (CME). This product will provide opportunity to Indian investors to invest in the market barometer of the world’s largest economy. The development is definitely a matter of excitement for Indian markets and investors.

These products can be used both as investment tools for taking a position on US economy as well as risk management tools. As risk management tools, futures on S&P 500 and DJIA can be used by domestic fund houses as well as individual investors to hedge their positions in Indian market. They would get the opportunity to take counter-positions in US indices since news flow from the US impact the capital markets across the world. This may prove to be a very effective tool for domestic fund houses to maintain their portfolio value since Indian markets largely mimic the rise or fall of the US market.

Both S&P500 and DJIA will be denominated in India rupee and so there will not be any currency risk on account of adverse dollar-rupee movements. Further, they will be traded during normal Indian trading hours and therefore will not require to wait for the US market to open for trades to take place.

At the same time, Indian markets may face other opportunities as well as challenges since futures on S&P500 and DJIA will be offered outside the US for the first time. Trading on them in India will be of interest to both non-US as well as US investors apart from domestic investors. These non-domestic investors will be interested because they may like to diversify their positions across different markets. If this happens, it may enhance forex inflow and will also provide an impetus for the appreciation of Indian rupee. An appreciation of the rupee will provide further opportunity to investors to increase their total return since they will get exchange rate advantage of the appreciated rupee during outflow of funds from the country. This will impose forex management challenges for the Indian regulator apart from adding volatility to forex market.

Let us wait to see how the market develops over a period of time.