EDITORS MOULI GHATAK RAHUL RAVI SAGAR KAPOOR SUMIT PAL SINGH MENTORS HARISH THANGARAJ LAVANYA R
TEAM MARK2MARKET Alka Katiyar Abhinav Gupta Abhinav Minnala Akash Krishnatry Balajee Rao Diwakar Shukla Gaurav Widhani Kunal Verma Partha Pratim Rucha Pundle Sahil Bansal Shilpa Taneja Sohini Banerjee Soumitra Sahu Srinjoy Saha Venkat Raman
MARK2MARKET VOLUME II 02
FROM THE EDITOR’S DESK “Derivatives are financial weapons of mass destruction” -
It’s a while sinceMark2Market took its first step. The encouragement we received from the readers was infectious! We would like to express our heartfelt gratitude for that. The time now is ripe for it to march on with its second edition. We have gleaned some intriguing topics from the realm of Finance for your perusal. Warren Buffet, one of the most venerable investors of recent times once reflected, “Derivates are a weapon of mass destruction”. The proponents of these instruments would like to believe otherwise. Like wise the shady world of Derivatives brings in both its advocaters and naysayers in equal measure. The cover story for this issue does an indepth analysis of a particular type of Derivative, Credit Default Swaps. The impending launch of these derivatives in India and the manner in which the market reacts, would be a riveting thing to follow. The finventory section has articles on diverse topics by students ranging from the tool of transfer pricing to the equation between two very different sectors of Finance and social media, to shedding some light on the recommendations analysts give to the companies, to some gyan on PIP and last but not the
least, a brief follow up on the European financial turmoil. A special thanks to all the contributors for their efforts! On the lines of the first edition, the best three articles in this issue will also be awarded prize money. Apart from these, the section on Industry Interaction features the viewpoints of Sanjay Dutt, CEO of Jones Lang Lasalle wherein he opines on some mantras for wealth creation through Real estate investment. The recent events at VGSoM section finds a mention of the very popular Brown Bag sessions and Gurukool lecture sessions started recently by Finterest, the Finance club of VGSoM. The Fin-Cross challenges you all again to an interesting crossword puzzle. Hope you find this issue enthralling to read and Mark2Market achieves the standards it set out for itself in its maiden edition! Happy Reading!
04 ___ COVER ARTICLE 04
INTRODUCTION TO CREDIT DEFAULT SWAPS IN INDIA
WEALTH CREATION THROUGH RESIDENTIAL REAL ESTATE INVESTMENT
07 ___ FINVENTORY 07 10 13 17 19
TRANSFER PRICING SOCIAL NETWORK AND FINANCIAL SERVICES ANALYSTS GIVE BUY RECOMMENDATIONS FOR THEIRCLIENT COMPANIES PIP AND THE CURRENCY TRADING IS GREEK EXIT FROM EURO INEVITABLE
22 ___ RECENT FINTEREST EVENTS AT VGSOM 22 24
06 ___ INDUSTRY INTERACTION AT VGSOM
BROWN BAG SESSIONS GURUKOOL SERIES OF LECTURES
25 ___ FIN-CROSS 25 26
FIN-CROSS, VOL II FIN-CROSS SOLUTION, VOL I
MARK2MARKET VOLUME II 03
INTRODUCTION OF CREDIT DEFAULT SWAPS IN INDIA COVER STORY ABOUT THE AUTHOR Vinodh Madhavan Assistent Professor Vinod Gupta School of Management IIT Kharagpur
CDS came into existence in 1990, with early trades carried out by Bankers Trust in 1991. Its modern format came into existence with JP Morgan extending $4.8 billion credit line to Exxon Mobile, then a team of J.P. Morgan bankers led by Blythe Masters then sold the credit risk from the credit line to the European Bank of Reconstruction and Development in order to cut the reserves that J.P. Morgan was required to hold against Exxon's default, thus improving its own balance sheet.
Research Areas i. Nonlinear Time Series Analysis ii. Long-Term Dependence iii. Credit Default Swap Indices Awards (2010) 2009-2010 Outstanding Graduate Student Doctor of Business Administration Program, Golden Gate University, San Francisco (2010) Publications (2010-11) Implications for Risk Management and Regulation: A study of long-term dependence in Credit Default Swap (CDS) Indices market by Vinodh Madhavan and Henry(Hank) Pruden International Federation of Technical Analysts (IFTA) Journal, (2011)
MARK2MARKET VOLUME II 04
As indicated in the draft guidelines made public by RBI in February 2011, Credit Default Swaps are bound to be introduced in India. Credit Default Swaps are instruments that help investors buy or sell protection on an underlying obligation(s). For example, a firm that has a certain amount of investment in bonds pertaining to an outside corporation can protect itself from the credit risk of the underlying bonds by enrolling in a CDS contract as a protection buyer. In the case of a default of underlying bonds during the life of the contract, the firm (protection buyer) would then be compensated for any loss incurred in underlying obligations by the counterparty of the CDS agreement. The counterparty of CDS contract that takes on the credit risk of the underlying bonds is the protection
Having studied the experience of western economies with regard to CDS-centered products during the 2007-2008 global financial crisis, RBI has prohibited introduction of CDS based on non-bond obligations. In other words, CDS can be written only on corporate bonds in the case of India. Further, unlike western economies, CDS in India should be based only on INRdenominated bonds issued by legal resident firms in India. Further, the minimum maturity for CDS should be 1 year. In other words, counterparties would not be in a position to enter into a CDS agreement wherein the underlying obligation has a maturity of less than 1 year. Further, RBI has bifurcated the participants into two categories namely market makers and users.
The market makers would be in a position act both as protection buyers or protection sellers in a CDS contract. On the other hand, the users can only serve as protection buyers.
DID YOU KNOW Mindful of the concentration of default risk as one of the causes of the S&L crisis, regulators initially found CDS's ability to disperse default risk attractive.In 2000, credit default swaps became largely exempt from regulation by both the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.
Further, a firm subsequent to entering into a CDS contractual agreement with a bank cannot unwind its position by entering into an offsetting CDS agreement with a different bank/counterparty. The concerned firm has to approach the same bank so as to unwind its position in the CDS contract. Although this is understandable from a macro-prudential policy perspective, it gives less motivation for the concerned bank to offer a competitive unwinding price to the firm. Further, restructuring will not be considered as a credit event in the case of India. And CDS could be written only on rated, listed corporate bonds, with the exception being unrated unlisted infrastructure bonds issued by special purpose vehicles.
Policy makers view introduction of CDS markets in India as a step towards helping corporations hedge their credit exposures in the right manner, which in turn would motivate such corporations to issue more credit. Free flow of credit coupled with a macroprudential regulatory framework with appropriate checks and balances in place would go a long way in enhancing the depth of the corporate bond market. This would then pave way for enhanced availability of credit for infrastructure projects â€“ a bridge that an emerging economy such as India needs to cross to make it big in the global arena. It would be interesting to see if CDS market in India would take off at a pace and a scale similar to the level of activity witnessed in western economies subsequent to introduction of these instruments.
DID YOU KNOW The Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole,specifically stated that CDSs are neither futures nor securities and so are outside the remit of the SEC and CFTC
MARK2MARKET VOLUME II 05
INDUSTRY INTERACTION AT VGSOM Wealth Creation Through Residential Real Estate Investment In order to mitigate most of the investment risk, one should restrict one’s residential property investment to Tier 1 and select Tier 2 cities. It is also most prudent to invest in properties where the price tag falls between Rs. 2500-5000/sq.ft., since such a price tag provides downside protection against any capital value erosion. Simply put, the cost of construction and minimum cost of land literally makes this price segment safe, and almost guarantees capital appreciation.
SANJAY DUTT CEO-Business JONES LANG LASALLE
The interview was done as part of interaction with industry experts and Finterest, VGSOM would like to share the opinion of these industry experts.
MARK2MARKET VOLUME II 06
What are the recommended guidelines for an Investor?
1. The property cycle needs to be understood so as to identify the best entry point. 2. Leasehold titles issued by the Government must be fathomed. 3. The investor needs to have a clear comprehension of unearned increase or capital gain and the consequently higher stamp duty implication at the time of conveyance from the developer. 4. The quality of the development is important, because depressed markets often result in poor design and construction quality. 5. Availability of the project’s development plans and all statutory approvals is de rigueur. If approvals are not yet in place, the investor should monitor them closely during the investment cycle. 6. The developer’s arrangement for all the finances for completion of the project must be verified. 7. The title’s due diligence by a qualified and reputed legal firm is now a given. One can no longer rely solely on the due diligence of home loan firms, as they have targets just like developers. 8. The location of the development may be important, but so is the location of the plot or apartment within the complex. Investors should avoid buying flats on the top floors of high-rise buildings, as these artificially add to the cost due to floor-rise concepts. 9. The credibility and track record of the developer need to be researched, since even the best ones have failed to deliver under the current market conditions.
10. The price band of the development should be lower than the last highest peak in 2008(exceptions can and should be made for quality, delivery date and location). 11. The time of conveyance of land and delivery (possession) must be explicitly clear. 12. The penalties in case of delay must be well understood; not everyone can fight legal battles. 13. The investor must clearly understand the delta between soft launch, launch and current price of the developer (the resale of existing ready projects may be actually cheaper). 14. The investor must understand the sale agreement along with the transfer charges in case he wishes to sell the apartment during construction or prior to registration. He should establish whether the agreement captures within the official cost all the amenities, parking, etc. that the developer promised at the time of sale, or whether these are mentioned separately. 15. The investor should employ usable carpet area vis-à-vis chargeable area as the price benchmark vis-à-vis other projects Finally, the investor should keep an eye on the market and sell the residential property at the right time in order to multiply wealth. If all the above precautions have been taken, the property should have appreciated at a consistent rate of 15% per annum for three years. It is important to remember that one can almost never sell at the peak, just as it is impossible to always catch the lowest price.
Articles Contributed By Students From B-schools Across The Country
1. Transfer Pricing - The Way Multinationals Cheat The World 2. Social Network And Financial Services 3. Analysts Give Buy Recommendations For Their Client Companies 4. Pip And The Currency Trading 5. Is Greek Exit From Euro Inevitable?
Transfer Pricing The Way Multinationals Cheat The World
ABOUT THE AUTHOR AMIT GARG MBA
OECD defines transfer price as
A transfer price is a price, adopted for book- keeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises.
Letâ€™s look at an illustration to see how a multinational operating in two countries can use the transfer pricing to change its profit by taking advantage of differential tax rates in the countries.
To simplify things it is the price which one division/subsidiary of a firm charges to another division or its parent when products or services are transferred internally within the firm e.g.
If Suzuki Japan manufactures gearboxes to be used in its Manufacturing plant in India, then the price Maruti Suzuki would be paying for it would be the transfer price and a similar analogy can be applied when transfer of whole of an outsourcing contract is done from a parent company like IBM to its Indian operation
MANAGEMENT DEVELOPMENT INSTITUTE GURGAON E email@example.com
Consider a hypothetical firm MultiCon Global headquartered in Mauritius where the corporate tax rate is 15% and its subsidiary MultiCon India which is operating in India as the name suggests where the corporate tax rate is 33 %( including cess). Consider three cases Case 1, Case 2, Case 3 as given on the next page. As you can see MultiCon Global increased its profits by just adjusting the transfer price and paying less Tax. Ultimately the profits made by tax avoidance are borne by the citizens of the country in this case India, as the loss of revenue is ultimately recovered by various forms of taxation on people like you and me. In 2009-10 TCS recorded a net profit of Rs. 4.3 Lac per employee, and Capgemini recorded a net profit of 1.5 Lac per employee. The difference is equally wide on
d RIZ 2n P
MARK2MARKET VOLUME II 07
DID YOU KNOW Its surprising to know that companies priced flash bulbs at $321.90 each, pillow cases at $909.29 each and a ton of sand at $1993.67, when the average world trade price was 66 cents, 62 cents and $11.20 respectively
Selling Price Rs. 1500
Profit Before Tax
Consolidated profits before Tax
Profit After Tax
Global Rs. 758.3
And Profits MultiCon India
DID YOU KNOW Google, the owner of the world’s most popular search engine, uses a strategy that takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax
Selling Price Rs. 1500
Consolidated profits before Tax
Profit After Tax
Global Rs. 813.3
Selling Price Rs. 1500
Profit Before Tax
Consolidated profits before Tax
Profit After Tax
Profit Before Tax
Consolidated MARK2MARKET VOLUME II
Global Rs. 850
other factors like net profit margin, revenue per employee and operating profit margins. This is the effect of “Transfer Pricing” according to tax experts. So how does the system work?
DID YOU KNOW
Most Indian subsidiaries of foreign companies work as “captives” – The parent company is US or Europe receives the contract from client and this is then sub-contracted to the Indian Subsidiary on ‘cost plus’ basis i.e. the Indian subsidiary would be reimbursed all the expenditure plus some margin.
The giant drug MNC, Glaxo Smith Kline, agreed to pay the US government $3.4 billion to settle a long-running dispute over the tax dealings between the UK parent company and its American subsidiary. This was one of the largest settlement of a tax dispute in the US.
At least 90% of revenues of the Indian subsidiaries of Accenture, IBM and Capgemini were such related party transactions with group companies. The result clearly shows in numbers , while these firms have around 30% of their work force in India on paper the Indian Unit contributes only 4-5% in the total profit of the enterprise.
Most of the countries including Indian laws (Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income tax Act, 1961) to prevent tax avoidance through transfer pricing are based on OECD guidelines, which state that such transactions should be recorded at “Arms Length Price” which should represent the price charged in comparable transactions between independent parties, where price is not influenced by the relationship or business interest between the parties in the transaction.
safe harbours. Safe harbour means that the Government would provide indicative price points for transactions between group entities to reduce transfer pricing litigation for Multinationals. However disputes arose in determining a mutually accepted safe harbour. Due to the wide variance in the ground level understanding of transfer pricing aspects, safe harbour limits proposed were so different that no consensus could be reached. The result - According to E&Y Global Transfer Pricing Survey India has the maximum transfer pricing litigations, almost two times that of the number two country.
DID YOU KNOW In India the penalty on transfer pricing assessment is One hundred percent to 300 percent of additional tax. Penalty for failure to maintain or furnish prescribed information and documentation is 2 percent of the value of international transaction. The penalty for failure to furnish with the return a report from an accountant is INR 0.1 million.
However the Arms Length Price is always a contentious issue and the matters often get entangled in litigation.
In 2009 NASSCOM created a platform to address the transfer pricing litigation through introduction of
MARK2MARKET VOLUME II 09
Social Network And Financial Services ABOUT THE AUTHOR
Financial information remains among the most searched items on search engines and business media, a prominent stakeholder in the financial world, is vigorously mining social media platforms like blogs (81%) and tweets (40%) for researching and sourcing new stories.
KHALID KAMAL RUMI MBA INDIAN INSTITUTE OF MANAGEMENT, INDORE E mail: firstname.lastname@example.org
The Early Adopters Chicago based CME group is known to be using social media since mid-2007. Swedish merchant bank SEB Group launched ‘The Benche’ in 2008 – a social media site aiming for some 250 users involved in trade finance (today it attracts over 20,000 visitors a month). Wells Fargo unveiled its corporate blogging strategy in 2009 and Putnam Investments forayed into the world of tweets the same year.
2010 welcomed the birth of linkedFA – an exclusive social network for Financial & Insurance Professionals and Investors. rd
Leading asset managers Vanguard and Fidelity are offering customer service and are answering questions from Twitter users via their company profiles. One of the largest insurers in the world, New York Life is also using social media to improve prospecting, lead generation and customer service. Even the most traditional and conservative organizations are now planning to join the network. The Federal Reserve Bank of New York is requesting proposals for a “Social Listening Platform” for sentiment analysis of online social networks. Indian financial institutions have slowly started warming up to the possibilities offered by this new media.
MARK2MARKET VOLUME II 10
Facebook Page Name
Kotak Mahindra Bank Ltd. HDFC RED
New Trends A recent research by Forrester suggests that 42% of adults using social networking sites are willing to engage with financial service providers on this new platform. Datamonitor has revealed that 41% consumers globally and 50% in the UK are already using a variety of online tools for financial decision making. Financial information remains among the most searched items on search engines and business media, a prominent stakeholder in the financial world, is vigorously mining social media platforms like blogs (81%) and tweets (40%) for researching and sourcing new stories. These exciting trends have caught the attention of leading industry observers and are being regularly reported by The Financial Brand, IR Web Report, StockTwits and Visible Banking.
The Aite Group in its 2010 study has pointed out that though 60% of financial services firms consider themselves to be novices in the field of social media, 70% of them
have already planned to dedicate funds for these initiatives. This is expected to cover around 90% of firms by 2012 and predicts that they would be spending between 2 to 10% of their overall marketing budgets on this. Financial pundits reckon that in developed financial services markets, social media is all set to supercede call centres as an effective customer service channel behind only to branches. In many developing markets it may even lead the branch. Adoption Inertia Financial services industry has been among the pioneers in the adoption of technology. However it maintained a healthy scepticism about the efficacy of social networks in catapulting its business. It sat on the fence and maintained a wait and watch attitude towards this playground for juveniles, unravelling whether this wave is a fad or a trend. But all this agnosticism was not unfounded. While many social networking platforms may be free to join but their monitoring and maintenance is a costly proposition. If not handled properly, this potent asset may soon turn out to be a liability leading only to public embarrassment. The product-focussed organisational set up of financial firms also lacked the requisite support structure and a holistic view of how customers could be engaged on such dynamic platforms. The other reason for reluctance on their part was regulatory barriers. Privacy concerns owing to the sensitive nature of information being dealt with led to apprehensions of stepping upon legal landmines.
An Imminent Espousal Financial firms gradually realized that quintessentially they are following an ostrich strategy. Their customers and prospects are already on all those platforms they are avoiding, where their perceptions, performance of their investments and experiences with the firm are being talked about loud and clear. The need for better communication is further accentuated in these times of financial crisis characterized by erosion of trust. Investors are expecting higher levels of disclosure, transparency and opportunities for peer review in selecting their service providers. Thus there is a good opportunity for whole new roles to be created as social exchange on financial matters is contingent on the availability of domain experts for review and recommendation purposes.
DID YOU KNOW According to comScore’s 2010 “State of Online Banking” paper, there was a steady increase in use of online banking from approximately 40 million users in 2006 to more than 58 million users in 2010. It seemed as though the best way for financial institutions like banks and insurance companies to engage consumers online was through service offerings.
Unlocking Potential Financial services firms are slowly turning into social media believers, willing to move up the ‘engagement pyramid’ and harness the potential of social networks for knowledge integration, generating value for their businesses and reshaping the future of customer service.
Listening to the Market
DID YOU KNOW
A plethora of social networking tools are readily available today12 to be deployed for gathering real time, first-hand information on brand perception about the firm, customer experiences with its product offerings, market sentiments, emerging trends and competitor activities. This is a faster, more authentic and lesser expensive route for driving critical customer
Three-in-five of the executives, however, still view themselves as novices or beginners with social media and only eight percent claim competency with it.
MARK2MARKET VOLUME II 11
insights that may pave way for product innovations and discovering early warning signals for potential issues.
DID YOU KNOW Even the “big guys” are joining the conversation. As first reported in Zero Hedge, The Federal Reserve Bank of New York is soliciting proposals for a “Social Listening Platform” that will monitor primary social media platforms such as blogs, Facebook, forums, Twitter, and YouTube. According to the request for proposal, sentiment analysis – a measure of positive, negative, or neutral comments – will be a central feature of the proposed platform.
Dissemination of Information Social networks are empowering firms to share with their stakeholders the latest news, initiatives, company results, investment ideas and research studies in an interactive and collaborative media format. In the last quarter, more than 50 firms used networks like Twitter and StockTwits to live tweet their earning results and half of them were non-US companies like Roche Holding Ltd. (Switzerland), Allianz SE (Germany), Telstra Corporation (Australia), Standard Bank Group (South Africa), and Tech Mahindra (India).
Strategic Implementation In the words of Marshall McLuhan, "The medium is the message".
tively. Even in normal circumstances, proactive listening should be encouraged and the approach should be to reward people for their suggestions and support in improving company’s processes. Thus adoption of a co-operative strategy and bestowing an advisory role to the customers is expected to minimise damage and avoid unnecessary and unwanted proliferation of negative sentiments on social networks.
Conclusion Thus, in nutshell we conclude that social networks hold great promise for financial firms in the coming days but exact to be leveraged intelligently for unlocking their true potential.
1.http://www.accenture.com/SiteCollectionDocument s/PDF/Accenture-Social-Banking-Retail.pdf 2.http://www.europeanfinancialreview.com/?p=4130
DID YOU KNOW Forty percent of their financial institutions expect to invest 2 percent to 10 percent of their overall marketing budget on social media next year.
MARK2MARKET VOLUME II 12
Introduction of financial institutions on social networks drives home the message that the firm is poised for an active engagement with its stakeholders: ready to listen, learn and reciprocate. Contingency Plan “Conventional marketing wisdom long held that a dissatisfied customer tells ten people. But…in the new age of social media, he or she has the tools to tell ten million” - Paul Gillin, author of ‘The New Influencers’. Detractors and disgruntled customers may resort to hostile “flaming” on social networks. A forethought mitigation plan thus needs to be in place for fire fighting such occasions. As the ownership of most successful social media sites lie with the community members, it is advised to approach such emergency situations with an empathic face towards customer grievances. Internally organisations need rigorous and well-articulated procedures to ensure that issues are dealt with in a co-ordinated manner, quickly and effec-
3.http://www.brandchannel.com/images/papers/530_ edelman_wp_social_media_financial_communication s_0911.pdf 4.http://www.forbes.com/sites/tomtaulli/2011/04/09/lin kedfariding-the-social-media-wave-in-financial-servic es/ 5.http://www.cnbc.com/id/44701381/The_Fed_Wants _to_Be_Your_Facebook_Friend 6.http://www.socialbakers.com/facebookpages/brands/india/type/156-bank-financial-institutio n/?interval=last-week#chart-intervals 7.http://www.accenture.com/SiteCollectionDocument s/PDF/Accenture-Social-Banking-Retail.pdf 8.http://about.datamonitor.com/media/archives/3756 9.http://london.fleishmanhillard.com/2011/09/13/finan ce-communications-in-a-social-media-world/ 10.http://www.aitegroup.com/Reports/ReportDetail.as px?recordItemID=723 11.http://www.vrl-financial-news.com/retailbanking/retailbanker-intl/reports/social-media-in-finan cial-serv.aspx 12.http://www.tripwiremagazine.com/2011/07/socialmedia-monitoring-tools.html 13.http://irwebreport.com/20110816/live-tweetingquarterly-earnings/
Analysts Give ‘Buy’ Recommendations For Their Client Companies Less than 1% of the recommendations by brokerage firm analysts during the 2000 and 2008 market plunges recommended that investors sell shares. Even during the 2008 slowdown, when the Nasdaq was way down, 2.1 percent of recommendations were to sell and 71 percent of the ratings were to buy.
ABOUT THE COAUTHORS ANKIT GOYAL MBA INDIAN INSTITUTE OF MANAGEMENT BANGALORE E mail: email@example.com
Objective In this project, the hypotheses we plan to test are: H1: Bank do not give biased recommendation on their client companies H2: For a company being an Debt side customer to a Bank has more bearing on the recommendations than being a Equity side customer. The objective is to try and reject these hypotheses – H1 and H2.
Methodology In this section, we present a methodology we used to find out if the bank is actually biased for its clients. Who is the client? But before we proceed, the first task is to know who the client of the bank is. This issue was addressed as follows. We assumed that if a particular company has gone for some offering – debt/equity through a bank(s), then the company is a client for that particular bank. Henceforth, we will use the term underwriter and bank interchangeably. Checking Biasness Now to find out the biasness – we have two set of information which is provided by
the analyst. First is the rating – ‘Buy/Hold/Sell’ and the second is the Target Price. We have made use of both these set of information independently. The methodology is presented in sections below. Target Price We take the target price given by the underwriter’s analyst and the average target price given by all other analysts. Then we calculate % extra return forecasted by bank when compared to the return forecasted in market. The formula used is as follows: Based on this % Change information, we have classified two cases: Overall: For each of the offering type, we calculate the % extra return given on an average. Underwriter: In this the task is to find out which particular underwriter is giving higher % extra return. Company: In this we find out those companies which are consistently given high % extra return.
t RIZ 1s P
ABOUT THE COAUTHORS SURBHI GARG MBA INDIAN INSTITUTE OF MANAGEMENT BANGALORE E mail: Surbhi.firstname.lastname@example.org
Buy Rating We now find whether the rating given to the client is better than the rating given by the market. We recognise bias in ratings in two circumstances: Market consensus rating is Hold /Sell but MARK2MARKET VOLUME II 13
Table 1: Biasness rating algorithm
DID YOU KNOW Both regional and national brokerage firms, which have conflicts of interest emerging from their activities in both underwriting securities and making investment recommendations, produce more optimistic recommendations than non-brokerage firms.
Market Rating (Majority)
the underwriter accords ‘Buy’ rating. Market consensus rating is Sell but the underwriter accords ‘Hold’ rating. Hence, we coded bias with the following algorithm described in table 1. Biasness Indicator is then defined as follows:
Sum total of biased ratings * 100 Number of total ratings given Based on the rating information, we have classified three cases:
DID YOU KNOW Sell-side analysts’ long-term growth forecasts are overly optimistic around seasoned equity offerings and analysts affiliated with the lead underwriter make the most optimistic forecasts.
Overall: Similar to the analysis in the Target Price, for each of the offering type in both countries, we calculate biasness indicator on an average. Underwriter: We find out biasness indicator for each underwriter type both in India and USA. This will help us zoom in on the underwriter who is giving bias recommendation to the clients. Company: In this the task, is to find out the set of companies which are being constantly given better recommendation by their analysts. This is to figure out if the % of companies which are getting better recommendation then market is high or low. We will use a cut off of 20 for biasness indicator to reject the hypothesis. If indicator is greater than 20, then hypothesis can be rejected. Further, we used a cut off of 0.5% for % extra return as a cut off to reject the hypothesis.
Data MARK2MARKET VOLUME II 14
For our study, we have
i. Covered several companies for which either debt or IPO or FPO offering was done. ii. Selected two regions – USA and India were selected for analysis to find out if there are systematic differences between the behavior of banks in one region over another. iii. Companies which fall in Medium to Large Cap market cap category in their respective regions. iv. Have offered equity/debt in last 3 years – the rationale being that analyst estimate data from Bloomberg older than 3 years is not available. The details about the companies are given in table 2. Table 2: Number of companies for different offering type across two regions Offering Type Debt FPO IPO
USA 5 8 12
India 5 8 15
The list of companies we analyzed is in Appendix A with details about their offerings and country. The list of banks we analyzed is given in table 3. Issues with data Banks use different rating criterions for covered companies. To resolve this issue, we have rerated different types of ratings into just one kind of rating - Buy/Hold/Sell. The mapping is shown in table 4.
Results Overall – Target Price We observe from table 5, that the extra return forecasted for clients in India is much higher than extra returns in USA.
Table3: List of Investment Banks we covered in our study
Banks Barclays Bradsc Citi CLSA
DB Edelweiss Enam GS
ICICI IDFC JM Fin JPM
Table 4: Mapping of different ratings into one single rating type Bank Rating1
Bank Rating 2
Equal Weight Suspended Coverage
Final Rating Used
Table 5: Average extra return forecasted by banks for their clients India 3.33% 4.74% -1.45% 1.96%
USA -1.19% 0.18% 1.24% 0.15%
One interesting picture that emerges from here is that in India Debt and FPO offering clients are more preferred than IPO where as in USA, it is other way around. Hence, from here we conclude that: Table F.1: Hypothesis conclusion 1 H1 H2
India Rejected Not Rejected
USA Not Rejected Rejected
Overall – Ratings From the analysis in table 6, we observe that on an average, Underwriters give higher target recommendations in India as compared to US. Also in India, the underwriters give more Buy recommendations for Debt offerings. On the other hand, Underwriters in US give more Buy recommendations for IPO and FPO. Table 6: Percentage of Favorable Recommendations (Number of times target by underwriter is higher than the target in the market) across regions and categories
Barclays Bradsc Citi CLSA
Table: 7: Biasness Indicator on an overall basis
Clearly, banks are giving more optimistic targets for their clients in India. To some extent, we can even say that for clients in USA on average are not getting higher estimates as 0.15% is almost 0.
Type Debt FPO IPO Total
Macquarie NOMURA RBC RBS
At the next level, we tried to see whether there is a difference in the recommendation patterns of Underwriters and Market for companies. For this, we checked whether the underwriters are biased towards their company as compared to market. We considered underwriters biased if they have given better recommendation as compared to the Total 0.35% market. For ex- if underwriter 1.67% has given Buy recommendation 0.18% whereas market consensus is 0.79% Hold or Sell. Similarly if underwriter has given Hold and market consensus is Sell. We analyzed the data at individual IPO, FPO and DEBT level and also at overall level. From this, we see that Underwriters in India tend to be more biased as compared to their counterparts in US. Also this trend is observed in firms underwriting FPOs as compared to IPOs and Debt offerings. Hence, from here we conclude that (using a cut off of 20%): Conclusion From joining table F.1 and F.2, we get the following table: We clearly see that H1 hypothesis for India can be rejected but not for USA. So, clearly the underwriters/banks are biased in giving
% of favorable Recommendations
IPO FPO DEBT Total
44.05% 56.89% 72.95% 69.17%
71.17% 63.69% 47.08% 55.40%
DID YOU KNOW The Securities Industry Association (SIA) when unveiling new voluntary guidelines for analysts said that they should not have their pay directly linked to the investment banking transactions handled by their firms for companies they covered.
DID YOU KNOW Buy-side analysts typically work for institutional money managers—such as mutual funds, hedge funds, or investment advisers—that purchase securities for their own accounts. They counsel their employers on which securities to buy, hold, or sell and stand to make money when they make good calls.
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Table F: Combination of table F.1 and F.2
DID YOU KNOW 56% of new buy recommendations underperform the appropriate benchmark 12 months after the recommendations are changed and, of these, more that 6 out of 10 stocks (62%) underperform the benchmark by at least 20% by month 12. On the other hand, 70% of new sell recommendations perform as expected over the 12-month period and only 16% outperform the benchmark by at least 20% by month 12.
Table F.1 H1 H2
IPO/FPO/Debt Debt Debt Debt Debt Debt
FPO FPO FPO
FPO FPO FPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO
MARK2MARKET VOLUME II 16
Not Rejected Not Rejected
Appendix A: List of Indian Companies Studied
HBS professor Mark Bradshaw and collaborators Scott Richardson and Richard Sloan found that forecasts and recommendations done by Wall Street research analysts universally tend to be more optimistic for companies their firms are issuing securities forâ€”or hope to do business with
preferential ratings for their clients in India but not in USA. We also notice that to some extent H2 hypothesis can be rejected in USA but definitely not in India. This does mean that
DID YOU KNOW
Name ICICI BANK Tech Mahindra Sterlite ONGC Reliance Industries LTd. Engineers India Limited Power Grid Corporation REC India NTPC Ltd Ansal Properties and Infrastructure Ltd Tata Motors Ltd IndusInd Bank Ltd IDFC LTD. MOIL Ltd. Shipping Corp of India Coal India Ltd. Prestige Estates Projects Pipavav Shipyard NMDC Ltd Jaypee Infratech Ltd MHRL IN NHPC LTD OIL India SKS Microfinance Ltd Standard Chartered PLC Ltd. Reliance Power Jyothi Laboratory Godrej Properties Ltd.
Bloomberg Ticker ICICIBC IN EQUITY TECHM IN EQUITY STLT IN EQUITY ONGC IN EQUITY RIL IN EQUITY ENGR IN Equity PWGR IN Equity RECL IN Equity NTPC IN Equity APIL IN Equity
TTMT IN EQUITY IIB IN EQUITY IDFC IN EQUITY MOIL IN EQUITY SCI IN EQUITY
Table F.2 H1 H2
Debt Debt Debt Debt Debt FPO FPO
Ford motors Intel Corp 3M Co Micron Tech John Dere Ecolab inc Wells Fargo & Co General Electric Co Petroleo Brasileiro SA Apache Corp Metlife Inc. Verisk Analytics, Inc SHANDA GAMES Talecris Biotherapeutics Hyatt Hotels Corp Cobalt International Energy Inc Starwood Property Trust Inc Mead Johnson Nutrition Co. Dollar General Corp Artio Global Investors Inc. General Motors VISA INC. ENERGY RECOVERY
FPO FPO FPO FPO IPO IPO IPO IPO
PIPV IN EQUITY
NMDC IN EQUITY JPIN IN EQUITY
RPWR IN Equity JYL IN Equity GPL IN EQUITY
Not Rejected Rejected
Appendix B: List of US Companies Studied
STAN IN EQUITY
whatever the biasness banks show in USA, that is more prevalent in equity offerings than debt. Hence, we are able to reject the hypothesis in very restricted set of cases.
COAL IN EQUITY PEPL IN EQUITY
MHRL IN EQUITY NHPC IN EQUITY OINL IN EQUITY SKSM IN EQUITY
IPO IPO IPO IPO IPO FPO FPO
M &T Bank Corp General Growth Properties
Bloomberg Ticker F US EQUITY INTC US EQUITY MMM US EQUITY MU US Equity DE US Equity ECL US EQUITY WFC US EQUITY GE US EQUITY PBR UN EQUITY APA US EQUITY MET US EQUITY VRSK UW EQUITY GAME UW EQUITY TLCR US EQUITY H US EQUITY CIE US EQUITY STWD UN EQUITY MJN US EQUITY DG US EQUITY ART US EQUITY GM US Equity V US EQUITY ERII US EQUITY
MTB US EQUITY GGP US EQUITY
“PIP”And The Currency Trading ABOUT THE AUTHOR
The word Pip has more than one connotation in the English language. But when it comes to the world of finance it has one literal meaning. Pip is the abbreviation for “Price interest Point” and is defined as the smallest gain or loss a person can incur in the exchange rate of any currency pair.
Out of the various trading instruments available in the market, currency market is one where pip is often used and is very effective in making money. Firstly, all currency pairs, except Japanese Yen, are quoted to the fourth decimal point. Example USDEUR is 1.3116 on any given day. If this value changes by .0001 in either direction, we say the currency has moved by a pip in the given direction. As mentioned before, a one pip move is the smallest move a currency pair can make in either direction. So if such a small move is possible in the currency market, the point of intrigue is how one can make money from such a small move. Herein comes the second factor: contract size. The contract size in a currency market is usually large. We would consider various examples to elucidate this aspect. In case of Japanese yen, which is quoted till only 2 decimal places, the .01 movement is called a pip movement.
In India the currency futures came in August 2008, with only the USDINR pair allowed for trading purposes. Later in January 2010 the RBI introduced the Euro, Japanese Yen and Sterling GBP to the Indian market. Similarly, in July 2010 the RBI approved options in currency trading. The lot size is
PRANAY KUMAR MBA INSTITUTE OF FINANCIAL MANAGEMENT AND RESEARCH
standard and is 1000 units for USD, EUR and GBP pairs. In case of Japanese yen the lot size is 100000 units. Now with such large sizes of contracts’ a slightest move in the currency pair can incur profit or loss. We would take another example of USDINR pair to understand how the large contract size can have effects on profit or loss. Say at any given day 1 USD = 49.00 INR. A one paisa gain in the dollar will take the value to 49.01. A one paisa gain is equivalent to Rupee 0.01/lot. Thereby, a full 1 rupee movement will make an INR gain or loss of 1000 per lot. The 1000 rupees is excluding the taxes and brokerage fee charged against every contract. Some trading platforms are also providing fractional pip to the customer. A Fractional pip is less than one pip and it basically helps in spread. Instead of absolute number of spreads, with fractional pips we can spread 2.5 instead of 3 points in spread. Before the online currency trading very few people used to take part in currency trading. The transaction cost was high and also the spread was big enough to reduce the individual profit.
E mail: email@example.com
DID YOU KNOW The GBPUSD currency pair is known as cable. This is because – before global satellites and fibre optics – the London and New York stock exchanges were connected using a giant steel cable under the Atlantic.
Pip spread at different levels of participation The higher the level of volume of trade in the currency of any bank or firm, the tighter price they will get to assess and because of this they would be able to pass on this to their clients.
MARK2MARKET VOLUME II 17
DID YOU KNOW How big is the market? More than $3.98 TRILLION are traded on the foreign exchange market each day. That’s about 53 times more than the New York stock exchange, where a measly (!) $74 billion changes hands daily.
By tighter pricing we mean that the spread between the bid price and the ask price is low. Usually the spread in the interbank market, often the market makers, is one pip. The smaller institutions which are involved in trading with these banks get an access to around 2-3 pips spread. These institutions have many corporates’ as their clients and the pass, on the spread, to the corporates is somewhere between10-30 pips. The individuals on the other hand usually get a spread of around 100-500 pips. Lets make this more clear with an example. Say at any given point EURUSD = 1.3209.
Suppose a trader wants to trade at this price. The trader will place an order with the broker and the broker will buy from the market maker to complete the process. If the market maker will buy at 1.3209 and sell at 1.3208, that’s 1 pip difference. The market maker will pass this on to the institution by a buy price of 1.3209 and a sell price of 1.3206, that is a 3 pip difference. DID YOU KNOW The origin of the "$" sign has been variously accounted for. Perhaps the most widely accepted explanation is that it is the result of the evolution of the Mexican or Spanish "P's" for pesos, or piastres, or pieces of eight. This theory, derived from a study of old manuscripts, explains that the "S," gradually came to be written over the "P," developing a close equivalent to the "$" mark. It was widely used before the adoption of the United States dollar in 1785.
MARK2MARKET VOLUME II 18
The market maker usually makes money from the difference in spread or buying at lesser price and selling at a higher price. Note that this is only difference in spread, the brokerage charges for individuals are additional. The DCGX
Therefore the smaller the spread, the more beneficial it is for clients and hence, a larger volume of trade can be seen. A pip movement is so significant that if an Indian national is trading in EURUSD or any other major currency pair like GBP or YEN through international brokers, he can earn in dollars and then convert it to the Indian currency. The profit will therefore swell. Currency trading is mainly done in eight pairs of the major currencies i.e. USD, EURO, GBP, JPY, CHF, Canadian Dollar, Australian dollar and NZ dollar. Rupee is still used for domestic trading only. However, central banks of different countries do sign contracts with RBI for rupee trading for different purposes. Dubai Gold & Commodity Exchange (DGCX) is one exchange which provides futures of Indian currency. References
1.http://www.traderupee.in/rupee_markets.htm 2. http://www.forex.com/Learn
Is Greek Exit From Euro Inevitable? In the event of Greece abandoning the common currency, a shift to a new currency called drachma would bring about substantial devaluation and in turn enhance the country’s competitiveness..
ABOUT THE AUTHOR SOHINI BANERJEE MBA Ist YEAR VINOD GUPTA SCHOOL OF MANAGEMENT IIT KHARAGPUR E mail: firstname.lastname@example.org
The eurozone, officially called the euro area and a monetary union of 17 European Union (EU) member states, came into existence in 1998 with the official launch of the euro on 1st January, 1999. Greece qualified in 2000 and was admitted in January, 2001. It was one of the fastest growing economies in the eurozone during the early 2000s. The decline of the Greek economy began in the later part of 2000 when the evil forces of disruption raised their ugly heads-- rising government debt levels, trade imbalances, monetary policy inflexibility and loss of confidence by the investors took their toll on the country, thereby transforming Greece into one of the worst affected economies in the ongoing eurozone financial crisis. The crisis, which started with widespread claims of corruption and financial fraud has now given birth to the most debatable issue of the eurozone – “Should Greece exit the euro?” This contention has invited mixed feelings from economists and financial analysts worldwide. Just a few months ago, the chance of Greece defaulting and exiting the single European currency was considered to produce disastrous effects on the entire euro area. Eurozone leaders have long been involved in talks with US, China and
Japan to contribute more to the International Monetary Fund (IMF) which can be used as a shield against the ongoing crisis. But the severe oppositions from America, Tokyo and Beijing have wiped off all rays of hope and hence there is an even greater need for Greece to undertake more effective austerity measures. Times have apparently changed and now it is thought that the exit of Greece might be laden with some potential benefits.
Greece’s exit from the euro area has to be voluntary. According to the EU guidelines, the other members cannot push the country out of the monetary union. On the other hand, Article 50 of the Lisbon Treaty (2007) allows a member to leave the EU after informing the European Council accordingly. What Greece gains by exiting the euro In the event of Greece abandoning the common currency, a shift to a new currency called drachma would bring about substantial devaluation and in turn enhance the country’s competitiveness. The tourism industry in Greece contributes to around 18% of the country’s GDP and the export industries include agriculture, manufacturing and pharmaceuticals. MARK2MARKET VOLUME II 19
DID YOU KNOW In 2012, Greece debt is forecasted to be 198.2% of its GDP, whereas GDP growth is forecasted to shring by 2.8%.
Thus, if the relative prices of Greek products and services fall rapidly due to devaluation, all these sectors would benefit immensely. Moreover, when the relationship between Greece and Troika (IMF, EU and ECB) comes to an end, some attractive financial incentives will be provided by the latter to restore the financial stability of the country.
What Greece gains by staying within the eurozone In contrast to the beneficial aspects considered above, it can be said with some amount of certainty that the citizens of Greece can also acquire considerable benefits by sticking to the euro rather than switching to the drachma.
DID YOU KNOW In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit, partly due to high defense spending amid historic enmity to Turkey.
The European Central Bank (ECB) is a source of extensive funding capabilities and Greece will be denied the services of the same if it leaves the euro area. Moreover, the wealth of the Greek citizens are measured in euros and an exit from the eurozone would expose this entire wealth to exchange rate fluctuations. Last but not the least, Greece will also lose
numerous political, social and economic benefits provided by EU as well as the fortunes of simplified international trade policies.
What Europe gains from a Greek Exit Although a Greek exit may cause an immediate banking crisis across entire Europe, a reformed and extensive European Financial Stability Facility (EFSF) â€“ would help to prepare the remaining EU members to restore their banking systems.
Attempts by other EU members to save Greece enhances the vision of mutual support and solidarity within the eurozone, but at the same time puts forward the glaring question to the world as to whether Brussels is capable enough to maintain a viable economic and monetary union. What Europe loses from a Greek Exit Most of the EU members, especially Germany, are sceptical about extending further financial support to Greece. But all these objections should be considered with a pinch of salt because in reality Europe will lose as much as Greece itself from an exit of the latter from the eurozone.
Greece is Europeâ€™s invincible barrier to the illegal immigration originating in Asia and it has carried out this duty with very little or no assistance from the remaining EU members. Hence, a Greek exit will cause huge turmoil along the frontiers. The city of Cyprus, being largely dependent on Greek economy, will also collapse in case of a Greek exit and Europe will have to continue without two internationally significant
MARK2MARKET VOLUME II 20
the benefits of devaluation will not bear fruit unless the Greek government undertakes structural reforms for the economy and labor market as prescribed by the Troika.
The other side of the coin also reveals that Europe will be blessed with only limited benefits in the event of a Greek exit and the impacts will be mostly negative as discussed in the previous sections.
players. Moreover, a Greek exit may become very costly for Europe because it will not only break the notion that no country ever leaves the eurozone, but other countries may also follow the same course, thereby causing the single currency to shake itself apart.
Thus, exiting the eurozone will submerge Greece into deeper financial turmoil and at the same time spell an end to the expansionary European economy.
DID YOU KNOW When economic crises arised in late 2000, Greece was unable to recover because its main industries shipping and tourism were sensitive and its debt began to pile up.
Lastly, when Greece shifts to a new currency called drachma, a huge disparity will be created between the financial instruments denominated in drachma and euro. Corporates exposed to these kind of imbalances will have a high probability of default which in turn poses considerable threat for the European economy. The Way Forward Although re-drachmatisation poses some apparent benefits for Greece, it is a costly alternative. The new currency will be valued at much less than that of euro and can lead to an expansion of the tourism and export industry only in the presence of abundant natural resources and a prosperous world economy to bank upon. Since Greece lacks both these advantages at present, the fortunes associated with shifting to a new currency are placed under the scanner. It also requires mention that
MARK2MARKET VOLUME II 21
RECENT FINTEREST EVENTS AT VGSOM BROWN BAG SESSIONS GURUKOOL SERIES OF LECTURES The Finance Club of VGSOM, IIT Kharagpur has been involved heavily in knowledge sharing among the finance enthusiasts at IIT Kharagpur. Through initiatives like “Brown Bag Sessions” and “Gurukool Series of Lectures” it is encouraging the finance fraternity at VGSOM and in the industry to learn and share simultaneously.
BROWN BAGS In January, 2012 Finterest introduced Brown Bag Sessions- A series of weekly sessions aiming at discussing the major issues and topics from finance domain where every participant is expected to do his/her research on the topic which results in a healthy exchange of ideas during the session.
The first session which was on Euro Debt Crisis attracted many finance enthusiast of Vinod Gupta School of Management, IIT Kharagpur to brain storm on various aspects of the crisis and the possible measures that should be taken to contain it. The energy level witnessed was nothing less than amazing .The Leaders in making ,convincingly put forwards their points and debated the pros and cons of various measures that could be taken. Gist of the Session: In the 2000s, Greece had abundant access to cheap capital, fueled by flush capital markets and increased investor confidence after adopting the euro in 2001. Capital inflows were not used to increase the competitiveness of the economy, however, and European Union (EU) rules designed to limit the accumulation of public debt failed to do so. The global financial crisis of 2008-2009 strained public finances, and subsequent revelations about falsified statistical data drove up Greece’s borrowing costs. By early 2010, Greece risked defaulting on its public debt.
MARK2MARKET VOLUME II 22
EU, European Central Bank, and IMF officials agreed that an uncontrolled Greek default could trigger a major crisis. In May 2010, they announced a major financial
assistance package for Greece, and the Greek government committed to far-reaching economic reforms. These measures prevented a default, but a year later, the economy was contracting sharply and again veered towards default. European leaders announced a second set of crisis response measures in July 2011. The new package calls for holders of Greek bonds to accept losses, as well as for more austerity and financial assistance. Additionally, the policy responses have not contained the crisis. Ireland and Portugal turned to the EU and IMF for financial assistance. In the summer of 2011, interest rates on Spanish and Italian bonds rose sharply.
The second Brown Bag Session was focused on FDI in Retail which kicked off with presentation of two short videos. The first one was on FDI and collaboration with foreign players asserting that the opportunity is huge, and that FDI is like an untapped resource for sustainable development. The second one was a clipping from a debate on India Tonight which talked about impact of FDI on India, its integration into the value chain of our system. The debate also raised questions on whether our system needed foreign investors in retail. Gist of the Session :
The parameters which were widely discussed were Infrastructure, Employment, Public Policy. With examples of FDI’s success story in China, Indonesia, Germany and other nations, the discussion tilted in favour of FDI in retail with its perceived positive impact on backend infrastructure. As India’s backend infrastructure in retail, especially cold storage facilities, is in a nascent stage, FDI in retail is thought to bring in new technology and years of experience from the big retailers of the world which would help upgrade the backend infrastructure and find a way around the high gestation period such initiative demands. But, questions arose on why not we could improve the infrastructure on our own. Whether the government wanted the foreign players to come in and clean the mess or is it just lack of effective policy making on the government’s behalf? The discussion also ventured into the 30 % restriction imposed in single brand FDI in retail on local sources of raw material and infrastructure. Surely some percentage is needed to be set aside to be sourced from within India, for FDI in retail to not harm the “kirana” shops or affect their business on a large scale. The discussion took a turn against FDI when voices were heard for the people who may get unemployed due to overhaul of the value chain and the backend infrastructure. It is thought that huge supermarkets, mega stores adversely affect the local businesses containing the “kirana” shop onwers, street vendors, etc. On the point of jobs being lost or actually made, two more videos were displayed which changed the perception that FDI in retail would only kill jobs. People started developing a point of view which showed them that jobs made be lost in certain places in the value chain, but FDI in retail had the potential to create more jobs in other places in the value chain. Therefore, the question which was pondered changed to whether this is a job loss scenario or job shift scenario. Taking the long-term view,
this was looking as a job shift scenario with ample opportunities being created elsewhere in the value chain. Increase in organized retail sector, resulting in increased tax paid to the government was one of the reasons FDI in retail was being supported. Also, FDI vs manufacturing sector debate raged on for some time, pondering on why India cannot improve its manufacturing sector infrastructure (which would take considerable effort from the government and require a huge amount of time) rather than going for the easier and potentially riskier option of FDI in retail. The intentions of the governments over the years to introduce the bill effectively and get it passed were questioned on the grounds of vote-bank politics and inability to form policy which would lure foreign giants to set up house in India.
Third session was organized on Currency Fluctuations and its Impact, in which participants discussed about how the currencies in the world fluctuate with respect to each other, what are the measures governments take to control the fluctuation. Along with this the discussion also moved towards the forex trading and fluctuations’ impact on exports and imports. Apart from it participants also discussed about the interests of some countries behind deliberately keeping their currency’s value low.
MARK2MARKET VOLUME II 23
Gurukool Series Of Lectures
DID YOU KNOW The earliest introduction of energy market concepts and privatization to electric power systems took place in Chile in the early 1980s, in parallel with other market-oriented reforms associated with the Chicago Boys.
Finterest took another novel intiative in February this year and introduced "Gurukool" Series of lectures. These sessions were aimed to foster greater interaction between finance enthusiasts of VGSoM and stalwarts from finance industry and academia.
The platform provided an excellent opportunity to students to explore niche areas in finance industry. First in the series of lecture was taken by Prof. Prabina Rajib of VGSoM, IIT Kharagpur on "Electricity Derivative". Prof. Rajib explained in detail how in India, regulation allows electricity derivatives to be traded in spot market only.The fact that it cannot be stored easily and must be produced virtually at the same instant it is consumed makes it unique when compared with the markets for other energy commodities, such as natural gas, oil, and coal, in which the underlying commodity can be stocked and dispensed over time to deal with peaks and troughs in supply and demand.
She went on to discuss how pricing is done for different time zones and different regions over the course of a year or even a day, electricity demand cycles through high and lows corresponding to changes in season. Regulators also play key role in reducing inherent volatility of electricity prices by tweaking demand-side management programs. Electricity prices are likely to be MARK2MARKET VOLUME II 24
most volatile during the on-peak hours of the day and substantially more stable (and lower) during the off-peak periods.
Second in the Gurukool series of lectures were conducted by Mr. Gaurav Sekhri, Vice President at IndiaVenture Advisors (a Private Equity firm promoted by the Piramal Group) on how to build your career in the exciting world of Private Equity Funding. Mr Gaurav met an enthusiastic student audience waiting to brain storm about the PE industry in India.The students discussed in depth the deal flow and deal ratinale of a PE across various sectors .Fine elements of Term sheet like Right to firts refusal Drag along right and variou exit option of a PE were the the highlights of the discussion. Mr. Gaurav Sekhri enjoyed answering all queries and concerns and advice on the steps you can take apart from the regular coursework to build your career in the world of Equity Markets and Private Equity funding. He also shared his experiences and learnings while working in the niche domain.
1. Burden 2. A transportation medium 5. Kind of cow 6. Secure 8. Get on 9. Free trading 11. Business magazine 12. 24-karat 15. Obligation 16. Euro forerunner 17. Redemption (10 letters comprising of 2 words attached)
1. Hint 2. Bargainbasement 3. Declared but not paid 4. In Jeopardy 7. Injured 10. Reply to a captain 12. A thump 13. Deposits 14. Component of an asset
Check out the answers in the next issue. MARK2MARKET VOLUME II 25
Across 1. A bookkeeping worksheet 5. Having less than five years to run before redemption 8. First-rate 10. Amalgamation 11. Ingests 13. Ordinary shares 16. Legally established as a corporation 17. Act of selling again 18. Effective 19. Type of a rock music 20. Euro forerunner 21. Cake-Walk 22. Wrestling hold 23. Nice to have this 24. Accept 25. Common Market inits. 26. Burden
Down 2. Gap 3. Conversion of a liability 4. Affirmative vote 6. Notes, coins 7. Deduction Rate 9. Similar to 10. Leadership post 12. A Union 14. A four sided shape 15. A business professional 22. Plenty
MARK2MARKET VOLUME II 26
Solution, Vol I
I A L B A L N O Y 5 6 7 8 9 S H O R T D A T E D A E N I 11 10 M E R G E R C O N S A D I O C 13 N C O M M O N S T O A U V U 17 18 G N R E S A L E 19 E R R E N T 21 R E A S Y S R N I A 22 23 L O C K P R O F I T Y O L N E 25 T E E C
A N C E 10
T I P A 12 U M E R U 14 15 A C K 16 I N C E T T 20 E C U A R 24 B U Y O 26 T A X
E E T ST N I F GP
VINOD GUPTA SCHOOL OF MANAGEMENT established in 1993, was the first school of management to be setup within the IIT system. It was initiated by a distinguished alumnus & a Life Time Fellow of the Institute, Mr. Vinod Gupta, whose generous endowment was matched by liberal support from the Government of India.Today, VGSOM is one of the best and leading B-Schools in India. FINTEREST, the Finance club of VGSoM, is dedicated to nurturing and enhancing the finquotient of students and also to increase industry interaction with our college. The club keeps its members updated on the latest trends and developments in corporate finance, capital markets, investment banking and other related areas.
Contact Information Vinod Gupta School Of Management IIT Kharagpur, Kharagpur West Bengal - 721302 Mark2Market: email@example.com Finterest: firstname.lastname@example.org