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INTRODUCTION
Arbitrage Pricing Theory
Definition
APT. An alternative asset pricing model to the Capital Asset Pricing Model. Unlike the
Capital Asset Pricing Model, which specifies returns as a linear function of only
systematic risk, Arbitrage Pricing Theory may specify returns as a linear function of more
than a single factor.
Fundamental Analysis
This investment strategy involves evaluating a stock by e amining the company,
especially its operations and its financial condition. !ere we look at several valuation
methods, factoring in price"earnings ratio, P#$, dividend yields, book value, price"sales
ratio, and return on e%uity.
Stoc Strategies
&earn about various strategies for investing in stocks, including the 'buy and hold
approach,( analy)ing market timing, and estimating a company*s potential for growth.
Stoc s and !our Portfolio
+ like this company, but should + add it to my portfolio This article talks about
diversification and balancing risk with your stock selections.
The Arbitrage Pricing Theory -APT was developed primarily by /oss -0123a, 0123b .
+t is a one4period model in which every investor believes that the stochastic properties of
returns of capital assets are consistent with a factor structure. /oss argues that if
e%uilibrium prices offer no arbitrage opportunities over static portfolios of the assets, then
the e pected returns on the assets are appro imately linearly related to the factor
loadings. -The factor loadings, or betas, are proportional to the returns* co variances with
the factors. The result is stated in 5ection 0. /oss* -0123a heuristic argument for the
theory is based on the preclusion of arbitrage. This intuition is sketched out in 5ection 6.
/oss* formal proof shows that the &inear pricing relation is a necessary condition for
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e%uilibrium in a market where agents ma imi)e certain types of utility. The subse%uent
work, which is surveyed below, derives either from the assumption of the preclusion of
arbitrage or the e%uilibrium futility4ma imi)ation. A linear relation between the e pected
returns and the betas is tantamount to an identification of the stochastic discount factor
-578 . 5ections 9 and :, respectively, review this literature.
The APT is a substitute for the Capital Asset Pricing Model -CAPM in that both
assert a linear relation between assets* e pected returns and their covariance with other
random variables. -+n the CAPM, the covariance is with the market portfolio*s return.
The covariance is interpreted as a measure of risk that investors cannot avoid by
diversification. The slope coefficient in the linear relation between the e pected returns
and the covariance is interpreted as a risk premium. 5uch a relation is closely tied to
mean4variance efficiency, which is reviewed in 5ection ;. 5ection ; also points out thatan empirical test of the APT entails a procedure to identify at least some features of the
underlying factor structure. Merely stating that some collection of portfolios -or even a
single portfolio is mean4variance efficient relative to the mean4variance frontier spanned
by the e isting assets does not constitute a test of the APT, because one can always find a
mean4variance efficient portfolio.
Conse%uently, as a test of the APT it is not sufficient to merely show that a setoff factor
portfolio satisfies the linear relation between the e pected return and its covariance with
the factors portfolios.
A sketch of the empirical approaches to the APT is offered in 5ection 3, while 5ection 2
describes various procedures to identify the underlying factors. The large number of
factors proposed in the literature and the variety of statistical or ad hoc procedures to find
them indicates that a definitive insight on the topic is still missing.
8inally, 5ection < surveys the applications of the APT, the most prominent being the
evaluation of the performance of money managers who actively change their portfolios. 0
Unfortunately, the APT does not necessarily preclude arbitrage opportunities over
dynamic portfolios of the e isting assets. Therefore, the applications of the APT in the
evaluation of managed portfolios contradict at least the spirit of the APT, which obtains
price restrictions by assuming the absence of arbitrage.
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Arbitrage is an often4used term in share markets. The arbitrager is an
important intermediary that helps in price discovery mechanism in all markets be it
e%uity, moneyfore or derivatives. There are three important participants that are
important in a cash market, the speculator, arbitrager and an investor. +n futures market
the investor is replaced by a hedger. Arbitrager and 5peculator are often confused and
both are termed as 5peculators. +n this article + wish to e plain the difference between the
two and show how arbitrage works in the market and its influence on market volatility.
Arbitraging in +ndia has been going on for several years. +nitially arbitrage activity
was between 5tock # change Mumbai and all other regional e changes. Mr. =abulal
=agri the founder of =&= 5ecurities and Mr. ManubhaiManeklal were legendary
arbitragers of that era. They traded between Mumbai, 7elhi and Calcutta markets.
Arbitraging in those days was done manually and not on any online system. The way thefingers of these brokers flew on tele machines giving trade instructions was an
e perience by itself. Then it shifted to cashing on price difference between >5# and =5#
limited. Today large amount of arbitrage happens between cash and derivative markets.
Arbitrage is also possible between the current month and near or far month contracts. +n
case of Commodity e changes also there is an arbitrage opportunity between the local
cash markets or mandis and the future markets which are popularly known as >ational
Commodity # changes.
5peculator is one who gives li%uidity to the markets. The buyers and sellers may
not often decide at the same time to buy or sell a security. There is a time gap as well as a
difference in price and %uantity at which the buyer and seller intend to do a transaction.
The speculator fills this time gap and gives %uotes to buyers as well as sellers on a
continuous basis. This imparts li%uidity to the market since each order has a counter offer
from a speculator even if there is no counter party to match the order.The arbitrager is
one who plays the role of balancing the price differences across the markets. The markets
may be two e changes trading in the same product or two segments such as cash and
derivatives or across international markets and local markets. The arbitrager continuously
tracks prices across the chosen segment. are momentary price differences in two markets
due to difference in level of information as well as demand supply situation in the market.
These price differences are a
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Conclusion
The Arbitrage 8und, in such uncertain times, can prove to be one of the good choices by
investors, other than putting the money in fi ed deposits. The 8und !ouse is claiming a
return of around 141.1?, which is much better than that of many other savingsinstruments. !owever, finding an arbitrage opportunity in a bear phase .
SCOP" OF T#" STUD!
The term ‘arbitrage trading’ could be misleading to novices in the feldo share
stocks trading and hence needs to be defned clearly as to bring out its
true meaningAnd implications or the individual investors, the share market and
nationalEconomy. Arbitrage trading is a phenomena which comes into play
when companiesAnd corporate houses make attempts to raise capital by o ering stocks
or sale on!ore than one stock e"change markets in a single country #or
theoretically in!ultiple countries$. %n those share markets which are not per ect in
terms o%nvestment value or price updating acilities, there e"ists a more than
air chance o&iscrepancies o share value o the same or closely related shares on
di erent stock!arkets. 'hen, an investor deliberately invests in the shares o a
particularcompany in one stock market and fnding it proftable( sells the same
in order to buy The same or closely related shares o the same company or group in
another stock !arket, it is called arbitrage trading. %n such a situation, the investor(
whether a)rivate individual, a bank or an investment frm, attempts to make
proft out o the &iscrepancies or di erence in the price o the shares across di erent
stock
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E"changes in a single country #or theoretically, in a bunch o countries$.
Need of the study$
To understand what makes for arbitrage, one need to distinguish between three types of
arbitrage. The first is pure arbitrage, where one has have two identical assets with
different market prices at the same point in time and the prices will converge at a given
point in time in the future. This type of arbitrage is most likely to occur in derivatives
markets options and futures4 and in some parts of the bond market. The second is near
arbitrage, where one has assets that have identical or almost identical cash flows, trading
at different prices, but there is no guarantee that the prices will converge and there e ist
significant constraints on investors forcing them to do so. The third is speculativearbitrage, which is really not arbitrage in the first place. !ere, investors take advantage of
what they see as mispriced and similar -though not identical assets, buying the cheaper
one and selling the more e pensive one. +f they are right, the difference should narrow
over time, yielding profits.
O%&"CTI'"S OF T#" STUD!
The ob@ective of the study is to analy)e the possibility of taking advantage of
arbitrage mechanism of the blue chip scrip*s of core sectors of +ndian economy,
traded in =5# and >5#.
Ten blue chip scrip of five core sectors are studied for evaluation.
The share prices of these scrip*s are being taken for analysis for the period of two
months, ctober 6B03 and >ovember 6B03.
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Closing prices of each share in the two e changes are taken for analysis.
The difference in the prices is analy)ed for any scope of arbitration.
The Fundamental Theorem of Arbitrage Pricing
0. +ntroduction
The =lack45chools theory, which is the main sub@ect of this course and its se%uel, is
based on the #fficient Market !ypothesis that arbitrages -the term will be defined
shortly do not e ist in efficient markets. Although this is never completely true in
practice, it is a useful basis for pricing theory, and we shall limit our attention -at least for
now to efficient -that is, arbitrage4free markets. e shall see that absence of arbitragesometimes leads to uni%ue determination of prices of various derivative securities, and
gives clues about how these derivative securities may be hedged. +n particular, we shall
see that, in the absence of arbitrage, the market imposes a probability distribution, called
a risk4neutral or e%uilibrium measure, on the set of possible market scenarios, and that
this probability measure determines market prices via discounted e pectation. This is the
8undamental Theorem of arbitrage pricing. =efore we state the 8undamental Theorem
formally, or consider its ramifications, we shall consider several simple e amples of
derivative pricing in which the #fficient Market !ypothesis allows one to directly
determine the market price.
"(am)le$ For*ard Contracts
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+n the simplest forward contract, there is a single underlying asset 5tock, whose
share price -in units of Cash at time t D B is known but at time t D 0 is sub@ect to
uncertainty.
+t is also assumed that there is a riskless asset MoneyMarket, that is, an asset whose
5hare price at t D 0 is not sub@ect to uncertaintyE the share price of MoneyMarket at t D B
is 0 and at t D 0 is regardless of the market scenario. The constant r is called the risk less
rate of return. The forward contract calls for one of the agents to pay the other an amount
8 -the forward price in Cash at time t D 0 in e change for one share of 5tock. The
forward price 8 is written into the contract at time t D B. >o money or assets change
hands at time t D B.
Proposition 0. +n an arbitrage4free market, the forward price is 8 D 5Ber.+nformally, an
arbitrage is a way to make a guaranteed profit from nothing, by short4selling certainassets at time t D B, using the proceeds to buy other assets, and then settling accounts at
time t D 0. hen an investor sells an asset short, he"she must borrow shares of the asset to
sell in return for a promise to return the shares at a pre4specified future time -and, usually,
an interest charge . +n real markets there are constraints on short4selling imposed by
brokers and market regulators to assure that the shares borrowed for short sales can be
repaid. +n the ideali)ed markets of the =lack45choles universe, such constraints do not
e ist, nor are there interest payments on borrowed shares, nor are there transaction costs
-brokerage fees . 8urthermore, it is assumed that investors may buy or sell shares -as
many as they like in any asset at the prevailing market price without affecting the share
price.
Fundamentals$ +uantitati,e and +ualitati,e
Fou could define fundamental analysis as 'researching the fundamentals(, but that
doesn*t tell you a whole lot unless you know what fundamentals are. As we mentioned inthe introduction, the big problem with defining fundamentals is that it can include
anything related to the economic well4being of a company. bvious items include things
like revenue and profit, but fundamentals also include everything from a company*s
market share to the %uality of its management.
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The various fundamental factors can be grouped into two categoriesG %uantitative
and %ualitative. The financial meaning of these terms isn*t all that different from their
regular definitions. !ere is how the M5> #ncarta dictionary defines the termsG
Huantitative I capable of being measured or e pressed in numerical terms.
Hualitative I related to or based on the %uality or character of something, often as
opposed to its si)e or %uantity.
+n our conte t, %uantitative fundamentals are numeric, measurable characteristics
about a business. +t*s easy to see how the biggest source of %uantitative data is the
financial statements. Fou can measure revenue, profit, assets and more with great
precision. Turning to %ualitative fundamentals, these are the less tangible factors
surrounding a business 4 things such as the %uality of a company*s board members and
key e ecutives, its brand4name recognition, patents or proprietary technology.
+uantitati,e -eets +ualitati,e
>either %ualitative nor %uantitative analysis is inherently better than the other.
+nstead, many analysts consider %ualitative factors in con@unction with the hard,
%uantitative factors. Take the Coca4Cola Company, for e ample. hen e amining its
stock, an analyst might look at the stock*s annual dividend payout, earnings per share,
P"# ratio and many other %uantitative factors. !owever, no analysis of Coca4Cola would
be complete without taking into account its brand recognition. Anybody can start a
company that sells sugar and water, but few companies on earth are recogni)ed by
billions of people. +t*s tough to put your finger on e actly what the Coke brand is worth,
but you can be sure that it*s an essential ingredient contributing to the company*s ongoing
success.
The Conce)t of Intrinsic 'alue
=efore we get any further, we have to address the sub@ect of intrinsic value. ne of
the primary assumptions of fundamental analysis is that the price on the stock market
does not fully reflect a stock*s 'real( value. After all, why would you be doing price
analysis if the stock market were always correct +n financial @argon, this true value is
known as the intrinsic value.
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8ollowers of the efficient market hypothesis, however, are usually in
disagreement with both fundamental and technical analysts. The efficient market
hypothesis contends that it is essentially impossible to produce market4beating returns in
the long run, through either fundamental or technical analysis. The rationale for this
argument is that, since the market efficiently prices all stocks on an ongoing basis, any
opportunities for e cess returns derived from fundamental -or technical analysis would
be almost immediately whittled away by the market*s many participants, making it
impossible for anyone to meaningfully outperform the market over the long term.
FUNDA-"NTA. ANA.!SIS G
+ualitati,e Factors / The Com)any
=efore diving into a companyKs financial statements, weKre going to take a look at some of
the %ualitative aspects of a company.
8undamental analysis seeks to determine the intrinsic value of a companyKs stock.
=ut since %ualitative factors, by definition, represent aspects of a companyKs business that
are difficult or impossible to %uantify, incorporating that kind of information into a
pricing evaluation can be %uite difficult. n the flip side, as weKve demonstrated, you
canKt ignore the less tangible characteristics of a company.
+n this section we are going to highlight some of the company4specific
%ualitative factors that you should be aware of.
%usiness -odel
#ven before an investor looks at a companyKs financial statements or does any
research, one of the most important %uestions that should be asked isG hat e actly does
the company do This is referred to as a companyKs business model I itKs how a company
makes money. Fou can get a good overview of a companyKs business model by checking
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out its website or reading the first part of its 0B4L filing ->oteG eKll get into more detail
about the 0B4L in the financial statements chapter. 8or now, @ust bear with us .
5ometimes business models are easy to understand. Take Mc7onalds, for instance,
which sells hamburgers, fries, soft drinks, salads and whatever other new special they are
promoting at the time. +tKs a simple model, easy enough for anybody to understand.
ther times, youKd be surprised how complicated it can get. =oston Chicken +nc. is
a prime e ample of this. =ack in the early K1Bs its stock was the darling of all 5treet. At
one point the companyKs C# bragged that they were the first new fast4food restaurant
to reach J0 billion in sales since 0131 . The problem is, they didnKt make money by
selling chicken. /ather, they made their money from royalty fees and high4interest loans
to franchisees. =oston Chicken was really nothing more than a big franchisor. n top of
this, management was aggressive with how it recogni)ed its revenue. As soon as it wasrevealed that all the franchisees were losing money, the house of cards collapsed and the
company went bankrupt.
At the very least, you should understand the business model of any company
you invest in. The racle of maha , arren =uffett, rarely invests in tech stocks
because most of the time he doesnKt understand them. This is not to say the technology
sector is bad, but itKs not =uffettKs area of e pertiseE he doesnKt feel comfortable investing
in this area. 5imilarly, unless you understand a companyKs business model, you donKt
know what the drivers are for future growth, and you leave yourself vulnerable to being
blindsided like shareholders of =oston Chicken were.
Com)etiti,e Ad,antage
Another business consideration for investors is competitive advantage. A companyKs long4
term success is driven largely by its ability to maintain a competitive advantage 4 and
keep it. Powerful competitive advantages, such as Coca ColaKs brand name and
MicrosoftKs domination of the personal computer operating system, create a moat around
a business allowing it to keep competitors at bay and en@oy growth and profits. hen a
company can achieve competitive advantage, its shareholders can be well rewarded for
decades.
!arvard =usiness 5chool professor Michael Porter, distinguishes between
strategic positioning and operational effectiveness. perational effectiveness means a
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company is better than rivals at similar activities while competitive advantage means a
company is performing better than rivals by doing different activities or performing
similar activities in different ways. +nvestors should know that few companies are able to
compete successfully for long if they are doing the same things as their competitors.
Professor Porter argues that, in general, sustainable competitive advantage gained byG
A uni%ue competitive position Clear tradeoffs and choices vis4N4vis competitor
Activities tailored to the companyKs strategy A high degree of fit across activities -it is the
activity system, not the parts that ensure sustainability A high degree of operational
effectiveness
-anagement
Oust as an army needs a general to lead it to victory, a company relies
upon management to steer it towards financial success. 5ome believe that management is
the most important aspect for investing in a company. +t makes sense 4 even the best
business model is doomed if the leaders of the company fail to properly e ecute the plan.
5o how does an average investor go about evaluating the management of a company
This is one of the areas in which individuals are truly at a disadvantage compared to
professional investors. Fou canKt set up a meeting with management if you want to invest
a few thousand dollars. n the other hand, if you are a fund manager interested in
investing millions of dollars, there is a good chance you can schedule a face4to4face
meeting with the upper brass of the firm.
#very public company has a corporate information section on its website. Usually
there will be a %uick biography on each e ecutive with their employment history,
educational background and any applicable achievements. 7onKt e pect to find anything
useful here. &etKs be honestG eKre looking for dirt, and no company is going to put
negative information on its corporate website.
+nstead, here are a few ways for you to get a feel for managementG
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of top e ecutives on company web sites. +dentify the companies they worked at in the
past and do a search on those companies and their performance.
Fear after year, key players in the 8ore market make a killing by picking the right
currencies I now it*s your turn. Access industry gurus =oris and Lathy*s e clusive 8/##
report, The 8ive Things That Move the Currency Market I And !ow to Profit 8rom
Them, right nowQ
Cor)orate 8o,ernance
Corporate governance describes the policies in place within an organi)ation denoting the
relationships and responsibilities between management, directors and stakeholders. These
policies are defined and determined in the company charter and its bylaws, along with
corporate laws and regulations. The purpose of corporate governance policies is to ensure
that proper checks and balances are in place, making it more difficult for anyone toconduct unethical and illegal activities.
$ood corporate governance is a situation in which a company complies with all of its
governance policies and applicable government regulations -such as the 5arbanes4 ley
Act of 6BB6 in order to look out for the interests of the companyKs investors and other
stakeholders. Although, there are companies and organi)ations -such as 5tandard
PoorKs that attempt to %uantitatively assess companies on how well their corporate
governance policies serve stakeholders, most of these reports are %uite e pensive for the
average investor to purchase.
8ortunately, corporate governance policies typically cover a few general areasG
structure of the board of directors, stakeholder rights and financial and information
transparency. ith a little research and the right %uestions in mind, investors can get a
good idea about a companyKs corporate governance
Technical Analysis
Definition
A method of evaluating securities by relying on the assumption that market data, such as
charts of price, volume, and open interest, can help predict future -usually short4term
market trends. Unlike fundamental analysis, the intrinsic value of the security is not
considered. Technical analysts believe that they can accurately predict the future price of
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a stock by looking at its historical prices and other trading variables. Technical analysis
assumes that market psychology influences trading in a way that enables predicting when
a stock will rise or fall. 8or that reason, many technical analysts are also market timers,
who believe that technical analysis can be applied @ust as easily to the market as a whole
as to an individual stock.
Related Terms
advance"decline line, head and shoulders, moving average, point4and4figure
chart, resistance, analysis, ascending bottoms, ascending tops, descending bottoms,
descending tops, breadth4of4market theory, breakout, chartist, cup and handle, saucer,
flag, pennant, double bottom, double top, #lliott ave Theory, high4low inde ,
momentum indicator, MAC7, on4balance volume, overbought, oversold,
overbought"oversold indicator, random walk theory, reading the tape, relative strength,
support, signal, technical analyst, technical indicator, test, trendline, vertical line charting,
Arms +nde , double top breakout, triple bottom, =ollinger bands
Technical Analysis
Technical analysis is the study of a stock, or the market as a whole, strictly by using the
price and volume history of a stock. Technical analysis uses little or no information
about the actual business behind the stock. The common belief is that a stock price
represents all known information about a stock. Technical analysis is an alternative tofundamental analysis.
ur service provides a very speciali)ed type of technical analysis, performing real4time
statistical analysis on all relevant market data. &ike many people we believe that changes
in the fundamentals will be visible through technical analysis.
Alert Ty)es
The methods used to analy)e securities and make investment decisions fall into
two very broad categoriesG fundamental analysis and technical analysis. 8undamental
analysis involves analy)ing the characteristics of a company in order to estimate its value.
Technical analysis takes a completely different approachE it doesnKt care one bit about the
value of a company or a commodity. Technicians -sometimes called chartists are only
interested in the price movements in the market.
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7espite all the fancy and e otic tools it employs, technical analysis really @ust
studies supply and demand in a market in an attempt to determine what direction, or
trend, will continue in the future. +n other words, technical analysis attempts to
understand the emotions in the market by studying the market itself, as opposed to its
components. +f you understand the benefits and limitations of technical analysis, it can
give you a new set of tools or skills that will enable you to be a better trader or investor.
9hat Is Technical Analysis:
Technical analysis is a method of evaluating securities by analy)ing the statistics
generated by market activity, such as past prices and volume. Technical analysts do not
attempt to measure a securityKs intrinsic value, but instead use charts and other tools to
identify patterns that can suggest future activity.
Oust as there are many investment styles on the fundamental side, there are alsomany different types of technical traders. 5ome rely on chart patterns, others use
technical indicators and oscillators, and most use some combination of the two. +n any
case, technical analystsK e clusive use of historical price and volume data is what
separates them from their fundamental counterparts. Unlike fundamental analysts,
technical analysts donKt care whether a stock is undervalued 4 the only thing that matters
is a securityKs past trading data and what information this data can provide about where
the security might move in the future.
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R"'I"9 OF .IT"RATUR"
Arbitrage is an often4used term in share markets. The arbitrager is an important
intermediary that helps in price discovery mechanism in all markets be it e%uity,
moneyfore or derivatives. There are three important participants that are important in a
cash market, the speculator, arbitrager and an investor. +n futures market the investor is
replaced by a hedger. Arbitrager and 5peculator are often confused and both are termed
as 5peculators. +n this article + wish to e plain the difference between the two and show
how arbitrage works in the market and its influence on market volatility.
Arbitraging in +ndia has been going on for several years. +nitially arbitrage activity
was between 5tock # change Mumbai and all other regional e changes. Mr. =abulal
=agri the founder of =&= 5ecurities and Mr. ManubhaiManeklal were legendary
arbitragers of that era. They traded between Mumbai, 7elhi and Calcutta markets.
Arbitraging in those days was done manually and not on any online system. The way the
fingers of these brokers flew on tele machines giving trade instructions was ane perience by itself. Then it shifted to cashing on price difference between >5# and =5#
limited. Today large amount of arbitrage happens between cash and derivative markets.
Arbitrage is also possible between the current month and near or far month contracts. +n
case of Commodity e changes also there is an arbitrage opportunity between the local
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cash markets or mandis and the future markets which are popularly known as >ational
Commodity # changes.
5peculator is one who gives li%uidity to the markets. The buyers and sellers may
not often decide at the same time to buy or sell a security. There is a time gap as well as a
difference in price and %uantity at which the buyer and seller intend to do a transaction.
The speculator fills this time gap and gives %uotes to buyers as well as sellers on a
continuous basis. This imparts li%uidity to the market since each order has a counter offer
from a speculator even if there is no counter party to match the order.
The arbitrager is one who plays the role of balancing the price differences across the
markets. The markets may be two e changes trading in the same product or two segments
such as cash and derivatives or across international markets and local markets. The
arbitrager continuously tracks prices across the chosen segment. are momentary pricedifferences in two markets due to difference in level of information as well as demand
supply situation in the market. These price differences are an
pportunity for the arbitrager.
The arbitrager has money power at his disposal. !e takes deliveries in a
particular market segment and is able to give deliveries in another market segment. There
is a time gap between giving and taking deliveries. !e holds the stock for this time and
earns an interest on the funds invested which comes by way of price differential between
buy and sell rates. The arbitrager has a particular interest return as his target. !e does not
have any open positions and all his purchases or sells in a particular market segment have
a counter position in another market segment. At the net level his position is always )ero.
This is how the arbitrager earns a risk free return.
The arbitrager does not always wait for the e piry of the contract or the settlement of the
transaction. They may reverse the position before the actual settlement date even if they
have to compromise on some percentage of the price difference earned by them. &esser
return is acceptable if it is earned with smaller or no investment. All decisions are taken
with reference to a benchmark4targeted return.
To give e ample of an arbitrage transaction, assume that the arbitrager has /s.0B
lacs available for doing arbitrage activity. !is targeted return is say 0
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a problem. therwise it is a volume game, small returns over thousands of transactions is
the name of the game. +t is advisable to study the opportunities. Fou may not act on all of
them, but it prepares you to invest your money wisely when you are a =illionaireR.
-utual Fund Feature
There have been many successful arbitrage schemes launched in the +ndian Mutual 8und
+ndustry, but OM 8inancial Mutual 8und is the pioneer in this segment. +t launched its first
arbitrage scheme 4 OM #%uity 7erivative 8und 4 and introduced the concept across the
country in 6BB;. After an overwhelming response to this scheme, where the Company
collected around /s
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discrepancy in their price relationship. +t is a risk4free transaction, as the long and short
legs of the transaction offset each other e actly. Thus, arbitrage engages in a strategy in
order to reduce risk of loss caused by price fluctuations of securities held in the portfolio.
+t involves buying and selling of e%ual %uantities of a security in two different markets,
with the e pectations that a future change in price will offset by an opposite change in the
other.
7aily turnover in the derivatives segment is around 9.; times the cash market
volumes and is to the tune of /s 9B,BBB crores. Arbitrage activity is largely concentrated
in single stock futures, while inde arbitrage is not very popular, although it contributes
about 6;49B? of the total stock futures volumes. +n +ndia, stock borrowing in the cash
market is cumbersome, making the '5ell 5tock buy 8utures( strategy difficultE hence,
almost the entire arbitrage activity is concentrated in '=uy 5tock45ell 8utures(.:Ad,antages of Arbitrage Strategy
• Capitalises opportunities of mis4pricing -cost of carry between cash and
derivatives.
• +t is safe, as it does not carry e%uity market risk, as all e%uity positions are
completely hedged.
• Potential returns are higher than comparable investment avenues with similar
risks.
• =enefits of investing in an Arbitrage 8und
• 5ince the arbitrage fund is categori)ed as e%uity fund, there will be no ta on
&ong4Term capital gainsE
• 7ividends are also ta 4free.
• Potential returns are higher than those in comparable investment avenues with
similar risks like bank
• 8i ed4deposits or li%uid schemes.
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• +t does not carry risk e%uivalent to the e%uity market risk, as all e%uity positions
are hedged.
Conclusion
The Arbitrage 8und, in such uncertain times, can prove to be one of the good choices by
investors, other than putting the money in fi ed deposits. The 8und !ouse is claiming a
return of around 141.1?, which is much better than that of many other savings
instruments. !owever, finding an arbitrage opportunity in a bear phase is very
The Fundamental Theorem of Arbitrage Pricing
0. +ntroduction
The =lack45chools theory, which is the main sub@ect of this course and its se%uel, is
based on the #fficient Market !ypothesis that arbitrages -the term will be defined
shortly do not e ist in efficient markets. Although this is never completely true in
practice, it is a useful basis for pricing theory, and we shall limit our attention -at least for
now to efficient -that is, arbitrage4free markets. e shall see that absence of arbitrage
sometimes leads to uni%ue determination of prices of various derivative securities, and
gives clues about how these derivative securities may be hedged. +n particular, we shall
see that, in the absence of arbitrage, the market imposes a probability distribution, called
a risk4neutral or e%uilibrium measure, on the set of possible market scenarios, and that
this probability measure determines market prices via discounted e pectation. This is the
8undamental Theorem of arbitrage pricing. =efore we state the 8undamental Theorem
formally, or consider its ramifications, we shall consider several simple e amples of derivative pricing in which the #fficient Market !ypothesis allows one to directly
determine the market price.
"(am)le$ For*ard Contracts
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+n the simplest forward contract, there is a single underlying asset 5tock, whose
share price -in units of Cash at time t D B is known but at time t D 0 is sub@ect to
uncertainty.
+t is also assumed that there is a riskless asset MoneyMarket, that is, an asset whose
5hare price at t D 0 is not sub@ect to uncertaintyE the share price of MoneyMarket at t D B
is 0 and at t D 0 is regardless of the market scenario. The constant r is called the risk less
rate of return. The forward contract calls for one of the agents to pay the other an amount
8 -the forward price in Cash at time t D 0 in e change for one share of 5tock. The
forward price 8 is written into the contract at time t D B. >o money or assets change
hands at time t D B.
Proposition 0. +n an arbitrage4free market, the forward price is 8 D 5Ber.+nformally, an
arbitrage is a way to make a guaranteed profit from nothing, by short4selling certainassets at time t D B, using the proceeds to buy other assets, and then settling accounts at
time t D 0. hen an investor sells an asset short, he"she must borrow shares of the asset to
sell in return for a promise to return the shares at a pre4specified future time -and, usually,
an interest charge . +n real markets there are constraints on short4selling imposed by
brokers and market regulators to assure that the shares borrowed for short sales can be
repaid. +n the ideali)ed markets of the =lack45choles universe, such constraints do not
e ist, nor are there interest payments on borrowed shares, nor are there transaction costs
-brokerage fees . 8urthermore, it is assumed that investors may buy or sell shares -as
many as they like in any asset at the prevailing market price without affecting the share
price.
Fundamentals$ +uantitati,e and +ualitati,e
Fou could define fundamental analysis as 'researching the fundamentals(, but that
doesn*t tell you a whole lot unless you know what fundamentals are. As we mentioned inthe introduction, the big problem with defining fundamentals is that it can include
anything related to the economic well4being of a company. bvious items include things
like revenue and profit, but fundamentals also include everything from a company*s
market share to the %uality of its management.
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The various fundamental factors can be grouped into two categoriesG %uantitative
and %ualitative. The financial meaning of these terms isn*t all that different from their
regular definitions. !ere is how the M5> #ncarta dictionary defines the termsG
Huantitative I capable of being measured or e pressed in numerical terms.
Hualitative I related to or based on the %uality or character of something, often as
opposed to its si)e or %uantity.
+n our conte t, %uantitative fundamentals are numeric, measurable characteristics
about a business. +t*s easy to see how the biggest source of %uantitative data is the
financial statements. Fou can measure revenue, profit, assets and more with great
precision. Turning to %ualitative fundamentals, these are the less tangible factors
surrounding a business 4 things such as the %uality of a company*s board members and
key e ecutives, its brand4name recognition, patents or proprietary technology.
+uantitati,e -eets +ualitati,e
>either %ualitative nor %uantitative analysis is inherently better than the other.
+nstead, many analysts consider %ualitative factors in con@unction with the hard,
%uantitative factors. Take the Coca4Cola Company, for e ample. hen e amining its
stock, an analyst might look at the stock*s annual dividend payout, earnings per share,
P"# ratio and many other %uantitative factors. !owever, no analysis of Coca4Cola would
be complete without taking into account its brand recognition. Anybody can start a
company that sells sugar and water, but few companies on earth are recogni)ed by
billions of people. +t*s tough to put your finger on e actly what the Coke brand is worth,
but you can be sure that it*s an essential ingredient contributing to the company*s ongoing
success.
The Conce)t of Intrinsic 'alue
=efore we get any further, we have to address the sub@ect of intrinsic value. ne of
the primary assumptions of fundamental analysis is that the price on the stock market
does not fully reflect a stock*s 'real( value. After all, why would you be doing price
analysis if the stock market were always correct +n financial @argon, this true value is
known as the intrinsic value.
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8or e ample, let*s say that a company*s stock was trading at J6B. After doing
e tensive homework on the company, you determine that it really is worth J6;. +n other
words, you determine the intrinsic value of the firm to be J6;. This is clearly relevant
because an investor wants to buy stocks that are trading at prices significantly below their
estimated intrinsic value.
This leads us to one of the second ma@or assumptions of fundamental analysisG in
the long run, the stock market will reflect the fundamentals. There is no point in buying a
stock based on intrinsic value if the price never reflected that value. >obody knows how
long 'the long run( really is. +t could be days or years.
This is what fundamental analysis is all about. =y focusing on a particular business,
an investor can estimate the intrinsic value of a firm and thus find opportunities where he
or she can buy at a discount. +f all goes well, the investment will pay off over time as themarket catches up to the fundamentals.
The big unknowns areG
• Fou don*t know if your estimate of intrinsic value is correctE and
• Fou don*t know how long it will take for the intrinsic value to be reflected in the
marketplace.
Criticisms of Fundamental Analysis
The biggest criticisms of fundamental analysis come primarily from two groupsG
proponents of technical analysis and believers of the 'efficient market hypothesis(.
Technical analysis is the other ma@or form of security analysis. e*re not going to get
into too much detail on the sub@ect. -More information is available in our +ntroduction to
Technical Analysis tutorial.
Put simply, technical analysts base their investments -or, more precisely,
their trades solely on the price and volume movements of securities. Using charts and a
number of other tools, they trade on momentum, not caring about the fundamentals.hile it is possible to use both techni%ues in combination, one of the basic tenets of
technical analysis is that the market discounts everything. Accordingly, all news about a
company already is priced into a stock, and therefore a stock*s price movements give
more insight than the underlying fundamental factors of the business itself.
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8ollowers of the efficient market hypothesis, however, are usually in
disagreement with both fundamental and technical analysts. The efficient market
hypothesis contends that it is essentially impossible to produce market4beating returns in
the long run, through either fundamental or technical analysis. The rationale for this
argument is that, since the market efficiently prices all stocks on an ongoing basis, any
opportunities for e cess returns derived from fundamental -or technical analysis would
be almost immediately whittled away by the market*s many participants, making it
impossible for anyone to meaningfully outperform the market over the long term.
FUNDA-"NTA. ANA.!SIS G
+ualitati,e Factors / The Com)any
=efore diving into a companyKs financial statements, weKre going to take a look at some of
the %ualitative aspects of a company.
8undamental analysis seeks to determine the intrinsic value of a companyKs stock.
=ut since %ualitative factors, by definition, represent aspects of a companyKs business that
are difficult or impossible to %uantify, incorporating that kind of information into a
pricing evaluation can be %uite difficult. n the flip side, as weKve demonstrated, you
canKt ignore the less tangible characteristics of a company.
+n this section we are going to highlight some of the company4specific
%ualitative factors that you should be aware of.
%usiness -odel
#ven before an investor looks at a companyKs financial statements or does any
research, one of the most important %uestions that should be asked isG hat e actly does
the company do This is referred to as a companyKs business model I itKs how a company
makes money. Fou can get a good overview of a companyKs business model by checking
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out its website or reading the first part of its 0B4L filing ->oteG eKll get into more detail
about the 0B4L in the financial statements chapter. 8or now, @ust bear with us .
5ometimes business models are easy to understand. Take Mc7onalds, for instance,
which sells hamburgers, fries, soft drinks, salads and whatever other new special they are
promoting at the time. +tKs a simple model, easy enough for anybody to understand.
ther times, youKd be surprised how complicated it can get. =oston Chicken +nc. is
a prime e ample of this. =ack in the early K1Bs its stock was the darling of all 5treet. At
one point the companyKs C# bragged that they were the first new fast4food restaurant
to reach J0 billion in sales since 0131 . The problem is, they didnKt make money by
selling chicken. /ather, they made their money from royalty fees and high4interest loans
to franchisees. =oston Chicken was really nothing more than a big franchisor. n top of
this, management was aggressive with how it recogni)ed its revenue. As soon as it wasrevealed that all the franchisees were losing money, the house of cards collapsed and the
company went bankrupt.
At the very least, you should understand the business model of any company
you invest in. The racle of maha , arren =uffett, rarely invests in tech stocks
because most of the time he doesnKt understand them. This is not to say the technology
sector is bad, but itKs not =uffettKs area of e pertiseE he doesnKt feel comfortable investing
in this area. 5imilarly, unless you understand a companyKs business model, you donKt
know what the drivers are for future growth, and you leave yourself vulnerable to being
blindsided like shareholders of =oston Chicken were.
Com)etiti,e Ad,antage
Another business consideration for investors is competitive advantage. A companyKs long4
term success is driven largely by its ability to maintain a competitive advantage 4 and
keep it. Powerful competitive advantages, such as Coca ColaKs brand name and
MicrosoftKs domination of the personal computer operating system, create a moat around
a business allowing it to keep competitors at bay and en@oy growth and profits. hen a
company can achieve competitive advantage, its shareholders can be well rewarded for
decades.
!arvard =usiness 5chool professor Michael Porter, distinguishes between
strategic positioning and operational effectiveness. perational effectiveness means a
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company is better than rivals at similar activities while competitive advantage means a
company is performing better than rivals by doing different activities or performing
similar activities in different ways. +nvestors should know that few companies are able to
compete successfully for long if they are doing the same things as their competitors.
Professor Porter argues that, in general, sustainable competitive advantage gained byG
A uni%ue competitive position Clear tradeoffs and choices vis4N4vis competitor
Activities tailored to the companyKs strategy A high degree of fit across activities -it is the
activity system, not the parts that ensure sustainability A high degree of operational
effectiveness
-anagement
Oust as an army needs a general to lead it to victory, a company relies
upon management to steer it towards financial success. 5ome believe that management isthe most important aspect for investing in a company. +t makes sense 4 even the best
business model is doomed if the leaders of the company fail to properly e ecute the plan.
5o how does an average investor go about evaluating the management of a company
This is one of the areas in which individuals are truly at a disadvantage compared to
professional investors. Fou canKt set up a meeting with management if you want to invest
a few thousand dollars. n the other hand, if you are a fund manager interested in
investing millions of dollars, there is a good chance you can schedule a face4to4face
meeting with the upper brass of the firm.
#very public company has a corporate information section on its website. Usually
there will be a %uick biography on each e ecutive with their employment history,
educational background and any applicable achievements. 7onKt e pect to find anything
useful here. &etKs be honestG eKre looking for dirt, and no company is going to put
negative information on its corporate website.
+nstead, here are a few ways for you to get a feel for managementG
01 Conference Calls
The Chief # ecutive fficer -C# and Chief 8inancial fficer -C8 host %uarterly
conference calls. -5ometimes youKll get other e ecutives as well. The first portion of the
call is management basically reading off the financial results. hat is really interesting is
the %uestion4and4answer portion of the call. This is when the line is open for analysts to
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call in and ask management direct %uestions. Answers here can be revealing about the
company, but more importantly, listen for candor. 7o they avoid %uestions, like
politicians, or do they provide forthright answers
21 -anagement Discussion and Analysis 3-D4A5
The Management 7iscussion and Analysis is found at the beginning of the annual report
-discussed in more detail later in this tutorial . +n theory, the M7 A is supposed to be
frank commentary on the managementKs outlook. 5ometimes the content is worthwhile,
other times its boilerplate. ne tip is to compare what management said in past years with
what they are saying now. +s it the same material rehashed !ave strategies actually been
implemented +f possible, sit down and read the last five years of M7 AsE it can be
illuminating.
61 O*nershi) and Insider Sales
Oust about any large company will compensate e ecutives with a combination of cash,
restricted stock and options. hile there are problems with stock options -5ee Putting
Management under the Microscope , it is a positive sign that members of management
are also shareholders. The ideal situation is when the founder of the company is still in
charge. # amples include =ill $ates -in the K
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report, The 8ive Things That Move the Currency Market I And !ow to Profit 8rom
Them, right nowQ
Cor)orate 8o,ernance
Corporate governance describes the policies in place within an organi)ation denoting the
relationships and responsibilities between management, directors and stakeholders. These
policies are defined and determined in the company charter and its bylaws, along with
corporate laws and regulations. The purpose of corporate governance policies is to ensure
that proper checks and balances are in place, making it more difficult for anyone to
conduct unethical and illegal activities.
$ood corporate governance is a situation in which a company complies with all of its
governance policies and applicable government regulations -such as the 5arbanes4 ley
Act of 6BB6 in order to look out for the interests of the companyKs investors and other stakeholders. Although, there are companies and organi)ations -such as 5tandard
PoorKs that attempt to %uantitatively assess companies on how well their corporate
governance policies serve stakeholders, most of these reports are %uite e pensive for the
average investor to purchase.
8ortunately, corporate governance policies typically cover a few general areasG
structure of the board of directors, stakeholder rights and financial and information
transparency. ith a little research and the right %uestions in mind, investors can get a
good idea about a companyKs corporate governance
Technical Analysis
Definition
A method of evaluating securities by relying on the assumption that market data, such as
charts of price, volume, and open interest, can help predict future -usually short4term
market trends. Unlike fundamental analysis, the intrinsic value of the security is not
considered. Technical analysts believe that they can accurately predict the future price of
a stock by looking at its historical prices and other trading variables. Technical analysis
assumes that market psychology influences trading in a way that enables predicting when
a stock will rise or fall. 8or that reason, many technical analysts are also market timers,
who believe that technical analysis can be applied @ust as easily to the market as a whole
as to an individual stock.
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9hat Is Technical Analysis:
Technical analysis is a method of evaluating securities by analy)ing the statistics
generated by market activity, such as past prices and volume. Technical analysts do not
attempt to measure a securityKs intrinsic value, but instead use charts and other tools to
identify patterns that can suggest future activity. Oust as there are many investment styles
on the fundamental side, there are also many different types of technical traders. 5ome
rely on chart patterns, others use technical indicators and oscillators, and most use some
combination of the two. +n any case, technical analystsK e clusive use of historical price
and volume data is what separates them from their fundamental counterparts. Unlike
fundamental analysts, technical analysts donKt care whether a stock is undervalued 4 the
only thing that matters is a securityKs past trading data and what information this data can
provide about where the security might move in the future.
INDUSTR! AND CO-PAN! PROFI."
%ombay Stoc "(change 3%S"5=ombay 5tock # change &imited is the oldest stock e change in Asia with a
rich heritage. Popularly known as =5# , it was established as The >ative
5hare 5tock =rokers Association in 05# , is tracked worldwide. #arlier an
Association of Persons -A P , the # change is now a demutualised andcorporative entity incorporated under the provisions of the Companies Act,
01;3,
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=5# -Corporati)ation and 7emutuali)ation 5cheme, 6BB; notified by the
5ecurities and # change =oard of +ndia -5#=+ . ith demutuali)ation, the
trading rights and ownership rights have been de4linked effectively addressing
concerns regarding perceived and real conflicts of interest. The # change is
professionally managed under the overall direction of the =oard of 7irectors.
The =oard comprises eminent professionals, representatives of Trading
Members and the Managing 7irector of the # change. The =oard is inclusive
and is designed to benefit from the participation of market intermediaries.
+n terms of organi)ation structure, the =oard formulates larger policy
issues and e ercises over4all control. The committees constituted by the =oard
are broad4based. The day4to4day operations of the # change are managed by
the Managing 7irector and a management team of professionals.
#istory of the %ombay Stoc "(change $
The =ombay 5tock # change is known as the oldest e change
in Asia. +t traces its history to the 0
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5ense futures contracts. The development of 5ense options along with
e%uity derivatives followed in 6BB0 and 6BB6, e panding the =5#Ks
trading platform. !istorically an open4cry floor trading e change, the
=ombay 5tock # change switched to an electronic trading system in
011;. +t took the e change only fifty days to make this transition.
NATIONA. STOC; "ational 5tock # change of +ndia &imited has genesis in the report of the !igh
Powered 5tudy $roup on #stablishment of >ew 5tock # changes, which recommended
promotion of a >ational 5tock # change by financial institutions -8+s to provide access
to investors from all across the country on an e%ual footing. =ased on the
recommendations, >5# was promoted by leading 8inancial +nstitutions at the behest of
the $overnment of +ndia and was incorporated in >ovember 0116 as a ta 4paying
company unlike other stock e changes in the country.
n its recognition as a stock e change under the 5ecurities Contracts -/egulation Act,
01;3 in April 0119, >5# commenced operations in the holesale 7ebt Market - 7M
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segment in Oune 011:. The Capital Market -#%uities segment commenced operations in
>ovember 011: and operations in 7erivatives segment commenced in Oune 6BBB.
The >ational 5tock # change of +ndia &td. is the largest stock e change of the
country. >5# is setting the agenda for change in the securities markets in +ndia. The last ;
years have seen us play a ma@or role in bringing investors from 939 cities and towns
online, ensuring complete transparency, introducing financial guarantee of settlements,
ensuring scientifically designed and professionally managed indices and by nurturing
the demateriali)ation effort across the country.
Our Technology
Across the globe, developments in information, communication and network
technologies have created paradigm shifts in the securities market operations. Technology
has enabled organi)ations to build new sources of competitive advantage, bring about
innovations in products and services, and to provide for new business opportunities.
5tock e changes all over the world have reali)ed the potential of +T and have moved over
to electronic trading systems, which are cheaper, have wider reach and provide a better
mechanism for trade and post trade e ecution.
>5# believes that technology will continue to provide the necessary impetus for
the organi)ation to retain its competitive edge and ensure timeliness and satisfaction in
customer service. +n recognition of the fact that technology will continue to redefine the
shape of the securities industry, >5# stresses on innovation and sustained investment in
technology to remain ahead of competition. >5#Ks +T set4up is the largest by anycompany in +ndia. +t uses satellite communication technology to energies participation
from around 96B cities spread all over the country. +n the recent past, capacity
enhancement measures were taken up in regard to the trading systems so as to effectively
meet the re%uirements of increased users and associated trading loads. ith up gradation
of trading hardware, >5# can handle up to 3 million trades per day in Capital Market
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segment. +n order to capitali)e on in4house e pertise in technology, >5# set up a separate
company, >5#.+T, in ctober 0111. This is e pected to provide a platform for taking up
new +T assignments both within and outside +ndia
>5#.+T is a state4of4the4art client server based application. At the server end, all
trading information is stored in an in4memory database to achieve minimum response
time and ma imum system availability for users. The trading server software runs on a
fault tolerant 5T/ATU5 main frame computer while the client software.
The telecommunications network uses .6; protocol and is the backbone of the
automated trading system. #ach trading member trades on the >5# with other members
through a PC located in the trading memberKs office, anywhere in +ndia. The trading
members on the various market segments such as CM " 8 , 7M are linked to the
central computer at the >5# through dedicated 3:Lbps leased lines and V5AT terminals.The # change uses powerful /+5C 4based U>+ servers, procured from 7igital and !P
for the back office processing. The latest software platforms like /AC 2 /7=M5,
$UPTA 4 5H&" /AC 8 /M5 :.; 8ront 4 #nds, etc. have been used for the # change
applications. The # change currently manages its data centre operations, system and
database administration, design and development of in4house systems and design and
implementation of telecommunicatiosolutions.
>5# is one of the largest interactive V5AT based stock e changes in the world.
Today it supports more than 9BBB V5ATs. The >5#4 network is the largest private wide
area network in the country and the first e tended C4 =and V5AT network in the world.
Currently more than 1BBB users are trading on the real time4online >5# application.
There are over 0; large computer systems which include non4stop fault4tolerant
computers and high end U>+ servers, operational under one roof to support the >5#
applications. This coupled with the nation wide V5AT network makes >5# the countryKs
largest +nformation Technology user.
+n an ongoing effort to improve >5#Ks infrastructure, a corporate network has been
implemented, connecting all the offices at Mumbai, 7elhi, Calcutta and Chennai. This
corporate network enables speedy inter4office communications
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Careers *ith Us
The >ational 5tock # change of +ndia &td. is the largest stock e change of the
country. >5# is setting the agenda for change in the securities markets in +ndia. The last ;
years have seen us play a ma@or role in bringing investors from 939 cities and towns
online, ensuring complete transparency, introducing financial guarantee of settlements,
ensuring scientifically designed and professionally managed indices and by nurturing the
demateriali)ation effort across the country.
>5# is a complete capital market prime mover. +ts wholly4owned subsidiaries,
>ational 5ecurities Clearing Corporation &td. ->5CC& provides clearing and settlement
of securities, +ndia +nde 5ervices and Products &td. -++5& provides indices and inde
services with a consulting and licensing agreement with 5tandard PoorKs -5 P , and
>5#.+T &td. forms the technology strength.
Today, we are one of the largest e changes in the world and still forging ahead. At
>5#, we are constantly working towards creating a more transparent, vibrant
innovative capital market. This invariably implies that our need for competent people is
continuous. As the leading stock e change and fiscal entity in the country, we believe in
recruiting the finest of talent in the industry.
e are looking for talent to be developed into future leaders of our organi)ation by cross4departmental e posure, continuous self4development opportunities and ongoing
reinforcement to develop enhance customer orientation leadership potential.
Awaiting you is an e cellent compensation package including medical benefits, super4
annotation benefits and a reward system designed to promote merit and professionalism.
Trading
>5# introduced for the first time in +ndia, fully automated screen based trading. +t uses
a modern, fully computeri)ed trading system designed to offer investors across the length
and breadth of the country a safe and easy way to invest.
The >5# trading system called K>ational # change for Automated TradingK
->#AT is a fully automated screen based trading system, which adopts the principle of
an order driven market.
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ICICI
O,er,ie*
+C+C+ =ank is +ndiaKs second4largest bank with total assets of /s. 9,::3.;< billion -U5J
21 billion at March 90, 6B09 and profit after ta of /s. 90.0B billion for fiscal 6B09.
+C+C+ =ank is the most valuable bank in +ndia in terms of market capitali)ation and is
ranked third amongst all the companies listed on the +ndian stock e changes in terms of
free float market capitali)ationW. The =ank has a network of about 1;B branches and9,9BB ATMs in +ndia and presence in 02 countries. +C+C+ =ank offers a wide range of
banking products and financial services to corporate and retail customers through a
variety of delivery channels and through its speciali)ed subsidiaries and affiliates in the
areas of investment banking, life and non4life insurance, venture capital and asset
management. The =ank currently has subsidiaries in the United Lingdom, /ussia and
Canada, branches in 5ingapore, =ahrain, !ong Long, 5ri &anka and 7ubai +nternational
8inance Centre and representative offices in the United 5tates, United Arab #mirates,
China, 5outh Africa, =angladesh, Thailand, Malaysia and +ndonesia. ur UL subsidiary
has established a branch in =elgium.
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+C+C+ =ankKs e%uity shares are listed in +ndia on =ombay 5tock # change and the
>ational 5tock # change of +ndia &imited and its American 7epositary /eceipts -A7/s
are listed on the >ew Fork 5tock # change ->F5# .
%OARD -"-%"RS
• Mr. >. Vaghul, Chairman
• Mr. 5ridhar +yengar
• Mr. &akshmi >. Mittal
• Mr. >arendra Murkumbi
#DFC %AN;
!78C =ank was incorporated in August 011: in the name of K!78C =ank &imitedK, with
its registered office in Mumbai, +ndia. The =ank commenced operations as a 5cheduled
Commercial =ank in Oanuary 011;.
The !ousing 7evelopment 8inance Corporation &imited -!78C was amongst the
first to receive an Kin principleK approval from the /eserve =ank of +ndia -/=+ to set up a
bank in the private sector, as part of the /=+Ks liberali)ation of the +ndian =anking in
011: !78C =ank has a network of over ;90 branches spread over 66< cities across
:B
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+ndia. All branches are linked on an online real4time basis. Customers in over 06B
locations are serviced through
Tata Consultancy Ser,ices
Com)any Profile$Tata Consultancy Ser,ices 3TCS5 is one of the leading information technologycompanies in the world. ith a workforce of over 2:,BBB professionals spread across
more than ;B global delivery centers, it helps organi)ations stay ahead with new
technology. +ts clients include seven of the top ten corporations in the 8ortune ;BB list of
the largest corporations in the United 5tates.
TC5 products and services help companies in various sectors effectively meet their
business challenges. ith technical e pertise and employing a fle ible approach to client
:0
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/anba y &aboratories &imited, head%uartered in +ndia, is an integrated, research
based, international pharmaceutical company, producing a wide range of %uality,
affordable generic medicines, trusted by healthcare professionals and patients across
geographies. The Company is ranked amongst the top ten global generic companies and
has a presence in 69 of the top 6; pharma markets of the world. The Company with a
global footprint in :1 countries, world4class manufacturing facilities in 00 and a diverse
product portfolio, is rapidly moving towards global leadership, riding on its success in the
world*s emerging and developed markets.
FINANCIA.
/anba y was incorporated in 0130 and went public in 0129. 8or the year 6BB3, theCompanyKs $lobal 5ales at U5 J0991 Mn reflected a growth of 02?. The #=+7TA at
U5J600 reflected an e pansion of 03?. Profit after Ta at U5J 00: Mn registered an
increase of 1;? over the previous year.
%#ARTI AIRT".
=harti Airtel is one of +ndiaKs leading private sector providers of telecommunications
services based on an aggregate of ;1,362,192 customers as on Oanuary 90, 6BBational
5tock # change of +ndia &imited ->5# .
PARTN"RS
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The company has a strategic alliance with 5ingTel. The investment made by 5ingTel is
one of the largest investments made in the world outside 5ingapore, in the company.
The company*s mobile network e%uipment partners include #ricsson and >okia. +n the
case of the broadband and telephone services and enterprise services -carriers ,
e%uipment suppliers include 5iemens, >ortel, Corning, among others. The Company also
has an information technology alliance with +=M for its group4wide information
technology re%uirements and with >ortel for call center technology re%uirements. The
call center operations for the mobile services have been outsourced to +=M 7aksh,
!indu@a TMT, and Teletech Mphasis.
NTPC >TPC &imited is the largest thermal power generating company of +ndia. A public
sector company, it was incorporated in the year 012; to accelerate power development in
the country as a wholly owned company of the $overnment of +ndia. At present,
$overnment of +ndia holds TPC has emerged as a truly national power company, with power generating
facilities in all the ma@or regions of the country. >TPC*s core business is engineering, construction and operation of power
generating plants. +t also provides consultancy in the area of power plant constructions
and power generation to companies in +ndia and abroad. As on date the installed capacity
of >TPC is 62,1B: M through its 0; coal based -66,TPC ac%uired ;B? e%uity of the 5A+& Power
5upply Corporation &td. -5P5C& . This OV company operates the captive power plants of
7urgapur -06B M , /ourkela -06B M and =hilai -2: M . >TPC also has 6TPC, $A+&, +ndian 8inancial +nstitutions and Maharashtra 5#= !olding Co.
&td. The present capacity of /$PP& is 2:B M .
>TPC*s share on 90 Mar 6B09 in the total installed capacity of the country was 6B.0
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>TPC has set new benchmarks for the power industry both in the area of power plant
construction and operations. +t is providing power at the cheapest average tariff in the
country. ith its e perience and e pertise in the power sector, >TPC is e tending
consultancy services to various organi)ations in the power business.
>TPC is committed to the environment, generating power at minimal environmental
cost and preserving the ecology in the vicinity of the plants. >TPC has undertaken
massive afforestation in the vicinity of its plants. Plantations have increased forest area
and reduced barren land. The massive afforestation by >TPC in and around its
/amagundam Power station -63BB M has contributed reducing the temperature in the
areas by about 9Zc. >TPC has also taken proactive steps for ash utili)ation. +n 0110, it set
up Ash Utili)ation 7ivision to manage efficient use of the ash produced at its coal
stations. This %uality of ash produced is ideal for use in cement, concrete, cellular concrete, building material.
A Centre for Power #fficiency and #nvironment Protection -C#>P##P has been
established in >TPC with the assistance of United 5tates Agency for +nternational
7evelopment. -U5A+7 . Cenpeep is efficiency oriented, eco4friendly and eco4nurturing
initiative 4 a symbol of >TPCKs concern towards environmental protection and continued
commitment to sustainable power development in +ndia.
As a responsible corporate citi)en, >TPC is making constant efforts to improve the
socio4economic status of the people affected by the pro@ects. Through its /ehabilitation
and /esettlement programmers, the company endeavors to improve the overall socio4
economic status of Pro@ect Affected Persons.
>TPC was among the first Public 5ector #nterprises to enter into a Memorandum
of Understanding -M U with the $overnment in 01irvanas*4 a potential
global giant. +nspired by its glorious past and vibrant present, >TPC is well on its way to
reali)e its vision of being 'A world class integrated power ma@or, powering +ndia*s
growth, with increasing global presence(
.
:;
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INSTA.."D CAPACIT!
A> V#/V+#
NTPC O9N"D
C A& 0; 66,
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Today, Larvy has access to millions of +ndian shareholders, besides companies,
banks, financial institutions and regulatory agencies. ver the past one and half decades,
Larvy has evolved as a veritable link between +ndustry, finance and people. +n Oanuary
011
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Corporate Advisory 8inancing Pro@ect 8inancing
/etail 8inancial Products
Larvy 7epositor 5ervices
#lectronic Custodial 5ervices7epository Participant
+nvestor 5ervices
Larvy 4 The TC#+ 7ealer
Medical Transcription
8inancial Products Marketed Through LarvyG
• +nitial Public fferings
• 8i ed +ncome Products8i ed 7eposits
7ebt +nstruments
=onds
Mutual 8unds
• Ta 5aving 5chemes
• Personal =anking Products
• Personal &oans insurance
8ROUP CO-PANI"S 4 DI'ISIONS$
;AR'! CONSU.TANTS .I-IT"D$ 7eals in /egistrar and +nvestment
5ervices
;AR'! S"CURITI"S .I-IT"D$ 7eals in distribution of various investment
products, vi)., e%uities, mutual funds, bonds and debentures, 8i ed deposits, insurance
policies for the investor
;AR'! IN'"STOR S"R'IC"S .I-IT"D$ 7eals in +ssue management,
+nvestment =anking and Merchant =anking,
;AR'! STOC; %RO;IN8 .I-IT"D$ 7eals in buying and selling e%uity
shares and debentures on the >ational 5tock # change ->5# , the !yderabad 5tock
# change -!5# and the ver4The4Counter # change of +ndia - TC#+ ,
:1
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A..IANC"S$
Larvy has a strategic alliance with Oardine 8leming +ndia 5ecurities &imited
-O8+5& I one of Asia*s most prestigious investment bankers I to leverage on the latter*s
investment banking e pertise. This would augment the retail distribution reach and
provide the +ndian access to the best global and local insights on financial markets.
Oardine is a respected investment banker with a demonstrated track4record of delivering
value to its clients spread over :9 countries. +t is ranked amongst the world*s T P 9
8oreign +nstitutional +nvestors -8++s .
+UA.IT! PO.IC!$
To achieve and retain leadership, Larvy shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide superior
%uality financial services. +n the process, Larvy will strive to e ceed Customer*s
e pectations.
+UA.IT! O%&"CTI'"S G
As per the Huality Policy, Larvy willG
=uild in4house processes that will ensure transparent and harmonious relationships
with its clients and investors to provide high %uality of services.
#stablish a partner relationship with its investor service agents and vendors that will
help in keeping up its commitments to the customers.
Provide high %uality of work life for all its employees and e%uip them with ade%uate
knowledge skills so as to respond to customer*s needs.
Continue to uphold the values of honesty integrity and strive to establish
unparalleled standards in the business ethics.
;B
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Use state4of4the art information technology in developing new and innovative
financial products and services to meet the changing needs of investors and clients.
5trive to be a reliable source of value4added financial products and services and
constantly guide the individuals and institutions in making a @udicious choice of same.
5trive to keep all stake4holders -shareholders, clients, investors, employees, suppliers
and regulatory authorities proud and satisfied.
;AR'!?;"! P"OP."$
%oard of Directors ? ;ar,y Consultants .imited
C. Parthasarathy 4 Chairman And Managing 7irector
M. Fugandhar 4 Managing 7irector M.5. /amakrishna 4 7irector
Prasad V Potluri 4 7irector
7r. P.V.5. Oaganmohan /ao I Company 5ecretary
Price ater !ouse, !yderabad I Auditors
%an ers$ UC =ank, =ank f =aroda, !78C =ank, 5tandard Chartered $rindlays
=ank.
Registered Office$ 'Larvy !ouse(, :3, Avenue :, 5treet >o.0, =an@ara !ills, !yderabad,
Andhra Pradesh, +ndia.
;AR'! -UTUA. FUND S"R'IC"S 3-FS DI'ISION5
* building a heritage of confidence –
There is a wide range of mutual fund services available at ;AR'! -UTUA.
FUND S"R'IC"S to the various categories like Asset Management Companies,
+nvestors, 7istributors and $eneral Users. e can use mutual fund services through web
also, the web site is karvymfs.com, with a click of the mouse we can enter into the karvymutual fund services, this provides +nteractive 8und 5ervice to %uery for account related
details and register specific services re%uests.
5ince its inception in 01
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and individuals. Larvy has since been performing a pivotal role as the intermediary I the
interface I between these players.
ith Mutual 8unds emerging as a distinct asset class, Larvy has made a strategic
choice to leverage the power of latest technology to provide a cutting edge to its services.
This, today, service nearly :B? of the asset management companies -AMCs across an
e tensive network of service centers with assets under service in e cess of /s.0B,BBB
crores.
Larvy*s ability to mass customi)e and offer a diverse range of products for
diverse range of customers has helped mutual fund companies to uni%uely position
themselves in the market place. These diverse range of services cut across multiple
delivery channels I service centers, web, mobile phones, call center I has brought hone
the benefits of technology to investors, distributors, and the mutual funds.
$oing forward, it shall strive to create new products and services, which would
address the needs of the end customer. +ts single4minded focus in delivering products for
customers has given the distinguished position of being the preferred provider of
financial services in the country. These services can be broadly categori)ed as belowG
♦ +nvestor 5ervices
♦ 7istributor 5ervices
♦ AMC 5ervices
♦ $eneral 5ervices or +nformation 5ervices
a5 IN'"STOR S"R'IC"S$
/ ;ee)ing ahead *ith the changing in,estor e()ectations -
+nvestor is a person who invests in the mutual funds in the mutual funds concept.
!e placed in the bottom of the structure, but he plays a pivotal role, without investor we
cannot imagine the mutual funds. There is a wide range of investor services provided by
karvy mutual fund services to the investors and also Mutual 8und +nvestors have the
convenience of logging on to the web site and utili)e various account related services. To
;6
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utili)e these web services the investor has to first register himself with the karvymfs.com
in the investor services with the web site, the karvymfs.com gives authori)ed +7 and
Password to the registered user, with a click of the mouse he can gets the services,
without authori)ed +7 and Password he cannot get the services. The ma@or online services
for investors can be categori)ed as belowG
View their account statements online
$et a snapshot of all their investment serviced by LarvyG
Portfolio Valuation 5ervices
>AV =roadcast 5ervices
>AV Alert 5ervices
/eceive Account statements by emailApart from the afore4mentioned services, any visitor from the web site has the
option to know Mutual 8und Concepts, check out the latest >AVs of his"her favorite
Mutual 8unds, etc., obtain dividend information, get the latest load structure information
etc.
b5 DISTRI%UTOR S"R'IC"S$
/ Re/defining ser,ice -
Larvy recogni)es the distributor, as on invaluable customer, in the Mutual 8und
transaction chain. Leeping this in mind, Larvy has engineered several initiatives for the
distributors and for the benefit of his clients.
A-C S"R'IC"S $
- !our )artners in )rogress /
;9
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There is wide range of AMC 5ervices provided by Larvy Mutual 8und 5ervices to
the registered Asset Management Company*s -AMCs .The AMC can now viewing
investor information and re%uesting various reports related to the investor, is possible
through the web site also, @ust by the click of the mouse. +n order to use the respective
AMC services on the site, Mutual 8und AMCs must enter into agreement with Larvy
Consultants &imited, whereby users are assigned a User +7 and Password at the fund
level. AMC may use this +7 and Password to access all the site services. +t provides
registered AMCs can check out various >&+># and MA+&4=ACL services and gets an
update on the investments of its investors.
Online Ser,ices$
0. +nvestor Account 5tatements
6. Huery on application number
9. Huery on investors* name
-ail/%ac Ser,ices$
0. Transaction /eports
6. >et Assets Under Management /eport
9. Asset Movement /eport
:. 5lab /eport