Despite Taiwan's relentlessly rising stock index, certain derivative instruments are becoming cheaper by the day. British merchant bank Flemings reports that certain euroconvertibles and equity swaps are trading at discounts of up to 20 per cent. It said they could provide returns to outstrip the gains made on either Taiwanese domestic funds or offshore funds. Derivatives analyst Carole Arumainayagam said such reasonably priced products were becoming increasingly rare and were caused by regulatory anomalies in the Taiwan market, which prevents foreign institutions from short-selling. Consequently, as the Taiwan market rises, there has been growing selling pressure on instruments such as off-exchange equity swaps, and the newly created stock index futures. Index swaps are being quoted at 5 to 6 percentage points below the one-year London interbank borrowing rate, Ms Arumainayagam says. 'In other words, sellers of the market will have to do so at a 6 per cent discount; and buyers can get into the market at a 5 per cent discount,' she said. In turn, arbitrageurs are exploiting the difference between the low price of index futures and equity swaps and the even-lower prices of Taiwanese closed-end funds. These are trading at a 14 to 15 per cent discount to the main market. They are also exploiting the difference between euroconvertibles and the closed-end funds, now at a 5 to 20 per cent discount to the main market. For fund managers this represents a good opportunity to hunt bargains and outperform the average Taiwan fund by about 5 per cent. The average performance of a group of Taiwan offshore funds on a one-year basis has been minus 0.2 per cent, while the average performance for local funds was minus 0.3 per cent for the same period, Flemings said. There are only seven identified euroconvertibles instruments that can be converted into ordinary shares. They are: Acer Peripheral, Far Eastern Department Store, Nan Ya Plastics, Teco Electronics, United Microelectronics, Pacific Construction and President.