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Pair Strategy Report
Strategy (Sell HDFCB IN and Sell Buy IDBI IN) We recommend a SELL on HDFCB IN and BUY on IDBI IN at the price ratio range of 17.800 to 18.000 at neutral exposure levels. The first target price ratio will be 17.1, which will give a return of 2.4% on gross total exposure. Second price target ratio will be 16.300, which will give a return of 5% on gross exposure. We recommend maintaining a stop loss of 18.200 for the cash price ratio. One should initiate a value neutral strategy by selling minimum 10 lot of HDFCB IN and buying 11 lot of IDBI IN or in the multiples of that. Strategy Rationale As seen in the below charts the price ratio of HDFCB IN- IDBI IN (HDFCB IN / IDBI IN) has touched the moving upper 3-sigma level of 1.550 (Chart 1). It is currently trading at a ratio of 17.890 and is likely to top out. Historically also this price ratio has declined after hitting upper 3sigma level (Chart 1). The one month price correlation of these stocks is at 0.03, while the one year price correlation is at 70, which is likely to retract. The two year Price correlation of the pair is 80. Historically, whenever one month price correlation catapults to current levels, the ratio drifts back. Chart I: Moving Price Ratio (HDFCB IN / IDBI IN)
P r Ratio 3M M VG M U B S1 L B S1 U B S2 L B S2 U B S3 L B S3
1st June 2011
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HDFCB IS (HDFC BANK LTD) Bloomberg Code Price 6 Month Beta* Market Cap Avg. 3M Cash Vol Avg. 3M Futures Vol 52 Week High/Low
HDFCB IS 2397.00 1.12 111681 847996 1107666 1808.35
21.0 19.0 17.0 15.0 13.0 11.0
IDBI IS (IDBI BANK LTD) Bloomberg Code Price 6 Month Beta* Market Cap Avg. 3M Cash Vol Avg. 3M Futures Vol 52 Week High/Low 202.25
MktCap in INR crore & * beta relative to Nifty Volume In No. of shares traded in NSE
IDBI IS 133.80 1.26 13174 2636923 8889246 / 109.05
RETURN MATRIX(%) Period 05 Day 10 Day 1 Month 3 Month 1 Year HDFCB IS 5.9% 5.4% 7.2% 12.1% 29.4% IDBI IS 5.8% 1.6% -1.9% -2.4% 20.6% Out/under Perf. 0% 4% 9% 15% 9%
Risk Reward At the first target level the rewards to risk ratio will be 3, and for second target level the rewards to risk ratio will be 6.3
Price Ratio Mean Ratio Price Correlation Return Correlation Crnt Ratio 17.915 1 Month 17.115 1 Month 3% 1 Month 79% Expd Ratio 16.300 3 Month 16.358 3 Month 64% 3 Month 71% % Return 5.0% 1 Year 15.631 1 Year 70% 1 Year 64%
Relative out/under performance is calculated HDFCB IS v/s IDBI IS
0 20.0 13.6782 18.___________________ Pair Strategy Report Fortune 1st June 2011 In Bollinger chart we can see that the pair ratio is trading near upper 3 sigma level.0 19.0 16.0 17. from where it retraced in the past too. 2.0 MVGM Moving Mean of Price ratio H M V G M Historical Moving Mean of Price ratio UBS1 LBS1 UBS2 LBS2 UBS3 LBS3 Upper band Sigma Level 1 Lower band Sigma Level 1 Upper band Sigma Level 2 Lower band Sigma Level 2 Upper band Sigma Level 3 Lower band Sigma Level 3 01-Dec-09 26-Oct-09 11-Aug-09 15-Sep-09 13-Aug-10 20-Sep-10 15-Feb-10 25-Oct-10 10-Feb-11 08-Jan-10 23-Mar-10 05-Jan-11 18-Mar-11 04-Jun-10 Chart III: Bollinger Upper and Lower levels B o ll UB B o ll LB P r Ratio B o ll M ean 30-Nov-10 01-Jun-11 30-Apr-10 27-Apr-11 07-Jul-09 09-Jul-10 21. Chart II: Historical Ratio U B S1 L B S1 U B S2 L B S2 U B S3 L B S3 P r Ratio H M VG M Glossary 21.0 14.0 13.0 19. 2 30-Nov-10 05-Jan-11 01-Jun-11 07-Jul-09 09-Jul-10 .0 Bollinger & Moving Sigma Band Boll Upper Band Boll Mean Pr Ratio Boll Lower Band 3M Moving Upper Band 3M Moving Lower Band 18. This Pair Strategy is based on Mean reversal basis.8966 16.0 11.0 9.0 15.4643 01-Dec-09 26-Oct-09 25-Oct-10 30-Apr-10 13-Aug-10 20-Sep-10 10-Feb-11 11-Aug-09 15-Sep-09 15-Feb-10 23-Mar-10 18-Mar-11 27-Apr-11 04-Jun-10 08-Jan-10 Pair Disclaimer 1. While undertaking the pair strategy it should be on cash neutral basis.0 12.0 18.7874 14.3017 14. Minimum margin required for initiating this trade of 10 lot of HDFCB IN and 11 lot of IDBIIN is ~INR 907K.0 15. All calculation are based on pure Statistical analysis on historical data and no fundamental aspect has been taken into account.0 17. 3.
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