October 27, 2013 Volume 14
JpMorgan’s $5 Billion Mortgage DEAL
Listing of Stock exchanges
Dynamic Hedging
FinNiche
FinXpress
FinXpress Volume 14 Oct 27, 2013
From The Editorial RISCON’13 Begins!
CONTENTS
From The Editorial In Focus: Listing of stock exchanges Term of the Week: Delta Hedging Opinion: JPMorgan's $5 Billion Mortgage Deal Market This Week News Fun Corner
The week was eventful for club Finniche, as we successfully completed the Online quiz round ENCEPHALON for RISCON’13. The quiz saw participation from b-schools like FMS, IIM-L, MDI, NMIMS, IIM-R. FinNiche expresses sincere thanks to all 120 teams for participating in the round. Congratulations to the teams that have been shortlisted for the final round. The week ended on a restful note as junior batch finished their second end terms. The economic and political environment was not any less eventful. Forex reserves up for third week in a row adding $1.9 billion to touch $281 billion. FIIs poured in Rs 12,100 crores in Indian stock market in October, leading to a healthy economy. In this edition of FinXpress, we have opinion section on JPMorgan's $5 Billion Mortgage Deal and in focus section on ‘Listing of stock exchanges’. Do look over the ‘News of the Week’ section for further noteworthy news and updates. The ‘Market of the Week’ covers the latest trends in the market this preceding week. We hope that’s you find the articles in this edition of FinXpress interesting as well as useful. We look forward for your feedback, comments, acknowledgements as well as criticisms regarding the same so. Do write us back and let us know your opinions. Happy Reading!!!
Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. October 2013
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FinNiche
IN FOCUS
Listing of Stock Exchanges —- By Mukul Gupta
April 2, 2013 was a landmark day in the history of financial intermediation in India. On this day the Securities and Exchange Board of India (SEBI) allowed the country’s stock exchanges to raise capital from the public through listing of their own shares. They however cannot list on themselves. This move was however contrary to the recommendations of the committee headed by former RBI governor Dr. Bimal Jalan in 2010.
clients and shareholders. But NSE, like the Bombay Stock Exchange, provides a critical financial market infrastructure and the business needs to be seen from two sides — profits and compliance. Investing in companies that run critical financial infrastructure, such as stock exchanges, credit rating agencies, clearing corporations and depositories, carries a risk of public policy. The critical differentiator here is regulatory oversight the company has been outsourced and entrusted with. Any compromise here would reflect not only on NSE but on all the 1,600-plus companies listed on it. A listed firm’s returns to investors is more than mere increased profits — a Re 1 of net profit translates into Rs 20 in the value of the firm that would trade at a PE multiple of 20. So, the pressure from investors can hang like a golden sword on the heads of managers.
According to SEBI, stock exchanges can be listed when they put in place an appropriate mechanism to tackle conflict of interest. No stock exchange will be allowed to list shares on its own equity trading platform, and to float an initial public offering (IPO) until it completes at least three years of operations. The fight to list the NSE is a consequence of this decision. But before deciding whether the National Stock Exchange of India Ltd (NSE) should list, it is important to understand the nature of the beast, the underlying asset.
Further, even if the oversight committees are chaired by public interest directors, their efficacy and effectiveness when functioning within the same corporate structure as the rest of the organisation is unproven. The regulatory function – a clear public good that needs public scrutiny and control – needs to be completely isolated from the profitgenerating part of the exchange.
However, there are many examples all around the world where listed stock exchanges like NYSE and LSE are performing better as compared to their unlisted counterparts. Their success can be attributed to proper regulatory environment protecting investor confidence and interest. It remains to The business of India’s largest exchange, been seen what happens next when NSE formed two decades ago, is unlike any of investors like SAIF Partners, Actis, the companies that list on it, barring General Atlantic, IDFC, NVP, Tiger banks. In all other companies, the profits Global, Temasek Holdings, and and losses are limited to one firm, its Beacon start pushing for the NSE listing.
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FinNiche
Term of the week
DELTA HEDGING —— By Ashish Agarwal
The goal of a delta-neutral portfolio (or delta-neutral hedge) is to combine a long position in a stock with a short position in a call option so that the value of the portfolio does not change when the value of the stock changes. A deltaneutral portfolio is a risk free combination of a long stock position and short calls where the number of calls to sell is equal to:
= $ 0.4 / $ 0.75 = 0.533 Delta neutral portfolios illustrated with an example.
are
best
You own 60,000 shares of Arthurall Company common stock that is currently selling for $50. A call option on Arthurall with a strike price of $50 is selling at $4 and has a delta of 0.60. Number of options needed to delta The number of call options necessary to hedge = number of shares hedged/delta create a delta-neutral hedge is as of call option follows: Delta is the change in the price of an Number of options needed to delta option for a one-unit change in the price hedge = 60,000 / 0.6 = 1, 00,000 of the underlying security: options or 1000 option contracts Delta of call = (C1 – C0) / (S1 – S0) = Because we are long the stock we need delta C/ delta S to short these many options Where: delta C= change in the price of the call over a short time interval delta S = change in the price of the underlying stock over a short time interval
Suppose during the last ten minutes of trading, call options on XYZ common stock have risen from $ 1.20 to $1.60. Shares of the underlying stock have risen from $51.30 to $52.05 during the same time interval. The delta of the call option would be
Now we will see the effect on portfolio of a 1$ increase in the price of Arthurall stock. As the price have increased by 1$ your stock position will increase by 60,000*1= $60,000 and the decrease in price of the option would be 1$*0.6=0.6 (delta of the option is 0.6). So the price of option will increase by 0.6 and since you are short on options you would lose 0.6*1, 00,000=$60,000. So the total change in portfolio value is 60,00060,000. A key consideration in delta-neutral hedging is that the delta-neutral position only holds for very small changes in the value of the underlying stock. Hence, the delta-neutral portfolio must be continually rebalanced to maintain the hedge. This is called a dynamic hedge. As the underlying stock price changes, so does the delta of the call option. As the delta changes, the number of calls that need to be sold to maintain a risk-free position changes. Hence, continuously maintaining a delta -neutral position can be very costly in terms of transaction costs.
Delta (call) = (1.6$ - 1.2$)/ (52.05$ 51.30$)
October 2013
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FinNiche
OPINION
JPMorgan's $5 Billion Mortgage Deal —- By Vipul Kumar Singh
The $5.1 billion that JPMorgan Chase has agreed to pay hardly ends its legal troubles over mortgage securities it sold. It's merely a down payment. JPMorgan still faces heavy financial burdens. The bank has set aside $23 billion to cover legal costs — and it may need it all. JPMorgan called its latest settlement an "important step" toward resolving allegations over mortgage-backed securities it sold.
and federal investigations into its sale of the mortgage-backed securities. Most of the trouble stems from JPMorgan's acquisition of Bear Stearns in March 2008. In September, JPMorgan agreed to pay $920 million and admit that it failed to oversee trading that led to a $6 billion loss last year in its London operation. That combined amount, in settlements with three regulators in the U.S. and one in Britain, is one of the largest fines ever levied against a The $5.1 billion would resolve federal financial institution. claims that it misled Fannie Mae and Freddie Mac about risky home loans and securities they bought before the housing market collapsed. Fannie and Freddie were rescued in a taxpayer bailout in 2008 as they sank under the weight of mortgage losses. Between 2005 and 2007, JPMorgan sold $33 billion in mortgage securities to Fannie and Freddie. That was the secondmost sold to Fannie and Freddie ahead of the crisis, behind only Bank of America. The securities soured after the housing bubble burst in 2007, losing billions in value. In another case, the company agreed to pay Fannie and Freddie own or guarantee about a $100 million penalty and admitted that half of all U.S. mortgages, worth about $5 its traders acted "recklessly" with the trillion. The two don't directly make loans to London trades. If that weren't enough, borrowers. They buy mortgages from JPMorgan is tied up in litigation over the lenders, package them as bonds, guarantee Bernard Madoff Ponzi scheme. JPMorgan them against default and sell them to has said it's responding to investigations by investors. This system helps make loans Justice and other regulators. The bank widely available to borrowers. The Federal hasn't given details. But it has previously Housing Finance Agency, which oversees faced accusations that it and other banks Fannie and Freddie, announced Friday's ignored signs that Madoff was a con artist. settlement with JPMorgan, the largest U.S. bank. Edward DeMarco, the FHFA's acting director, said the settlement with JPMorgan The deal is expected to be followed by a "provides greater certainty in the broader agreement with the Justice marketplace and is in line with our Department that's still being negotiated. responsibility for preserving and conserving Last weekend, JPMorgan reached a Fannie Mae's and Freddie Mac's assets on tentative deal with Justice to pay $13 behalf of taxpayers. "The FHFA sued 18 billion. The $13 billion tentative deal financial institutions in September 2011 included $4 billion to resolve the FHFA over their sales of mortgage securities to claims. Even reduced by that amount, it Fannie and Freddie. The total price for the would be the largest penalty the securities sold was $196 billion. The government has extracted from a company government rescued Fannie and Freddie for actions related to the financial crisis. It's during the financial crisis when both were unclear when the broader agreement will be on the verge of collapse. The companies finalized. The bank still faces local, state received taxpayer aid totaling $187 billion.
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OPINION Of the $5.1 billion it's agreed to pay, New York-based JPMorgan will pay about $2.74 billion to Freddie and $1.26 billion to Fannie for mortgage bonds it sold. JPMorgan is paying a separate $1.1 billion
for home loans it sold them. The mortgage securities that JPMorgan sold to Fannie and Freddie included billions that were packaged by two institutions that failed in 2008: Wall Street bank Bear Stearns and Seattle-based Washington Mutual, the largest U.S. savings and loan. JPMorgan bought Bear Stearns and Washington Mutual in deals brokered by the government. A number of big banks, including JPMorgan, Goldman Sachs and Citigroup, previously have been accused of abuses in sales of securities linked to mortgages in the years leading up to the crisis. Together, they have paid hundreds of millions in
October 2013
FinNiche
penalties to settle civil charges brought by the SEC, which accused them of deceiving investors about the quality of the bonds they sold. But no high-level Wall Street executives has been sent to jail over charges related to the financial crisis. The banks in all the SEC cases were allowed to neither admit nor deny wrongdoing — a practice that brought criticism of the agency from judges and investor advocates. Some lawmakers and other critics have demanded that the big bailed-out banks and senior executives be held accountable. JPMorgan had long enjoyed a reputation for managing risk better than its Wall Street competitors. The bank came through the financial crisis in better shape than most of its rivals. But in recent months, it has been engaged in a number of embarrassing and costly settlements. In September, the bank agreed to pay $920 million and admit that it failed to oversee trading that led to a $6 billion loss last year in its London operation. That combined amount, in settlements with three regulators in the U.S. and one in Britain, is one of the largest fines ever levied against a financial institution. In another case, the company agreed to pay a $100 million penalty and admitted that its traders acted "recklessly" with the London trades. In a first for a major company, JPMorgan itself admitted in the agreement with the SEC over the trading loss in London that it failed in its oversight.
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week This week saw NSE nifty witnessing a roller coaster ride by touching up to 21000 levels and closing little below. Business front has yielded much improved quarterly results in particular with ICICI, Yes Bank and Kotak Mahindra managing to beat street’s expectations. In spite of mixed reaction by the market FIIs continued to be net buyers of 13,000 crores.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
20,175.53 19,584.58 19,434..23 19,475.43
CNX Nifty
October 2013
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FinNiche
FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages Thirty Days Fifty Days Hundred And Fifty Days Two Hundred Days
6030.87 5855.60 58460.6 5,890.4
Commodities Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 30734.00 49709.00 6045.00
% Change 0.56% -0.79% -0.75%
Lending / Deposit Rates Base Rate Savings Deposit Rate Term Deposit Rate
9.8%-10.25% 4.0% 8%-9.0%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
9.00% 7.50% 6.50% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
October 2013
61.62 85.13 63.48 99.93
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FINANCIAL KNOWLEDGE
NEWS Hindustan Unilever Q2 net up 13.24% at Rs 913.8 crores FMCG major Hindustan Unilever Ltd (HUL) on Saturday reported a 13.24 per cent increase in standalone net profit at Rs 913.8 crore for the second quarter ended September 30.The company had posted a profit of Rs 806.92 crore in the corresponding quarter a year ago. Net sales climbed to Rs 6,747.2 crore in the quarter from Rs 6,155.41 crore a year earlier. Government to finalise draft policy on incentives for green buildings The Centre was finalising a draft policy on non-financial incentives to promote green buildings. Addressing the “Green Building Congress-2013” organised by CII and the Indian Green Building Council, top official of the Ministry of Housing and Urban Poverty Alleviation said the Centre would hold dialogue with State governments on such incentives for green buildings. Centre is also planning to do about a million houses in the next four years by entering into an MoU to promote this energy saving green technology.
S&P 500 ends at record high, boosted by tech results The S&P 500 ended at another record high on Friday, boosted by gains in technology shares after strong results from Microsoft and Amazon.com. Amazon.com shares rose as high as $368.40, a record, after the online retailer reported stronger-than-expected sales growth. Shares ended up 9.4 percent at $363.39.The market has risen following last week's legislation to avoid a U.S. debt default and end a partial government shutdown, as well as increased speculation the Federal Reserve will delay scaling back its stimulus for several months. Forex reserves up $1.9 bn to $281 bn India's foreign exchange reserves shot up for a third week in a row, adding a healthy $1.9 billion to touch $281.12 billion in the week to October 18 on account of growth in a key component. In the previous reporting week, the reserves had increased by $1.51 billion to $279.24 billion. Foreign currency assets (FCAs), which form the largest chunk of the reserves, jumped $1.8 billion to $252.7 billion in the week under review. The gold reserves remained unchanged at $21.765 billion while the special drawing rights increased by $25.6 million to $4.46 billion. India's reserve position with the IMF rose by $12.7 million to $2.205 billion.
Facebook becomes Google advertising ally Google-owned online ad-placing service DoubleClick announced that the way has been cleared to include space at Facebook. DoubleClick Bid Manager is a way for marketers to buy online ad space at websites across the Internet. Starting in a few months, clients will be able to buy inventory on FBX via Tata-SIA plans to take to skies by DoubleClick Bid Manager. June The Tata-Singapore Airlines joint Motorola looking to exit wireless LAN venture hopes to start flying by June, business the airline’s Chairman, Prasad Menon, Motorola Solutions Inc is exploring the said on Friday, a day after the proposal sale of its underperforming wireless LAN was cleared by the Foreign Investment business, which has grappled with Promotion Board (FIPB). Tata Sons declining share in a market dominated holds a 51 per cent stake while by rivals such as Cisco Systems Inc. An Singapore Airlines has taken up the rest exit from the wireless LAN market would of the equity in the new full-service come as Motorola seeking to focus on its airline. The two partners signed a core government and public safety Memorandum of Understanding in division. September and immediately applied to
October 2013
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FinNiche
FINANCIAL KNOWLEDGE
NEWS the FIPB for permission to establish the airline. The decision to set up a new airline came within months of the Centre reversing its earlier decision to not allow foreign airlines to acquire a stake in domestic airlines. JP Morgan agrees $5.1bn settlement JP Morgan has reached a $5.1bn (ÂŁ3.2bn) settlement with the US Federal Housing Finance Agency (FHFA) over charges it misled mortgage giants Fannie Mae and Freddie Mac during the housing boom. The bank added that the agreement relates to "approximately $33.8 billion of securities purchased by Fannie Mae and Freddie Mac from JP Morgan, Bear Stearns and Washington Mutual" from 2005 - 2007. As part of the agreement with the FHFA, the bank will pay $4bn to Fannie Mae and Freddie Mac to settle claims that it violated US securities law.
title - 'Applications invited for the post of Managing Director & CEO'. Beside qualifications and experiences, the new chief shall report to the board of directors and shall be responsible for conduct of affairs of the Exchange under the direction and supervision of the Board. Joseph Massey, the previous managing director and CEO of MCX-SX, resigned from the exchange's board along with Jignesh Shah, founder of the Financial Technologies group, after Securities and Exchange Board of India (SEBI) stepped into ring-fence the bourse from any fallout of the NSEL scam and ordered extraordinary general body meeting (EGM). Banks replace IT as key drivers of markets Banks are becoming the main drivers of Indian shares, with the NSE Bank index up 11.8 per cent in October compared with a 7.7 per cent gain for the broader Nifty. By contrast, gains in IT shares have been slower recently. The sector had been the key driver in markets. The NSE IT Index has gained 8.1 per cent so far this month, although the sub -index is still up 46.2 per cent for the year compared with the 13.5 per cent fall for banks.
Yellen, as head of FED, confirmation talks next week White House officials say the have submitted the paperwork necessary to confirm Janet Yellen as the next head of the Federal Reserve. Ms Yellen will meet US Senators next week as part of the process to install her as the next head of the central bank. Officials say they are confident that she will secure the 51 US dismisses Nawaz Sharif's plea for Senate votes needed to confirm her intervention position. The US has dismissed Pakistan Prime Minister Nawaz Sharif's plea for an Applications invited to head the intervention on Kashmir issue, asserting troubled MCX-SX that its position on this matter has not MCX-SX on Monday published an changed and would encourage New advertisement in a newspaper with the Delhi and Islamabad for a dialogue.
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
2. 3.
4. 5.
Last Week’s Answers
What is the bias that occurs in hedge funds when including a fund in the index because of it’s past performance? ________ What is the buying of shares of a company and selling short the firm making the acquisition called? _______ What is the portfolio called that has the same sensitivities as the S&P 500, but does not hold all 500 stocks in the index? _________ What do FIIs invest in Indian market through? ______ The term “Golden Triangle” refers to one of Asia’s two main opium producing areas consisting of three countries of Southeast Asia. Identify the three.
1. Board of Directors 2. Sustainability 3. Relative Strength Index 4. Warren Buffet 5. Leveraged Buyout
CARTOONS
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Volume 14 Publisher : Mukul Gupta
October 2013
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