VOL 3.19

JAN 01

NewsInvestor CheckBuzzwordsDerivatives in InsuranceDid You KnowDebateCommodities ArticleQuiz & Crossword

234567911

1

45

45.4

45.8

46.2

46.6

47

30-Nov-09 3-Dec-09 8-Dec-09 11-Dec-09

Rs/$

Rs/$

15500

15900

16300

16700

17100

17500

30-Nov 03-Dec 08-Dec 11-Dec

Gold(per 10 gram)

Gold(per 10 gram)

70

72

74

76

78

80

82

30-Nov 03-Dec 08-Dec 11-Dec

Oil(per bbl)

Oil(per bbl)

20000000

23000000

26000000

29000000

4900

5000

5100

5200

5300

30-Nov 03-Dec 08-Dec 11-Dec

future ratesopen interest

RepoReverse RepoCall rateInflation (as on 14 dec)Forex Reserve (as on 18th dec)91day T-BillIIPGS 2019

4.75%3.25%2.10-3.35%4.78%$283.643 billion3.7652%10.3%, 7.6289-7.7250%

46.2

46.4

46.6

46.8

47

47.2

47.4

14-Dec-09 17-Dec-09 22-Dec-09 29-Dec-09

Rs/$

Rs/$

15000

15300

15600

15900

16200

16500

14-Dec 17-Dec 22-Dec 29-Dec

Gold(per 10 gram)

Gold(per 10 gram)

66

70

74

78

82

86

90

14-Dec 17-Dec 22-Dec 29-Dec

Oil(per bbl)

Oil(per bbl)

13000000

16500000

20000000

23500000

27000000

4900

5000

5100

5200

5300

14-Dec 17-Dec 22-Dec 29-Dec

future ratesopen interest

13000000

16500000

20000000

23500000

27000000

4900

5000

5100

5200

5300

14-Dec 17-Dec 22-Dec 29-Dec

future ratesopen interest

4,800.00

5,000.00

5,200.00

5,400.00

5,600.00

16300

16600

16900

17200

17500

14-Dec-09 17-Dec-09 22-Dec-09 29-Dec-09

sensex nifty

Australia announces Net filter to control internet abuse.•

Germany’s Daimler is in talks to increase its 10% stake in Russian •

truckmaker Kamaz by a further 5-6%.

Dutch Shell, Europe’s largest oil company, is planning to sell oilfields in •

Nigeria valued at up to $5 billion.

SANOFI-AVENTIS agreed to buy Chattem, the maker of Gold Bond •

medicated body powder, for $1.9 billion to enter the US consumer

health care market.

FORD Motor agreed with China’s Zhejiang Geely Holding Group on a •

sale of its Volvo Car unit.

Convergys and Microsoft set up community technology centre in Banga-•

lore.

ONGC temporarily suspends its first major ultra deep oil drilling off Kochi •

Coast.

Government of India and FCCI set up ‘Invest India’ JV to attract FDI.•

India releases FDI policy first draft.•

Bharti Airtel starts Middle East data services.•

Punjab to set up self contained IT-knowledge park.•

India, Japan to launch defence action plan, no n-deal for now.•

Max India to sell 9.4 pct to Goldman unit for $115 million.•

Ranbaxy Laboratories has sold its entire stake in Chinese JV Ranbaxy •

Guangzhou China Ltd (RGCL) to HNG Chembio Pharmacy Co Ltd.

Jindal Power to raise 72 bln rupees via IPO.•

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The US Dollar and Japanese Yen: “An Interesting Relationship”

Introduction:

Japanese yen against the U.S. dollar, USD/JPY is a complicated proposition. This should not be the case when the Japanese yen is understood in terms of U.S. treasury

bonds, notes and bills. The main driver of this pair is not only trea-suries, but interest rates in both Japan and the U.S. This means that the pair is a measure of risk that determines when to buy or sell the USD/JPY, in terms of interest rates. Knowing where interest rates are heading will determine the direction of this pair.

The Relationship:

Traditionally, the USD/JPY has been known as a currency pair because of its close correlation with U.S. treasuries. When treasury bonds, notes and bills rise, USD/JPY prices weaken. The logic is that the U.S. would never default on its bond obligations, known as defensive assets; hence its safe haven status is secure. This relationship can be viewed in two ways: through the U.S. dollar and interest rates. When interest rates are heading higher during the course of a trading day, or are suspected to head higher in the future, treasury bond prices will go down. This will send the U.S. dollar higher and, in turn, USD/JPY prices will strengthen. In this instance, the market is more in search of yields from treasury trades and a lower USD/JPY price. This is a short position. Yields are the rate of interest paid on a treasury instrument. Yields and bond prices have an inverse relationship. When yields slump, a flight to liquidity occurs, and this liquidity must find a home. This relationship is a measure of market risk.

The USD/JPY pair has been the market determinant of risk. When markets are in search of risk trades, treasury bond yields will rise as interest rates fall. Yields are also a market determinant of risk as this correlation is opposite to the USD/JPY prices because yield trades are risky due to the market’s ability to turn quickly when panic occurs. If panic or fear hits the markets, treasury bond prices will rise, yields will turn lower, the U.S. dollar will turn lower and the USD/JPY will appreciate, a long position. This is due to the yen’s status as the premiere funding currency. Selling a lower-yield-ing currency, such as the yen, with current interest rates below its major trading part-ners, such as the euro, UK, U.S., Canada, Swiss, Australia and New Zealand, allows the yen to be borrowed at a low interest rate to seek higher interest rate instruments within its major trading partners for carry trade purposes.

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By M.R.Ravi, II MBA

“When I was young I used to think that money was the most important thing in life. Now that I am old, I know it is.”

Oscar Wilde

Conclusion:

U.S. stock markets, treasury bonds and the USD/JPY also have inverse relationships. When stock markets rise, bond prices fall, yields rise and the USD/JPY should be sold because investors are more willing to trade risky assets. Stocks are viewed as risky assets and not backed by a government with the ability to turn if fear grips the market. Liquidity here takes on risk rather than the safe status of treasuries. On summary, the correlative points are: bonds up; USD/JPY up; USD down; yields down and stock mar-kets up.

“More and more these days I find myself pondering how to reconcile my net income with my gross habits.”

John Nelson.

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Buzz Words

Churning A period of heavy trading with few sustained price trends and little movement in stock market indexes.

BadwillThe negative effect felt by a company when shareholders and the investment commu-nity find out that is has done something that is not in accordance with good business practices.

Cockroach TheoryA market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.

BulgeA slang term used to describe a rapid advance in prices within the commodities mar-ket.

Cold Calling A method used by brokers to obtain new business by making unsolicited calls to po-tential clients.

Fat CatA slang word used to describe executives who earn what many believe to be un-reasonably high salaries and bonuses. These top executives also receive generous pensions and retirement packages, consisting of extra compensation not available to other company employees.

Derivatives in Insurance

While the global economy is struggling to jump out of the recession, India’s quest for rapid economic growth is changing the very phase of the economy. Indian econ-

omy is now flooded with many new set of reforms including SEBI’s reforms in mutual funds, governments large scale financial sector reforms announced recently, to name a few among these. Moreover, Asia’s oldest bourse BSE is framing new tactics to revive its struggling derivatives segment. All these are expected to catalyze the growth of the Indian economy. The recent decision of opening derivatives segment in insurance can also contribute to this objective.

The role of derivatives is breaking its boundaries so as to make its debut in the insur-ance sector. The IRDA’s (Insurance Regulatory and Development Authority of India) move of introducing derivatives in insurance could change the way life insurance com-panies’ function in India. Such a move which enable life insurers to invest in equity derivatives, would allow these firms to hedge the risks emanating from cash markets. IRDA have not reached on any conclusion on the percentage of the equity portfolio that would be invested in derivatives market. But it is expected that insurers can invest up to 5% of their other than approved portfolio in derivatives for traditional insur-ance plans and for ULIP’s the investment limit is 5% of the entire portfolio.

Derivatives are any investment whose returns are based on the change in price of another investment. The most common derivatives are stock options, which allow the purchaser to either buy or sell a stock or index at a specific price in the future. An equity derivative is one whose value is based on the value of a given equity or index, prede-cided between the buyer and seller of the contract depending on the expectation of the price movement of the underlying instrument on the date of delivery. The value is derived from the estimated future price of stocks or stock indices and is generally used as a hedge or insurance against the risks associated with the underlying instrument. So far, they have been allowed to invest only in the cash market.

For traditional policies, Life insurers, at present, are allowed to invest 50 per cent of their funds in government securities, 15 per cent in infrastructure-related projects, and the balance 35 per cent in other-than-approved instruments consisting of equities, mu-tual funds and other money market instruments. In the unit-linked insurance products, insurers are allowed to invest their corpus in equities.

The opening of derivatives gate for life insurance companies bring in the following advantages. If insurers are allowed to enter the derivatives market, it will not only im-prove liquidity and volumes but also reduce market volatility due to greater participation. Through these Insurance companies will be able to hedge their equity exposure and protect returns of policyholders if these firms are allowed to invest in equity derivatives. This also gives them an opportunity to buy put options and hedge their equity portfolio

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By Traicymol John, II MBA - Fin

against fall in investment values. It also improves the trading volumes of equity deriva-tives in the exchanges.

For example an insurance company that has invested in equity shares is convinced about the long-term prospects of these shares. At the same time it wants to protect it-self against the short-term risk of a fall in the markets, which could erode the value of its portfolio and hurt investor confidence. One option it has in the Indian market to hedge its portfolio against market risk is to sell Nifty futures. If the market falls, it will make a profit when it buys back the futures at a lower price, negating the impact of the fall in the value of its portfolio. It could also buy a Nifty put option by paying an option premium, which gives it the right to sell the Nifty index at a predetermined price. The insurance companies fully welcome this as it generates additional income, if deriv-ative investments are allowed. Insurers will be able to take a view on market direction, hedge their portfolio and will throw up opportunities for further product innovation.

Did You Know

1. HMT, Hindustan Fertiliser Scooters India, Hindustan Cables, Triveni Structurals and NEPA are the six loss-making Public Sector Units offered by the government on long term lease to private players for periods up to 99 years. The proposal to lease out loss-making Public Sector Units instead of rehabilitating or selling them, will form part of the government’s divestment policy under which it has already firmed up a plan for profit-making firms.

2. Nomination and will are not same. The nominee can act as trustee in case of life insurance policy or bank account. However, at all times, provision of the will prevails over the nomination. So, if a person is a nominee in an insurance policy, he could be entitled to receive the money on demise, but not to use it. In fact, he could be respon-sible to pass on the benefits to another person, may be a disabled relative or a minor of the policy holder.

3. As per section 60 of Income Tax Act, 1961, if a person transfers only income from a property to his relatives and not the property itself, then he continues to be assessable to income tax for the income from such property, despite the transfer, whether revo-cable or irrevocable.

4. In the beginning, credit cards were just charge accounts, offered by individual stores and only usable at those stores. The first credit card that could be used at mul-tiple locations was offered by The Diner’s Club in 1950.

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A second reason why science cannot replace judgement is the behavior of financial markets. Martin Feldstein

Given the professionalism of Michigan teachers, I think they’re not teaching because of the financial rewards. John Engler

Is GST beneficial to Indian Economy?

Yes: GST implementation has added benefits to India Incorporation:

By Enoch Sarin Paul

Reforms in indirect taxes are far more com-plicated than any that might be attempted under direct taxes. This is because the tax-ation powers, under the Constitution, are shared between the Centre and the state governments. In fact, the power to levy indi-rect taxes on some commodities has been exclusively reserved for states.Moreover, tax at the retail outlets is levied at varying

rates by the states, which makes for a country with fragmented markets and distortions.The solution to the fragmentation and distortion is going to be the goods and services tax, or GST.GST is a part of the pro-posed tax reforms that centre around evolving an efficient and harmonized consump-

tion tax system in the country. France was the first country to introduce this system in 1954.Today, it has spread to over 140 countries.Presently, there are parallel sys-tems of indirect taxation at the central and state levels. Each of the systems needs to be reformed to eventually harmonize them. In the Union Budget for the year 2006-2007, Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared be-tween the Centre and the States.

The first step towards introducing GST is to progressively converge the service tax rate and the CENVAT rate.Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of man-ufacturing and service sector. The introduc-tion of goods and services tax will lead to

No: Implementation of GST is not a ben-eficial to India Incorporation

By Ravi Kiran (I MBA - Kengeri)

While a GST regime appears to be an exer-cise in simplification, it is likely to increase government interference in business, while also discriminating against the poor

EQUITY ISSUES BYPASSED:First, a single rate structure of GST, one where the rich and the poor pay the same tax, is iniquitous given the disparities in in-come in India, which have only grown dur-ing the reform years. Even at equal rates of taxation, the burden on net consumption is more on the poor. At the BPL level the entire income is con-sumed and at a level above, savings is nominal. These seg-ments must constitute 70 per cent of our population. Bulk of the savings happen at the highest end (20 per cent), which may be saving 50 per cent or more to pull the average savings rate of the economy to 37-38 per cent of GDP.

Thus a GST of 16 per cent translates to 16 per cent of the total income for the poor whereas the same rate becomes 8 per cent for someone at the highest income brack-et who is consuming only half his income. Second , India needs the full breadth of tax policies for delivering on or correcting so many social and economic disparities. GST will virtually remove fiscal policy as a tool for achieving any of the social and eco-nomic objectives and leave the entire task to monetary policy, which is largely ineffec-tive in India, given the low levels of moneti-sation. More than half the population would actually need government help through tax policies on a sustained basis or during a crisis. We saw this during the farmers’ dis-

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the abolition of taxes such as Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, and eliminate the cascading effects of mul-tiple layers of taxation.Once these taxes are subsumed within GST and the rate of State GST for a product is uniform across the country, a border tax equivalent to that rate would equalise the burden between domestic and imported good. GST will fa-cilitate seamless credit across the entire supply chain and across all states under a common tax base.

The prices of commodities are expected to come down in the long run as dealers pass on the benefits of re-duced tax incidence to con-sumers by slashing the pric-es of goods. Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.The GST regime is likely to confer substantial benefits on the export-ing community in so far as it would permit the neutralisation of a substantial burden of State-level taxes suffered on inputs and finished products, which was not the case today. Moreover, this would be true of both goods and services in respect of all State taxes that are subsumed within the GST. The GST system could boost the bottomline of India Inc in an appreciable manner as it will bring down their net burden of taxation by as much as 25-30 per cent.

tress and the government’s proposal for the debt waiver. Many of the debt-ridden farm-ers had borrowed from local money lend-ers and many of the distressed simply did not fall within the radar of formal systems. Much of Rs 60,000 crore relief announced remained on paper.

Third, the argument that GST is an effec-tive plug on tax leakage and does away with administrative interference is far from convincing.. To be effective, GST has to be implemented right through to the retail level. On most products the gross margins given to final retailers is about 10-12 per cent. On

this, if one could evade the GST of 16 per cent, it is al-most 2 per cent of sales – the kind of net margins on sales most retailers end up making. There will be a defi-nite temptation to show just as much sales as to absorb the input taxes paid. This will result in the tax authori-ties asking for physical stock reconciliation for cross veri-

fication — first for internal consistency and next with third party suppliers and buyers. And soon enough, more rules and regula-tions will follow which negate the spirit of the professed self-assessment.

TRANSITION TOO RAPID:Lastly, the implementation process marks a wholesale rather than incremental shift, bringing with it associated problems. In-dia’s implementation of Modvat and Cenvat (over 20 years) was a smooth experience only because it was implemented gradually. Wholesale changes make for easy political targeting, whereas small but successive in-cremental changes through the annual bud-gets do not. It gives time for people to adjust and provide the government enough room to manoeuvre tactically. Radical changes make for potential conflicts between tax col-lectors and tax-payers. Gradualism would have been more welcome.

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Commodity ETFs are a great investment vehicle for investors who need to hedge risk or want to gain exposure to physical goods like agricultural products, precious metals, and energy resources. This article gives you an insight into what commodity ETFs are all about, the types of commodity ETFs and a few basic strategies on trading in Com-modity ETFs.

What are Commodity ETFs????

Commodity ETFs are Exchange Traded Funds that are traded in a regular stock ex-change with commodities as underlying assets. The make-up of a commodity ETF is a little different than a normal ETF. Most ETFs consist of equities relating to a particular market index, sector, or region.

Commodity ETFs consist of either company stocks that are involved with the commod-ity or they consist of futures and derivative contracts in order to track the price of the underlying commodity, or in some cases indexes. These contracts represent the com-modity and will track the performance of that particular product. However, the actual commodity is not in the ETF. For example if you buy a Gold ETF, you are not buying an asset full of gold bars. You are buying an ETF consisting of assets backed by gold.

Commodity ETFs thus offer a simple way to expose your investment strategy to the price and performance of any commodity, without actually owning the commodity it-self.

Types of Commodity ETFs

To start with, there are broad-based commodity ETFs that track multiple types of com-modities in one fund, like the GSG - the iShares S&P GSCI Commodity-Indexed Trust ETF. There are also funds that track one particu-lar commodity like oil ETFs, gold ETFs, and energy ETFs. There are even sub-sector ETFs like solar energy ETFs that just track this particular type of energy.

The SPDR Gold Shares ETF (GLD) is a gold ETF that tracks the price performance of the gold bullion. Owners of the

Commodity ETFsBy Andrea Dominica Simento

9

ETF do not actually own the gold asset, they are held by a Trust. The Trust is expected to issue baskets in exchange for deposits of gold for when the baskets are redeemed.

The USO (US Oil) is an ETF that tracks the performance of crude oil. The fund consists of futures contracts for different oils, gases, and petroleum based-fuels. At times the oil ETF may consist of options on oil futures contracts, forward contracts for oil, and OTC transactions based on the price of oil.

The DBA (PowerShares DB Agriculture) is a commodity ETF that tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index, Optimum Yield Ag-riculture Excess Return. The index is composed of futures contracts on some of the most liquid and widely traded agricultural commodities like wheat, soy beans, corn and sugar.

The DBE (PowerShares DB Energy ETF) tracks the Deutsche Bank Liquid Commodity Index, Optimum Yield Energy Excess Return. The index is composed of futures con-tracts on some of the most heavily traded energy commodities in the world like crude oil, heating oil, gasoline and natural gas.

To be continued in the next issue…

“Money is something you have to make in case you don’t die.” - Max Asnas.

“Anyone who lives within their means suffers from a lack of imagination.” - Oscar Wilde

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Crossword

Quiz

Across

4. A three-legged option strategy, often used in forex trading, that can provide a hedge against the undesired movement of an underlying asset.5. A situation in which one broker who has direct access to a stock exchange per-forms trades for a broker who does not have access.6. A buzzword that refers to a benchmark used to evaluate a fund’s performance.

1.The strategy of investing in different kinds of assets to reduce risk is called:

2.The interest rate the Federal Reserve charges banks for short-term loans is the:

3.The rate which banks charge preferred borrowers

4.Many financial advisers recommend DRIPs, which are:

5.The primary purpose of the International Monetary Fund is to:

6.Beta measures the -

“A bargain is something you can’t use at a price you can’t resist.” - Franklin Jones

“Money is better than poverty, if only for financial reasons.” - Woody Allen

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Down

1. A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors.2. A type of chart developed by the Japanese in the 1870s that uses a series of vertical lines to illus-trate general levels of supply and demand for certain assets.3. A retraction of stock prices or of the market in general.

Answers

Cross word Quiz1. Diversification

2. Discount rate

3. Prime rate

4. Dividend reinvestment plans (they take the dividend paid by a particular stock and use it to purchase more shares of that stock, rather than paying it to the shareholder. It is an easy way to buy more shares of stock, if you do not need the dividend income.)

5. Promote international monetary cooperation.

6. Volatility of a particular stock

Team

Archana Kushwah Co-ordinator

Nitin Mishra Investors check

Ravi M R Debate

Andrea Simento Commodities Market

Ramya

& Supreetha Student Article & Scam

Gyanesh Shroff, Editor

Manesh Paul Mani Jr. Co-ordinator

Dorin Jane Quiz & Did You Know

Mantri Ankit Atul Quotes & BuzzWords

Pottim Sahiti Reddy Crosswords

Vipul Jain Graph, Rates

Amutha Priya D News

Bhargav K Compiling and Design

Navakranth Pothkanoori Compiling and Editing

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