Pravartana Runners up - Financial product competition
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Runners up at Pravartana - The Financial Product Designing Competition
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Pravartana Runners up - Financial product competition
- 1. Team Numero Uno K. J. SOMAIYA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Team Members : - • Trimurti Gupta • Vikas Sonwane • Pulkit Giria
- 2. 0 20 40 60 80 100 120 140 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 4/1/2013 7/1/2013 10/1/2013 1/1/2014 4/1/2014 7/1/2014 10/1/2014 1/1/2015 DollarPriceperBarrel Monthly Europe Brent Spot Price – 5 Year Chart Spot Price The fall of crude oil • 5 year lows since 7th Jan 2015 • 10 Year low of $45.69 on 15th Jan 2015 *Source : - U.S. Energy Information Administration
- 3. Reasons for this fall Supply Shale Oil Boom •10% and growing of Daily production of crude oil OPEC excess supply •Price war for hurting Shale gas producers •Gain Market Share from Iran & Iraq Alternative Sources of Energy •Electric Vehicles •Bio fuel supply Demand China Slowdown •Chinese economy is slowing to a growth rate of 7.3% Europe Debt Crisis •Slow down in economies or Greece, Spain ,Portugal, Ireland and Cyprus Global Weak Demand •Weak Demand •Drive towards alternative sources of energy
- 4. High Supply Demand Mismatch • A Historical surplus production in excess of 2 million barrels per day *Source : - U.S. Energy Information Administration
- 5. “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” -Warren Buffett The ‘Oracle of Omaha’
- 6. Why Oil prices will recover – Fundamentals Shale Oil Economics not sustainable • Majority of Oil producers have a breakeven in a wide range of $ 59-$80 • The profitability of shale gas is not uniform • High Debt for some shale gas projects • OPEC countries have a lot of war chest Economic Fundamentals • Demand from Indian Economy having a GDP growth rate of 7.7% • Stronger European and North American economies • OPEC strategy Outcome – Either shale market would break – OPEC would need to cut down production – Either ways price will increase
- 8. How to gain from the rise in oil price ? OIL STOCKS • The Performance of these stocks depends on management efficiency • No direct Exposure to Oil as a Commodity COMMODITY FUTURES • Very Risky • Costly • Cannot invest for a longer term There is NO FINANCIAL product which gives a DIRECT exposure to OILfor a LONGER TERM in India.
- 9. The Emerging India Oil Exchange Traded Fund - OETF OETF Seller Buyer What is OETF ? The Oil exchange trade fund will be a domestic exchange traded security designed to track the daily prices movements of MCX crude oil index. The Asset Management Company will issue shares that may be purchased and sold on the National Stock Exchange. Cash OETF shares
- 10. Variable Cash Flow PrimaryMarketSecondaryMarket Authorized Participants/ Financial Institutions NSESeller Buyer Fund Cash OETF shares Cash OETF shares Swap Counter- Party Cash Index Return Swap Counter- Party Index Return Cash Collateral Basket Cash Return On Collateral Cash OETF shares WORKING DIAGRAM
- 11. Type of Fund Non-Equity Exchange Traded fund Linked to Crude Oil Investment Investment in Underlying Crude Oil Country of Investment India Taxation Treatment Capital Gains Benchmark Index MCX Crude Oil Index Fund Inception Launched around March 2015 Pricing per unit Approximately 10% price of 1 Barrel of Crude Oil Minimum Lot(Exchange) One Unit/Share Minimum Lot (Directly with fund as per creation unit) 1000 units Expense Ratio 1.5% Annualized • Fact Sheet Features and FACT Sheet
- 12. Holdings • Commodity Futures • Present Month • Near Month futures • Cash • Indian Rupee • U.S. Dollars • Government Bonds • Short term Maturity • Long term Maturity Portfolio Holdings CRUDE OIL 19Feb2015 15% CRUDE OIL 19Mar201 5 24% 8% Govt. of India Savings Bonds (2015) 14% 8% Govt. of India Savings Bonds (2017) 24% Indian Rupee 18% US Dollars 5% Percentage breakup
- 13. Benefits Equity like features • Commodity traded as a stock on national stock exchange Commodity exposure • Commodity exposure without using the commodity trading account Used as a Financial hedging instrument against rise in crude oil Lower expenses as compared to mutual funds • Fund is managed passively hence lower expense and fees Low capital gains tax as compared to mutual funds
- 14. Returns SCENARIO RANGE (LOW –HIGH) RETURN Best Case $85 - $90 55 % Base Case $72 - $76 31% Worst Case $38 - $43 (25%) Calculations based on oil price on 12-02-2015 - $58 Time period of 15 – 24 months
- 15. Risks Involved Investment Risk • Investment not suitable for all kind of investors • Economic, demand and supply conditions • Commodity Trading is highly speculative • Very Volatile and high degree of risk • Concentration risk • Can suffer from prolonged periods of decline in value Operational Risks • Tracking error risk as is the case of every index fund (Correlation risk • Risks related to every ETF fund • Natural forces of “Backwardation” and “Contango” • Liquidity risk • OTC credit risk
- 16. Market Size of Crude oil based Financial Product in India Investor Response Commodity ETF Gold Fund ₹1100 crore MCX Crude Oil Market 2 OUT OF 10 investors Highest open Interest for the 19th Feb 2015 Expiry AUM Of ₹2365.11 crore *Source : - www.mcxindia.com, www.nseindia.com *Source : - Team survey from potential investors
- 17. Income generated for the asset management company • Considering the corpus of ₹ 1100 crore – Management fee as 1.5 % of AUM Particulars Amount Revenue for AMC ₹ 16.5 crore Less : Management fees ₹ 7.05 crore Less : Brokerage Commissions ₹ 3.12 crore Less : Other expenses ₹ .83 crore Net Profit ₹ 5.5 crore
- 18. THANK YOU THE EMERGING INDIA OIL EXCHANGE TRADED FUND - OETF