The regulator clarified that hedged or offsetting positions taken during the course of trade will not be considered while computing the gross exposure of ETCDs for the funds.
For eg, if a fund has received the underlying goods backing a contract on an exchange , it could initiate a fresh short position against the underlying goods so long as the shorts don’t exceed the quantum of goods held. These shorts will not be taken as fresh exposure .
Assume a fund has taken delivery of one kilo of gold on an exchange, it can initiate a short position on a 1 kilo contract of gold futures traded on that exchange . This 1 kilo will not be computed as a fresh position .
Futures contracts facilitate the sale or purchase of an underlying commodity at a preset price for delivery on a future date.
Also, a short position on a futures contract will not be considered as a fresh position if it is initiated against a long position on the same underlying goods. This will facilitate calendar spread initiation wherein an MF buys a shorter dated futures contract and sells a longer dated futures contract or vice versa.
Sebi further clarified that mutual funds shall not write or sell options, or purchase instruments with embedded written options in goods or on commodity futures.
That is because selling options involves unlimited risk if the market moves against the seller . A buyer of an option either call or put pays a premium to the seller. Maximum loss is restricted to the premium paid.
