October 27, 2013

Volume 14

JpMorgan’s

$5 Billion

Mortgage DEAL

Listing of

Stock exchanges

Dynamic Hedging

RISCON’13 Begins!

The week was eventful for club Finniche, as we successfully completed

the Online quiz round ENCEPHALON for RISCON’13. The quiz saw

participation from b-schools like FMS, IIM-L, MDI, NMIMS, IIM-R.

FinNiche expresses sincere thanks to all 120 teams for participating in

the round. Congratulations to the teams that have been shortlisted for

the final round.

The week ended on a restful note as junior batch finished their second

end terms. The economic and political environment was not any less

eventful. Forex reserves up for third week in a row adding $1.9 billion

to touch $281 billion. FIIs poured in Rs 12,100 crores in Indian stock

market in October, leading to a healthy economy.

In this edition of FinXpress, we have opinion section on JPMorgan's $5

Billion Mortgage Deal and in focus section on ‘Listing of stock

exchanges’. Do look over the ‘News of the Week’ section for further

noteworthy news and updates. The ‘Market of the Week’ covers the lat-

est trends in the market this preceding week.

We hope that’s you find the articles in this edition of FinXpress

interesting as well as useful. We look forward for your feedback,

comments, acknowledgements as well as criticisms regarding the same

so. Do write us back and let us know your opinions.

Happy Reading!!!

Regards,

The Editorial Team

FinNiche Club

From The Editorial FinXpress Volume 14

Oct 27, 2013

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

October 2013 Page 1

CONTENTS

From The Editorial

In Focus: Listing of stock

exchanges

Term of the Week: Delta

Hedging

Opinion: JPMorgan's $5

Billion Mortgage Deal

Market This Week

News

Fun Corner

Page 3

IN FOCUS

April 2, 2013 was a landmark day in the

history of financial intermediation in

India. On this day the Securities and

Exchange Board of India (SEBI) allowed

the country’s stock exchanges to raise

capital from the public through listing of

their own shares. They however cannot

list on themselves. This move was however

contrary to the recommendations of the

committee headed by former RBI governor

Dr. Bimal Jalan in 2010.

According to SEBI, stock exchanges can

be listed when they put in place an

appropriate mechanism to tackle conflict

of interest. No stock exchange will be

allowed to list shares on its own equity

trading platform, and to float an initial

public offering (IPO) until it completes at

least three years of operations. The fight to

list the NSE is a consequence of this

decision. But before deciding whether the

National Stock Exchange of India Ltd

(NSE) should list, it is important to

understand the nature of the beast, the

underlying asset.

The business of India’s largest exchange,

formed two decades ago, is unlike any of

the companies that list on it, barring

banks. In all other companies, the profits

and losses are limited to one firm, its

clients and shareholders. But NSE, like

the Bombay Stock Exchange, provides a

critical financial market infrastructure

and the business needs to be seen from

two sides — profits and compliance.

Investing in companies that run critical

financial infrastructure, such as stock

exchanges, credit rating agencies,

clearing corporations and depositories,

carries a risk of public policy. The critical

differentiator here is regulatory oversight

the company has been outsourced and

entrusted with. Any compromise here

would reflect not only on NSE but on all

the 1,600-plus companies listed on it.

A listed firm’s returns to investors is

more than mere increased profits — a Re

1 of net profit translates into Rs 20 in the

value of the firm that would trade at a PE

multiple of 20. So, the pressure from

investors can hang like a golden sword on

the heads of managers.

Further, even if the oversight committees

are chaired by public interest directors,

their efficacy and effectiveness when

functioning within the same corporate

structure as the rest of the organisation

is unproven. The regulatory function – a

clear public good that needs public

scrutiny and control – needs to be

completely isolated from the profit-

generating part of the exchange.

However, there are many examples all

around the world where listed stock

exchanges like NYSE and LSE are

performing better as compared to their

unlisted counterparts. Their success can

be attributed to proper regulatory

environment protecting investor

confidence and interest. It remains to

been seen what happens next when NSE

investors like SAIF Partners, Actis,

General Atlantic, IDFC, NVP, Tiger

Global, Temasek Holdings, and

Beacon start pushing for the NSE listing.

FinNiche

Listing of Stock Exchanges

—- By Mukul Gupta

October 2013

Page 4

Term of the week

The goal of a delta-neutral portfolio (or delta-neutral hedge) is to combine a long position in a stock with a short position in a call option so that the value of the portfolio does not change when the value of the stock changes. A delta-neutral portfolio is a risk free combination of a long stock position and short calls where the number of calls to sell is equal to: Number of options needed to delta hedge = number of shares hedged/delta of call option Delta is the change in the price of an option for a one-unit change in the price of the underlying security: Delta of call = (C1 – C0) / (S1 – S0) = delta C/ delta S

Where: delta C= change in the price of the call over a short time interval delta S = change in the price of the underlying stock over a short time interval

Suppose during the last ten minutes of trading, call options on XYZ common stock have risen from $ 1.20 to $1.60. Shares of the underlying stock have risen from $51.30 to $52.05 during the same time interval. The delta of the call option would be Delta (call) = (1.6$ - 1.2$)/ (52.05$ - 51.30$)

= $ 0.4 / $ 0.75 = 0.533 Delta neutral portfolios are best illustrated with an example. You own 60,000 shares of Arthurall Company common stock that is currently selling for $50. A call option on Arthurall with a strike price of $50 is selling at $4 and has a delta of 0.60. The number of call options necessary to create a delta-neutral hedge is as follows: Number of options needed to delta hedge = 60,000 / 0.6 = 1, 00,000 options or 1000 option contracts Because we are long the stock we need to short these many options Now we will see the effect on portfolio of a 1$ increase in the price of Arthurall stock. As the price have increased by 1$ your stock position will increase by 60,000*1= $60,000 and the decrease in price of the option would be 1$*0.6=0.6 (delta of the option is 0.6). So the price of option will increase by 0.6 and since you are short on options you would lose 0.6*1, 00,000=$60,000. So the total

change in portfolio value is 60,000-60,000. A key consideration in delta-neutral hedging is that the delta-neutral position only holds for very small changes in the value of the underlying stock. Hence, the delta-neutral portfolio must be continually rebalanced to maintain the hedge. This is called a dynamic hedge. As the underlying stock price changes, so does the delta of the call option. As the delta changes, the number of calls that need to be sold to maintain a risk-free position changes. Hence, continuously maintaining a delta-neutral position can be very costly in terms of transaction costs.

FinNiche

DELTA HEDGING

—— By Ashish Agarwal

October 2013

Page 2

OPINION

The $5.1 billion that JPMorgan Chase has agreed to pay hardly ends its legal troubles over mortgage securities it sold. It's merely a down payment. JPMorgan still faces heavy financial burdens. The bank has set aside $23 billion to cover legal costs — and it may need it all. JPMorgan called its latest settlement an "important step" toward resolving allegations over mortgage-backed securities it sold.

The $5.1 billion would resolve federal claims that it misled Fannie Mae and Freddie Mac about risky home loans and securities they bought before the housing market collapsed. Fannie and Freddie were rescued in a taxpayer bailout in 2008 as they sank under the weight of mortgage losses. Between 2005 and 2007, JPMorgan sold $33 billion in mortgage securities to Fannie and Freddie. That was the second-most sold to Fannie and Freddie ahead of the crisis, behind only Bank of America. The securities soured after the housing bubble burst in 2007, losing billions in value. Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. The two don't directly make loans to borrowers. They buy mortgages from lenders, package them as bonds, guarantee

them against default and sell them to investors. This system helps make loans widely available to borrowers. The Federal Housing Finance Agency, which oversees Fannie and Freddie, announced Friday's settlement with JPMorgan, the largest U.S. bank. The deal is expected to be followed by a broader agreement with the Justice Department that's still being negotiated. Last weekend, JPMorgan reached a tentative deal with Justice to pay $13 billion. The $13 billion tentative deal included $4 billion to resolve the FHFA claims. Even reduced by that amount, it would be the largest penalty the government has extracted from a company for actions related to the financial crisis. It's unclear when the broader agreement will be finalized. The bank still faces local, state

and federal investigations into its sale of the mortgage-backed securities. Most of the trouble stems from JPMorgan's acquisition of Bear Stearns in March 2008. In September, JPMorgan agreed to pay $920 million and admit that it failed to oversee trading that led to a $6 billion loss last year in its London operation. That combined amount, in settlements with three regulators in the U.S. and one in Britain, is

one of the largest fines ever levied against a financial institution.

In another case, the company agreed to pay a $100 million penalty and admitted that its traders acted "recklessly" with the London trades. If that weren't enough, JPMorgan is tied up in litigation over the Bernard Madoff Ponzi scheme. JPMorgan

has said it's responding to investigations by Justice and other regulators. The bank hasn't given details. But it has previously faced accusations that it and other banks ignored signs that Madoff was a con artist. Edward DeMarco, the FHFA's acting director, said the settlement with JPMorgan "provides greater certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae's and Freddie Mac's assets on behalf of taxpayers. "The FHFA sued 18 financial institutions in September 2011 over their sales of mortgage securities to Fannie and Freddie. The total price for the securities sold was $196 billion. The government rescued Fannie and Freddie during the financial crisis when both were on the verge of collapse. The companies received taxpayer aid totaling $187 billion.

FinNiche

JPMorgan's $5 Billion Mortgage Deal —- By Vipul Kumar Singh

October 2013

Page 6

OPINION

Of the $5.1 billion it's agreed to pay, New York-based JPMorgan will pay about $2.74 billion to Freddie and $1.26 billion to Fannie for mortgage bonds it sold. JPMorgan is paying a separate $1.1 billion

for home loans it sold them. The mortgage securities that JPMorgan sold to Fannie and Freddie included billions that were packaged by two institutions that failed in 2008: Wall Street bank Bear Stearns and Seattle-based Washington Mutual, the largest U.S. savings and loan. JPMorgan bought Bear Stearns and Washington Mutual in deals brokered by the government. A number of big banks, including JPMorgan, Goldman Sachs and Citigroup, previously have been accused of abuses in sales of securities linked to mortgages in

the years leading up to the crisis. Together, they have paid hundreds of millions in

penalties to settle civil charges brought by the SEC, which accused them of deceiving investors about the quality of the bonds they sold. But no high-level Wall Street executives has been sent to jail over charges related to the financial crisis. The banks in all the SEC cases were allowed to neither admit nor deny wrongdoing — a practice that brought criticism of the agency from judges and investor advocates. Some lawmakers and other critics have

demanded that the big bailed-out banks and senior executives be held accountable. JPMorgan had long enjoyed a reputation for managing risk better than its Wall Street competitors. The bank came through the financial crisis in better shape than most of its rivals. But in recent months, it has been engaged in a number of embarrassing and costly settlements. In September, the bank agreed to pay $920 million and admit that it failed to oversee trading that led to a $6 billion loss last year in its London operation. That combined amount, in settlements with three regulators in the U.S. and one in Britain, is one of the largest fines ever levied against a financial institution. In another case, the company agreed to pay a $100 million penalty and admitted that its traders acted "recklessly" with the London trades. In a first for a major company, JPMorgan itself admitted in the

agreement with the SEC over the trading loss in London that it failed in its oversight.

FinNiche

October 2013

Page 7

FINANCIAL KNOWLEDGE FinNiche

Market This Week

This week saw NSE nifty witnessing a roller coaster ride by touching up to 21000

levels and closing little below. Business front has yielded much improved quarterly

results in particular with ICICI, Yes Bank and Kotak Mahindra managing to beat

street’s expectations. In spite of mixed reaction by the market FIIs continued to be

net buyers of 13,000 crores.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 20,175.53

Fifty Days 19,584.58

Hundred and Fifty Days 19,434..23

Two Hundred Days 19,475.43

October 2013

Page 8

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 9.00%

Repo Rate 7.50%

Reverse Repo Rate 6.50%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 23%

INR / 1 USD 61.62

INR / 1 Euro 85.13

INR / 100 Jap. YEN 63.48

INR / 1 Pound Sterling 99.93

Commodity Unit Rs / Unit % Change

Gold 10 grams 30734.00 0.56%

Silver 1 Kg 49709.00 -0.79%

Crude Oil 1 bbl 6045.00 -0.75%

Base Rate 9.8%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8%-9.0%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 6030.87

Fifty Days 5855.60

Hundred And Fifty Days 58460.6

Two Hundred Days 5,890.4

Key Policy Rates and Reserve Ratios

Exchange Rates

October 2013

Page 9

FINANCIAL KNOWLEDGE

Hindustan Unilever Q2 net up 13.24% at Rs 913.8 crores FMCG major Hindustan Unilever Ltd (HUL) on Saturday reported a 13.24 per cent increase in standalone net profit at Rs 913.8 crore for the second quarter ended September 30.The company had posted a profit of Rs 806.92 crore in the corresponding quarter a year ago. Net sales climbed to Rs 6,747.2 crore in the quarter from Rs 6,155.41 crore a year earlier. Government to finalise draft policy on incentives for green buildings The Centre was finalising a draft policy on non-financial incentives to promote green buildings. Addressing the “Green Building Congress-2013” organised by CII and the Indian Green Building Council, top official of the Ministry of Housing and Urban Poverty Alleviation said the Centre would hold dialogue with State governments on such incentives for green buildings. Centre is also planning to do about a million houses in the next four years by entering into an MoU to promote this energy saving green technology. Facebook becomes Google advertising ally Google-owned online ad-placing service

DoubleClick announced that the way has been cleared to include space at Facebook. DoubleClick Bid Manager is a way for marketers to buy online ad space at websites across the Internet. Starting in a few months, clients will be able to buy inventory on FBX via DoubleClick Bid Manager. Motorola looking to exit wireless LAN business Motorola Solutions Inc is exploring the sale of its underperforming wireless LAN business, which has grappled with declining share in a market dominated by rivals such as Cisco Systems Inc. An exit from the wireless LAN market would come as Motorola seeking to focus on its core government and public safety division.

S&P 500 ends at record high, boosted by tech results The S&P 500 ended at another record high on Friday, boosted by gains in technology shares after strong results from Microsoft and Amazon.com. Amazon.com shares rose as high as $368.40, a record, after the online retailer reported stronger-than-expected sales growth. Shares ended up 9.4 percent at $363.39.The market has risen following last week's legislation to avoid a U.S. debt default and end a partial government shutdown, as well as increased speculation the Federal Reserve will delay scaling back its stimulus for several months. Forex reserves up $1.9 bn to $281 bn India's foreign exchange reserves shot up for a third week in a row, adding a healthy $1.9 billion to touch $281.12 billion in the week to October 18 on account of growth in a key component. In the previous reporting week, the reserves had increased by $1.51 billion to $279.24 billion. Foreign currency assets (FCAs), which form the largest chunk of the reserves, jumped $1.8 billion to $252.7 billion in the week under review. The gold reserves remained unchanged at $21.765 billion

while the special drawing rights increased by $25.6 million to $4.46 billion. India's reserve position with the IMF rose by $12.7 million to $2.205 billion. Tata-SIA plans to take to skies by June The Tata-Singapore Airlines joint venture hopes to start flying by June, the airline’s Chairman, Prasad Menon, said on Friday, a day after the proposal was cleared by the Foreign Investment Promotion Board (FIPB). Tata Sons holds a 51 per cent stake while Singapore Airlines has taken up the rest of the equity in the new full-service airline. The two partners signed a Memorandum of Understanding in September and immediately applied to

FinNiche

NEWS

October 2013

Page 10

FINANCIAL KNOWLEDGE

the FIPB for permission to establish the airline. The decision to set up a new airline came within months of the Centre reversing its earlier decision to not allow foreign airlines to acquire a stake in domestic airlines. JP Morgan agrees $5.1bn settlement JP Morgan has reached a $5.1bn (£3.2bn) settlement with the US Federal Housing Finance Agency (FHFA) over charges it misled mortgage giants Fannie Mae and Freddie Mac during the housing boom. The bank added that the agreement relates to "approximately $33.8 billion of securities purchased by Fannie Mae and Freddie Mac from JP Morgan, Bear Stearns and Washington Mutual" from 2005 - 2007. As part of the agreement with the FHFA, the bank will pay $4bn to Fannie Mae and Freddie Mac to settle claims that it violated US securities law. Yellen, as head of FED, confirmation talks next week White House officials say the have submitted the paperwork necessary to confirm Janet Yellen as the next head of the Federal Reserve. Ms Yellen will meet US Senators next week as part of the process to install her as the next head of the central bank. Officials say they are

confident that she will secure the 51 Senate votes needed to confirm her position. Applications invited to head the troubled MCX-SX MCX-SX on Monday published an advertisement in a newspaper with the

title - 'Applications invited for the post of Managing Director & CEO'. Beside qualifications and experiences, the new chief shall report to the board of directors and shall be responsible for conduct of affairs of the Exchange under the direction and supervision of the Board. Joseph Massey, the previous managing director and CEO of MCX-SX, resigned from the exchange's board along with Jignesh Shah, founder of the Financial Technologies group, after Securities and Exchange Board of India (SEBI) stepped into ring-fence the bourse from any fallout of the NSEL scam and ordered extraordinary general body meeting (EGM). Banks replace IT as key drivers of markets

Banks are becoming the main drivers of Indian shares, with the NSE Bank index up 11.8 per cent in October compared with a 7.7 per cent gain for the broader Nifty. By contrast, gains in IT shares have been slower recently. The sector had been the key driver in markets. The NSE IT Index has gained 8.1 per cent so far this month, although the sub-index is still up 46.2 per cent for the year compared with the 13.5 per cent fall for banks.

US dismisses Nawaz Sharif's plea for intervention The US has dismissed Pakistan Prime Minister Nawaz Sharif's plea for an intervention on Kashmir issue, asserting that its position on this matter has not changed and would encourage New Delhi and Islamabad for a dialogue.

FinNiche

NEWS

October 2013

FinNiche

Fun Corner

FinQuiz 1. What is the bias that occurs in hedge funds when

including a fund in the index because of it’s past performance? ________

2. What is the buying of shares of a company and selling short the firm making the acquisition called? _______

3. What is the portfolio called that has the same sensitivities as the S&P 500, but does not hold all 500 stocks in the index? _________

4. What do FIIs invest in Indian market through? ______ 5. The term “Golden Triangle” refers to one of Asia’s two

main opium producing areas consisting of three countries of Southeast Asia. Identify the three.

Last Week’s Answers

1. Board of Directors

2. Sustainability

3. Relative Strength Index

4. Warren Buffet

5. Leveraged Buyout

CARTOONS

FUN CORNER

Page 11

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Volume 14 Publisher : Mukul Gupta

October 2013