>Trade Winds (KARVY)

20 April 2009 to 26 April 2009

Investors during the great Indian elections
With the world’s largest democracy going to the polls, there has been tremendous volatilityin the stock markets. Without a clear winner in sight, the uncertainty about the policies ofthe new government has become a cause of concern for investors in the stock markets,particularly after having witnessed the market crash on May 17, 2004, during the post-electionand pre-government formation process. This time, the election environment is quite chargedup with three camps—UPA, NDA, and the Third Front—fi ghting intensely for the hotseat. As a result, volatility in the stock markets is set to rise to unprecedented levels. At thisjuncture, investors should be very cautious while trading in the stock markets.On the other hand, investors are also looking forward to participating in the global stockmarket rally. The unprecedented stimulus packages announced by major economies acrossthe globe are working and there are signs that the pace of global economic recession in theUS, China and EU is easing. The recent corporate earnings announcements have exceededmarket estimates—Wells Fargo, JPMorgan, Citicorp, and Hewlett-Packard announcedbetter-than-expected earnings, triggering a rally in the global stock markets.Given the need to participate in the global stock market rally and the major concern ofvolatility during the election process, we believe derivatives would be the right solution insuch a scenario. Futures and options come in handy, wherein investors can participate inthe stock market rally while handling the volatility during the election process. Investorswith holdings in the cash market can use put options to partially hedge their portfoliosfor a limited period. They can remove the hedge once clarity emerges about the newgovernment and its policies. Also, investors can buy call options which give them the rightto participate in the rally, and at the same time, limit the downside risk. Moreover, futuresand options hybrid strategies, such as long straddle and long strangle, can be used untilthe new government is in place. Overall, all kinds of investors can benefi t from the use ofoptions during these volatile days.

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