HDFC Mutual Fund in Mumbai is waiting for liquidity to improve before it makes its first use of over-the-counter equity options. A fund manager at the firm said it has received board approval and will look to purchase and sell over-the-counter options as a hedging instrument for its INR2.5 billion (USD52 million) equity portfolio within a year. He continued that the firm will start with futures and exchange-traded options within six months. "We're aware of how equity derivatives work. The point is its difficult to implement strategies in a market with poor liquidity," the manager said. One of the strategies HDFC will use is writing covered puts. The fund manager explained that this generates premium for the fund and does not put the fund at risk, since it is long the underlying stock.
Shabbir Kapasi, fixed-income fund manager in Mumbai, said the fund already uses interest-rate derivatives for its long-term and short-term fixed income funds. For example, it recently entered a three-month USD2 million dollar (notional) interest-rate swap to convert floating-rate notes into synthetic fixed-rate assets. Kapasi said the fund pays a floating rate of MIBOR at 7.12% and receives fixed at 8.2%. He entered the swap as a defensive strategy to stabilize the return on the portfolio. The recent terrorist attacks in the U.S. have driven volatility higher, prompting the fund to lock in fixed rates.
