What advantage would the Nifty offer over the Sensex for index-linked derivatives?
An index that best represents the market is the most useful index for hedging. In this respect, the Nifty is ideal for derivatives trading. The total market capitalisation of the stocks that constitute the Nifty is around 45 per cent of the capitalisation of all listed stocks in India. We had also conducted internal studies where we randomly picked up over a thousand portfolios of various sizes and compositions and we found they were all well correlated with the Nifty. Liquidity in the underlying stocks, as measured by their impact cost, is very important for an index to be used for derivatives trading. Though the Nifty meets this criterion, we review the index each quarter and replace any company that fail to qualify on our set criteria. After the tie-up of our joint venture on index products with Crisil and Standard & Poor’s (S&P’s), our indices will also face S&P’s scrutiny.I think these factors make Nifty very reliable. Users of index derivatives do not want an index that can be ma
