Niveshak July 2013

THE INVESTOR VOLUME 6 ISSUE 7 July 2013

Niveshak

CAN GOLD APPEAR A LITTLE LESS SHINY TO INDIANS?, PG. 22

VOLATILE MARKETS: WHERE IS THE MONEY? PG. 08

Superstitions in Finance

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

F R O M E D I T O R ’ S D E S K

NiveshakVolume VIISSUE VIIJuly 2013

Faculty MentorProf. P. Saravanan

Anchal Khaneja

Anushri Bansal

Gourav Sachdeva

Himanshu Arora

Ishaan Mohan

Kaushal Kumar Ghai

Kritika Nema

Neha Misra

Nirmit Mohan

All images, design and artwork are copyright of

IIM Shillong Finance Club

©Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,

India’s defense of its currency is showing signs of working as the RBI pays the highest yields for short-term debt in years. The rupee rose to a five-week high of 58.76 per dollar on 25th July, after the RBI agreed to pay double-digit yields to sell 52 billion rupees in one and two-month debt, in its second sale of short-term debt in as many days. At times the financial markets show absurd behavior with wide upswings and downswings in indices in both intraday trading as well as daily trends. Such volatile movements happening in markets keep many investors out of the markets. The Article of the Month discusses about the cause of this capricious market behavior and how to react in such markets.The cover Story for the Month of July takes a step away from the conventional topics of Finance and discusses about psychological biases, commonly known as superstitions, which significantly affect financial decision making. It tries to find reasons for the existence of superstitions in today’s new age capital markets, with all sophisticated IT systems and endless packs of data.Niveshak also brings some more good reads for you in this issue –Given the ballooning Current Account Deficit and importing gold being a major concern, the Fin-Sight of the issue tries to throw light on various angles by which gold imports can be reduced. ‘Futures’ & ‘Options’ are the two words that are usually associated with high-risk. FinGyaan of the issue talks about how ‘Futures’ & ‘Options’ prove to be excellent hedging tools that can continually act as protective measures for prudent investors in case things start taking a turn for the worse.Then there is a discussion on the impact of the Airline Deregulation Act of 1978 in USA, passed with the intent to remove government control over fares, routes and market entry (of new airlines) from commercial aviation. The issue also explains the concept of Put and Call options through our much cherished Classroom Section.Last week we organized “Celebratio”, a series of run-up events to the 5 year Anniversary issue coming next month in August. We would like to thank all for participating in such huge numbers and making “Celebratio” a big success. To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. Thank you! It is your endless encouragement and enthusiasm that keeps us going. Kindly keep pouring in your suggestions and feedback to [email protected] and as always,

Stay Invested!Team Niveshak

C O N T E N T S

Niveshak Times04 The Month That Was

Article of the month 08 Volatality Markets: Where is the Money?

Cover Story

12 Superstitions in Finance

FinGyaan 16 Options: A Guide to Hedging

Finistory18 Were Skies Always So Vast?The Build Up towards Airline Deregulation Act of 1978 in USA and its Effects

Finsight22 Can Gold appear a little less shiny to Indians?

CLASSROOM25 Put-Call Ratio

JULY 2013

RBI opens special liquidity window for mutual funds

The RBI has opened a special liquidity window for commercial banks to meet the cash requirements of mutual funds (MFs). MFs have faced heavy redemption pressure in debt-oriented MF schemes due to steps taken by the RBI to shore up the faltering currency. A special three-day repo window has been opened which will allow banks to borrow a total of INR 25,000 crore at a rate of 10.25%. This money can be borrowed by banks to lend onwards to MFs. In addition to the allocation of funds to banks on the basis of bids, banks availing of the additional liquidity support can seek a waiver of penal interest for any shortfall in maintenance of the

statutory liquidity ratio (SLR) up to 0.5% of their

deposits, in addition to the 2% waiver allowed under the marginal standing facility (MSF). RBI has fixed the borrowing limit

for banks at 1% of the system’s net demand

a n d time liabilities, or banks’ total deposit base. Also, the overnight borrowing limit has been set at 75000 crore Rupees for the entire banking system. There was no limit earlier. Besides the borrowing limit, RBI has also raised the interest rate on money that banks borrow from MSF to tide over liquidity shortages—by two percentage points to 10.25%.

China’s downside risks for growth are increasing – IMF

According to the International Monetary Fund (IMF), risks are increasing that China’s economic growth this year will fall short of the lender’s forecast as it urged the nation to follow through on policy reforms to sustain expansion. The IMF in May lowered its forecast for China’s growth to about 7.75% for this year and next. This is higher than the median estimate of 7.6% of 60 economists surveyed by Bloomberg News over the past month. As per IMF, China should use “on-budget fiscal stimulus”

to support the economy if expansion slows too much below the government’s goal. IMF reiterated RMB against a basket of currencies undervalued moderate recommended daily floating range of RMB China to relax and let the central parity to better reflect market conditions. IMF called on China to take advantage of money market interest rates in turn replace bank lending and deposit rates, as the main monetary policy instrument. It also said that China’s central bank’s first step should be to build a stable short-term interest rates, such as seven-day or overnight inter-bank repo rate.

Deutsche Bank cuts FY14 GDP forecast to 5% from 6%

Deutsche Bank has cut India’s growth forecast for the current fiscal year ending in March 2014 to 5% from 6% after recent industrial production, trade, and business sentiment data. Deutsche’s growth forecast matches the lowest forecast in a Reuter’s poll and follows other major downgrades of GDP by Macquarie and Bank of America-Merrill Lynch earlier this week. Macquarie had earlier cut India’s e c o n o m i c growth forecast for the fiscal year ending in March 2014 to 5.3% from 6.2%, citing negative factors including the rupee fall, capital

outflows, political uncertainty and a slowdown in new projects. Macquarie also mentioned that the RBI’s recent measures to drain liquidity from the financial system also mark a shift towards a focus on financial stability from growth concerns, and predicted the central bank may delay lowering rate cuts. When RBI announced measures to curb the rupee’s decline by tightening liquidity and making it costlier for banks to access funds from the central bank, the investment bank said the tightening will push back lending rate cuts.

Govt Approves Proposal to Grant SEBI more Powers

The Union Cabinet on Wednesday July 17th, approved a proposal to bring an ordinance that will make

The Niveshak Times


IIM ShillongTeam NIVESHAK

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amendments to the Sebi Act, Securities Contracts (Regulation) Act, and the Depositories Act to give more powers to the Securities and Exchange Board of India (Sebi). The capital market regulator will now have powers to regulate any pooling of funds under an investment contract involving a corpus of Rs.100 crore or more and attach assets in case of non-compliance. This should help Sebi supervise entities that do not fall under any regulated category. The chairman of Sebi will have powers to authorize search and seizure operations as part of efforts to crack down on Ponzi schemes. The regulator will also have the powers to seek information such as telephone call data records during the course of insider trading investigations. Sebi will now also be allowed to regulate “chit fund” schemes which earlier came under the purview of Chit Fund Act, 1982 and respective state governments. Currently, it is possible for companies to set up investment schemes and design a company in such a manner that it does not classify as an NBFC, a chit fund, or any other regulated entity to avoid oversight by regulators and government departments. The amendment proposal comes from an inter-ministerial group formed by the government post the West Bengal-based Saradha Group, with an objective to plug regulatory loopholes around deposit-taking pyramid schemes.

Nyse Euronext To Take Over Administration Of Libor

The operator of New York Stock Exchange, NYSE Euronext will replace the British Bankers’ Association (BBA) as Libor’s administrator in early 2014. The move comes at a time when regulators try to revive confidence in the scandal-hit benchmark. NYSE Euronext already operates Liffe, Europe’s second-largest derivatives exchange, which offers derivatives based on Libor. The BBA, whose members are among the world’s largest banks including those who contribute to Libor, was criticized by policy makers in the U.K. and the U.S. for failing to address concerns about the rate-setting process? A UK government review recommended in 2012 that the BBA should be stripped off the responsibility of Libor after regulators found banks had tried to manipulate it to profit from bets on derivatives. The U.K. government formally started the search for a replacement body to administer Libor in February after the BBA formally voted to surrender operation of the benchmark. Earlier, the Libor system depended heavily on self-reported estimates from banks that

had huge incentives to manipulate rates. For now, the new owners plan to keep this system, with some additional safeguards, including subjecting banks’ rate reporters to internal compliance rules. This change will play a vital role in restoring the international credibility of Libor.

Fdi In Telecom Hiked To 100 Percent

In a major reforms push, the Government raised FDI limits in 12 different sectors as proposed by the Arvind Mayaram committee, thereby allowing 100 percent FDI in Telecom sector. There is raising of cap from 74 to 100 percent in basic and cellular services. Up to 49 percent remains under automatic route and 49-100 percent through FIPB route. Senior government officials had dispelled fears that the home ministry would oppose this move on security grounds. The Indian telecom services industry, which generates about USD35bn-37bn in annual gross revenue, is facing a huge debt burden of over USD40bn. This comes at a time when the voice subscriber base has stagnated at around 880-900 million customers, and data services still represent only a small proportion of overall industry revenue. At least 40% of Indian telcos’ debt is denominated in US dollars; and they are suffering from a weak rupee, which has depreciated by over 20% in the last two years. The government’s decision to remove the foreign direct investment (FDI) limit in the telecom sector will help reduce leverage and strengthen balance sheets in the medium term. The increased limits are expected to bring in around Rs.10, 000 crore of investment for the sector. Vodafone, Telenor, Maxis and Sistema may be among the first to take advantage of the change, as they are already at the current 74 percent holding limit. FDI in other Indian telcos, including Bharti Airtel and Idea Cellular, is still well below the current 74 percent limit, so the change is only likely to benefit them in the medium term. The move could also potentially lead to bigger M&A deals as the industry needs to consolidate further. For a foreign investor, holding a 100% stake will fast-track the decision-making process and strengthen their confidence. Taking complete ownership would remove the burden of dealing with a local partner.

The Niveshak Times

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MARKET CAP (IN RS. CR)BSE Mkt. Cap 6,479,662Index Full Mkt. Cap 3,266,346Index Free Float Mkt. Cap 1,694,565

CURRENCY RATESINR / 1 USD 59.45INR / 1 Euro 78.44INR / 100 Jap. YEN 59.51INR / 1 Pound Sterling 91.24

POLICY RATESBank Rate 10.25%Repo rate 7.25%Reverse Repo rate 6.25%

Market Snapshotwww.iims-niveshak.com

RESERVE RATIOSCRR 4.00%SLR 23%

LENDING / DEPOSIT RATESBase rate 9.70%-10.25%Deposit rate 7.50% - 9.00%

Source: www.bseindia.com www.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com28th June to 24th July 2013

Data as on 24th July 2013

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CURRENCY MOVEMENTS

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arket Snapshot

BSEIndex Open Close % changeSensex 18875.95 20090.68 6.44%

MIDCAP 5832.58 5889.83 0.98%Smallcap 5567.25 5601.87 0.62%AUTO 10392.42 10698.38 2.94%BANKEX 12849.04 12237.89 -4.76%CD 6123.79 6364.7 3.93%CG 8758.19 8566.81 -2.19%FMCG 6434.29 7521.21 16.89%Healthcare 8647.39 9316.57 7.74%IT 6208.7 7255.36 16.86%METAL 7405.51 7360.63 -0.61%OIL&GAS 8610.65 9016.73 4.72%

POWER 1557.84 1610.32 3.37%PSU 5953.47 5855.45 -1.65%REALTY 1466.46 1449.89 -1.13%TECK 3636 4199.23 15.49%


Market Snapshot

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The financial markets, in the last fortnight, have shown absurd behavior with wide upswings and downswings in indices in both intraday trading as well as daily trends. Such volatile movements happening in markets keep many investors out of the markets. This article discusses about the cause of this capricious market behavior and how to react in such markets. It has been seen that the movement is a bit too sharp in Indian markets in the last fortnight as compared to the early May to June period. These wide upswings and downswings have occurred in a well-defined range of 5750 and 5900 in Nifty charts (See figure 1).

Let us try to understand volatility first. Volatility is a statistical measure of dispersion of returns for a given stock or market index. Volatility refers to the actual current volatility of a financial instrument for a specified period (for example 30 days or 90 days). It is the volatility of a financial instrument based on historical prices over the specified period with the last observation of the most recent price. This is measured by variance or standard deviation between returns from that same security or market index. In the current scenario, we are observing that the market index (Nifty) has entered a high resistance and support zone between 5750-5900 and is range bound. The volatility in a particular defined range is

called range bounded volatility. The zones are called high resistance and support zones when there is a large support at the bottom and large resistance at the top. Market is not expected to breach these levels with ease. On observing the opening interval on each day from July in the 30 minute charts of Nifty, we can see that the market is showing gap up and gap down (see figure 2).

These are strong indicators for the markets but they don’t seem to give any particular direction to the market as of now. The below enlisted reasons are few of the major ones causing these movements:

1.Global Economy

The economies all around the globe are going through similar situations. Everyone is keeping an eye on the US Federal Reserve policies which are making the movements so volatile. US Federal Reserve has been following Quantitative Easing (QE) for some time now and with the hawkish statements made in the previous Federal Reserve meeting, the markets got a clue that the end to QE is near. This end to QE means an end to infusion of liquidity by the Reserve. This is a negative signal in the short term as definitely

the money supply which was directed towards equity will no longer be there. Though, in the long run this is a signal indicating revival of US economy, in the short term this created bearish sentiments and caused a drop of around 5-7% in markets world over. India was no exception and we saw Nifty and Sensex both falling 1-2% in single trading sessions. Now with the job scenarios improving in the United States, the markets reacted as a bullish signal and again showed a 1-2% rise in the indices world over but such optimistic data meant even a quicker end to QE and market again tested downsides.

Along with the United States, the action is happening in Europe and Japan as well. All time low interest

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IMI DelhI

Gurpreet Singh

Volatile Markets:

Where is

the Money ??

Fig 1: Range bounded Nifty (28th May to 9th July)


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rates in Europe and no rise in these rates gave a stimulus to European markets and we saw them rising 3-4% and in a single day but the very next day the news of tapering of QE by the Fed led to market climbing down 1-2% in a single trading session.

2. Exchange Rate

Just two months ago we were sitting very comfortably with the rupee at around 54 and it looked like Indian importers were making merry that all our problems of huge Current Account Deficit (CAD) would reduce if rupee improved further. However, in no time we have seen rupee going to 61 and this means more CAD and more pressure on the government. RBI tried to intervene and buy some rupee but it was to no avail. This exchange rate problem meant increase in prices of petrol, gas and diesel even when commodity prices were falling globally. And with recent surge in crude prices along with depreciation of rupee, it means a double edged sword for Indian finance ministry; crude being one of our major imports. Thus crude getting costlier and rupee becoming weaker means getting same crude for a lot more and this is a negative indicator for our economy and for investors’ sentiments. Also with certain good economic indicators like improving job scenario in the United States and hopes of revival of US growth story, there has been a huge outflow of foreign investments from India. Recently we have seen that both Security Exchange Board of India (SEBI) and RBI have taken measures such as increasing the margins and directing the oil companies to approach single public sector banks so as to reduce volatility from the markets.

3. No Direction for RBI

There has already been a lot written and discussed on the debate between inflation and growth. There has been a lot of criticism of RBI for being too conservative in its stance and not boosting growth. When the inflation data for April came and RBI had 25 basis-point cut in bank rates, this looked

to be quite a hawkish move and the market did not welcome this decision. Experts all around were quoted saying “This is just a start, more will follow very soon”. RBI was also criticized for not lowering down the Cash Reserve Ratio (CRR) because a 25 basis point cut meant nothing for investors (as it was not transferred to customers by any major bank). Expectations were for a further 25 basis cut in the next month and a possible 25 basis cut in CRR as well. But market had something else in store as there was a sudden rise in exchange rates and seeing the Rupee going close to 61, it now seems quite a distant story if at all RBI can manage to give any relaxation in interest rates. It is important to understand that rates were stagnant for quite a long time as inflation was hovering at very high levels. With inflation showing signs to come in control and with Meteorological department hinting at normal monsoons, even if all goes well, still it looks quite a tough decision for RBI to have a rate cut soon.

4. Uncertain political environment

With 2014 elections approaching, we observe that any move for reforms more or less looks like a move to attract the vote banks and there are many reforms like real estate regulation bill, food security, and land acquisition bill which look like an uphill task if government can get them going.

5. Technical boundaries

If we observe the Nifty charts on Fibonacci retracement zones, we see that market has entered the strong retracement zone between 38.2% and 61.2% .These are strong regions for support and resistance and we are seeing market testing both these levels over and over again. (Figure 3)

What to do as an investor??

As an investor it is advisable in such volatile markets to not be too aggressive and stay away from the markets and invest in SIPs but if one is market savvy and one wants to make quick money with

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Fig 2: Comparison of June and July month charts in terms of smoothness and less gap ups and downs

Early June Early July

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limited risks one can invest in the following option strategies:

Straddle

It is dealing simultaneously in one call and one put option with same strike price. A rational investor makes a position in Long straddle when one is bullish on volatility i.e., one thinks that the stock or index is going to move big but one is unsure of the side of movement whether it is on bull side or bear side, then one is advised to take position in Long straddle. Similarly, if one thinks that the stock is into strong resistance zone and is unlikely to make a big move, then he is advised to go for Short straddle.

Long Straddle

This involves buying of both a call and a put option with same strike price and same expiration date. These straddles can lead to large profits provided the move in market is strong enough. Long straddle options lead to unlimited profits and limited risk.

In this strategy,

Maximum Profit = Unlimited

Profit Achieved When Price of Underlying > Strike

Price of Long Call + Net Premium Paid

OR

Price of Underlying < Strike Price of Long Put - Net Premium Paid

Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid

OR

Profit = Strike Price of Long Put - Price of Underlying - Net Premium Paid

Now let us see how this strategy helps making profits. Let’s understand using a practical example. Say Nifty is trading at 5650 and one knows either it will go down to 5400 or will rise to 5800. Now the investor buys a call and a put option with strike price of 5600. The price of call is 100 and price of put is 50. Now if nifty goes to 5800 at the expiry, the price of 5600 call option will be around 200 and put will go worthless and one will not exercise it. So

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for a lot size of 50 the profits can be calculated as =200*50-(100+50)*50 i.e. 2500.

And in case market goes other way round and say drops down to 5400 in that case as well the price of put will be close to 200 and call will go worth less.

The profits will be =200*50-(100+50)*50 i.e. 2500

The worst would happen if the price of the option does not move sharply, say it is 5600 at time of expiry. The entire premium paid at the start would go down the drain and the loss will be 7500 but one can always play with a stop loss and sell away the options if markets look like getting a direction. (See Figure 4).

Strangle

This is also a neutral strategy like the straddle. Strangle can also be both Long and short Strangle. Let us try to understand both one by one.

Long Strangle

Long strangle involves buying a call and a put option simultaneously of the same underlying security and with the same expiration date. In strangle both call and put options bought are out of the money.

The long options strangle is an unlimited profit, limited risk strategy that is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term. Initially, some money is required to enter into this strategy and hence these are also known as Debit spreads.

Fig 3: Fibonacci Retracements levels on Nifty Charts

Fig 4: Long Straddle


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In this strategy,

Maximum Profit = Unlimited

Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid

OR

Price of Underlying < Strike Price of Long Put - Net Premium Paid

Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid

OR

Profit = Strike Price of Long Put - Price of Underlying - Net Premium Paid

Again let us try to understand strangle using the similar example we used in straddle. Say Nifty is trading at 5600 and one expects that the stock will show significant volatility in the near term. In this case one buys a call option of 5700 and also buys a put option of say 5500. Both are out of the money. The price of call option will be around 20 and for the put as well the price will be around 20. So the total initial debit will be (for lot size of 50) will be 40*50=2000

Now if the price of Nifty goes to 5800, the call will

be worth 100 at the time of expiry and put will go worthless so the profit would be 100*50-(2000)=3000

And if the price of nifty goes to 5400 then call will go worthless and put would be worth 100. In that case as well the profit would be 100*50-(2000) =3000

The worst would happen if the price of Nifty does not show volatility and remains range bound then the price of both options will tend towards zero and no exercising of options takes place and the initial 2000 invested becomes zero. (See Figure 5)

Fig 5: Long Strangle

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FIN-Q SolutionsJune 2013

1. Benjamin Graham

2. ICICI bank

3. Laos

4. Green Shoe Option

5. American Express Bank

6. Dim sum bonds

7. Domenico Dolce and Stefano Gabbana

8. Yield elbow

9. UBS

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educated ones. A question that arises here is why do superstitions exist, and the answer to it can be understood just by looking at students preparing for examinations. Many students study extensively prior to an exam. However, no matter how well prepared they are, there are always some factors which are not under their control. For example, they have no influence over the questions that will be asked in the exam. Psychological research has shown that individuals are more likely to let superstitious beliefs guide their actions when they’re in environments dominated by uncertainty, high stakes and a perceived lack of control over the outcomes of those actions. Researchers say feeling “out of control” makes people more likely to misinterpret information as they search for signs of order. When such a situation occurs, faith in superstitions increase.

TESTING THE SUPERSTITION

Though superstitions give individuals some control over the situation, but is there any scientific evidence of their existence? Researchers have tried testing the validity of these age-old beliefs and found them wanting. There have been both positive and negative results of various tests conducted in different parts of the world. In a number of situations, researchers could actually prove that though there are superstitions, still they did not have any significance influence on anyone - neither people’s behavior nor the market. On the other hand, in some cases, they

New age capital markets, with all their sophisticated IT systems and endless packs of data, often seem to be run by automatons, not people. But alas! Dig a bit deep and the conjurers making the moves are discovered to be as vulnerable to fear and irrationality as any of their abacus-wielding ancestors. Today, a rich body of evidence suggests that psychological biases, commonly known as superstitions, significantly affect financial decision making. The notion that ideas or ideologies have important effects on political and social behavior is commonplace. However what this story sets to investigate is how investment ideas, from the specific, such as whether a given firm’s strategy for exploiting the cloud is promising, to the general, such as portfolio theory, contrarianism, or the notion that it is good to ‘buy on the dips,’ affect investor behavior? It may be surprising to see the enormity of irrationality in a world so deeply believed to be logic driven but then such is life!

Every culture in the world has been rife with superstition ever since we can recall, and today’s world is no exception. Be it cricketers such as Steve Waugh, who used to carry a red handkerchief in his left pocket given to him by his grandfather or Bollywood producer Rakesh Roshan, who always has the names of his movies starting with the letter ‘K’, there are numerous examples of superstitious beliefs all around us disproving the belief that superstitions exist only among the less

IIM ShIllong

Ishaan Mohan and Kaushal Ghai

SUPERSTITIONS IN FINANCE


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could crisply quantify how badly the superstitions affected people’s behavior. One such example is the case of China. In China, many large casino-hotels omit floor numbers 4, 14, 24, 34 and 40 to 49 because the number “4” is considered unlucky in the Chinese tradition, as the pronunciation of the word for four is very similar to the word for death in several Chinese dialects. On the other hand, the word for eight is phonetically similar to the word for prosperity or wealth. When the Beijing Summer Olympics opened at 08:08:08 pm on the 8th day of the 8th month of 2008, it was displayed to the world that the Chinese take the auspiciousness of the number “8” seriously. The sentiments of Chinese towards these two numbers is still observed in the real estate market too, when Chinese buy houses. It is generally observed that the houses with address ending with the number “8” are on an average more in demand than other houses, whereas the houses with address ending with the number “4” are less in demand. In order to scientifically prove this believe, a study was done using real estate data on more than 115000 house sales. The study concluded that the houses with address number ending in four were sold at a 2.2% discount and those ending in eight were sold at a 2.5% premium, in comparison to houses with other address. Nobody knows since when did this belief in numbers start, but it is a scientifically proven fact now that it still exists and has a significance effect on the real estate market.

SUPERSTITION AND STOCK MARKET

The impact of superstitions has been widely researched in fields of sociology and psychology but its role in behavioral finance is relatively a new area of interest. A significant part of the credit for generating increased interest goes to Gabriele Lepori, an assistant professor in the finance department of the Copenhagen Business School. He holds the view that superstitious beliefs affect human behavior and has a clear impact on their decisions.

Research has shown that superstitious beliefs prevail during the uncertain times and the stock market, by its very nature, is the perfect example to test the hypothesis. Lepori examined the impact of all 362 solar and lunar eclipses that occurred between 1928 and 2008 by measuring the performance of S&P 500, Dow Jones Industrial Average, New York Stock Exchange Composite and Dow Jones Composite Average before and after each eclipse. Solar and lunar eclipses have always been conceived as the bad omens in many cultures, portentous of bad luck and illness.

He concluded that the markets have shown small but persistent below average returns based upon the average daily returns computed for these indices. Statistically it was as low as seventeenth of 1% but yes, it was there. In the three days around the date of an eclipse, three of the four stock indices exhibited lower-than-average returns. Another startling effect of the study showed that if an eclipse occurs when the markets are open, its impact is larger than if occurred on Saturday or Sunday. Moreover, there is a positive correlation between the magnitude of eclipse – that is, the bigger the percentage of the sun covered by the moon, or of the moon covered by the Earth’s shadow – and performance of the stock market. Lepori also found that the stocks recovered quickly following the eclipse showing that the market conceived it as irrational and hence corrected it later on (“reversal effect”).

Another misconception is “October Effect”. Investors around the world perceive October as the least performing month of the year. Its roots go back to market crashes of 1929 and 1987 which occurred during the month of October. But the reality again is different from the perception. According to Stock Trader’s Almanac, September is the worst performing month across the year.

Figure 1 shows the interesting observation that every time a very tall building is erected or is on the verge of completion, the market crashes. This has been popularly known as the “Skyscraper Curse”. Going by what we have experienced till date, the market faces another downturn risk with China’s Shanghai Tower close to its completion in 2014.

SUPERSTITION AND HOUSING MARKET

The superstitious beliefs are not restricted to stock markets. The fascination and fear among the Chinese towards the number 8 and 4 respectively has shown how it impacts the real estate market. And, it doesn’t end here; the hotels in Las Vegas are another example of how superstitious beliefs overpower one’s thinking. Many large hotels such as MGM, Wynn and Palms Place do not have floor numbers ending in 4.

Not only this, one of the most widely discussed number is 13 whenever one talks about the superstitious or supernatural beliefs. This number is considered as one of the unluckiest numbers. Many tall buildings do not have 13th floor and many streets & houses skip this number. Many people’s fear of Friday the 13th stems from the number itself. It has been conceived to possess the occult powers and thus has transformed into a

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common phobia amongst many. Despite witnessing a number of technological advancements such as mortgage calculators, property research, the number is believed to have an extra-ordinary influence over the prospective buyer. According to the research which is a part of book No. 13, one out of ten people who lived at number 13 believed that their house has brought bad luck to them. One of the studies have proved that the superstitions related to number 13 have caused a loss of $800 to $900 million as people resist from travelling or buying a new house.

Numerous studies have been conducted to understand these anomalies but these are no more than one’s behavior. Taking into consideration the effect of human behavior on his/her financial decisions opens the door of behavioral finance. This is one of the fields which is hard to understand and predict.

SUPERSTITIONS: BOON OR BANE FOR BUSINESS

Be it the Shradh period in India or Friday the 13th in United States, it is considered

inauspicious to make new purchases on these days, which pulls down the sales by millions of dollars. Companies have to woo buyers by offering deep discounts. On the other hand we also have days such as Dhanteras and Thanks-Giving, when the sales are peak high. Superstitions can be either boon or bane for business houses, depending upon what business they are in and how innovatively they create business opportunities out of them. For example, take the case of marriage insurance business in India. It is believed that marriage insurance in India hasn’t taken off due to superstition. The logic being that if I insure the wedding, something bad is going to happen. Another example is that of engagement or marriage rings by diamond merchants. There has been a superstition that a ring should cost no less than two months’ salary, and it is also believed that this superstition was started by diamond merchants to give a push to their business. There are several other businesses which did not do well or did very well because of the superstitions and the emotions attached with them.

Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals’ investment decisions as well as market

outcomes.

Fig 1: Superstition in the Housing Market, “Skyscraper Curse”


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SUPERSTITIOUS FUNDS

Some people trust stock traders and mutual fund managers to grow their money, there are some who buy gold, plunk it in a vault, and pray that it will be worth more on some future date than it is today while there are others who use customized algorithms designed to respond to various market conditions. Shing Chung, a graduate in design from the Royal College of Art in London, has started an experiment in which stock trades are carried out by an Automated Trading System, which is a computer program that buys, sells or holds stocks based on a set of specifications encoded into the program’s governing algorithm. Unlike other investment models the algorithm does not make trade decisions based on stock’s recent performance, fundamental analysis or technical analysis. The criterion for this program are lunar phases and the affection and disaffection people have for certain numbers. The program doesn’t buy anything on the 13th of the month, and steers clear of buying or selling any stock if its value happens to have a 13 in it. As for lunar phases, the algorithm finds a new moon to be “good”, whereas a full moon is very, very bad. As people constantly look at correlations in the world and try to interpret them as patterns that they can or should act upon, the program also generates new, albeit irrational, beliefs and acts on them. The world has seen enough of Wall Street bankers making investment decisions based on high profile projections and complex algorithms. The project is sponsored by Microsoft Research, and is intended to reveal what patterns emerge when an entity invests based on astrological and numerological

information. Though currently the fund is around -10% of its starting value (see figure 2), it is not that bad in the age of LIBOR, Lehman, Madoff and Sovereign debt.

After having seen superstitions of different types and its impact, the question - why are businesses and businessmen so superstitious? - still remains unanswered, The simplest reason that can be thought of is that in the business world, there is a

tremendous amount of randomness in the market and people seek ways to gain control over these events, even though they can’t. Superstition is an important part of how people make sense of randomness and form strategies for dealing with risk. What one wears on a day, the coffee that he drinks — these things can’t

affect the outcome of the day’s business, but people engage in this to feel like they’ve done every possible thing to manage the outcomes. And this feeling of satisfaction, that they have done everything that can be done from their end, makes them follow superstitions. And that way, one thing that remains certain among the plethora of randomness in this world is that superstitions are here to stay for a long time to come!

Superstition is an important part of how people make sense of randomness and form strategies for

dealing with risk.

Fig 2: Returns of an Automated trading system based on superstitions

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the expiration day, you would incur a loss, up to a maximum of the premium paid (premium paid X lot size) and vice-versa. The premium tends to go down as the expiration date draws closer and eventually becomes zero at the closing minutes of trade during the expiration day.

Similarly, referring to the above example, if one believes that the share price would go down and buys a put option (PE) of 440 strike price, for say Rs.10, it implies that one would incur a loss if the share price closes above 440 on the expiration day, again up to a maximum of the premium paid multiplied by the lot size. However it is possible to sell the option at any day prior to the expiration date in order to book profit or loss and close out the trade.

Hedging Using OptionsAs you can see from the above examples, using options alone can indeed be quite risky as buying or selling is purely based on intuition and at times, technical analysis, which is unreliable to say the least. Combine that with heavy premiums, and you have a deadly combination that can go against you at any given time, thereby eroding your capital, which is undoubtedly the last thing you would want.

However, the smart investor combines a strategy of long term cash buying along with short term trading based on price movements and would generally benefit the most when it comes to using options. Assuming that one is fairly sure about the prospects of any particular share and decides to hold it for several years to make the most from his investment, but wants to protect his capital from heavy fluctuations or maximize his returns

Futures’ & ‘Options’ are the two words that are usually associated with high-risk; with most investors considering them as get-rich-quick speculative tools that are, yet, to be stayed away from. However, beyond their negative image, options can, in fact, prove to be excellent hedging tools that can continually act as protective measures for prudent investors in case things start taking a turn for the worse.

What Are Options?In essence, options are derivatives that give their holders the right, but not the obligation, to buy or sell the underlying asset at a specific price up to any time before the expiration date. An option to buy is called a call, whereas an option to sell is known as a put.

Generally short term traders who are willing to quick profits based on either their intuition or specific news about the stock tend to go for options. If they feel the current price of a share is too high and that its price would come down in the near future, they buy a put. On the other hand, if the current price of a share seems low and technical indicators turn bullish, they would go for a call option, whose value will increase depending on the rise in the share price.

However options always command a premium, as they allow you to leverage your capital several times depending upon your risk appetite. For example, if the current share price of Yes Bank is Rs.460, the 460 call option (CE) for the current month would be available in the range of Rs.15-20, which is the premium you pay for trading on the stock without the need to invest a major chunk of your capital. Essentially it means that if Yes Bank’s share price stays below 475-480 on

IMT ghazIabaD

Harshit Singhal

OPTIONSA GUIDE TO HEDGING

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the stock price goes to say 600 on expiration day, you would incur a loss of Rs.10,000 on the call option which would be offset by the profits from the cash holdings. Essentially it would mean that you have exited at a share price of ₹ 590, which is still 10 rupees higher than your target price.

Similarly, till the target price is reached you can continue to write out-of-money calls each month and continue to bring your average down, until the month when your target price is reached eventually, by the time which you would have increased your profits substantially. The best time to implement this strategy is in the beginning of the month since the premium tends to be highest

at that time.

3. Creating an Equity CollarAlthough the strategy of writing covered calls would seem to be the best one as it continually leads to profits, however it does not provide protection on the downside, which means your portfolio is liable to go down in value as per the downside fluctuation in the share price. A much better way of insuring yourself against drop in share prices and saving on

the premium you would normally pay for a put is using the equity collar strategy.

This strategy involves writing a covered call and subsequently buying a protective put, thereby reducing the put premium paid as the premium received from the writing the call covers the premium paid for the put. Again considering our example, in order to create an equity collar, you would write a Rs. 580 call option at, say, Rs.10 and buy a 530 put option for Rs. 10, which limits your downside to 530 while limiting your profits to 580, which was your target price anyway.

by short term profits, can make use of options to safeguard his investments.

Considering a real time example, let’s talk about some of the popular options strategies that could be used by investors. For the purpose of clarity and ease, we will assume that you had bought 1000 shares of Yes Bank at a price of Rs. 500 each and the current trading price is Rs. 550 (The lot size of options is assumed to be 1000 shares as well).

1. Buying Protective PutsThis strategy involves buying puts depending on the amount of cash exposure that one has. Since you do not want to book the profits (Rs. 50 per share) yet and would like to hold it as you believe the stock has much more upside but are also concerned about the share price dropping in the short term, you can go for puts which would increase in value as the share price goes down, thereby limiting the loss in his potential profits. The loss due to premium paid on the puts would be offset by the any further gains in the share price, while at the same time providing decent profits in case the stock tanks.

2. Writing Covered CallsWriting, which essentially means selling a call option and buying it later, can be a high-risk strategy in case one does not own that particular stock in cash (naked writing). But when combined with cash buys, writing calls can be a lucrative and relatively safe way of making extra profits each month, until your target price is reached eventually. As we have already assumed that you are currently making a notional profit of Rs. 50 per share, but you do not want to let go of your cash investments as your target price (say, Rs. 580) hasn’t been reached yet. What you can do is to write a call option of Rs. 580 strike price at say, Rs. 10. This would mean if the stock price stays below 580 on expiration day, you would make a profit of Rs.10,000 and hence your average of cash buying would come down by Rs. 10. On the other hand, if

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Today, if you need to go someplace by air, you invariably go to a travel site on the web, enter the origin, destination and date; site compares all airlines on cost (or similar criteria) and ticket is booked. It wasn’t always like this. Airlines were more like public utility companies that offered, more often than not, a travel at their terms and not a plethora of choices like they do at present. Second, when a ticket is booked today, there is probably a probability that is not negligible, which says that your airline may go bankrupt before your flight actually takes off! We might be surprised hearing this in India but in US, people are wary of booking flights on unknown carriers (yes, there are carriers that are unheard of!) even when popular ones are full. Sample this: since 1978, 160 airlines have come and gone from US skies alone! Why 1978? Because that was the year when Airline Deregulation Act was passed by US congress with the intent to remove government control over fares, routes and market entry (of new airlines) from commercial aviation.

In this account, we take a critical look at the act and how it affected US aviation. Having said that, it never hurts to have a deeper understanding about the industry that makes headlines every few months and with that in mind, we will have a look at how Aviation developed as we understand the run-up towards deregulation. In the late 1970s, airline system was hurting

itself under an inflexible regulatory structure. A lengthy procedure and detailed sanctions were required from the Civil Aeronautics Board (CAB) for employees of two affiliated airlines to wear similar uniforms! But how did the situation reach this stage?The Glorious BeginningSurprising as it may seem, airplanes were first used by US postal service (USPS) to deliver mails fast. Initially, army planes were used for the purpose but due to the general disinterest of army and the on-going World War 1, USPS decided to raise its own airplane fleet. This grew on to become the largest air network on earth in the next 7 years. But to help private airlines flourish, the Air Mail Act of 1925 authorized the Postmaster General to use independent private companies to transport air mail. It also fixed the rates to be paid to companies that carried the air mail. After this, the USPS disbanded its own air service as quickly as it had developed it. Airline industry developed rapidly between 1925 and 1930. Aviation started evolving from something that required no infrastructure at all to one that increasingly needed more and more infrastructure for its support (navigational aids, night flying support, emergency landing strips). The reliability of USPS was also at stake. This led to the 1926 Air Commerce Act which was primarily about creating safety parameters and service infrastructure.

IIM ShIllongGourav Sachdeva

Were Skies Always So Vast?The Build Up towards Airline Deregulation Act of 1978 in

USA and its Effects

Airplanes were first used by US postal service (USPS) to deliver

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The Initial HiccupsIn 1926, USPS paid the airlines at the rate of $3 per pound mail for flying a thousand miles. Carrying a 70 kg passenger at two-third of this price, would mean a ticket price of over $300 – a clearly impossible rate to charge then. Indeed, the rates paid to airlines were so high that some airlines would send letters to their own self and profit from it. This provided airlines with no incentive to transport passengers and other freight. Thus, the Air Mail Act of 1930 evolved which gave a great deal of power to Postmaster General. Key change in the USPS’ remit was now to award mail contracts not to the lowest bidder, but instead to the lowest responsible bidder. The encouragement for planes to carry passengers, regular freight and airmail spurred the airlines and the airplane manufacturers into developing larger planes. As all of this was happening, the roaring twenties were giving way for great depression of the 1930’s. The stock markets were in deep dive and the US Republican government was replaced by Democratic government in the 1932 elections. The public anger – understandably – was on a high and – for no guessable reason – the Postal Service and its actions in 1930 with the airlines became a target for recrimination. Government ordered the dismissal of Postmaster General and proceeded with hearing on possible corruption in his dealings with airlines. On 9 February 1934, President Roosevelt cancelled all the air mail contracts and directed the US Army Air Corps to once again provide mail services. The Army could not handle the job of mail deliveries satisfactorily (yes, the requirements were more demanding on pilots and their planes were ‘wartime’ machines, meant to discharge duties the Air Corps had trained them for!). Just 3 months later, President reversed the decision and airlines re-handled the job of carrying mails. But some draconian provisions were added. For instance, the airlines that had formerly held contracts were prohibited from getting new contracts. These new requirements were laid down in Air Mail Act of 1934.

Civil Aeronautics Act of 1938 transferred the responsibility of non-military aviation from the Bureau of Air Commerce to a new body, the Civil Aeronautics Authority. Civil Aeronautics Board (CAB) – an offshoot of the Civil Aeronautics Authority split of 1940 – began overseeing economic regulation of airlines. CAB assigned specific routes and service areas to airlines, gave formulas governing the fares they could charge and the profits they could earn. Even the kinds of aircraft they could fly and the seating configuration was decided by CAB.Why were regulations removed?During 1970’s, when man had actually touched moon, the regulatory framework of 1930’s – and little modified since then – was struggling to keep up with the transformed world of airlines. Few of the main reasons why the regulations were becoming too unbearable for both airlines and consumers were:(a) The prices were too high. The CAB did not allow discounts when the planes were actually flying half empty. Occasionally, mild discounts were allowed but they were far too less.(b) The process of adding new routes was time consuming too. As a fact, no new air routes were added to the US skies after 1969 till 1978. The population patterns and the requirements changed, but CAB was too slow to grant permission for new routes. Moreover, any airline currently operating on a particular route may veto the application of a new airline to fly on that route. In a celebrated instance, World Airways application to fly on a new route between New York and Los Angeles was rejected after 6 and half years on the account that application was too old and no longer relevant! (c) As a supplement to (b) above, the airlines weren’t even allowed to discontinue flying on routes they weren’t willing to.(d) The airlines weren’t making any profits. Doesn’t this defeat the very purpose of having regulations in the first place? I mean, regulations were meant to keep the airlines afloat when they were actually causing them losses. Sample this:

Air Mail Act of 1930 evolved which gave a great deal of power to

Postmaster General.

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Beginning of regulations had 16 ‘trunk’ airlines in USA, which reduced to 10 after 40 years.(e) No new service providers were allowed to enter the industry. Even after looking at points above, if a group of investors waned to venture in the industry, it wasn’t allowed by CAB. So, choices for consumers were decreasing while anti-competitive agreements amongst airlines were on the rise.

(f) One of the main reasons why it was becoming increasingly apparent that regulations weren’t benefitting anybody was rise of intra-state airlines like PSA in California and Southwest in Texas (they weren’t being monitored by CAB). The fares were almost half against inter-state regulated carriers flying comparable distances and services were superior. Higher fares were eroding customer numbers and this was raising fares – it had turned into a vicious cycle. The 1973 oil crisis had caused massive losses for airlines across US. Add to all of it the evolution of economic wisdom and you have a fertile ground ready for de-regulation of the industry. The Airline Deregulation Act was quickly passed by both congress and senate in 1978 and CAB was finally closed down at the end of 1984.Results of De-RegulationAs a result of deregulation, airlines could now fly to wherever they wanted, whenever they wanted

and at whatever cost they wanted! Few points that are a direct result of de-regulation and worth mentioning are:(a) Air fares dropped drastically – The passengers paid, on an average, 8.32 cents to fly one mile in 1978 (according to ATA). That adjusted for inflation, is around 30 cents today. The actual price paid by consumers in 2009 was 13.5 cents per mile.

Figure 1, shows for comparison, more or less steady prices for more regulated and less competitive Canadian aviation market and the downfall of airline prices in US after de-regulation.(b) Number of people travelling by air increased – There are around twice as many flights and thrice as many customers flying in US today when compared to 70’s.(c) Airlines flew to more destinations – American Airlines flew to 39 destinations (1978), it now does to 260 destinations. On the domestic front, number of carriers offering services on busy routes increased from 36 (1978) to over 120 (1985). (d) Most importantly, Frequent Flier Programs came into being – Business paradigm changed and customer loyalty became the new currency. Today, there are more than 125 million Americans enrolled in various frequent flyer programs and there are some 10 trillion unspent miles in their

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Fig 1: Average Domestic Airfares


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combined account!(e) Umpteen jobs were created – In the first de-regularised decade (i.e. from 1979 to 1989), employment increased from 3.56 million to 5.56 million people. This has actually gone down a bit in more recent years but that is due to recent slow in the economy and efficient work practices. (f) The airlines are a lot safer – Actually, we hear so many things against this claim that many of us are surprised to hear this. Well, critic’s views first – airlines cannot be trusted to follow their own safety, in order to maximize profits; airlines may compromise on standards. I will let facts do the talking - The fatal accident rate, per departure, is 13 times lower in 2009 than in 1969. This simply can’t be attributed to airlines being ‘good guys’ or alike; it is due to commercial implications attached with operating unsafe. Ironically, airlines would have been shielded from those same consequences that had them been regulated in past.(g) Emergence of ‘Hub and Spoke’ model – The freedom granted to airlines on routes of their choices led to the development of the model wherein an airline routes its flights through one or more ‘hub’ cities. Productivity increase due to this model is huge.(h) Airlines are actually the force behind development of new, better planes – After

the extraordinary demise of the airplane manufacturing industry, with just 2 major players remaining on the planet, they could exist in a cosy duopoly and innovation may come to a standstill. Thankfully, airlines are under constant pressure to reduce costs and maintain a constant demand for sophisticated, highly technical planes which keeps the 2 companies on their heels.

(i) The market share of US airlines increased – Several bilateral agreements were signed and open skies policies were formed and results can be seen in Figure 2.ConclusionTime and again, people have advocated re-regulation of airline industry citing various reasons. Through above analysis, it becomes quite clear that such step, if taken, would be nothing short of suicide for the airline industry. Much of the airline industry is still under regulations in some form or the other. De-regulation has been an incomplete process till date, more so for international operations. This needs to be done away with. In a nutshell, airline de-regulation has worked. It would be ironic in our times, if by misdiagnosing our present discontents, we were to return to old days of protectionism when countries as diverse as Russia, China, France and Australia are all discovering the benefits of free market.

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Fig 2: Market Share of US airlines

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In India, gold is religion and thus it is no surprise that we are amongst the largest importer of gold in the world. The law of economics says, “When the price of a commodity increases its demand decreases”, but this proved rationale doesn’t hold true for gold in India – the investment in gold is becoming price inelastic. The gold imports have been rising at an exorbitant rate, irrespective of the price associated with it. This large import of gold accompanied with depreciating rupee adds to the deterioration of our Current Account Deficit (CAD).

The situation has not always been like this- before the liberalization in 1992, gold imports were restricted by the then existing Gold control act, 1968 and the precious metal used to be brought into India through illegal sources. Under the liberalized policy for importing gold, Government of India permitted certain nominated agencies viz. State Bank of India, Minerals and Metals Trading Corporation (MMTC), State Trading Corporation, Handicrafts and Handlooms Export Corporation and other agencies authorized by RBI to import gold.

Magnitude Of Gold Imports We all know that the domestic production of Gold in India is insignificant as compared to its demand, so a large part of the consumption is met through imports. Statistics say that the contribution of gold was nearly 30% of trade deficit during FY10 to FY12, which is higher than 20% during FY07 to FY09. The gold imports in India grew at 39% in FY12, when the world gold demand was growing at only 24%. Had it been in tandem with the world demand our CAD would have been lower by 0.3% of GDP. This unabated gold demand is also putting pressure on our Balance of Payments (BoP) management, which can make our foreign exchange management vulnerable and can have implications on for maintaining adequate foreign exchange buffer.

The problem is not only confined to gold imports, but it is exasperated by the developments in gold

loan market. With the sharp rise in gold demands, several institutions came up to accommodate the demand for gold loans, but they did it by excessive reliance on banks and other borrowings on a massive scale. There are apprehensions about the systemic concerns that might arise, because of the huge borrowing of public funds by these companies.

Can Policy Change Come To Rescue?As mentioned earlier, investment in gold is price inelastic. So, if there are efforts made to suppress its demand then the supply of gold from the authorized channels might be restricted but there is a huge possibility that buyers may take recourse to illegal channels. Thus, there is a requirement to opt for selected demand and supply management measures.

Demand Reduction Measures 1. Demand for gold is a function of alternative financial investments, economic growth, import duty, exchange rate, availability of credit and the current account transactions. If any policy is to be evolved it should consider the developments in all of these parameters.

The absence of financial instruments that can give real returns to investors leaves gold as the only option for the hedge against inflation and stock market fluctuations. So, if products like inflation indexed bonds are devised, then they can prove to be an effective alternative to gold investments.

2. The other options worth considering are, introduction of gold backed financial products. Products that are :-

Gold accumulation plan – a saving plan in which gold imports are deferred till the time of actual delivery of gold.

Gold Deposit Scheme- gold taken as deposit is recycled for meeting domestic demands and given back at the time of maturity.

Gold Linked Account – the entire transaction takes

nMIMSHimanshu Bhinda

Can Gold appear a little less shiny to

Indians?

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place outside India and Import of gold is not involved

Gold Pension Products- gold is surrendered to government and the customer receives streams of monthly pension till his demise

3. The excessive love for physical gold can be curtailed by financial literacy and investor education. With the awareness of the financial products stated above, it is possible to reduce the demand for gold, or at least postpone it for future. The, educated urban consumers can be diverted towards gold in dematerialized form. These financial products also reduce the operations risk (theft) and operational expenses (bank locker charges).

4. There have been preferential treatments for gold as compared to other imported products. If the gold import regulations are aligned with the rest of imports, then it will take away most of the incentives given to the yellow metal, and will create a level playing field between gold and other imports.

Supply Side MeasuresIn India, there are some importers which have access to gold borrowings albeit within pre specified limits, and they, in turn, pay interest on the amount of gold hence borrowed. We have gold lying as Exchange Traded Funds (ETFs) which can be put to productive use by lending a part of their total corpus to the above mentioned class of importers. This will benefit us in two ways, first in the transaction of this kind gold is bought at the end of the tenor of loan which postpones the demand for gold imports and relives the pressure on our stressed BoP. Secondly, it would increase the return on the ETF investments.

Plugging loopholesThe major concern in India is that, nobody knows the amount of gold the other person possesses. Buying gold is easy with no significant hassles as far as the documentation is concerned. If someone invests in equities he has to pay capital gains tax, but there is no such deterrent in gold transaction, neither there is any tax deduction at source. But still, there are current norms which say that PAN number has to be provided for buying gold beyond a certain limit, but there is no mechanism to catch hold of the jewelry shops which overtly flout the rules. Hence, there is a strong need to track these loopholes and plug them.

Introduction Of Tax Incentives On Alternative InstrumentsThis kind of initiative, might not be very promising, as in India only 3% of population earns above the minimum limit of taxable income, but keeping in mind the High Net worth Individuals, if enough tax incentives are given under gold bonds and gold deposit schemes with a minimum lock in period of 3-5 years, the gold imports can be brought down.

Monetization Of Idle Gold StocksAs said above, a lot of gold lies with the sections of the society, which are economically weaker and don’t pay tax and in order to meet their untimely demands they fall prey to local money lenders and pawn brokers. Here, banks may start accepting gold jewelry as collateral against loan for all types of productive purposes.

Now, there are certain other measures which are existent worldwide but not so known in India, of

Fig 1: Yearly Returns on Domestic Financial Products (2008-2012)

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course, there are some products which have gained attention of the investors but there are still some which needs a greater exposure-

Scope Of Dematerialization Of GoldGold Etfs

These are already existent in our country, people don’t have to take the physical delivery of gold, and instead they can invest in these products. The prices of dematerialized gold correspond to physical gold, and are aimed to offer returns close to that of actual gold.

Gold OptionsDerivatives have always been an effective way of getting big returns, just like other securities, there can also be Gold options. Here, just like we trade in other securities, we will have the facility of ‘Call’ and ‘Put’ options. The risk of the buyer of ‘call’ option will be limited to the amount of premium that he has paid but the amount of profit that he can book can be very high. The cost of such options is dependent on a number of factors, like the interest rates, current spot price of gold, anticipated or implied volatility, time to expiry and the strike price.

Gold Swaps

We have often heard of interest rate swaps and currency swaps- the mechanism of Gold Swap is also very similar to it, but they also have features of repo mechanism. Gold Swaps are essentially kind of repurchase agreements commonly undertaken between central banks or between a central bank and other financial institutions. As, banks keep government securities with RBI to purchase them back at a later date at a predetermined price, Gold is exchanged for foreign exchange under Gold Swap agreements to repurchase it at a specified price on a specified future date. They in turn can also provide liquidity for the gold loan market, when converted into loans by concerned dealers.

Gold Fund Of FundsGold fund of funds offers open ended schemes just like most of the mutual funds, and provides an opportunity to invest in other mutual funds specialized in investing gold ETFs. It’s a very convenient way of taking exposure in gold as an

asset class. They have features like growth and income options, similar to normal MFs.

Gold- Backed Pension ProductsIt’s again an innovative way of mobilizing idle gold stocks and distributing gold equivalent return to the depositor for a period of 20 – 25 years. The basic premise behind this product is to provide pension to households. Indians, by nature, are highly risk averse which is evident from the popularity of government jobs even amongst youth. People are inclined towards government jobs because they feel that the future is secure there – the government takes responsibility of your needs even after your retirement. Hence, any product which can give a regular monthly income just like pension is always welcome here. Besides, giving

benefits to customers, this scheme also helps in reducing gold imports to the extent of gold deposits mobilized. Since, here we are talking of 20-25 periods, so this long gestation period may definitely have a cumulative impact on reducing gold imports.

ConclusionImporting gold has been a major concern

for quite some time now, given the ballooning Current Account Deficit. There is an immediate requirement of prudent measures that should be taken by not only the regulating authorities of India but also by us, the common man. This article has tried to throw light on various angles by which gold imports could be reduced, but the key to all these measures is financial literacy. Although literacy has been on the rise in our country, but the financial literacy situation is still worrisome. We, as Indian citizens, have to take tough stands to do our bit.

There has been some effort already started, jewelers have raised their voice in sync with RBI and have gradually started supporting it. Big banks have stopped offering easy EMI facilities on credit cards to buy gold coins. RBI is doing all sorts of effort to reduce the over reliance of NBFCs on banks which offer gold loans.

Hence, at the end it will be a matter of time when this kind of awareness will be spread and concerted efforts would be done by us citizens which will not only reduce our gold imports but also help in the target of financial inclusion as envisaged by Government of India.


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Sir, I was on a flight to Delhi last week and overheard two investors talking about the Put-Call Ratio and I could not understand the term.

Put-Call Ratio (PCR) in an equity derivatives market is the ratio of positions in put contracts to the positions in call contracts. It can be calculated for an individual stock as well as for an entire index

Okay, I have understood the ratio but practically how is it calculated?

PCR is not a real-time measure. Rather it is calculated after the stock markets close. PCRs can be

calculated in two ways: based on open interest and based on trading volumes. PCR-open Interest (PCR-OI) is the most commonly used ratio and is calculated as the ratio of open interest of put options to that of call options.

Open interest is the total number of open positions of a particular contract in the market. A PCR-trading volume is calculated as the ratio of total trading volumes of put contracts to that of call contracts.

I can now calculate the ratio but I do not understand what to infer out of the same.

A put option protects the buyer from a fall in the prices of the underlying asset. On the other hand, call option aim to profit the buyer from an increase in the prices of the underlying. A high PCR (close to 1) indicates

that more investors are buying put options as compared to call options. This implies that more and more investors are anticipating a fall in the share prices. This indicates a falling market and hence is a bearish indicator. On the other hand, a low PCR (close to 0.5) indicates more number of call options being purchased as compared to put options.

It signifies that the investor sentiment is positive and the markets are expected to rise in the future. This indicates a rising market and hence is a bullish indicator. Analysts perceive PCR as a highly “academic” indicator and its interpretation differs from person to person. PCR can also be used by the contrarian investors.

Sir, who are contrarian investors and how is PCR useful for them?

A contrarian investment style goes against the prevailing market trends, by buying shares that are performing poorly and then selling them when they start performing well. Sometimes traders calculate the PCR to take

the contrarian view. If the PCR is high, it can also signify that the market is being oversold. This can result in the traders taking the opposite view of the market i.e. the bullish view. Vice versa is true for a low PCR.

If it is considered as an academic indicator, how relevant is the ratio for small retail investors like me?

Some analysts believe that this indicator covers only one part of the market i.e. options. But still traders watch out for the PCR values. PCR is a technical indicator demonstrating investor sentiment. Swings in the ratio are

seen as very important as this is commonly viewed as a change in the tide of overall market sentiment. By being able to get ahead of the tide, traders may be able to reap the rewards of taking positions at prices below future projections. Investors with a contrarian view can track the PCR and accordingly look for cover positions to hedge their existing positions. This is not a magic number that signals that the market has created a bottom or a top, but usually investors will anticipate this by looking for spikes in the ratio or when the ratio reaches levels that are outside the normal range.

Sir, Thank you for explaining the concept of Put-Call Ratio. I am sure it will help me to understand the markets in a better manner now.

CLASSROOMFinFunda

of the Month

Put-Call Ratio

NIVESHAK 25C

lassroom

IIM ShillongANCHAL KHANEJA

2626

F I N - Q1. X is a British company and started India’s first tire factory at Calcutta in India.

This gave birth to the Indian tire industry. Name the company and the year in

which it set up its factory?

2. An IIM Ahmedabad graduate, she began her career with Industrial Credit and Investment Corp. India in 1980. Now she is the CEO of India’s third largest bank in the private sector. Identify the person.

3. This premier Global Investment & Strategy firm was founded in the year 1985 by the ex-employees of Lehman Brothers. Today, this company is the leader in the Alternative Asset Management domain. Identify the Organization.

4. This is a phrase used when any kind of feelings like greed or fear involved while taking a financial decision are removed.

5. This former British Colony, now administered under the “One Country, Two system” principle is famous for low tax rate, unrestricted capital movement and a duty free port. Identify this former British colony.

6. Eurobank recently took over a Greek bank as a part of consolidation. Name the bank and also the bank that was the funds adviser on the sale.

7. Name the theory according to which some investors will buy stock even if it is overvalued, on the conviction that there will be someone else who will buy the stock from them at higher prices.

8. Share prices of an Airline company fell on the Indian Stock exchange because of his resignation. Identify him and the company.

All entries for the Anniversary Edition should be mailed at [email protected] by 5th August, 2013 23:59 hrs

Article of the MonthPrize - INR 1000/-Gurpreet Singh

IMI Delhi

W I N N E R SFIN - Q

Prize - INR 500/-Ravindra Singh

NMIMS

Finance Club-IIM Shillong invites articles for

Scripting the Great Indian Revival in Niveshak’s Anniversary Edition

Do you often think how an altogether new tax regime in the country would put half of the nation’s economic prob-lems to an end? Or do you imagine a young figure taking India into that awe-inspiring league as (s)he is elected as the new PM? Well, here’s your chance!! Put on your thinking hats and take your beloved country on a path of uncharted success, and what’s more, win awesome prizes in the journey.As Niveshak enters the sixth year of its wonderful journey, Team Niveshak is coming out with its fifth annual special anniversary issue. For this purpose, we invite critical views on the theme – Scripting the Great Indian Revival from B-schools across India. The top three articles would be awarded with Cash Prizes worth Rs. 12,000. Besides, all the articles that get published stand to win attractive Niveshak goodies and certificates! You can either choose to write on a topic of your choice (but within the ambit of the aforementioned theme) or choose one from the following list. Please note that the list is only suggestive and, by no means, an exhaustive one.1. Will 2014 elections put Indian economy into new orbit?2. Reforms in Banking Sector3. Are stalled infra-structure projects weakening Indian economy?4. Will playing with interest rates really solve the problem?5. Youngsters in higher echelons of politics and corporate6. Is natural capital accounting an answer to Indian misery?7. How to attract FII and FDI to the Indian markets?8. Will adhering to 5 year plans make a difference?9. Will gold throw Indian economy for another toss?10. Forging new economic ties with emerging economies11. Is GCP answer to rising economic woes?12. Tax reforms in the new economy13. Decoupling of Indian Economy14. Capital Market reforms15. Your opinion of a sector which will be the engine of Indian economy

GUIDELINES Following Guidelines must be adhered to while submitting your entries for the event:

• Please e-mail your entries before 5th August 2013 to [email protected] • Number of authors per article is limited to 2 at maximum. However, one person/team can send more than one article, if they so wish• Please keep the file name and the subject of the e-mail as “Anniversary Issue_<Title of the Article>_<Institute Name>”• Entries must be sent in Microsoft Word Document (.doc/.docx) format and NOT in any other format (including .pdf) and should be within the word limits of 2000-2500 words only• Mention your Institute name, e-mail id and mobile numbers without failing at the beginning of article • Please submit all relevant graphs, tables, pictures and references along with your entry• Plagiarism of any kind in the entry will lead to straight disqualification of the team• The decision of Finance Club, IIM Shillong regarding the selection and publication of any article will be final and binding

Anniversary EditionNiveshak

CASH

Prizes

up to

Rs.12,00

0/-

COMMENTS/FEEDBACK MAIL TO [email protected]://iims-niveshak.comALL RIGHTS RESERVED

Finance ClubIndian Institute of Management, Shillong

Mayurbhanj Complex,NongthymmaiShillong- 793014

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