NISM Update September 2011


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NISM Update September 2011

  1. 1. Concept Sharing Workshop on Financial Literacy in School EducationSEPTEMBER 2011 A New Dimension in Risk Management: Managing the Risk of Financial Models – Part 2 SEBI Financial Education Resource Persons Workshop Pocket Money Programme in Thane and Vashi
  2. 2. FOREWORD NISM recently held its first convocation ceremony for students of the PGPSM and CFERM programmes and it was a memorable occasion for more reasons than one. This issue contains a coverage of the event along with photographs that some of those who attended the event will cherish for a long, long time. We are also sending a copy of the Convocation Address delivered by the Hble Chief Guest, Padma Vibhushan Dr. C. Rangarajan at the event, along with this issue of NISM Update. This months issue also contains the second and concluding part of the article A New Dimension in Risk Management: Managing the Risk of Financial Models. If youve enjoyed reading the first part, do make sure you catch up with the final part. Also in this issue are details of a unique concept workshop organized by NISM for developing a curriculum for financial literacy in school education. The programme was attended by representatives of all regulatory agencies, viz. RBI, SEBI, IRDA, PFRDA along with representative from NSE, BSE and CBSE. NISM also conducted two programmes for school teachers under the Pocket Money programme for school teachers in Thane and Navi Mumbai, respectively. Along the same lines, a 7-day workshop for a new batch of Financial Literacy Resource Persons for the Western region was held at NISM Bhavan in August. Theres all this and more in this issue of NISM Update. As always, do keep writing to us with your feedback and comments. NISM UPDATE Team NiSM NATIONAL INSTITUTE OF SECURITIES MARKETS NISM Bhavan, Plot No. 82, Sector - 17, Vashi, Navi Mumbai - 400 705 Phone: +91- 022-66735100-106 | Fax: 022-66735110 NiSM September 2011
  3. 3. convocation NiSMNISM held its first Convocation for students of the dignitaries and guests. Mr. Soneji, Registrar, NISMPost Graduate Programme in Securities Markets then presented the activity report of the institute.(PGPSM) and Certificate in Financial Engineering He highlighted the achievements of the institute,and Risk Management (CFERM) on September 9, especially the progress achieved in certification of2011 at the Y. B. Chavan Centre, Nariman Point, securities markets intermediaries, NISMs effortsMumbai. These long-term programmes were in implementing SEBIs initiative of creatingoffered under the aegis of the School for awareness about financial literacy amongst theSecurities Education (SSE) at NISM. The masses, the value additions to the industryceremony was presided by Mr. U. K. Sinha, through knowledge dissemination andChairman, Board of Governors, NISM. Padma interactions on key issues by thought leadersVibushan Dr. C. Rangarajan, Chairman, Economic from India and abroad, among others. Mr. SonejiAdvisory Council to the Prime Minister was the also presented the plans for the institute duringChief Guest. the coming years.The programme started at 6:30 p.m. at Rangswar The convocation certificates were presented byHall, Y. B. Chavan Centre with the invocation of the Mr. U. K. Sinha, Chairman, Board of Governors,Saraswati Vandana. Prof. G Sethu, OSD & In- NISM. Apart from the certificates, there was thecharge NISM, extended a warm welcome to the State Bank of India sponsored Gold Medal for the September 2011 NiSM 3
  4. 4. September 09, 2011 4 NiSM September 2011
  5. 5. student securing top rank in PGPSM along The Hble Chief Guest Padma Vibhushanwith a cash prize of Rs. 1 lakh and a Canara Dr. C. Rangarajan, in his convocationBank sponsored Gold Medal for the student address, spoke about the thrust given by thesecuring top rank in CFERM. The medals along institute in providing education and trainingwith the citation certificates to these two top to prepare ready-made professionals to fillranking students were distributed by Hble the gap in the securities markets. HeChief Guest Padma Vibhushan Dr. C. provided insights of successes and failuresRangarajan. Mr. Amalendu Gupta won the SBI of regulators in various parts of the world.medal while Mr. Chaitanya Nemali won the He also pointed out that while India is on theCanara Bank medal for best academic growth path, a constant vigil must always beperformance for PGPSM and CFERM, maintained on the financial markets to stayrespectively. on course. Addressing the student community, he said “Please maintain alwaysWhile delivering his address, Mr. U. K. Sinha, a professional approach with high ethicalChairman, Board of Governors, NISM and standards and by doing so you will serve theChairman of SEBI articulated SEBIs plan for country the best.” (Copies of Dr. C.building a strong institute in NISM. He said Rangarajans Convocation Address, printedthat the vision for NISM is to actively in the form of a booklet, were distributed tocollaborate with the securities markets everyone at the end of the ceremony.)fraternity and academia to take the institutetowards the nex t level of growth. Mr. U. K. Sinha presented the Chief Guest aCongratulating all students, he said “this memento on behalf of NISM. Thecertification will help you not only in getting a convocation ceremony was followed bybetter position in life but also to contribute dinner.meaningfully to the growth of the securitiesmarkets.” September 2011 NiSM 5
  6. 6. A NEW DIMENSION IN RISK MANAGEMENT: MANAGING THE RISK OF FINANCIAL MODELS – PART II AKHLAQUE AHMAD, LECTURER, SCHOOL OF SECURITIES EDUCATION, NISM Are models really responsible? Excerpts from Part 1 At a conference in February 1998, an industry Regardless of what type of stock market trade magazine called Derivatives Strategy, transaction one performs, risk is always present. sponsored a discussion group titled “First Kill All People need a fast and reliable way to calculate the Models”. This group reflects the recent and control the risk involved in stock trading…. backlash against financial models. Many figures in the financial industry question whether The functioning of the Black-Scholes Model is models can match a traders skill and gut intuition based on the use of stock options. What makes about market dynamics. stock options so appealing is that the purchaser knows that the limit of his/her losses can only be Derivatives make the news, because, like an the premium price. However, there are no limits airplane crash, their losses can be dramatic and to his/her gains, because the limit of the value of chaotic. Enormous losses by Proctor & Gamble the stock is theoretically limitless…. and Gibson Greetings and the bankruptcies of Barings Bank and Orange County, California have If there were a formula that could tell you the fair been attributed to the use of models. price for an option while taking into account all necessary factors, it would come of great use to However, Scholes says that it was not so much the the financial world…. formula itself that caused these losses, rather its misuse by market traders. Every statistician and This is where the Black-Scholes Option Pricing mathematician knows you cannot predict the Model comes in. Black and Scholes found a future with 100% accuracy. Laws as rigid as the theoretical way to neutralize risk. They laws of physics do not govern the market. Peter discovered that they could reduce risk by creating Fisher, a New York economist says: “Math doesnt a balance in which all movements in the markets drive financial markets, people drive financial cancelled each other out… . markets, and people are not predictable. We do not yet have a universal theory of human Although a marvellous achievement, there was a behaviour or human motivation.” practical problem with the formula. It assumed that markets were always in equilibrium; that It was not the model by itself that caused these supply equals demand. A Harvard graduate by the losses, but the blind faith that market traders put name of Robert Merton solved this problem by into it. They all jumped at the prospect of making introducing the notion of continuous time.... money without risk. However, this formula cannot eliminate risk, it can only minimize it. Like So overwhelming was the sudden mass use of the many mathematical models, it relies on inputs Black-Scholes Model, that when the stock market and assumes a functioning market. It is a crashed in 1978, the influential business powerful way to manage risk, but its not a crystal magazine Forbes put the blame squarely onto ball. Scholes says this equation should be used as that one formula.... a tool for making decisions, not a platform from which all decisions should be made.6 NiSM September 2011
  7. 7. Fisher says: “If a random bolt of lightning hits you us to be very humble in applying mathematics towhen youre standing in the middle of the field, it markets, and to be extremely wary of ambitiousfeels like a random event. But if your business is to theories, which are in the end trying to modelstand in random fields during lightning storms, human behaviour. We like simplicity, but wethen you should anticipate, perhaps a little more should remember that it is our models that are simple, not the world.robustly, the risks youre taking on.” We do need models and mathematics – youThis formula is a method to calculate these risks, cannot think about finance and economicsnot a risk neutralizer. “There is a danger of without them – but one must never forget thataccepting models without carefully questioning models are not the world. Whenever we make athem,” says Joseph A. Langsam, a former model of something involving human beings, wemathematician who develops and tests models are trying to force the ugly stepsisters foot intofor fixed- income securities at Morgan Stanley. Cinderellas pretty glass slipper. It doesnt fitThus, Modelers are not the culprit for all financial without cutting off some essential parts. And inlosses, but traders blind faith in them. cutting off parts for the sake of beauty and precision, models inevitably mask the true riskWhat care should be taken? rather than exposing it. The most important question about any financial model is how wrongMany traders still use the ideas behind the Black- it is likely to be, and how useful it is despite itsScholes Options Pricing Model, if not the model assumptions. You must start with models anditself. The fundamental ideas behind the equation then overlay them with common sense andforever changed the stock market. Today, traders experience.use many principles of the Black-Scholes Model asguides through the treacherous waters of the Many academics imagine that one beautiful daystock market. For this, Scholes and Merton we will find the right model. But there is no rightbecame Nobel laureates. model, because the world changes in response to the ones we use. Progress in financial modellingIn finance we study how to manage funds – from is fleeting and temporary. Markets change andsimple securities like dollars and yen, stocks and newer models become necessary. Simple, clearbonds, to complex ones like futures and options, models with explicit assumptions about small numbers of variables are therefore the best waysubprime CDOs and credit default swaps. We to leverage your intuition without deludingbuild financial models to estimate the fair value of yourself.securities, to estimate their risks and to show howthose risks can be controlled. How can a modeltell you the value of a security? And how did these Referencesmodels fail so badly in the case of the subprimeCDO market? Dammers, Jerry (1998). “Option Pricing: The Concept & the Black- Scholes Method” Valuemetrics, Inc. (2000)Models are tools for approximate thinking; they Devlin, Keith. (November 1997). “A Nobel Formula”serve to transform your intuition about the future Mathematical Association of America (2000)into a price for a security today. Its easier to thinkintuitively about future housing prices, default Hull, J.C. (2010). “Options, Futures, and other Derivativesrates and default correlations than it is about CDO New York” Prentice Hall.prices. CDO models turn your guess about futurehousing prices, mortgage default rates and a Rubash, Kevin. (1998). “A Study of Option Pricing Models” Bradley University (2000)simplistic default correlation into the modelsoutput: a current CDO price. Scott Patterson (2010). ”The Quants: How a New Breed of Math Whizzes Conquered Wall Street and NearlyOur experience in the financial arena has taught Destroyed It” Crown Business New York September 2011 NiSM 7
  8. 8. CONCEPT SHARING WORKSHOP ON FINANCIAL LITERACY IN SCHOOL EDUCATION Mr. Ramesh Krishnamurthi, Director-Capital Markets, Ministry of Finance, addressing the group NISM organized a concept sharing workshop on anomalies. He also said that awareness about Curriculum Development in Financial Literacy in financial transactions has to be created at an early School Education at the premises of Securities age so that people understood concepts like Exchange Board of India, New Delhi, on August Aadhar, PAN, KYC, among others. Presently, he 16, 2011. The programme was attended by said, peoples knowledge was limited to knowing representatives from all regulatory agencies, viz. about tax savings instruments. He was confident RBI, SEBI, IRDA, PFRDA, and from NSE, BSE, NISM that financial education would make India a and CBSE. powerhouse in terms of development. Addressing the gathering, Mr. Ramesh Mr. Prashant Saran, Whole Time Member, SEBI Krishnamurthi, Director – Capital Markets, emphasized on the 3Rs followed in the past – Ministry of Finance informed the participants aRithmetic, Reading and wRiting that makes one that curriculum development on financial literacy literate. Todays school syllabus should be was very close to the heart of the ministry of integrated with financial education without finance and that they would like to take all efforts causing any extra burden on books, he said. He to ensure that financial literacy is inculcated as mentioned the case of people working in the part of the school education. He noted that in a financial sector but having inadequate country of 1.2 billion people, only 2 million knowledge about managing their own finance as people were having demat accounts. Likewise, he an example of poor awareness about personal added, a vast segment of people were excluded finance. Its imperative to inculcate knowledge of from the reach of banking services. Curriculum managing their own finances at an early age, he development in Financial Literacy would said. And the ideal way to start early, he said, therefore play a key role in addressing these would be to introduce the topic at the school8 NiSM September 2011
  9. 9. stage itself. He informed the gatheringthat he was glad to know that theministry of finance has taken a stepforward in this direction.Speaking on the occasion, Prof. GSethu, Officer on Special Duty, NISMmentioned that supply side anddemand side are to be strengthenedto make the financial services industrygrow efficiently. In financial markets,supply side dominates the demandside. Prof. Sethu informed thegathering that regulators were puttingtheir efforts to make it balanced. Healso noted that while developing thecurriculum, we need to think whereIndia would be after 10 - 20 years andefforts should be taken early to seethat the young generation areprovided with the right inputs onfinancial education. Mr. Prashant Saran, Whole Time Member, SEBI The workshop has decided to take the process forward by compiling materials on various topics on financial literacy. The respective regulatory agencies have been entrusted the responsibility of preparing the material while NISM will coordinate the entire exercise. September 2011 NiSM 9
  10. 10. SEBI FINANCIAL EDUCATION RESOURCE PERSONS WORKSHOP The second round of the recruitment and Money discussed the importance of money in empanelment of Resource Persons for SEBIs terms of value. Participants were also briefed Financial Education was held at Navi Mumbai about asset classes (physical assets, financial during August 20-27, 2011. Forty eight resource assets, etc.) along with concepts of safety, persons were recruited and empanelled. The liquidity and returns. The session on banking workshop was inaugurated on August 21, 2011. covered deposit and loan products. The various The function was attended by Prof. G. Sethu, OSD, features of secured loans and unsecured loans NISM, Shri K. Sukumaran, Dean-SIEFL, Mr. G. P. were debated so as to get a fair understanding of Garg, Chief General Manager, SEBI and Mr. N credit markets. There were also sessions on Hariharan, General Manager, SEBI. insurance and SEBIs modules on financial The workshop began with a session on the various education. At the end of the sessions, the regulatory agencies and the roles they perform. candidates were asked to make a presentation on The participants were provided a macro picture of selected topics. The workshop also had two capital markets wherein the functioning of stock resource persons of the previous batches share exchanges, clearing corporations, depositories, their experiences at the ground level with the market intermediaries, viz. brokers, distributors, new batch. Also included was a session on merchant bankers, custodians, etc. were Communication Skills to impart soft skills that discussed. This session was followed by one on would be required while conducting workshops. Financial Planning where the significance of Mr. Amit Trivedi anchored the entire workshop. planning and budgeting finances of individuals Certificates were distributed to all participants at were discussed. The session on Time Value of the end of the workshop.10 NiSM September 2011
  11. 11. NISM LAUNCHES ITS OWN TEST CENTRESNISM is glad to announce that its two state-of- Nariman Point, Mumbaithe-art test centres are now available for 1st Floor, C Wing, Mittal Court, Oppositecandidates wishing to appear for certification Vidhan Bhavan, Nariman Point, Mumbai,examinations mandated by Securities and Maharashtra.Exchange Board of India (SEBI). You can register Phone : 022-66540591-93for any of the NISM exams by filling in theprescribed registration form available on the Vashi, Navi MumbaiNISM Online Certification System at Ground Floor, NISM Bhavan, Plot No. 82, Sector - 17, Near HDFC Bank, Vashi, Navi Mumbai,The location of the two test centres are as follows: Maharashtra. Phone : 022-66735185-86PREVENTION OF SEXUAL HARASSMENT AT THEWORKPLACEThe Supreme Court of India has made it NISM recently held an interactive session on themandatory for every organization to put in place subject to sensitize employees on the topic. Titledpreventive, corrective and punitive measures to “Prevention of Sexual Harassment at theeliminate sexual harassment at the place of work. Workplace”, the session was conducted by seniorNISM has already appointed a three-member resource person and subject matter expertcommittee to deal with complaints originating Ms. Shanti Mojumdar on Friday, July 29, 2011. Allfrom staff members on this issue. staff members of NISM attended the session. September 2011 NiSM 11
  12. 12. POCKET MONEY PROGRAMME As part of our mission to spread financial literacy The programme at Navi Mumbai was held on among the student community, the Pocket August 27 and 28 in the Municipal School at Money programme was conducted in Thane and Shiravne Gaon. A total of 73 school teachers Navi Mumbai during August 2011. attended the program. The inaugural session was In Thane, the programme was held on August 19 attended by Mr. Chabuswar, Deputy and 20 at Narendra Ballal Hall within the premises Commissioner, NMMC and Mr. Sonawane, of Thane Municipal Corporation (TMC). A total of Programme Co-ordinator. Mr. Ashutosh Wakhare 100 school teachers attended the programme. and Mr. Murli Iyer conducted the workshop. The inaugural session was attended by Shri Ramchandra Fadtare, Sabhapati, Pre-primary and Secondary education and Mrs. Chaya Mankar, Assistant Commissioner, Pre-primary and Secondary education, TMC. The workshop was conducted by Mr. Nitin Tike, Mr. Ashutosh Wakhare and Mr. Murli Iyer.12 NiSM September 2011