Page 35 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes 2.6.3 Exchange Traded Funds

Exchange Traded Funds (ETFs) are innovative products, which first came into existence in the
USA in 1993. They have gained prominence over the last few years with over $300 billion
invested as of end 2001 in about 360 ETFs globally.

Did u know? About 60% of trading volume on the American Stock Exchange is from ETFs.
Among the popular ones are SPDRs (Spiders) based on the S&P 500 Index, QQQs (Cubes)
based on the Nasdaq-l00 Index, iSHARES based on MSCI Indices and TRAHK(Tracks)
based on the Hang Seng Index.

ETFs provide exposure to an index or a basket of securities that trade on the exchange like a
single stock. They have a number of advantages over traditional open-ended funds as they can
be bought and sold on the exchange at prices that are usually close to the actual intra-day NAV
of the scheme. They are an innovation to traditional mutual funds as they provide investors a
fund that closely tracks the performance of an index with the ability to buy/sell on an intra-day
basis. Unlike listed closed-ended funds, which trade at substantial premia or frequently at
discounts to NAV, ETFs are structured in a manner which allows creating new units and redeeming
outstanding units directly with the fund, thereby ensuring that ETFs trade close to their actual
NAVs.
The first ETF in India, “Nifty BEES” (Nifty Benchmark Exchange Traded Scheme) based on S&P
CNX Nifty, was launched in December 2001 by Benchmark Mutual Fund. It is bought and sold
like any other stock on NSE and has all characteristics of an index fund. It would provide returns
that closely correspond to the total return of stocks included in Nifty.

Self Assessment

State whether the following statements are true or false:

13. Index derivatives are derivative contracts which have the index as the underlying.
14. An index fund is a fund that tries to replicate the index returns.
15. The first ETF in India, “Nifty BEES” (Nifty Benchmark Exchange Traded Scheme) based on
S&P CNX Nifty, was launched in December 2001 by SEBI.

Case Study Foreign Exchange

he Foreign Exchange Market is all set to welcome the FX portals that are sure to
revolutionise the way Forex trading would take place in future. Their viability
Twould depend on the way participants would embrace them and on the competition
that would ensue. The two portals that have hit the market amid great fanfare are FX all
and Atriax. By providing a sufficient range of currencies to the players to allow ease of
execution and by giving access to a range of prices from different sources at all times, these
portals are aiming to garner liquidity. Instead of being in a win-lose situation, a win-win
scenario could emerge if both the systems would work in tandem and manage to capture
a large enough portion of the growing Foreign Exchange Market pie. Forex trading itself
is expected to zoom because of growing B2B transactions over internet as the investors are
going global and holding greater foreign securities in their portfolios. Therefore, a more
Contd...

30 LOVELY PROFESSIONAL UNIVERSITY