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US corporate earnings probably fell for a sixth-straight quar

the longest streak in at least 20 years, as consumer spending

on automobiles, homes and retailers collapsed.

Mumbai-based EMCO, engaged in manufacture and sale of

transformers and single-phase electronic energy meters in

India, is planning to enter South African market.

FIIs pull out $13 bn in '08, may start buying in H2-09.

Forex reserves rise by $3.6 bn.

GM to sell Taiwan venture to Yulon Motor for NT$1

Oil ends above $40 as Middle East fighting rages.

Recession sets in, in Europe, US & Japan.

UN to raise budget by $700m to 4.87 bn

Toyota has forecast its first annual loss in 71 years due to

plummeting sales

stJa

n200

9

lume2

,Issue

19

Repo Rate- 6.5%

Reverse Repo 5%

Cash Reserve Ratio - 5.5%

P - 4.6% Inflation Rate - 6.61%

Issue Attractionstional Headlines 1

ernational Headlines 1

mpany Review 2

dent Article 3

dent Article/Buzzrds

4

ssword/Quiz 5

estors Check 6-7

iz/Crosswordwers/Did You Know

7

15 days Movements

THE CHAANAKYA TEAM WISHES ALL READERS A VER

HAPPY AND PROSPEROUS NEW YEAR!!

Kingfisher to slash fares from Jan 1

Sebi imposes Rs 10-lakh fine on Kotak Sec in 2003 case

Reliance Infra sole bidder for 135-km Delhi expressway

Chanda Kochhar succeeds K V Kamath as ICICI Bank CEO &

MD

World Bank admits to ban on Satyam for data theft

Reliance begins soft launch of GSM network

MindTree to hold 79.9% stake in Aztecsoft post-merger

Intel weighs WiMAX-related opportunities to invest in Indian

Telecom

International Headlines

National Headlines

CHAANAKYACHAANAKYACHAANAKYACHAANAKYA

Wealth IncorporationChrist University

Institute of ManagementFinance Club Initiative Presents...

1 6 1 7 1 8 1 9 2 2 2 3 2 4 2 6 2 9

Sensex

Sensex

1 2 3 4 5 6 7 8 9

Rs/$

Rs/$

16 18 19 20 22 23 24 27 29

Gold(per gram)

Gold(per gram)

16 18 19 20 22 23 24 27 29

Oil(per bbl)

Oil(per bbl)

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CAMBRIDGE SOLUTIONS LTD.

Cambridge Solutions Ltd. was created by seasoned international executives to be thatpartner a solution for Fortune 500 and fast-growing firms that understand howoutsourcing can deliver the savings and efficiencies to improve profitability and at thesame time, free them to focus on their core business mission. It has a global team of

over 4600 professionals offering: A leading IT practice in the banking and financial services, insurance,

manufacturing and government sectors, offering business consulting, applicationmaintenance support through software development, and applicationimplementation service

One of the largest independently owned property and casualty insuranceprocessing and claims outsourcing providers.

The largest outsourcing provider of professional liability claims services

The second largest outsourcing provider of structured settlement services and

Experts in product liability consulting and recall outsourcing.

Financials

Awards

Global Services Media and neoIT has named Cambridge one of the top bestperforming BPO companies for the past three years

Ranked as the 10th leading outsourcing company in the world on theInternational Association of Outsourcing Professionals (IAOP)s 2007 GlobalOutsourcing 100 list.

The Software Engineering Institute has certified Cambridges Singapore facilitiesas Capability Maturity Model Integration 5 (CMMI 5)

Life at Cambridge

Cambridge recognizes their employees as their greatest asset, and are committed toproviding their employees with a dynamic work environment and numerousopportunities for career advancement and personal growth. Their culture welcomespeople with a variety of experiences, skills, talents and viewpoints to an environmentrich with the opportunity for advancement. Their approach is simple: great peoplemake great companies.

2007 (Rs. in cr) 2008 (Rs. in cr)

Total Income 171.9 166.98

Net Profit -11.13 4.32

EPS -1.06 0.39

Sales Turnover 170.91 178.23

Company Review

A market is the combined behavior of thousands of people responding to informationmisinformation and whim. -Kenneth Chang

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Student Article By: Sebin EmmanuelUSE OF DURATION IN MEASURING RISK

Measuring Risk In Bonds

A coupon bond makes a series of payments over its life, so fixed-income investors need a measure of t

average maturity of the bond's promised cash flow to serve as a summary statistic of the effective maturity the bond. Also needed is a measure that could be used as a guide to the sensitivity of a bond to interest rachanges, since price sensitivity tends to increase with time to maturity. The statistic that aids investors in bo

areas is duration. Read on to find out how duration and convexity can allow fixed-income investors gau

uncertainty when managing their portfolios.

Duration Defined

In 1938, Frederick Macaulay termed the effective-maturity concept the duration of the bond, and suggestthat duration be computed as the weighted average of the times to each coupon or principal payment made

the bond. Macaulay's duration formula is as follows:

- D is the bond's duration

- C is the periodic coupon payment

- F is the face value at maturity (in dollars)

- T is the number of periods until maturity

- r is the periodic yield to maturity

- t is the period in which the coupon is received

Duration for Portfolio Management

Duration is key in fixed-income portfolio management for the following three reasons:

-It is a simple summary statistic of the effective average maturity of a portfolio.

-It is an essential tool in immunizing portfolios from interest rate risk.

-Duration is an estimate of the interest rate sensitivity of a portfolio.

Because duration is so important to fixed-income portfolio management, it is worth exploring the followiproperties:

1) The duration of a zero-coupon bond equals its time to maturity.

2) Holding maturity constant, a bond's duration is lower when the coupon rate is higher. This rule is due to t

impact of early higher coupon payments.

3) Holding the coupon rate constant, a bond's duration generally increases with time to maturity. Th

property of duration is fairly intuitive; however, duration does not always increase with time to maturity. Fsome deep-discount bonds, duration may fall with increases in maturity.

...Continued on page 4

Bulls make money. Bears make money. Pigs get slaughtered. Anon.

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Student Article ...continued from previous page

Buzz Word

Immediate Or Cancel Order IOC: An order requiring that all or part of the order be executed immediatelyafter it has been brought to the market. Any portions not executed immediately are automatically cancelled.

Index Amortizing Note IAN: A type of structured note whose payment schedule is determined by thebehavior of interest rates.

J Curve: A theory stating that a country's trade deficit will worsen initially after the depreciation of its currencybecause higher prices on foreign imports will be greater than the reduced volume of imports.

Lemming: The act of following the crowd into an investment that will inevitably head for disaster.

Macaroni Defense: An approach taken by a company that does not want to be taken over. The company issues alarge number of bonds with the condition they must be redeemed at a high price if the company is taken over.

4) Holding other factors constant, the duration of a coupon bond is higher when the bond's yield to maturitylower. This principle applies to coupon bonds. For zero-coupon bonds, duration equals time to maturitregardless of the yield to maturity.

5) The duration of a level perpetuity is (1 + y)/y. For example, at a 10% yield, the duration of perpetuity thpays $100 once a year forever will equal 1.10/.10 = 11 years, but at an 8% yield it will equal 1.08/.08 = 13years. This principle makes it obvious that maturity and duration can differ substantially. The maturity of t

perpetuity is infinite, whereas the duration of the instrument at a 10% yield is only 11 years. The presenvalue-weighted cash flow early on in the life of the perpetuity dominates the computation of duration.

Duration for Gap Management

Many banks have a natural mismatch between asset and liability maturities. Bank liabilities are primarily tdeposits owed to customers, most of which are very short-term in nature and of low duration. Bank assets

contrast are composed largely of outstanding commercial and consumer loans or mortgages. These assets aof longer duration and their values are more sensitive to interest rate fluctuations. In periods when intere

rates increase unexpectedly, banks can suffer serious decreases in net worth if their assets fall in value

more than their liabilities.

To manage this risk, a technique called gap management became vogue in the 1970s and early 1980s, withe idea being to limit the "gap" between asset and liability durations. Adjustable-rate mortgages (ARM) weone way to reduce the duration of bank-asset portfolios. Unlike conventional mortgages, ARMs do not fall

value when market rates increase because the rates they pay are tied to the current interest rate. Even if t

indexing is imperfect or entails lags, indexing greatly diminishes sensitivity to interest rate fluctuations. On tother side of the balance sheet, the introduction of longer-term bank certificates of deposit (CD) with fixterms to maturity served to lengthen the duration of bank liabilities, also reducing the duration gap. One w

to view gap management is as an attempt by the bank to equate the durations of assets and liabilities

effectively immunize its overall position from interest rate movements. Because bank assets and liabilities aroughly equal in size, if their durations are also equal, any change in interest rates will affect the value

assets and liabilities equally. Interest rate changes would have no effect on net worth. Therefore, net wor

immunization requires a portfolio duration, or gap of zero. The idea behind immunization is that with duratiomatched assets and liabilities, the ability of the asset portfolio to meet the firm's obligations should unaffected by interest rate movements.

Sometimes your best investments are the ones you dont make. -Donald Trump

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on automatic ilot." -Robert G. Allen

Across

Down

2. A security which offers a way for US citizens to invest in a foreign company3. What term became popular after the newspaper report of Watergate Scandal in the year

1973?7. Where is the European Central Bank located?8. What is known as the cost of living index which represents the goods and services

purchased by consumers?12. The name for the common currency of most European countries.13. Market price of mutual funds

Q1. An economic indicator created by economist Arthur Okun that is found by adding the

unemployment rate to the inflation rate.

Q2. A day on which contracts for stock index futures, stock index options, stock options and

single stock futures (SSF) all expire.

Q3. A fraudulent investment operation that pays returns to investors out of the money paid

by subsequent investors rather than from profit.

Q4. Who was arrested on December 11, 2008 for running an alleged Ponzi scheme; his

hedge fund lost about $50 billion, but kept it hidden by paying out earlier investors with

money from later investors.

Q5. The action taken usually during a recessionary period, through government spending,

interest rate and tax reductions so that the economy can be primed to function properly once

again.

Q6. The act of selling and buying stocks almost instantaneously in order to increase or

decrease book value. This is a routine method used by many investors and companies to

change book values without changing beneficial ownership.

Q7. A term used by British labor ministers during the 1964 Sterling Crisis to refer to Swiss

banks.

Q8. A currency that trades in markets outside of its domestic borders.

Q9. An option whose notional payments increase significantly after a set threshold is broken.

Quiz

Crosswords

Tequila Effect is

informal nam

given to the impa

of the 199

Mexican econom

crisis on the SouA m e r i c a

e c o n o m y

T h e T e q u i

Effect occurr

because of

sudden devaluati

in the Mexic

peso which th

caused other cur

ncies in the regi

(the Southe

Cone and Brazil)

decline.

The First U

Income Tax r

f r o m 1 8 6

1872. It w

designed to pay f

the Civil War a

was a tax of 3%

income in exce

of $800.

The Ponzi scam

n a m e d a f t

Charles Ponzi,

clerk in Bost

w h o f i r s

orchestrated su

a scheme in 1919

Andrew Jackson

renowned for h

hatred of tSecond Bank of t

United States a

i s l a r g e

responsible for

demise. In wh

was called a Ba

War, he to

federal Money o

of the US bank a

had it deposited

State Banks.

Did you Know

1. What is the over-the-counter market which connects dealers across the USthrough a network of computers andother electronic equipment called?

4. This method of trading involves sellingof securities without owning them.

5. A payment by the government toproducers or distributors in an industryto prevent the decline of that industry oran increase in the prices of its productsor simply to encourage it to hire morelabor.

6. Name the first company from India tolist on the Nasdaq

9. English economist who felt governmentaction is necessary for economic stability

10. Japanese version of the Dow11. Which country's currency is known as

Drachma, which in Greek means 'tograsp'?

14. Name the term used for depreciating acompany's intangible assets?

1 2 3

4

5

6 7

8 9

10 11 12

13

14

EclipseCrossword.com

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Forex Trading Strategies

By 2008, currency trading exceeded $3 trillion dollars daily, but the majority of traders onlyparticipate in a fraction of the currency opportunities available to them. However, the currencymarket is a multilayered kaleidoscope of spot, futures and options trading. The currency market

also has very distinct trending patterns that can become more difficult to interpret the shorter the

time frame to trade. This is the problem that many new currency traders face as they enter theworld of spot trading, but it can be overcome by combining spot, futures and options currencytrades.

Downside Risk of Spot Forex Transactions

In Figure 1, we can see the euro trending upward from $1.44 to $1.60. This entire move of 16 cents(1 cent = $1,000 when using a standard contract of 100,000 units) represents a potential gain of$16,000 in the spot market. From February of 2008 to April 2008, there were multiple pullbacks andretracements. On March 17, 2008, the market dropped in value from $1.56 to $1.53. This represents

a $3,000 loss. The market eventually rebounds, but hindsight is 20/20 - while you are in the trade,there is no such consolation.

A $3,000-dollar drop could wipe out the margin of a full-sized spot forex contract. So, while youcould be right about the market's overall direction, you can be wrong on your timing in executing thetrade.

Fig 1

While a trader with a strong money management program would not hold on to a loss of thismagnitude all the way down, the fact that the trader must perfectly time the top and bottom of themarket's activity in order to succeed makes profiting a herculean task. Fortunately, there is a simple

way to protect your account in the face of these factors. In Figure 1, it can clearly be seen that the

market is trending up. In order to take maximum advantage of this momentum, there is no doubtthat the smart money would go long the euro, as shown in Figure 2. To avoid a sudden pullback inprice, the easiest position protection is to either short the euro in the futures market or purchase a

euro put option.

Fig 2

"The study of money, above all other fields in economics, is one in which complexity is used tdisguise truth or to evade truth, not to reveal it." - John Kenneth Galbraith

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Using Futures Contracts to Manage Spot Risks

If a euro futures contract is used, two new variables are added to the equation:

the margin to use on the contract and the possibility that the market will moveagainst your spot transaction. The margin in the euro futures market comes in

either a full-sized contract or a mini futures contract. As of June 2008, a full-sized euro contract required a margin of $3,105 and every one-cent move would

be equal to $1,250. A mini euro contract required a margin of $1,553, about halfas costly, and a one-cent move equaled $625. Depending on the amount of

capital available to you, a full-sized futures contract makes the most sense as asource of protection from downside risk. On the other hand, you are losing an

additional $250 for each one-cent move if you decide to use a futures contract

to protect yourself and the market moves against you. You could also attempt touse a mini-euro contract, but the opposite problem would occur. Every one-cent

move is worth $625 in the mini, but every one-cent move in the spot is $1,000.This leaves the position underprotected by $375 and defeats the purpose of the

protective position altogether.

Using Options to Manage Spot Risks

Another route that a trader can take is to use a CME euro put option. Based onan option's volatility, where its price is in relation to the underlying asset, and

the time until expiration, the value of the put option will fluctuate. In thisinstance, we can choose to purchase a put option at the same price as when wedecide to go long the spot euro contract. This would be considered an at-the-money option purchase. The option can range in value, but a general rule is that

the option price will typically fall between 10-20% of the value of the futuresmargin. This could range anywhere from $300 to $600 in this instance. Thissmall upfront cost is worth spending if it will help protect you from a $3,000

loss. Because an option's loss is limited to the amount invested, the spot

trader's risk exposure never exceeds the premium's value. This means that theunderlying spot position can increase in value without the worry that you willlose $250 for every one-cent move against you, like you would if you had a

futures contract protecting you.

Fig 3

In Figure 3, the euro successfully rebounds from its low and eventually exceedsthe original entry price of the spot euro contract. Without the option contract as

protection, there would have been a potential loss of $3,000 for a spot position,

with little to no recourse. The only hope for the spot trader losing money wouldhave been to use a stop loss-order and hope to catch the rebound in time tomake up for the loss.

INVESTORS CHECK . Contd.

T h e A d a m

Express closed

end mutual fun

got its start as

d e l i v e r

company. Durin

the Civil War, the

d e l i v e r e

paychecks to bot

sides and eve

delivered a boxed

up s lave t

freedom.

In 1792, the Ban

of the Unite

States was fir

f o r m e d bA l e x a n d e

Hamilton. It wa

one of the first ho

issues in the I.P.

market. Tradin

began before th

stock was eve

issued.

D u r i n g t h

A m e r i c a

revolution inflatio

was rampant. I

an attempt to slo

it, in November

1 7 8 0

"Committee o

Merchants" we

t h r o u g

Philadelphia an

tried to dictate th

value of th

C o n t i n e n t a

money. This wa

not successf

however and b

mid 1781 the valu

was depreciate

by nearly 90%.

Did you Know

Chaanakya is crisp, punctual, knowledgeable and keeps the students well informed. - Arpit Ja

MBA I Year

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