1. Concept Sharing
Workshop on Financial Literacy
in School Education
SEPTEMBER 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. 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 H'ble 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 you've 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.
There's 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
www.nism.ac.in
2 NiSM September 2011
3. convocation
NiSM
NISM held its first Convocation for students of the dignitaries and guests. Mr. Soneji, Registrar, NISM
Post 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 of
2011 at the Y. B. Chavan Centre, Nariman Point, securities markets intermediaries, NISM's efforts
Mumbai. These long-term programmes were in implementing SEBI's initiative of creating
offered under the aegis of the School for awareness about financial literacy amongst the
Securities Education (SSE) at NISM. The masses, the value additions to the industry
ceremony was presided by Mr. U. K. Sinha, through knowledge dissemination and
Chairman, Board of Governors, NISM. Padma interactions on key issues by thought leaders
Vibushan Dr. C. Rangarajan, Chairman, Economic from India and abroad, among others. Mr. Soneji
Advisory Council to the Prime Minister was the also presented the plans for the institute during
Chief Guest. the coming years.
The programme started at 6:30 p.m. at Rangswar The convocation certificates were presented by
Hall, 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 the
charge NISM, extended a warm welcome to the State Bank of India sponsored Gold Medal for the
September 2011 NiSM 3
5. student securing top rank in PGPSM along The H'ble Chief Guest Padma Vibhushan
with a cash prize of Rs. 1 lakh and a Canara Dr. C. Rangarajan, in his convocation
Bank sponsored Gold Medal for the student address, spoke about the thrust given by the
securing top rank in CFERM. The medals along institute in providing education and training
with the citation certificates to these two top to prepare ready-made professionals to fill
ranking students were distributed by H'ble the gap in the securities markets. He
Chief Guest Padma Vibhushan Dr. C. provided insights of successes and failures
Rangarajan. 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 the
Canara Bank medal for best academic growth path, a constant vigil must always be
performance for PGPSM and CFERM, maintained on the financial markets to stay
respectively. on course. Addressing the student
community, he said “Please maintain always
While delivering his address, Mr. U. K. Sinha, a professional approach with high ethical
Chairman, Board of Governors, NISM and standards and by doing so you will serve the
Chairman of SEBI articulated SEBI's plan for country the best.” (Copies of Dr. C.
building a strong institute in NISM. He said Rangarajan's Convocation Address, printed
that the vision for NISM is to actively in the form of a booklet, were distributed to
collaborate with the securities markets everyone at the end of the ceremony.)
fraternity and academia to take the institute
towards the nex t level of growth. Mr. U. K. Sinha presented the Chief Guest a
Congratulating all students, he said “this memento on behalf of NISM. The
certification will help you not only in getting a convocation ceremony was followed by
better position in life but also to contribute dinner.
meaningfully to the growth of the securities
markets.”
September 2011 NiSM 5
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 trader's 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 doesn't
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 it's 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. Fisher says: “If a random bolt of lightning hits you us to be very humble in applying mathematics to
when you're standing in the middle of the field, it markets, and to be extremely wary of ambitious
feels like a random event. But if your business is to theories, which are in the end trying to model
stand in random fields during lightning storms, human behaviour. We like simplicity, but we
then you should anticipate, perhaps a little more should remember that it is our models that are
simple, not the world.
robustly, the risks you're taking on.”
We do need models and mathematics – you
This formula is a method to calculate these risks,
cannot think about finance and economics
not a risk neutralizer. “There is a danger of without them – but one must never forget that
accepting models without carefully questioning models are not the world. Whenever we make a
them,” says Joseph A. Langsam, a former model of something involving human beings, we
mathematician who develops and tests models are trying to force the ugly stepsister's foot into
for fixed- income securities at Morgan Stanley. Cinderella's pretty glass slipper. It doesn't fit
Thus, Modelers are not the culprit for all financial without cutting off some essential parts. And in
losses, but traders' blind faith in them. cutting off parts for the sake of beauty and
precision, models inevitably mask the true risk
What care should be taken? rather than exposing it. The most important
question about any financial model is how wrong
Many traders still use the ideas behind the Black-
it is likely to be, and how useful it is despite its
Scholes Options Pricing Model, if not the model
assumptions. You must start with models and
itself. The fundamental ideas behind the equation then overlay them with common sense and
forever changed the stock market. Today, traders experience.
use many principles of the Black-Scholes Model as
guides through the treacherous waters of the Many academics imagine that one beautiful day
stock market. For this, Scholes and Merton we will find the 'right' model. But there is no right
became Nobel laureates. model, because the world changes in response to
the ones we use. Progress in financial modelling
In finance we study how to manage funds – from is fleeting and temporary. Markets change and
simple securities like dollars and yen, stocks and newer models become necessary. Simple, clear
bonds, to complex ones like futures and options, models with explicit assumptions about small
numbers of variables are therefore the best way
subprime CDOs and credit default swaps. We
to leverage your intuition without deluding
build financial models to estimate the fair value of
yourself.
securities, to estimate their risks and to show how
those risks can be controlled. How can a model
tell you the value of a security? And how did these References
models fail so badly in the case of the subprime
CDO 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. It's easier to think
intuitively about future housing prices, default Hull, J.C. (2010). “Options, Futures, and other Derivatives
rates and default correlations than it is about CDO New York” Prentice Hall.
prices. CDO models turn your guess about future
housing prices, mortgage default rates and a Rubash, Kevin. (1998). “A Study of Option Pricing
Models” Bradley University (2000)
simplistic default correlation into the model's
output: a current CDO price. Scott Patterson (2010). ”The Quants: How a New Breed
of Math Whizzes Conquered Wall Street and Nearly
Our experience in the financial arena has taught Destroyed It” Crown Business New York
September 2011 NiSM 7
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, people's 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. Today's 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. It's 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 school
8 NiSM September 2011
9. stage itself. He informed the gathering
that he was glad to know that the
ministry of finance has taken a step
forward in this direction.
Speaking on the occasion, Prof. G
Sethu, Officer on Special Duty, NISM
mentioned that supply side and
demand side are to be strengthened
to make the financial services industry
grow efficiently. In financial markets,
supply side dominates the demand
side. Prof. Sethu informed the
gathering that regulators were putting
their efforts to make it balanced. He
also noted that while developing the
curriculum, we need to think where
India would be after 10 - 20 years and
efforts should be taken early to see
that the young generation are
provided with the right inputs on
financial 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. 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 SEBI's 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 SEBI's 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. NISM LAUNCHES ITS OWN TEST CENTRES
NISM is glad to announce that its two state-of- Nariman Point, Mumbai
the-art test centres are now available for 1st Floor, 'C' Wing, Mittal Court, Opposite
candidates 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 : 022-66540591-93
for any of the NISM exams by filling in the
prescribed registration form available on the
Vashi, Navi Mumbai
NISM Online Certification System at
https://certifications.nism.ac.in/. 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 : 022-66735185-86
PREVENTION OF SEXUAL HARASSMENT AT THE
WORKPLACE
The Supreme Court of India has made it NISM recently held an interactive session on the
mandatory for every organization to put in place subject to sensitize employees on the topic. Titled
preventive, corrective and punitive measures to “Prevention of Sexual Harassment at the
eliminate sexual harassment at the place of work. Workplace”, the session was conducted by senior
NISM has already appointed a three-member resource person and subject matter expert
committee to deal with complaints originating Ms. Shanti Mojumdar on Friday, July 29, 2011. All
from staff members on this issue. staff members of NISM attended the session.
September 2011 NiSM 11
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
