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This Presentation includes a Excel File as well neone who is in need of it can cont me at This presentation is an attmpt to show a virtual portfolio of CDS and its effect of diff betas

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  • Govt. stepped back due to global meltdown.
  • Cds

    1. 1. CDS Introduction to India Analysis With Indian Bond Market
    2. 2. Outlines <ul><li>CDS Arrival. </li></ul><ul><li>Working of CDS. </li></ul><ul><li>Present Indian Bond Market. </li></ul><ul><li>Comparing with and without CDS position of Indian Economy. </li></ul><ul><li>Benefits. </li></ul><ul><li>Drawbacks. </li></ul>
    3. 3. History of CDS <ul><li>CDS were introduced in 1997 by JP Morgan to shift the risk of default to third party. </li></ul><ul><li>By the end of 2007, the CDS market had a notional value of $45 trillion. </li></ul><ul><li>Controversy arises after Bear Stearns Case and Lehmann Brothers failed in 2008. </li></ul><ul><li>The outstanding notional amount in the CDS market at the end of June`09 was $57 trillion (nearly Rs2,760 trillion today). </li></ul>
    4. 4. CDS Arrival in India <ul><li>CDS as mentioned in CFO Round table is Just Show up Fizz as when world’s GDP was 35 Tn $ CDS was at 65 Tn $. Source: CMS Market Securities Chief Presentation. </li></ul><ul><li>Govt. is introducing CDS in order to reform the Debt Market in country. </li></ul><ul><li>Govt. had given guidelines to introduce CDS in 2007 but had taken a back step at that time. Source: </li></ul><ul><li>Finance Ministry likely to introduce It at the end of 2009. Source Mint. </li></ul>
    5. 5. Working of CDS <ul><li>CDS is basically used for B to B business operations. </li></ul><ul><li>For Ex:- If a Mutual Fund Co. is having a Equity Fund whose underlying stocks are highly risky and co. wants to safeguard itself from such risk, then it approach any bank which for a specified amount of premium will headge risk of mutual fund. </li></ul>
    6. 6. Working Contd… Mutual Fund Co. Insuring Bank Fixed Premium at recovery rates Equity Value of fund if it defaults Equity Returns Fixed Capital Raising
    7. 7. Indian Companies Hedging <ul><li>For Ex:- A mutual Fund company having a stock portfolio consisting of stocks of HDFC, Reliance, BHEL, Hero Honda and Infosys. </li></ul><ul><li>Considering the beta of these companies we can determine the volatility in these stocks. </li></ul><ul><li>By determining volatility, we can allocate the fund to these companies. </li></ul>
    8. 8. Virtual Portfolio <ul><li>The Normal Size of typical MF in India is about 1000 cr . Source: </li></ul><ul><li>Let us suppose, the size in our example is 1000 cr. </li></ul><ul><li>It will invested in stocks of these 5 companies with different percentages. </li></ul><ul><li>Mutual fund Co. will require to earn 15% per year as its returns for its investors. Source: </li></ul><ul><li>Insurance Co. insures its returns of 15% on 12% premium(Recovery rate) annually payment by the MF Co. </li></ul><ul><li>Indian Govt. Risk free rate is 8.24%. Source: </li></ul><ul><li>Indian Market Returns is 24.66%. Source: </li></ul>
    9. 9. Findings <ul><li>If the Portfolio is risky having Beta of 1.16 then cost of capital will be high which will result in lesser profit to MF Company. </li></ul><ul><li>If the portfolio is less risky and having Beta of 0.79 then it will result in more profit to MF Company. </li></ul>
    10. 10. Conclusion <ul><li>Bubble Mystery. </li></ul><ul><li>In A Typical CDS Deal, A Hedge Fund Will Sell Protection To A Bank, Which Will Then Resell The Same Protection To Another Bank, And Such Dealing Will Continue, Sometimes In A Circle. That Usually Creates A Huge Concentration Risk. Source: </li></ul><ul><li>Better Regulations need to curb down its effects as in the absence of a Regulator there is no scope to adequately monitor counterparty risk in credit-default swaps. Already happened in US. </li></ul>
    11. 11. Thank You <ul><li>Presented By: </li></ul><ul><li>Smit Shrivastava. </li></ul>