Smart Disha LJ Integrated MBA-3 Days Workshop-15-17 March 2017

BULL & BEAR: Game called
- INVESTMENT-
M- 70436 90580 www.smartdisha.com

www.smartdisha.com info@smartdisha.com M-70436 90580 LL- 079 4800 7780
Day-1 Basics for Securities Market
Day-2 Basics of Mutual Funds
Day-3 Risk management through
Derivatives
The Game called
“INVESTMENT”

Day-1
Basics for Securities Market
The Game called
“INVESTMENT”

INVESTMENT BASICSINVESTMENT BASICS

BASICSBASICS
What is Saving?
What is Investment?
Why should one invest?
When to start invest?
What care should one take while investing?
What is interest?
Determinants of interest rate?

INVESTMENT OPTIONSINVESTMENT OPTIONS
PHYSICAL ASSETS
FINANCIAL ASSETS

SHORT TERM INVESTMENT OPTIONSSHORT TERM INVESTMENT OPTIONS
Saving bank account
Liquid funds
Fixed deposits

LONG TERM INVESTMENT OPTIONSLONG TERM INVESTMENT OPTIONS
Post office saving scheme
PPF
Company FD
Bonds
Debenture
Mutual Funds
Equity Shares

OTHER CONCEPTSOTHER CONCEPTS
What is Index?
What is depository?
What is dematerialization?
Stock exchange
Derivative market

SECURITIES PRIMARY ANDSECURITIES PRIMARY AND
SECONDARY MARKETSECONDARY MARKET

PRIMARY MARKETPRIMARY MARKET
What is Primary Market?
IPO
FPO
Right Issue
Preferential Issue

IPO PROCESSIPO PROCESS
Who is Merchant Banker?
Pricing Of Issue
Face value
Premium and Discount to Face Value
Book Building Process
Cut-off Price
Prospectus
Abridged Prospectus
Listing of Securities
Delisting of Securities

SECONDARY MARKETSECONDARY MARKET
What is Secondary market?
Diff. between Primary and Secondary market
What is Stock Exchange?
Products in Secondary Market
Shares / Debentures / Bonds
What is Trading member?
What is Clearing Member?
What is Clearing Corporation?
What is Rolling Settlement?
What is Pay-in and Pay-out?
What is Auction?

DERIVATIVE MARKETSDERIVATIVE MARKETS
Meaning
Factors Influencing Derivative Market
 Market price fluctuation
 Integration of financial market
 Latest technology
 Innovation in derivative market
Types of Derivative market
Forwards, Futures, Options, SWAPS
Different Derivative Market
Equity Derivative, Currency Derivative, Commodity Derivative
Market Participants
Hedgers, Speculator, Arbitrageurs

CORPORATE ACTIONSCORPORATE ACTIONS
Dividend
Stock Splits
Bonus
Buy back of shares

ANALYZING RISK AND RETURNANALYZING RISK AND RETURN

WHAT IS RISK?WHAT IS RISK?
Types of Risk
Systematic Risk
Unsystematic Risk
Measures of Risk
Standard Deviation
Beta

ANALYZING RETURNANALYZING RETURN
Simple Return
I = P*r*t
Compounded Return
FV = PV (1+i)^t

WHAT IS TIME VALUE OF MONEY?WHAT IS TIME VALUE OF MONEY?
Future value of single cash flow
Future value of annuity
Present value of single cash flow
Present value of annuity

RATIO ANALYSISRATIO ANALYSIS

LIQUIDITY RATIOLIQUIDITY RATIO
Current Ratio = Current Assets / Current Liability
Acid – Test Ratio =
[ Current Assets – Inventory ] / Current Liability

TURNOVER RATIOSTURNOVER RATIOS
Inventory Turnover Ratio = Cost of good sold /
average inventory
Debtors turnover ratio = Net credit sales /
Average Account Receivable
Average collection period = average debtors /
avg. daily credit sales

Average collection period = 365 days / debtors
turnover
Fixed assets turnover ratio = net sales / net fixed
assets
Total assets turnover ratio = net sales / average
total assets

LEVERAGE/CAPITAL STRUCTURELEVERAGE/CAPITAL STRUCTURE
RATIOS:RATIOS:
Debt – equity ratio = total debt / total
equity
Debt asset ratio = total debt / total assets

Interest coverage ratio = EBIT / interest
Debt Service Coverage Ratio (DSCR) =
[PAT + DEP + Non Cash Exp. + Interest ] / [
Interest + Repayment of Term Loan]

PROFITABILITY RATIOS:PROFITABILITY RATIOS:
Gross Profit Ratio = [gross profit /net sales]
*100
Net Profit Ratio = [net profit /net sales] *100

PROFITABILITY RATIOS:PROFITABILITY RATIOS:
Return on Total Assets = PBIT / Total Assets
Return on Capital Employed = PAT / Total Capital
Employed
Return on Shareholders' Equity = PAT / Net worth

PROFITABILITY RATIOSPROFITABILITY RATIOS
EPS = Profit available to shareholder / no. of equity
share outstanding
Price-earnings ratios = P/E Ratio = Market Price /
EPS

REDRESSAL MECHANISMREDRESSAL MECHANISM
Investor grievances cell of stock exchange
Arbitration through stock exchange
Investor protection fund

THANK YOUTHANK YOU
END OF DAYEND OF DAY--11

Day-2
Basics of Mutual Funds
The Game called
“INVESTMENT”

INTRODUCTION TO MUTUAL FUNDSINTRODUCTION TO MUTUAL FUNDS

BASIC CONCEPTSBASIC CONCEPTS
MEANING :
A mutual fund is a professionally managed type of
collective investment
scheme that pools money from many investors and
invests it in stocks,
bonds, short-term money market instruments and
other securities

NEED FOR MUTUAL FUNDSNEED FOR MUTUAL FUNDS
Managed by professionals
Channelizing savings to investments
High liquidity
Tax Benefit
Small investment possible

STRUCTURE OF MUTUAL FUNDSSTRUCTURE OF MUTUAL FUNDS
ININ INDIAINDIA

33 –– TIER STRUCTURETIER STRUCTURE
 Sponsor
 Trustee
 Asset Management Company (AMC)

Role of AMC
Role of Custodian
What is NFO?
What is Registrar and Transfer Agent?
How to invest in NFO?
Offer Documents
Key Information Memorandum

MUTUAL FUNDS PRODUCTS ANDMUTUAL FUNDS PRODUCTS AND
FEATURESFEATURES

EQUITY FUNDSEQUITY FUNDS
Equity Funds Definition
Open Ended and Close Ended Fund
Index Fund
Diversified Large Cap Fund
Small and Mid Cap Fund
Sectoral Fund

OTHER EQUITY SCHEMESOTHER EQUITY SCHEMES
Arbitrage Fund
Multi-cap Fund
Quant Fund
P/E Ratio Fund
International Equity Fund
ELSS
Fund of Fund

Growth Based Investing
Value Based Investing
What is NAV?
Expense Ratio
Analysis of Cash Level in Portfolio
Exit Loads – Contingent Differed Sales Charge

DEBT FUNDSDEBT FUNDS
Meaning
Features
Face Value / Coupon / Maturity Value

RISK IN DEBT FUNDRISK IN DEBT FUND
Interest Rate Risk
Credit Risk

DEBT FUND PRICINGDEBT FUND PRICING
Present Value of Future Cash Flow
Yield To Maturity
Duration as Risk Mgmt Control

DEBT MUTUAL FUND SCHEMESDEBT MUTUAL FUND SCHEMES
Fixed Maturity Plans
Capital Protection Plans
Gilt Funds
Balanced Funds
Monthly Income Plan
Child Benefits Plan

LIQUID FUNDSLIQUID FUNDS
Meaning
Investment in Short Dated Securities
Major Contributor - 40% of Industry AUM
Liquidity
Return
Risk

TAXATIONTAXATION
EQUITY DEBT
(Min. 65% in Indian Equity)
LTCG 0% 10% without
indexation
20% with
indexation
STCG 15% Marginal Rate
of Tax
Profit Added
to Income

REGULATIONSREGULATIONS
Limit of certain 10% of NAV in single security
No more that 15% of NAV in rated debt paper
No more that 10% of NAV in unrated debt paper
Total investment in unrated debt not more than
25% of NAV
No investments in unlisted company of sponsor group

REGULATIONSREGULATIONS
In open ended scheme max. 5% of NAV in unlisted
company of other group
In close ended scheme max. 10% of NAV in unlisted
company of other group
No more that 25% of NAV investment in listed
company of sponsor group

INDUSTRY ASSOCIATIONINDUSTRY ASSOCIATION
AMFI – Association of Mutual Funds in India

OBJECTIVES OF AMFIOBJECTIVES OF AMFI
Promote interest of mutual funds and unit holder
Interact with SEBI/RBI/Govt. Regulators
To set up ethical, professional and commercial
standards in the industry
To increase public awareness and understanding of
concepts
Develop well trained distributors
Undertake training programm

Systematic Investment Plans (SIP)
 Meaning
 Advantages
Disciplined Saving
Flexibility
Long term gain

Systematic Transfer Plans (STP)
Meaning
Systematic Withdrawal Plans (SWP)
Meaning

Growth Options
Dividend Pay Out Options
Dividend Re-investment Options

FINDING GOOD SCHEME OF MUTUAL FUNDSFINDING GOOD SCHEME OF MUTUAL FUNDS
 Identify industry average past return
 Identify industry average risk
 Find out good performing scheme based on Sharpe
ratio and Traynor’s Ratio
 Find out major contributor in the portfolio
 Identify track record of Promoter
 Identify track record of Fund Manager

PROCESS OF MUTUAL FUNDS INVESTMENTSPROCESS OF MUTUAL FUNDS INVESTMENTS
 KYC is required
 Pan card, Address Proof, Bank Statement to be
submitted
 Application Form to be submitted
 One can subscribe through Distributor or directly
through AMC

THANK YOUTHANK YOU

Day-3
Risk Management Through Derivative
The Game called
“INVESTMENT”

INTRODUCTION TOINTRODUCTION TO
DERIVATIVE MARKETDERIVATIVE MARKET

MEANINGMEANING
Derivative is a contract whose value is derived from
value of some other assets known as underlying. Its on
wide range of underlying like
Metals – gold, silver, zinc, copper, nickel etc.
Energy – Oil, Gas, Coal, Electricity
Agri commodity – wheat, sugar, coffee
Financial Assets – shares, bonds, currency

EVOLUTIONEVOLUTION
Forward Market Evolution
Agriculture related products
Future Market Evolution
Standardized forward contract

HISTORYHISTORY
12th Century- In European trade fairs, sellers signed contracts
promising future delivery of the items they sold.
13th Century- There are many examples of contracts entered
into by English Cistercian Monasteries, who frequently sold their
wool up to 20 years in advance, to foreign merchants.
1634-1637 Tulip Mania in Holland. Fortunes were lost in after a
speculative boom in tulip futures burst.

HISTORYHISTORY
In 1848, The Chicago Board of Trade (CBOT) facilitated trading of
forward contracts on various commodities
In 1865, the CBOT went a step further and listed the first “exchange
traded” derivative contract in the US. These contracts were called
“futures contracts”.
In 1972, Chicago Mercantile Exchange created International Monetary
Market, which allowed trading in currency futures.
In 1975, CBOT introduced Treasury bill futures contract. It was the first
successful pure interest rate futures.
In 1983, Chicago Board Options Exchange decided to create
an option on an index of stocks.

INDIAN DERIVATIVE MARKETINDIAN DERIVATIVE MARKET
In 1999, The Securities Contract Regulation Act (SCRA) was amended to
include “derivatives” within the domain of securities’ and regulatory
framework was developed for governing derivatives trading.
The exchange traded derivatives started in India in June 2000 with
index futures contracts based on CNX Nifty and S&P BSE Sensex.
Later, trading in Index options commenced in June 2001 and trading in
options on individual stocks commenced in July 2001. Futures contracts
on individual stocks started in November 2001.
Futures contracts on Volatility Index were launched in 2014.

MARKET PARTICIPANTSMARKET PARTICIPANTS
Hedgers
Speculators
Arbitrageurs

TYPES OF DERIVATIVE MARKETTYPES OF DERIVATIVE MARKET
Organized Exchanges –Exchange Traded
Derivatives
Over The Counter Derivative Market

PRODUCTS IN DERIVATIVE MARKETPRODUCTS IN DERIVATIVE MARKET

FORWARD CONTRACTFORWARD CONTRACT
Meaning:
It is a contractual agreement between two
parties to buy/sell an underlying asset at a
certain future date for a particular price that is
pre-decided on the date of contract. These are
OTC contracts.

FORWARD MARKET FEATURESFORWARD MARKET FEATURES
Operational Mechanism – Traded on OTC
Specification – As per needs of parties involved
Counter Party Risk – Exist, reduced by guarantee
Liquidity – Low
Example – Currency Forward

FUTURE CONTRACTSFUTURE CONTRACTS
Meaning:
Exchange Traded Standardized Forward Contract

FUTURE MARKET FEATURESFUTURE MARKET FEATURES
Operational Mechanism – Traded on Exchange
Specification – Standardized
Counter Party Risk – Exist, but clearing agency
becomes counter party
Liquidity – High
Example – Commodity Future, Stock Future, Index
Future, Currency Future

SWAPSSWAPS
Meaning:
A swap is an agreement made between two parties to
exchange cash flows in the future according to a
prearranged formula. Swaps are series of forward
contracts. Swaps help market participants manage risk
associated with volatile interest rates, currency
exchange rates and commodity prices.

OPTIONS CONTRACTOPTIONS CONTRACT
Meaning:
An Option is a contract that gives the right, but not an
obligation, to buy or sell the underlying on or before a
stated date and at a stated price. While buyer of option
pays the premium and buys the right, writer/seller of
option receives the premium with obligation to sell/ buy
the underlying asset, if the buyer exercises his right.

FACTORS AFFECTING DERIVATIVE MARKETFACTORS AFFECTING DERIVATIVE MARKET
Increased fluctuation in market price of financial assets
Integration of financial market globally
Use of latest technology
Frequent innovation in derivative markets

PRICING FORWARD AND FUTUREPRICING FORWARD AND FUTURE
CONTRACTSCONTRACTS

CASH AND CARRY ARBITRAGECASH AND CARRY ARBITRAGE
Forward Price = Cash Price + Interest Cost +
Carrying Cost
FP = [SP * e^(RT)] + Other Carrying Cost
E = exponential function
R = rate of interest
T = time period of holding

BUYER OF FORWARD / FUTUREBUYER OF FORWARD / FUTURE
Obligation – to pay settlement price
Margin requirement – Yes
Risk – Unlimited, if price goes down
Profit – Unlimited, if price goes up

BUYER OF FORWARD / FUTUREBUYER OF FORWARD / FUTURE
If a stock future is bought @100, the pay-off diagram is
as follow.
-60
-40
-20
0
20
40
60
50 60 70 80 90 100 110 120 130 140 150
Series1

SELLER OF FORWARD / FUTURESELLER OF FORWARD / FUTURE
Obligation – to deliver underlying
Margin requirement – Yes
Risk – Unlimited, if price goes up
Profit – Unlimited, if price goes down

SELLER OF FORWARD / FUTURESELLER OF FORWARD / FUTURE
If a stock future is bought @100, the pay-off diagram is
as follow.
-60
-40
-20
0
20
40
60
50 60 70 80 90 100 110 120 130 140 150
Series1

TERMS USED IN OPTIONS CONTRACTTERMS USED IN OPTIONS CONTRACT
 Call Options – gives buyer the right to buy the
underlying
 Put Options - gives buyer the right to sell the
underlying
 Buyer of options pays premium
 Seller/writer of options receives premium
 Premium is a price of options contract
 Strike Price / Exercise Price ( K ) – price of
underlying at which it is purchased or sold

TERMS USED IN OPTIONS CONTRACTTERMS USED IN OPTIONS CONTRACT
 Spot Price – Current Market Price
 Exercise of options – buying/selling of
underlying in an options contract by buyer of
the options contract
 Expiration day – the day on which options
stops to exist
 Tenor of options – life of options contract
 Lot size – number of units of underlying in
an options contract

MONEYNESS OF OPTIONSMONEYNESS OF OPTIONS
CALL PUT
IN – THE – MONEY S > K S < K
AT – THE – MONEY S = K S = K
OUTOF – THE – MONEY S < K S > K

POSITION OF CALL OPTIONS BUYERPOSITION OF CALL OPTIONS BUYER
 Right - Buy underlying at strike price.
 Obligation - Nil.
 Premium paid or received - Paid.
 Margin requirement - No.
 Risk profile - Limited, to the extent of
premium paid.
 Profit potential - Unlimited, if prices go up.
 Breakeven point = Strike price + Premium.

PAYOFF OF CALL BUY POSITIONPAYOFF OF CALL BUY POSITION
Price
Cash In
Flow
Premiu
m
P & L
490 0 -10 -10
495 0 -10 -10
500 0 -10 -10
505 5 -10 -5
510 10 -10 0
515 15 -10 5
520 20 -10 10
525 25 -10 15
530 30 -10 20
Bought/long Tisco call option with strike price of 500 @ Rs. 10/-
-15
-10
-5
0
5
10
15
20
25
490495500505510 515520525530
Series1

POSITION OF CALL OPTIONS SELLERPOSITION OF CALL OPTIONS SELLER
 Right – Nil.
 Obligation - Sell underlying at strike price /
Pay settlement difference.
 Premium paid or received - Received.
 Margin requirement - Yes.
 Risk profile - Unlimited, if prices go up.
 Profit potential - Limited, to the extent of
premium received.
 Breakeven point = Strike price + Premium.

PAYOFF OF CALL SELL POSITIONPAYOFF OF CALL SELL POSITION
Price Cash Flow Premium P & L
490 0 10 10
495 0 10 10
500 0 10 10
505 5 10 5
510 10 10 0
515 15 10 -5
520 20 10 -10
525 25 10 -15
530 30 10 -20 -25
-20
-15
-10
-5
0
5
10
15
490 495 500 505 510 515 520 525 530
Series1
Sold/Write Tisco call option with strike price of 500 @ Rs. 10/-

POSITION OF PUT OPTIONS BUYERPOSITION OF PUT OPTIONS BUYER
 Right - Sell underlying at strike price.
 Obligation - Nil.
 Premium paid or received - Paid.
 Margin requirement - No.
 Risk profile - Limited, to the extent of premium
paid.
 Profit potential - Unlimited*, if prices go down.
 Breakeven point = Strike price - Premium.

PAYOFF OF PUT BUY POSITIONPAYOFF OF PUT BUY POSITION
Price Cash Flow Premium P & L
470 30 -10 20
480 20 -10 10
490 10 -10 0
500 0 -10 -10
510 0 -10 -10
520 0 -10 -10
Bought/long Tisco Put option with strike price of 500 @ Rs. 10/-
-15
-10
-5
0
5
10
15
20
25
470 480 490 500 510 520
Series1

POSITION OF PUT OPTIONS SELLERPOSITION OF PUT OPTIONS SELLER
 Right - Nil.
 Obligation - Buy underlying at strike price / Pay
settlement difference.
 Premium paid or received - Received.
 Margin requirement - Yes.
 Risk profile - Unlimited*, if prices go down.
 Profit potential - Limited, to the extent of premium
received.
 Breakeven point = Strike price – Premium.

PAYOFF OF PUT SELL POSITIONPAYOFF OF PUT SELL POSITION
Price
Cash
Flow
Premium P & L
470 30 10 -20
480 20 10 -10
490 10 10 0
500 0 10 10
510 0 10 10
520 0 10 10
Sold/Write Tisco Put option with strike price of 500 @ Rs. 10/-
-25
-20
-15
-10
-5
0
5
10
15
470 480 490 500 510 520
Series1

OPTIONS PRICING MODELSOPTIONS PRICING MODELS

THE BINOMIAL PRICING MODELTHE BINOMIAL PRICING MODEL
 The binomial option pricing model was developed by William
Sharpe in 1978. It has proved over time to be the most
flexible, intuitive and popular approach to option pricing.
 The binomial model represents the price evolution of the
option’s
underlying asset as the binomial tree of all possible prices at
equally spaced time steps from today under the assumption
that at each step, the price can only move up and down at
fixed rates and with respective simulated probabilities.
 This is an intuitive way to price options but also very lengthy
and time consuming model.

THE BLACK &THE BLACK & SCHOLESSCHOLES MODELMODEL
 The Black & Scholes model was published in 1973 by Fisher
Black and Myron Scholes.
 It is simplified form of Binomial model with assumption that asset
prices are continuously changing rather than having only two
possible outcomes over a defined price step.
 The original formula for calculating the theoretical Option Price
(OP)
is:

OP = SN(d1)-XertN(d2)

Where,

D 1=[In(s/n)+(r+(v2/2)t]/ v*[(t)^(0.5)]

D 2 = d1-v*[(t)^(0.5)]

THE BLACK &THE BLACK & SCHOLESSCHOLES MODELMODEL
 S = stock price
 X = strike price
 t = time remaining until expiration, expressed in
years
 r = current continuously compounded risk-free
interest rate
 v = annual volatility of stock price (the standard
deviation of the shortterm returns over one year)
 In = natural logarithm
 N(x) = standard normal cumulative distribution
function
 e = the exponential function

IMPACT OF CHANGE IN OPTIONIMPACT OF CHANGE IN OPTION
PARAMETERS ON CALL AND PUTPARAMETERS ON CALL AND PUT
PRICING FACTOR CALL OPTIONS PUT OPTIONS
CMP INCREASE DECREASE
STRIKE PRICE DECREASE INCREASE
VOLATILITY INCREASE INCREASE
TIME TO EXPIRATION INCREASE INCREASE
INTEREST RATE INCREASE DECREASE
Effect of an increase in each pricing factor on the
option value, holding other factors constant:

IMPORTANCE OF RISK MANAGEMENTIMPORTANCE OF RISK MANAGEMENT
 Profit can be maximized
 Loss can be minimized
 Impact of uncertainty can be reduced
 Minimization of loss by keeping profit
potential can be attained
 Consistency of earning profit can be
maintained
 Discipline in investment management can be
developed
 Peace of mind

THANK YOUTHANK YOU

ALL THE BESTALL THE BEST

Smart Disha LJ Integrated MBA-3 Days Workshop-15-17 March 2017

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Smart Disha LJ Integrated MBA-3 Days Workshop-15-17 March 2017