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1st MAY 2008

Volume 2, Issue 3

Wealth Incorporation - A CCIM Finance Club Initiative Presents

CHAANAKYA
..Tracking the Economy Stocks don't go straight down and stocks don't go straight up. The market's in trouble ? technically, it's in trouble and fundamentally it's in trouble. We're going to bounce around with a downward bias.
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Issue Attractions
National Headlines International Headline Corporate Interview Quiz Student Editorial Investors Check/Tag lines/Buzz Word

- KEN SHEINBERG

National Headlines

Axis bank makes Rs. 72 crore Provision in 4th quarter for foreign exchange derivatives, HDFC set aside Rs. 471 crore. Reliance Industries LTD. Major petrochemicals industry posted 24% rise in 4th quarter profit. Maruti Suzuki net Profit falls by 34% in the 4th quarter and was RS 297 Crore. RBI hikes CRR by 50 basis points to 8% that will suck Rs. 18,500 Crore from market to keep inflation under control. Infosys 4th quarter net profit grows by 9.2% touching RS 1249 Crore. Venture Capital & Private Equity funds have raised Rs. 28000 Crore in the year 2007. SEBI has allowed AMCs (asset management companies) to invest in real estate through guidelines that AMCs have to follow. Fund houses likely to get Rs. 30K- 50K Crore.

Inflation 7.33% , IIP 8.7%

15 days Movements
18000 17500 17000 Sensex 16500 16000 15500 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Sensex

40.9 40.7 40.5 40.3 40.1 39.9 39.7 39.5 1 2 3 4 5 6 7

Rs/ $
Rs/$

International Headlines

US financial groups raise $28 billion, Citigroup- $6B, JP Morgan -$6b, Merrill Lynch$2.5b. BMW takes $370 million charge due to falling prices and rising bad debts in the US. Arcelor-Mittal plans $10 billion Indonesia deals by buying stakes in Krakatau Steel. Delta Airlines and Northwest Airlines agreed to merge to become worlds biggest carrier. GM loses sales to Toyota as it reports 0.6% drop in Q4 Sales to 2.25 Million. Bank of England unveils 50 billion debt market plans.UBS details its sub-prime losses, the banks write downs have swollen to more than $34bn. Royal Bank of Scotland unveils 12 bn. rights issue. Warburg Pincus, the US-based private equity group raised $15billion for its new project. Citigroup reports $5.1 Billion loss in Q1.

9 10 11 12 13 14 15 16 17

1200 1150 1100 1050 1000 1 2 3 4 5 6 7 8 Gold(per gram) 9 10 11 12 13 14 15 16

Gold


Oil(per bbl)

4800 4700 4600 4500 4400 4300 1 2 3 4 5 6 7 8

Oil

9 10 11 12 13 14 15 16

The key to making money in stocks is not to get scared out of them. - Peter Lynch, American Fund Manager

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Interview With M.S. Murthy


EDUCATIONAL QUALIFICATION B.Sc. (Hons), M.Sc. (Electronics), CAIIB Presently, he is on the board of a bank and a pharmaceutical company, a consultant to a multinational consulting company and an adviser to a educational group. Moreover, he spends good time on reading and writing for financial news papers. He started his career as a physics professor in a college in Hyderabad before joining the state bank as a probationary officer in the year 1966 and has served 5 banks in the State Group over a period of 38 years in various capacities including a stint at SBI, Paris for over three years as DGM. From 2000 to 2003, he was the M.D. & CEO of State Bank of Mysore, during which period the bank underwent a transformation and turn around. Q1. Post CRR hike, What move do you expect from the Government & RBI, against the rising inflation ? ANS. What started off as a temporary demand supply mismatch has become a market distortion due to psychological and political factors. It is fuelled by the soaring oil prices. Besides the fiscal and administrative such as duty reduction, ban on certain exports the government can do well to monitor stocks and their movements & hoarding and act firm against profiteers. Though RBI has sent signals through increase in CRR, for effective control of prices of essential commodities and inflation resort to some selective credit controls can be attempted. Ultimately the supply side management will ease the situation. Reports of a good Rabi harvest and built up of buffer stocks will have an impact on inflation as food prices will comedown, in turn taming the dairy and poultry product prices. Because of the psychological factors the inflation, hope fully, should come under control. Q2. How do you see the recent derivative losses suffered by many banks in India? What measures do you suggest? ANS. . Any risk management tool is like insurance and not meant for speculation. Anxiety to make money by the bankers and the over enthusiastic corporate finance managers who are out to prove themselves are to blame for the losses suffered by both. Though the banks mostly seem to have covered their risks they still have to contend with the credit risk for the losses suffered by their customers. Instead of using plain vanilla products some of the banks offered structured products. Customers should be properly educated about the products. The regulators may have to come down heavily on violators of guidelines Q3. Do you welcome the consolidation of State Bank of India & its associates? ANS. Yes. Competing for the same business by the group members is frittering away valuable resources. Problems with unions should be sorted out through negotiations and fair and transparent personnel policies. The alternative is to merge all the Associate banks to become the second largest bank in the country. To be continued in the next issue....

Quiz
1. The divergence of a mutual fund from its stated investment style or objective. It occurs as a result of intentional portfolio investing decisions by management, a change of the fund's management or, in the case of stocks, a company's growth.

2. The tendency for mutual funds with poor performance to be dropped by mutual fund companies, generally because of
poor results or low asset accumulation. This phenomenon, which is widespread in the fund industry, results in an overestimation of the past returns of mutual funds. 3. A group of mutual funds offered by one investment or Fund Company. Generally, the constituent funds cover a wide range of fund categories and investment objectives. Chains of habit are too light to be felt until they are too heavy to be broken. - Warren Buffet

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UNDERSTANDING CREDIT DERIVATIVES

By: Fouzia Taranum

Did you Know?

Credit risk is the risk of financial loss arising from the failure of the counter party to meet his One of the smallest obligation or failure of a customer to pay principal or interest. Generally credit risk is managed by bank notes in the fixing suitable exposure limits, insurance, securitization, etc. Credit derivatives were developed to world is the Ivory overcome the inefficiencies in the credit market

Why Credit Derivatives?

Coasts 0.10 franc note, issued in 1920. This actually a postage stamp pasted on cardboard.
Did you Know?

Diversify credit risk: Like a zero sum game-credit risk is neither created-nor destroyed-it keeps on 32mm*46mm note is passing from one hand to other Maintain client relationship Banks construct and manage a credit risk portfolio as per their preference Basel 2 requirements: Unbundle credit risk for less capital adequacy System is more stable because loses are borne by wider pool of investors Make assets, such as loan portfolio, more liquid

The term Budget comes from the French Credit Derivative: Definition word BOUGETTE, a little bag, once used for ISDA (Intl Swaps and Derivatives Assn) Definition 1999: CDs are OTC financial contracts defined as off balance sheet financial instruments that permit pills and medication.
one party to transfer credit risk of a reference asset, which it owns, to another party without actually selling the asset. The ICICI experience: It therefore, unbundles credit risk from the credit instrument and trades it separately.

Terms often used

Answers To Quiz

Protection seller (Credit risk buyer or guarantor) refers to the party that contracts to 1. STYLE DRIFT receive premium or interest-related payments in return for assuming the credit risk. 2. SURVIVORSHIP BIAS Protection buyer (Credit risk seller) refers to the party that contracts to transfer the credit risk on 3. FAMILY OF FUNDS an asset to the protection seller. Premium is the fee the protection buyer pays to the protection seller as in case of insurance business Credit event is defined as a scenario or condition agreed between the contracting parties that will trigger the credit event payment from the protection seller to the protection buyer. Credit events usually include bankruptcy, insolvency, merger, failure to pay, rating downgrade etc. Reference Asset : Refers to asset to which payments under the credit derivative contract are referenced or linked. It is also called reference obligation.
Stock Ratnas DLF, BSE 532868, NSE- DLF, CMP- Rs705.25 TARGET PRICE: RS.577 ELGI EQUIPEMENTS, BSE- 500103, NSE- ELGIEQUIP CMP- Rs. 66.50 TARGET PRICE: RS.89 NAGARJUNA FERT, BSE- 500075 NSE NAGARFERT CMP- Rs. 47.45 TARGET PRICE: Rs.24 (CMP Current Market Price) If past history was all there was to the game, the richest people would be librarians. - Warren Buffet, American Investor, Businessman

Types of Credit Derivatives


Credit Default Swap Collateralized Debt Obligations Credit Linked Note Total Return Swap The Reserve Bank of India issued Draft guidelines for introduction of Credit Derivatives in India (DBOD.BP. 1057 /21.04.103/2002-03; March 26, 2003) meant to apply to all Scheduled Commercial Banks (Excluding RRBs & LABs). It gives details like Types Permitted, Parties to the transactions, Exchange Control, Risk Management, Provisioning, Exposure Norms, Documentation and Disclosures.

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Tag Lines:
ABN AMRO Bank - Making More Possible Allianz Group - The Power on your side ANDHRA BANK - "Much more to do, with YOU in focus." Bank of America - Higher Standards Bank of Baroda - India's International Bank BANK OF RAJASTHAN - Dare to Dream Bombay Stock Exchange (BSE) - The Edge is Efficiency

INVESTORS CHECK
Some key technical indicators: Price , volume and open interest PART:A- to start with Price is the most important indicator in technical analysis. Along with the stock price movement, we can correlate its volume behavior for better forecasting. Volume is the number of units (shares) traded during a particular time period (it can be an hour, day, week, etc) ,it serves the purpose of verifying the strength of the particular price move. The investors/traders can keep an eye on volume movement along with price movement. This helps in forewarning them about an impending spurt in price movement when they observe a sudden spurt in volume. Open interest is the number of outstanding contracts, in both futures and options, on a given day. Open interest increases when a buyer or a seller creates new contracts. This happens when the buyer initiates a fresh long position or the seller initiates a fresh short position. Conversely, the open interest decreases when the existing contracts are squared up or exercised or allowed to expire. Relationship between 3 indicators

PART: B- next issue

Buzz Word

Unleveraged beta The beta of an unleveraged required return (i.e. no debt) on an investment when the investment is financed entirely by equity. Wallflower Stock that has fallen out of favor with investors; tends to have a low P/E (price to earnings ratio). A.D.R Ratio The number of ordinary shares into which an A.D.R. can be converted. Greenshoe option Option that allows the underwriter for a new issue to buy And resell additional shares.

Book Quotes:
You must dare to disassociate yourself from those who would delay your journey Leave, depart, if not physically, then mentally. Go your own way, quietly, undramatically, and venture toward trueness at last . - Vernon Howard "We were designed to love and when we do, something good develops inside. We feel clean, rich, whole. Even better, we become less concerned with how we feel and more concerned with the lives of others." - Inside Out by Larry Crabb

Please mail your valuable feedbacks, reviews at chaanakya.ccim@gmail.com

Contributions made by :
Taglines & Editing News Did you know, Quotes Stock Ratnas, Quiz Graphs Investors Check Interview Book Quotes, Buzz Word Article Coordination Arihant Patawari Fouzia Taranum Anup Rajan & Ashish Poddar Sukrutha Lavanya Gnana Devi Diwakar Grover Sasmit K. Sahu Nikhil Mehta Fouzia Taranum Manish Sinha