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Finly is the Official Finance Magazine of K.J Somaiya Institute of Management Studies and Research
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Dear Readers
In the month of November we have witnessed how big data analytics can go terribly wrong , when
Grand Alliance lead by Nitish Kumar sweeps the Bihar assembly elections with the huge margin ,
this win has exemplified that democracy can't be a variate of any methodology. But what
implications it can have at the center stage is what we have to watch out for . I strongly believe that
this assembly results will cast shadow on the upcoming winter session , the government is in the
minority in the upper house where some major bills are pending including GST. The distressed
status of government doesn't end here, we have 7th Pay commission report coming in, which has
blurred the fiscal consolidation vision for the government for the upcoming quarters. Even the Gold
monetization scheme has failed to hit the market with a bang, although it is too early to say, but so far
government has managed only 400 gms of gold under the scheme. Hence, it is very interesting to see
how these testing times are being warded off by Government and RBI at the Non Strike.
Our cover article talks about RoboAdvisory and algorithmic trading methodology, which is gaining
ground as far as Indian capital market scenarios are concerned. In this article we have tried to figure
out what implications it may have on our markets, what challenges it may face in the future and how
efficient are they not only just to beat the markets but also to minimize the losses in the bearish
market conditions.
We have come up with Japan Deflation in the series which will give you a fair
amount of idea about what factors have led Japan into dormant deflation for so long with some
macroeconomic concepts blended in. Our faculty section talk about the alternative hedging
instrument called in order to minimize the loss due to currency fluctuations
prevailing in the world currency markets.
Lastly, It gives me immense pleasure to announce from
as the Winner of Call for Articles for this edition. I would also like to thank our sponsors Finacue
Research and Education for their support ,all our readers, Faculty members and seniors for their
constant support and encouragement.
Bubble Trouble
Range Forwards
IIM Udaipur
Abhimanyu Singh Chauhan
Sidhartha Bhattacharyya
EDITOR’S NOTE
cONTENTS
EDITOR’S NOTE 2
COVER STORY 4
ARTICLE OF THE MONTH 12
ECO SECTION 15
FACULTY SECTION 21
ALUMNI SECTION 23
ARTICLE BY FINACUE 25
NEWS BUZZ 29
TRIVIA 31
FACULTY INCHARGE
EDITOR IN CHIEF
EDITING TEAM
DESIGN
: Prof. Pankaj Trivedi
: Abhimanyu Singh Chauhan
: Shreya Gupta, Tamoghna Das, ParthaBanerjee, Preyas Jain, Prateek Singh, Abhijit Khadilkar, RishiTekchandani, Gunjan Pathak
: Geetanjali, Prateek Singh, Rohit Prabhakar,Jay Khuthia
Automation Evolution
Invention of Robo-Advisors
With the evolution of technology, we are seeing a new
landscape building in the financial services industry. This
includes integrated mobile payment solutions, crowd-
based lending platforms and automated wealth
management. While this evolution has several merits, the
most promising feature is the Robo-Advisor.
A robo-advisor is similar to a personal wealth management
advisor, except it is an online automated service. It is simply
a mathematical algorithm program that manages your
money automatically, without using a human financial
planner. Robo-advisors typically offer basic portfolio management but do not offer services for any
personal aspects of wealth management, such as estate, retirement or tax planning.
To use robo-advisors, customers fill out an online questionnaire providing information about their
income, financial goals and their comfortable level when taking risks. The pre- programmed
instructions normally include:-
RISE OF ROBO ADVISORS: IMPACT, CHALLENGES AND FUTURESania Motwani PGDM B(2015-17)
COVER STORY
S I M S R
Initialprice
Exit price
TrailingStops
ALGOTRADING
Quantity
Ordertype
Profittargets
The robo-advisor software then uses its built-in algorithm to choose investments that meet the goals
and needs of the investor. Once the program matches the investor with the investments it deems as
best meeting the investor's needs, the investor confirms the choices before the program actually
initiates any investments. Once a portfolio of investments is created, the program manages the
portfolio, rebalancing it periodically as necessary. This keeps the portfolio on the right track and
properly oriented toward the investor's goals.
Robo-advisors assess a person's income and find out: how much they can afford, how much they
need to save, study the best tax structure and then decide which investments are to be made to attain
those objectives.
Features of Robo-Advisors:
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The answers are analyzed and the algorithms are processed, resulting in a tailor made
investment plan.
Users can always adjust their goals and risk tolerance as they may prefer.
Thanks to the outreach of robo-advisors compared to traditional advisors, an automated robot
can charge lesser fees.
Typically, robo-advisers invest in low-cost exchange-traded funds, or ETFs.
Robo-advisors also charge
less than the industry standard
of 1 percent of assets managed
fo r f inanc ia l adv i so ry
services.
Robots don't need to sleep
and are scanning the markets
24*7. They can make their
calculations and movements
while analyzing markets
whatever be the time.
S I M S R
Types ofAlgorithms
One can broadly classify the algorithms in two types:
The algorithms falling under this category are “not truly” algorithmic in nature. By nature these
algorithms, could apply the intelligence of market data and coded logic and make a decision to
sell/buy the particular instrument at the best price, Hence the name Decision Algorithms. The
algorithms classified under this category are the USP's of a
firm and quite confidential in nature. Some of the major type
of the algorithms' which fall under this category are:
Antigaming
Automated Gaming
High-Frequency Trading
IndexArbitrage
Market Making
Pairs Trading
StatisticalArbitrage
TechnicalAnalysis
The core of Algorithmic Trading. Unlike the Decision algorithms, these algorithms are pretty much
commoditized and are customized based on client's needs.
Execution Algorithms could be defined as algorithms who
assist in executing orders
Some Examples OFAlgorithms Strategies’
Implementation Shortfall
Volume WeightedAverage Price [VWAP]
Iceberg
Time WeightedAverage Price [ TWAP]`
Decision Making Algorithms/ Systematic Algorithms
Execution Algorithms
1.
2.
1.
3.
4.
5.
6.
7.
8.
2.
3.
4.
S I M S R
Impact of Robo-Advisory andAlgorithm trading:
Algorithmic trading has been around for many years now, and has been evolving with increasing
power of computers, lower latency networks and ever smarter programmers coding them.However,
it is a double-edged sword.
The main attraction of robo-advisors is its significantly lower cost compared to traditional financial
advisors. Robo-advisors can cater to a larger audience and hence enjoy low cost advantage.
FundsIndia, Scripbox and MyUniverse, currently charge no fee at all, relying on the commission
earned by selling mutual funds for their cash flow. It also increases liquidity due to low costs.
The layout and interface of robo-advisors is extremely user-friendly. Any laymen having access to
such technology would find it easy to use. Also, one does not have to go looking around for a human
advisor who needs to be trustworthy and competent.
There are algorithms that sniffs news reports on stocks, and starts placing orders before the market
gets any time to react. The speed at which they initiate and process transactions is unmatched by any
human advisor, giving them a great edge with respect to timing.
Robo-advisors provides the service of creating, updating and maintaining their portfolio from home
or on-the-go. One does not have to physically meet the advisor or go to submit the documents. One
can even make changes and rebalance the portfolio at the click of a button.Also, robo-advisors alerts
the user in case of any change in the portfolio instantly.
Algorithm trading makes trade efficient. It results in maintaining consistent prices across markets by
removing any price differences/gaps for a commodity across exchanges.
Advantages:
Low cost:
Easy Interface and layout:
Speed:
Convenience:
Efficient markets:
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S I M S R
Disadvantages:
Lacks holistic view:
Limited customization scope:
Lack of human touch:
Quality dependent:
Similar algorithm configuration:
Spoofing:
Robo-advisors categorize portfolios limited to certain commodities only. They do not offer a holistic
portfolio such as planning for real estate, insurance, budgeting, tax optimization, etc. However,
traditional human advisors provide these services to their clients.
Robo-advisors have a narrow scope for an individual suited portfolio customization. They typically
follow the return and risk inputs. For example, if a person is nearing retirement then it will invest in
less risky debt instruments. However, it will not consider the cash flow through pension and interest
income of the person at that time.
Robo-advisors lack the human touch, judgment enhanced by experience, and other qualities that
machines still cannot provide, such as providing a steadying influence during bear markets. A
traditional adviser, on the other hand, will be in a position to hand-hold the person and navigate a
potentially rocky financial terrain.
The quality of inputs will determine the quality of the outputs. Not all robo-advisors are associated
with quality. Some provide high quality algorithm, speed, costs, etc. Others which are not able to
compete with such quality will eventually suffer.
Often, there are more than one algorithms having the same configuration. Example, if an algorithm
is configured to sell when a stock goes below its 100 day moving average (also read as 100DMA)
and there are many such algorithms active in the market, then the day it falls below 100DMA,
everyone would start selling it and the market price would crash way beyond it needs to.
The algorithm places a large number of orders at very high or low prices having no intention to
execute it. This is done to fool other traders and algorithms involved into believing that there is a
demand for these stocks. The flash crash in the US market in 2010 is an example of this where the
market crashed almost 9% within minutes and soon recovered as well.
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S I M S R
Current Market Scenario:
Algorithms trading has been in existence for more than a decade in the Indian financial markets,
although their usage has been limited to a few hedge funds and portfolio managers. However, over
the last couple of years, retail participation has increased dramatically and according to the IT arm of
the National Stock Exchange (NSE), about a third of exchange trades in India are carried out using
Algorithms trading.
Current stock market has reached to the stage where the human intervention is completely erased
by the algorithms trading. 70% of trades in US are program driven trades and in Europe it is
S I M S R
approximately 40%. In India, one third of the exchange trades are done through algorithms
trading in both the segments.
Robo-advisor is a logical next step for many former do-it-yourself investors. Also, for many
Millennial and emerging investors, this meets their needs at the stage of life they are at. Previously,
they had to rely on financial advisers who derived all or some of their income from the sale of
financial products. They use this model the most since the end result is similar to what a traditional
human advisor would do for them but at a lower cost i.e. collapse of commission prices.
Robo advisory is in its infancy stage in our country. However, the sheer scale of demand and lack of
other credible alternatives will help it make it to the mainstream. For retail customers, this is a
welcome change and a sure way to start securing their financial future with professional help,
irrespective of their asset size. What does this mean for our markets? With technology rapidly
evolving and high-frequency trading and other types of trades garnering speed, there have been
instances of odd and sharp price movements that cannot be explained by fundamentals. This
phenomenon cannot be ruled out. For the average retail investor who isn't savvy with these
technologies, watching their portfolio returns suddenly fall can lead to loss of faith in markets. The
Future of Robo-Advisors
best course would be to stick to fundamentals, invest in high quality and growth companies with
sound and ethical business and potential for long-term returns, while ignoring short-term sharp
movements.
S I M S R
Hybrid-Advisors
In the Indian ecosystem, robo-advisers would need to wed technology with human touch points.
While 100% robo-advisory might help with a high percentage of individuals, there are always cases
where automated guidance isn't appropriate. This has led to the emergence of Hybrid-Advisors,
wherein, if you want, the human element is not completely removed from the loop with some of these
firms. The hybrid service combines asset allocation and rebalancing with access to
over the phone and via videoconferencing. At the front end, customers consult with
a human planner on goals and risk tolerance, tweaking the computerized asset allocation where
appropriate. They also can call in for help with key decisions, such as when to retire, as well as
emotional support to stay the course when the market tanks.
computerized
human advisors
S I M S R
S I M S R
There is a general misconception that “doing good” and “doing well” can be used interchangeably.
That is actually not the case- “doing good” refers to saving people like superman does while “doing
well” is what we can say about successful businessmen like Anil Ambani. But, sometimes there
comes along a set of individuals who can be referred to as “doing good” as well as “doing well”.
Thus, comes along the concept of “Green Finance”- which refers to business investments which help
in improving the environment. With the influx of environmental calamities and rapid degradation of
the general ecology there is a need for improvement and green finance is the stairway to the
metaphoric environmental heaven. The companies leading the way in green finance are working on
innovative methods to create solar panels or biofuels. The evolution of technology has cut out a path
for progress in this field. With huge companies like Solar Power Inc. planning to do a $300 million
IPO in the US Stock Exchange there is a huge uproar for green financing.
The billion dollar oil companies drilling with reckless abandon might lead to the owners having
highly inflated bank accounts but the damage on mother earth definitely puts them at loss. The green
finance initiative is an integral part of green growth that is growth keeping the carbon emissions low.
This in turn is the link between the financial industry, improvement of the economy and the
economic growth of the country- all of which are essential for sustaining growth in a country like
India.
IS GREEN FINANCE VIABLE IN INDIA?Sidhartha Bhattacharyya PGP-2015-17
IIM Udaipur
article of the month
S I M S R
In India, companies like SIDBI have taken initiatives in promoting green finance in budding
entrepreneurs. They provide funding for several business developers who are ready to take on the
green initiative. SIDBI promotes investment in environment friendly technologies that have huge
upward potential through lending schemes.They have
two modes of lending which include concessional
lending to boost investment in the sector as well as
“cluster specific dissemination”. In the case of energy
saving schemes, SIDBI provide financial assistance
in buying plants and machinery, on the condition that
they follow the green norms of carbon emission. The
parent company IDBI also has a devoted group
working on carbon credit advisory according to the norms of the Kyoto Protocol.
The beauty of this form of business is the levels of innovation that people can bring into their
technology. In the Indian context if we think of jute harvesting, over-maturity of stalks causes loss of
yield and quality. Thus, came up the innovative idea of creating a ribboning machine which would do
the process quickly to improve yield and productivity of the crop. The whole process became
mechanized and with low cost it was made very easily available for the farmers. The machine uses
simple technology where two sets of parallel rollers help in increasing this productivity. These kinds
of simple technology helps bring the cost down as well as improve availability of such resources to
the needy.
In terms of projects in green finance the country sees no shortage in investments. Heavy funding has
gone into projects such as creation of a green habitat which refers to a complete housing complex
that will be completely satisfied by recyclable and renewable products. Water will be derived from
rain water harvesting, energy through a system of nanoparticle based solar cells along with a
complete waste management system so that the refuse from the habitat would not pollute the
environment. More projects on biomass have taken the fore with investments seen in creation of new
technology which uses refuse materials like rice husk and molasses waste from farmers who harvest
the crops.
S I M S R
Items that would be previously thrown away as waste, is now being used to produce energy. The final
aim of the project would be to make these farmers self-sustaining with no cost of electricity from the
outside.
For every ying there is a yang, so even for such a remarkable initiative there will be certain
drawbacks. The fact that the initiative is green in nature gives us the most obvious drawback that is
profit. People tend to refrain from such investments as their return in terms of monetary value would
be low. They tend to for less environment friendly investments in the hope to get rich quick. The
realization is in the fact that there the benefits of such investments may not give immediate benefits
but the environmental benefits are massive. Thus, there is a move towards increasing the returns on
such investments which can only happen through better technological innovation and possibly more
government intervention in terms of tax subsidies. On top of this government intervention in terms
of tax subsidies. On top of this there is also a problem in the risks involved in such technologies. The
market for the products might not be as large as others due to the fact that they are created taking
sustainability into consideration. Sustainability refers to usage of resources in such a way that they
do not harm the environment. Such a beautiful concept lies untapped due to the bane of productivity
loss. The risks involved with 'dirty' investments are much lower, thus investors tend to gravitate
towards it. What the investors do not realize the environmental risks involved in such investments.
With the declining environmental conditions the need for green investments should increase rather
than decrease but for the greed of money.
At the end of the day money is the driving
factor for most people just that at some
point in time some individuals come to the
forefront that will change how we
perceive the world of investments. Thus,
the torch bearers of green finance, the lone
individuals who do not ride with the herd, strive to change the world for the better. People who go by
follow the principle saying “Give hope to others, expect nothing back”, they will be the ones thriving
as the world of investments is bound to change and it will change to provide us a greener tomorrow.
S I M S R
BUBBLE TROUBLETHE RISING SUN SETS INTO THE LOST DECADE
Shrirang Lichade PGDM B (2015-17)
ECO SECTION
Hola!!! Finance aficionados…..
In the last edition of FINLY, we took a tour of CHINA's bubble economy and detailed analysis on the
recent burst. In the second article of this series, we are going to examine the two decade long
deflation in Japan which was triggered by popping of asset bubble. When we look back at the history,
the popping of asset bubbles has nearly always been tragic. Social, political and economic
turbulences have a bad habit of following asset bubbles, while wealth destruction is a guaranteed
feature.
Now let's consider the opinion of Keynes who spearheaded a revolution in economic thinking and is
considered as the father of modern economics.
“Thus Inflation is unjust and Deflation is inexpedient. Of the two, perhaps Deflation is . . . the worse;
because it is worse, in an impoverished world, to provoke unemployment than to disappoint the
rentier.”
—John Maynard Keynes (1923)
Keynes's observation aptly describes the current situation of Deflation Inflicted Japan. Many
economist and members of intelligentsia still quibble over the fact whether Japan is in deep trouble
due to its own opulent or spiritual way of life. That's the ironic part of Japan's ultra-development
saga. The 'Land of the rising sun' has the world's third-largest economy ($4.210 trillion) by nominal
GDP and the world's fourth-largest economy ($4.843 trillion) by purchasing power parity. But
startlingly, however, the Japanese economy dramatically deteriorated in what is now called the 'lost
decade' of the 1990s. The growth rate declined to less than 1 per cent per annum on average, and it
was negative in some years. The 'lost decade' has extended also into the new century. Now
economists are referring it as the 'Lost Two Decades'.
S I M S R
Many problems have been pointed to as contributing factors that explain the “lost decade” in Japan.
Let's find out the key causes which lead to the chronic deflation
Financial deregulation was an important factor which established a conducive
environment for a land price bubble, which in turn enabled firms to borrow heavily in order to invest
in commercial real estate.
It also prompted the acquirement of differing financing options, which lessened the corporations'
dependency on banks for funding. In the 1980s, the Japanese banks shifted their main target of credit
supply from manufacturing to non-traded-goods industries such as real estate, finance, and other
services that were not well disciplined by global competition.
Japan is one of the excessive savings glut countries in Asia. During 1980's when Japan was growing
at faster pace, people of Japan were saving 15% of their after tax income. This contradicted with
Keynesian principle that when investment exceeds saving, there will be inflation. If saving exceeds
investment there will be recession. One implication of this is that, in the midst of an economic
depression, (in this case deflation after crash) the correct course of action should be to encourage
spending and discourage saving.
Thus this was the major problem
which is still ongoing in Japan
and PresidentAbe is urging
people to go and spend money
which could lead to higher
inflation rate.
#1.Financial Deregulation
#2.Unsolved excessive saving issue
S I M S R
#3.Asset Price Deflation
In the first half of the 1980's, control on capital movements were pulled down, interest rates on
deposits was close to zero. Japanese banks lost large corporations to global capital markets, but
eventually banks found their new customers in SME's. These enterprises were able to borrow for
risky projects simply against real estate collateral. During this time, people got much more money
due to financial deregulation and easy money policy. So this excess liquidity was invested in real
estate.
1987-1990 is termed as the “bubble period”, from the viewpoint of the coexistence of three factors
indicative of a bubble economy, that is, a marked increase in asset prices, an expansion in monetary
aggregates and credit, and an overheating economy.
.
Thus, in the latter half of 1980's, central bank of Japan realized that this was not sustainable and to
check the further repercussions on the economy, tried to tighten the policy by increasing the interest
rates. Which in turn lead to burst of the asset prices and Nikkei stock index had plummeted to half its
peak. This collapse lead to a total loss in asset values of 1000 trillion yen by the middle of the decade,
or 2.4 times the country's GDP. This was a huge loss, even compared with the United States' capital
loss of 1.9 times GDPduring the Great Crisis after 1929.
S I M S R
#4. Non-Performing Loans
Economic issues:
Labor problems
Investment demand Stagnation
Since the loans were disbursed against land, and land price plummeted through 1990 to 1998, the
number of loan going bad increased drastically. Japanese banks were hard hit since loans were given
mainly to industries against land. Thus, increasing bad debts for the banks. In the global circle, many
entities accused banks in Japan of cooking the books to hide the losses from the customers and
shareholders.
The list given above is non-exhaustive. Since many facets which are still debated like muddled
monetary policies, advent of ICT and liberalization. Alas, we need to consider long lasting
ramifications of deflation in terms of economic and social effects.
: Since more than two-thirds of Japanese workers are employed by SME's,
these business failures were among the most important causes of the rising unemployment in the
country. The unemployment rate in Japan increased from about 2 % in 1990 to 3.60 % in 2015.
However, the concept of unemployment in Japan is loosely defined, thus real unemployment
statistics is believe to be double the given number to be comparable with Western economies. In the
given scenario, the unemployment rate in Japan would be comparable with the depressed European
economies. Rising unemployment, bonus and overtime payment cuts and the use of cheaper part-
time workers have led to a significant reduction in household income. Unsurprisingly, domestic
consumption demand has been depressed since the beginning of the 1990s.
: Investment demand stagnated over the years, given the
existence of idle capacity. Thus, the bad loans of the Japanese banks have not been cleared up and,
instead, they have fed the deflationary spiral of the economy. The result has been a vicious circle,
with banks facing difficulties due to their bad loans and shrinking capital base, medium and small
firms running into difficulties due to the credit crunch, and the resulting deterioration in workers'
employment and income leading to depressed consumer demand and deflating real estate and share
prices.
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Social issues:
Youth is refraining from consumption
Declining birth rate
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: Traditionally Japanese people are known for content
lifestyle. But economically this is hurting the nation. Japan raised its consumption tax rate in 1997
from 5% to 8% which lead to reduction in consumption to this day. Government has started declaring
holidays so that populace can go and buy things and economy can run again.
: The financial burden of raising children and obtaining education,
medical services and care for elderly parents has not been addressed by public spending, and this
burden has increased due to the deepening fiscal crisis of the state and its imposition of neoliberal
social policies. One of its consequences is that the average birth rate of Japanese women has declined
sharply, from above two at the beginning of the seventies to 1.29 in 2003, leading to a rapidly ageing
society. Japan is grappled with what is supposed to be 'New world' problems.
Key take-away from Japan's deflationary economy
From the given data we can conclude that Japan's Two Lost Decades are a result of inappropriate
fiscal and monetary policies which are indeed need to be probed. As the world still remembers the
subprime lending crisis of 2008 which resembles to Japan's stock market crash to a greater extent.
Some of the key take away are-
S I M S R
S I M S R
#1. Popping of the bubble by central bank by tightening monetary policy was a critical
mistake: It is still a debatable topic among the economists whether a bubble should be deliberately
popped beforehand. It is universally accepted that asset price is closely related to general price level,
thus asset prices should remain stable in the long run. But using monetary policy to collapse the
booming asset prices was a severe mistake.
#2. The inadequate responses after the burst of the bubble:
Asset prices in Japan have been falling for the last two decades, which is unusual for the developed
economy as that of Japan. The policy reactions were too little too late, marked by a repetition of stop
and go, without coordination of fiscal and monetary policy, which lead to chaotic environment for
the private investors and dried up investments.
#3. Bad loan problems: The major focus during the period was the bad loan problem. It is still
debatable about the relationship between the bad loan and macroeconomic performance. The banks
were lending too much to inefficient firms and industries so that they survived unduly: Zombie
lending. Even though its economic impacts were unclear, it was no doubt that there was a series of
government's mistakes not to deal with the bad loan problem as soon as it appeared. The ministry of
finance did not recognize the magnitude of the problem,
Postponing and prolonging the necessary measures to deal with the problem lead to severe deflation
indirectly.
The main objective of this article was to give readers a brief idea about the lost decade and deflation.
I tried to keep it simple and lucid without any verbosity and hardcore finance and economics
knowledge. The subject matter was rather vast and full of complexities. But it gave me an immense
pleasure to make this article simple for the readers. So keep reading Finly and wait for the next
article.
If you can't explain it simply, you don't understand it simply- Albert Einstein
S I M S R
Everyone is aware that the Indian stock market has been sliding lower since the last week of August
2015 but how many of us have been watching the currency market? The Indian rupee has been quite
volatile against the US dollar over the past four months. The dollar broke the range of 63.30 – 63.50
that prevailed in July 2015 and spiked to 66.80 in the last week ofAugust. It then subsided to 64.70 –
65 in October only to shoot upwards again in November. While such volatility is a boon for currency
traders it does not augur well for end-users of foreign currency who must look for suitable hedging
tools to protect themselves from the adverse effects of such volatility.
faculty section
S I M S R
FOUR WORDS ON FORWARDSProf. Aparna Bhat
Finance dept - SIMSR
dollars forward. Exporters, on the other hand, may choose to keep their exposure unhedged and
hope for higher levels. Of course, this plan may back-fire should the dollar suddenly reverse its
direction and start weakening against the rupee. Exporters could be reluctant to take forward cover in
the present situation because a forward contract involves a commitment to deliver the dollar at the
agreed rate. An exporter who has sold dollars forward at a rate of 66.80 would be very unhappy if the
dollar subsequently shoots up to 68. Buying call and put options on the foreign currency is an
alternative for importers and exporters respectively but it involves an upfront cost in the form of an
option premium. What both parties need is an instrument with the flexibility of an option but without
any upfront cost.
The range forward is just such an alternative which combines the best of both the worlds. Let us say
Forwards and options are some
such hedging instruments. A
forward contract is an agreement
to buy or sell foreign currency at a
predetermined rate on a specific
future date. In the current scenario
importers may rush to hedge
against a rising dollar by buying
S I M S R
an exporter has a receivable of USD 5 million three months down the line. The current three-month
forward rate is 67.95. Instead of entering into an outright forward contract to sell his dollars, the
exporter can negotiate a range forward contract with his bank. As the name suggests, it is a forward
contract that is based upon a range of exchange rates rather than a single exchange rate. The contract
involves a 'floor ', at say, 67.80 and a 'cap' at say, 68.20. If on the maturity date of the range forward,
the dollar is below 67.80, say at 65.18, the exporter will receive the floor rate of 67.80 and is thus
protected against any unexpected weakening of the dollar. On the other hand, if the dollar
strengthens to 69, the exporter will receive the cap rate of 68.20. For any exchange rate within the
range of 67.80 – 68.20 the exporter has no obligation to the bank and may sell the dollar separately at
the prevailing market rate. The range forward thus offers full protection against unfavourable
exchange rate movements and also enables the hedger to participate in favourable exchange rate
movements up to a pre-determined level. Of course, the hedger will give up the benefit of a
favourable exchange rate beyond the floor rate or cap rate depending upon his exposure.
How does the bank structure a range forward? The hedger selects either the floor rate or the cap rate
according to his exposure and the bank determines the other rate. It is basically a combination of two
options. In the foregoing example the bank has effectively sold a put option to the exporter at a strike
price of 67.80 and simultaneously bought a call option from him at a strike of 68.20. The strike prices
are so arranged that the net premium is zero. The bank will gain if the dollar rises beyond the cap rate
but will suffer losses if the dollar weakens below the floor rate.
Range forwards are an over-the-counter (OTC) product and as such are subject to the guidelines of
the RBI regarding OTC derivative contracts.
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First of all, I would like to congratulate Team Finly for this great initiative as it not only helps the students
preparing for their placements by getting insights about what the corporate world has in store for them but also
gives the alumni community a chance to reflect on our experiences of past few months and compare our
peaceful and fun filled life at SIMSR with the fast paced life of the corporate world.
Hearty congratulations to Paridhi, Venkat and Shweta for sharing their wonderful experiences in the previous
editions of Finly and when Tamoghna asked me for this article I could not deny it as I also wanted to join this
elite group of writers and share my experiences with my readers.
I am currently employed with BA Continuum India Private Limited, a non-banking subsidiary of Bank of
America - Merril Lynch (BofA- ML) which visited our campus in November last year. Presently I am part of
Global Investment Banking- Pitchbook division and working for Real Estate, Gaming and Logistics Sector
(REGL).
As the name suggests I am involved in preparation of Pitchbook for REGLsector. Basically it is an Investment
Banking backend department.
It involves:
Maintaining Trading Comparable (Comps) for multiple sub sectors such as Lodging REITs, Real Estate
Finance Companies, Casinos etc. Trading comps involves pulling in numbers from Earning Release of
comparable companies to come out with different multiples as an output.
2) Transaction Comparables which involves analysis of past deals in the Real Estate sector to come out with
appropriate multiples.
3) Company profiling of various companies.
4) Benchmarking of comparable companies for different metrics.
1)
Alumni section
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Investment Banking: My experience at BA Continuum IndiaPrivate Limited (A non-banking subsidiary of Bank of
America)Utkarsh Ojha
PGDM - FinanceBatch 2013-15
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As far as company culture is concerned, Bank of America scores over other organizations in the
Investment Banking sector. The company culture is quite accommodating and gives a chance for
overall development. Organization is quite flexible as far as location is considered. Working hours
are not fixed and your workday can range from 6 hours to 15 hours depending on the volume of work.
At this time of the year most of you will be busy preparing for the placement season. So now it is time
for some GYAAN. Specifically for the Investment Banking interview preparation keep yourself
abreast with the latest happenings in the M&A sector. Keep yourself updated with the data and
rationale behind various deals that have taken place recently. Brush up your accounting concepts.
Financial StatementAnalysis is a crucial part of any Investment Banking interview.
Never fear rejection as every rejection teaches us something new. (I myself was selected in my 10th
interview).
When it's your day everything will fall into place. Don't feel the pressure when people around you get
placed. Keep calm and enjoy your life at SIMSR because you will never get these golden moments
back in life. Cherish each and every moment and make the most of it.
Lastly, I would like to thank Team Finly and Finstreet for giving me an opportunity to pen down my
experiences. All the best guys for the days ahead. Have fun and enjoy your life at SIMSR. You can
write to me at [email protected] for any queries. Cheers!
ALIBABA – Built to Last*
It may not be early to say thatAlibaba is in the league of those built to last, after close two decades of
keeping investors and consumers positively surprised.
Alibaba was a home brewed business started by Jack Ma in 1999. In the early years Ma developed his
core skills in English language and International trade and proceeded to take a formal education in
Cheung Kong Graduate School of Business. In the year 1995 Ma was amazed by the possibilities of
VBN which was one ofAmerica's first internet service providers, and hence started a website: China
Pages. This was an online directory for domestic businesses interested in building overseas business
relationships. But Ma was forced to give up control of the company eventually, to the Govt. In 1999
Ma pushed again and this time with a fleet of 17 co-founders determined to execute the theme 'help
businesses find businesses', formed Alibaba. The earliest funding came from Goldman Sachs for $5
million followed by Softbank for $20 million. To attract investors Ma incorporated VIE (Variable
Interest Entity) which was the bellwether for investments and funding that followed. China restricts
foreign investments in sectors it may consider sensitive and internet was one of those. Ma set up an
off-shore entity in Cayman Islands a tax haven, where investors were entitled to profit under the
contract, despite the US regulator raising an eyebrow.
In early 2000's Jack Ma tested his strategic predisposition by putting Ebay on the edge of
withdrawal. He launched Taobao where businesses could register completely free for a few years.
Ebay's partner in China Eachnet lost ground as the customers moved for better profits through
Taobao.
Jack Ma believed in sustainable opportunities that an internet services provider could bring in and
transform business processes. Ma was able to engage Yahoo who invested $1billion in cash but in
exchange for a 40% stake in 2005. Things went awry in the following years as Yahoo volunteered in
The Beginning
Time before the listing
marketing activities that was detrimental toAlibaba. Ma tried avenues to get the control back but in
(*Title inspiration from Jim Collins book - Built to Last)
Article by finacue
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vain. An attempt for listing in HKSE failed too due to regulatory bottlenecks. Finally five years
of struggle ended in 2010 when Ma spun off Alipay through a controversial move. Founded in
2004 Alipay dealt with the payments, and provided escrow services to customers of Alibaba. The
Alipay offshoot was one of Ma's best laid plans as today it controls almost half of China's online
payment market. The spin-off was under affiliation of Zhejiang Small and Micro Financial
Services Co. (ZSMF) and eventually Ma had to share 51% of its profits between Yahoo and
Softbank. Till early 2014 ZSMF Services Co. expanded with wealth management and lending
services and finally had China's biggest money market funds. Thus when the bell rang in NYSE
on 18th Sep 2014 Alibaba (NYSE: BABA) emerged as the biggest IPO ever in NYSE with $21.8
billion.
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Deals, deals and deals
Today looking at Jack Ma's history one would begin to think he has an obsessive compulsive deal-
making disorder, only in his case it proved beneficial. Partners from ZSMF Services helped Ma build
Yungfeng Capital a PE firm in 2010 and it served as a route for the deals that followed. Cainiao was
formed in 2013 to shape China's logistics structure with collaboration from Fosun and Yintai which
are both successful enterprises in China. Alibaba's acquisitions each year included something from
most industry sectors be it navigation systems or a sports team. To solve any itches that Beijing may
have raised all this while Ma had nurtured ties in the city since long. One such collaboration was
eminent during a well thought out deal of buy back of shares from Yahoo. The buy- back was
executed from Yahoo in 2012 for a hefty consideration and a sizable portion was resold to a PE firm
Boyu Capital founded by the grandson of a former president.
In recent times Alibaba managed to stay afloat despite the national slowdown. A key move during
this rough weather was executed by capturing the shift of consumer spending as well as
advertisements at the right time on mobile devices. Analyst's data shows non-manufacturing sector
continuing in growth mode. The services portion alone accounted for about 51% of GDP in the three
quarters of this year, which is a 15% rise from last five years. Thus this giant beat analyst
expectations with its 3Q15 results of 32% y-o-y revenue growth and 30% y-o-y EPS growth.
Alibaba and India
India had been on Jack Ma's mind and even had a Memorandum of Understanding (MoU) with CII
(Confederation of Indian Industry). 300 million people in India have an online presence which is a
25% (an estimate) of total population. In 2010 Alibaba took over Easy Business India E-commerce
and put a footprint in the B2B space. Over the years Alibaba India housed 1.3 million suppliers and
made a profit of 1Cr against sales of 20Cr in 2014. Analyst expectations point towards a $43 billion
ecommerce market by 2019, with a 50% share of online business.
Indian policy frameworks do not allow foreign investment in retail online business, but this does not
pose a challenge to Alibaba to grab a share of the B to C space. Alibaba would run its model without
any inventory at all. Ma's dreams took shape with his first round of investments close to $500 million
in Snapdeal after year long negotiations this year, though the larger share of the pie is held by
Amazon and Flipkart. Ma's deal making disorder prevailed and within a month he grabbed a stake in
One 97 communication the parent of payment services provider Paytm.
Stake shares and growth in GMV's (Gross Merchandize Value ) aside Ma's 360 approach of tying up
all loose ends has setAlibaba to be 'Built to Last' for a long time now.
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news buzz
7th Pay Commission ReportThe 7 pay commission submitted its report to the
finance ministry on 19 November 2015. The
recommendations are likely to increase the salary
of government employees by 23.5%. The impact
of this salary hike on the fiscal policy is estimated
to 102000 crores. It will be implemented from
January, 2016.
th
th
Gold demand plummetedDemand for gold slipping to all time low in 8 years
despite festive season round the corner. This can be
attributed to poor investment demand and back-to-
back droughts that have slashed earnings for the
country's millions of farmers. The Indian rupee has
fallen over 5 percent this year, restricting the drop in
local gold prices to 5.5 percent, compared with a 9.3
percent drop in U.S. dollar denominated gold.
India's gold imports, which account for nearly all of its demand for the precious metal, could fall to
around $5.7 billion in the December quarter, the Federation's Bamalwa said. Two gold dealers
forecast a similar fall.
RBI Allows Foreign Investors To Buy BondsRBI has permitted foreign investors to buy corporate
bonds. It is a step taken for debt restructuring of the
distressed companies and is a part of the bankruptcy
code formulated by the RBI. The maturity of the bonds
will be 3 years or more.
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news buzz
Euro on shaky ground, stocks up on talk of
aggressiveECB easing has sent ripples in the market as the euro slipped back towards seven-
month lows, bond yields fell and European shares rallied as talk of aggressive
stimulus from the European Central Bank next week gained ground. Against this
backdrop, the euro remained on the back foot, dipping 0.15 percent to
$1.0626EUR.
China's biggest broker Citic probed for 'rule violations'
The China Securities Regulatory Commission
(CSRC) is investigating Citic Securities for
allegedly violating the Supervision and
Management Regulation for Securities
Brokerages. The probe into the brokerage giant
was announced as part of a wave of measures
targeting the financial sector, following the
spectacular meltdown of the Chinese stock
market this summer.
Bihar Election 2015: Nitish – Lalu stop Modi – Shah
Juggernaut
The Bihar election was billed as a grudge match between 'secular' and 'communal' forces. Nitish
Kumar led the 'secular' GrandAlliance to a landslide win over BJP-led NDA.
The Bihar Election results are perceived to influence the course of reforms and questions are being
raised as whether the government will succeed in getting the key bills like GST and Bankruptcy code
passed. However, irrespective of the election results markets have recovered in anticipation of
mellowing down of BJP which may bring consensus and also because India is the only high growth
country across international markets.
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trivia
1. Singapore has the world's highest
percentage of millionaires with 1 out of 6
households having at least USD one million in
disposable wealth.
2. The portrait of Abraham Lincoln on the
penny faces to the right and all other portraits of
presidents on U.S. circulating coins face to the
3. Ikea is the world's largest and richest
"non-profit charity."
4. 40% of McDonald's pr ofits come from
the sales of Happy Meals.
5. The note with the most zeroes is a
Yugoslavia 500,000,000,000 Dinara, issued in
199 3 with 11 zeroes.
6. One of the highest-priced single
purchases ever charged to anAmerican Express
card was $2.5 million for a painting by Roy
Lichtenstein.
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