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09 19 20 e an Issu tJ 1s e 2, lum Vo

Wealth Incorporation Christ University Institute of Management Finance Club Initiative Presents...

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Issue Attractions
National Headlines International Headlines Company Review Student Article Student Article/Buzz Words Crossword/Quiz Investors Check Quiz/Crossword Answers/Did You Know
Repo Rate- 6.5%

National Headlines

Kingfisher to slash fares from Jan 1 Sebi imposes Rs 10-lakh fine on Kotak Sec in 2003 case Reliance Infra sole bidder for 135-km Delhi expressway Chanda Kochhar succeeds K V Kamath as ICICI Bank CEO & MD World Bank admits to ban on Satyam for data theft Reliance begins soft launch of GSM network MindTree to hold 79.9% stake in Aztecsoft post-merger Intel weighs WiMAX-related opportunities to invest in Indian Telecom

Reverse Repo 5% Cash Reserve Ratio - 5.5% IIP - 4.6% Inflation Rate - 6.61%

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International Headlines

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US corporate earnings probably fell for a sixth-straight quarter, the longest streak in at least 20 years, as consumer spending on automobiles, homes and retailers collapsed. Mumbai-based EMCO, engaged in manufacture and sale of transformers and single-phase electronic energy meters in India, is planning to enter South African market. FIIs pull out $13 bn in '08, may start buying in H2-09. Forex reserves rise by $3.6 bn. GM to sell Taiwan venture to Yulon Motor for NT$1 Oil ends above $40 as Middle East fighting rages. Recession sets in, in Europe, US & Japan. UN to raise budget by $700m to 4.87 bn Toyota has forecast its first annual loss in 71 years due to plummeting sales

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Company Review
Cambridge Solutions Ltd. was created by seasoned international executives to be that partner a solution for Fortune 500 and fast-growing firms that understand how outsourcing can deliver the savings and efficiencies to improve profitability and at the same time, free them to focus on their core business mission. It has a global team of over 4600 professionals offering: A leading IT practice in the banking and financial services, insurance, manufacturing and government sectors, offering business consulting, application maintenance support through software development, and application implementation service

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One of the largest independently owned property and casualty insurance processing and claims outsourcing providers. The largest outsourcing provider of professional liability claims services The second largest outsourcing provider of structured settlement services and Experts in product liability consulting and recall outsourcing.

2007 (Rs. in cr) Total Income Net Profit EPS Sales Turnover 171.9 -11.13 -1.06 170.91 2008 (Rs. in cr) 166.98 4.32 0.39 178.23


Global Services Media and neoIT has named Cambridge one of the top best performing BPO companies for the past three years Ranked as the 10th leading outsourcing company in the world on the International Association of Outsourcing Professionals (IAOP)s 2007 Global Outsourcing 100 list. The Software Engineering Institute has certified Cambridges Singapore facilities as Capability Maturity Model Integration 5 (CMMI 5)

Life at Cambridge Cambridge recognizes their employees as their greatest asset, and are committed to providing their employees with a dynamic work environment and numerous opportunities for career advancement and personal growth. Their culture welcomes people with a variety of experiences, skills, talents and viewpoints to an environment rich with the opportunity for advancement. Their approach is simple: great people make great companies.

A market is the combined behavior of thousands of people responding to information, misinformation and whim. -Kenneth Chang

Student Article
Measuring Risk In Bonds

By: Sebin Emmanuel

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A coupon bond makes a series of payments over its life, so fixed-income investors need a measure of the average maturity of the bond's promised cash flow to serve as a summary statistic of the effective maturity of the bond. Also needed is a measure that could be used as a guide to the sensitivity of a bond to interest rate changes, since price sensitivity tends to increase with time to maturity. The statistic that aids investors in both areas is duration. Read on to find out how duration and convexity can allow fixed-income investors gauge uncertainty when managing their portfolios. Duration Defined

In 1938, Frederick Macaulay termed the effective-maturity concept the duration of the bond, and suggested that duration be computed as the weighted average of the times to each coupon or principal payment made by the bond. Macaulay's duration formula is as follows:

- D is the bond's duration - C is the periodic coupon payment - F is the face value at maturity (in dollars) - T is the number of periods until maturity - r is the periodic yield to maturity - t is the period in which the coupon is received Duration for Portfolio Management Duration is key in fixed-income portfolio management for the following three reasons: -It is a simple summary statistic of the effective average maturity of a portfolio. -It is an essential tool in immunizing portfolios from interest rate risk. -Duration is an estimate of the interest rate sensitivity of a portfolio. Because duration is so important to fixed-income portfolio management, it is worth exploring the following properties: 1) The duration of a zero-coupon bond equals its time to maturity. 2) Holding maturity constant, a bond's duration is lower when the coupon rate is higher. This rule is due to the impact of early higher coupon payments. 3) Holding the coupon rate constant, a bond's duration generally increases with time to maturity. This property of duration is fairly intuitive; however, duration does not always increase with time to maturity. For some deep-discount bonds, duration may fall with increases in maturity.

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Bulls make money. Bears make money. Pigs get slaughtered. Anon.

Student Article ...continued from previous page

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4) Holding other factors constant, the duration of a coupon bond is higher when the bond's yield to maturity is lower. This principle applies to coupon bonds. For zero-coupon bonds, duration equals time to maturity, regardless of the yield to maturity. 5) The duration of a level perpetuity is (1 + y)/y. For example, at a 10% yield, the duration of perpetuity that pays $100 once a year forever will equal 1.10/.10 = 11 years, but at an 8% yield it will equal 1.08/.08 = 13.5 years. This principle makes it obvious that maturity and duration can differ substantially. The maturity of the perpetuity is infinite, whereas the duration of the instrument at a 10% yield is only 11 years. The presentvalue-weighted cash flow early on in the life of the perpetuity dominates the computation of duration.

Duration for Gap Management Many banks have a natural mismatch between asset and liability maturities. Bank liabilities are primarily the deposits owed to customers, most of which are very short-term in nature and of low duration. Bank assets by contrast are composed largely of outstanding commercial and consumer loans or mortgages. These assets are of longer duration and their values are more sensitive to interest rate fluctuations. In periods when interest rates increase unexpectedly, banks can suffer serious decreases in net worth if their assets fall in value by more than their liabilities. To manage this risk, a technique called gap management became vogue in the 1970s and early 1980s, with the idea being to limit the "gap" between asset and liability durations. Adjustable-rate mortgages (ARM) were one way to reduce the duration of bank-asset portfolios. Unlike conventional mortgages, ARMs do not fall in value when market rates increase because the rates they pay are tied to the current interest rate. Even if the indexing is imperfect or entails lags, indexing greatly diminishes sensitivity to interest rate fluctuations. On the other side of the balance sheet, the introduction of longer-term bank certificates of deposit (CD) with fixed terms to maturity served to lengthen the duration of bank liabilities, also reducing the duration gap. One way to view gap management is as an attempt by the bank to equate the durations of assets and liabilities to effectively immunize its overall position from interest rate movements. Because bank assets and liabilities are roughly equal in size, if their durations are also equal, any change in interest rates will affect the value of assets and liabilities equally. Interest rate changes would have no effect on net worth. Therefore, net worth immunization requires a portfolio duration, or gap of zero. The idea behind immunization is that with durationmatched assets and liabilities, the ability of the asset portfolio to meet the firm's obligations should be unaffected by interest rate movements.

Buzz Word
Immediate Or Cancel Order IOC: An order requiring that all or part of the order be executed immediately after it has been brought to the market. Any portions not executed immediately are automatically cancelled. Index Amortizing Note IAN: A type of structured note whose payment schedule is determined by the behavior of interest rates. J Curve: A theory stating that a country's trade deficit will worsen initially after the depreciation of its currency because higher prices on foreign imports will be greater than the reduced volume of imports. Lemming: The act of following the crowd into an investment that will inevitably head for disaster. Macaroni Defense: An approach taken by a company that does not want to be taken over. The company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over.

Sometimes your best investments are the ones you dont make. -Donald Trump

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What is the over-the-counter market which connects dealers across the US through a network of computers and other electronic equipment called? 4. This method of trading involves selling of securities without owning them. 5. A payment by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor. 6. Name the first company from India to list on the Nasdaq 9. English economist who felt government action is necessary for economic stability 10. Japanese version of the Dow 11. Which country's currency is known as Drachma, which in Greek means 'to grasp'? 14. Name the term used for depreciating a company's intangible assets? 1.

Did you Know?

Tequila Effect is an in f o r m al n am e given to the impact of the 1994 Mexican economic crisis on the South A m e r i c a n e c o n o m y . The Tequila Effect occurred because of a sudden devaluation in the Mexican peso which then caused other curre ncies in the region (the Southern Cone and Brazil) to decline. The Fir st US Income Tax ran from 18611872. It was designed to pay for the Civil War and was a tax of 3% of income in excess of $800. The Ponzi scam is named after Charles Ponzi, a clerk in Boston w h o f i r s t orchestrated such a scheme in 1919. Andrew Jackson is renowned for his hatred of the Second Bank of the United States and i s l a r g e l y responsible for its demise. In what was called a Bank War, he took federal Money out of the US bank and had it deposited in State Banks.




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A security which offers a way for US citizens to invest in a foreign company What term became popular after the newspaper report of Watergate Scandal in the year 1973? 7. Where is the European Central Bank located? 8. What is known as the cost of living index which represents the goods and services purchased by consumers? 12. The name for the common currency of most European countries. 13. Market price of mutual funds

Q1. An economic indicator created by economist Arthur Okun that is found by adding the unemployment rate to the inflation rate. Q2. A day on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire. Q3. A fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. Q4. Who was arrested on December 11, 2008 for running an alleged Ponzi scheme; his hedge fund lost about $50 billion, but kept it hidden by paying out earlier investors with money from later investors. Q5. The action taken usually during a recessionary period, through government spending, interest rate and tax reductions so that the economy can be primed to function properly once again. Q6. The act of selling and buying stocks almost instantaneously in order to increase or decrease book value. This is a routine method used by many investors and companies to change book values without changing beneficial ownership. Q7. A term used by British labor ministers during the 1964 Sterling Crisis to refer to Swiss banks. Q8. A currency that trades in markets outside of its domestic borders. Q9. An option whose notional payments increase significantly after a set threshold is broken.

"Your goal, as a creative investor, is to launch your ship into financial orbit ... and then put it on automatic pilot." -Robert G. Allen

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Forex Trading Strategies

By 2008, currency trading exceeded $3 trillion dollars daily, but the majority of traders only participate in a fraction of the currency opportunities available to them. However, the currency market is a multilayered kaleidoscope of spot, futures and options trading. The currency market also has very distinct trending patterns that can become more difficult to interpret the shorter the time frame to trade. This is the problem that many new currency traders face as they enter the world of spot trading, but it can be overcome by combining spot, futures and options currency trades. Downside Risk of Spot Forex Transactions In Figure 1, we can see the euro trending upward from $1.44 to $1.60. This entire move of 16 cents (1 cent = $1,000 when using a standard contract of 100,000 units) represents a potential gain of $16,000 in the spot market. From February of 2008 to April 2008, there were multiple pullbacks and retracements. On March 17, 2008, the market dropped in value from $1.56 to $1.53. This represents a $3,000 loss. The market eventually rebounds, but hindsight is 20/20 - while you are in the trade, there is no such consolation. A $3,000-dollar drop could wipe out the margin of a full-sized spot forex contract. So, while you could be right about the market's overall direction, you can be wrong on your timing in executing the trade.

Fig 1 While a trader with a strong money management program would not hold on to a loss of this magnitude all the way down, the fact that the trader must perfectly time the top and bottom of the market's activity in order to succeed makes profiting a herculean task. Fortunately, there is a simple way to protect your account in the face of these factors. In Figure 1, it can clearly be seen that the market is trending up. In order to take maximum advantage of this momentum, there is no doubt that the smart money would go long the euro, as shown in Figure 2. To avoid a sudden pullback in price, the easiest position protection is to either short the euro in the futures market or purchase a euro put option.

Fig 2

"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." - John Kenneth Galbraith


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. Contd.

Using Futures Contracts to Manage Spot Risks If a euro futures contract is used, two new variables are added to the equation: the margin to use on the contract and the possibility that the market will move against your spot transaction. The margin in the euro futures market comes in either a full-sized contract or a mini futures contract. As of June 2008, a fullsized euro contract required a margin of $3,105 and every one-cent move would be equal to $1,250. A mini euro contract required a margin of $1,553, about half as costly, and a one-cent move equaled $625. Depending on the amount of capital available to you, a full-sized futures contract makes the most sense as a source of protection from downside risk. On the other hand, you are losing an additional $250 for each one-cent move if you decide to use a futures contract to protect yourself and the market moves against you. You could also attempt to use a mini-euro contract, but the opposite problem would occur. Every one-cent move is worth $625 in the mini, but every one-cent move in the spot is $1,000. This leaves the position underprotected by $375 and defeats the purpose of the protective position altogether. Using Options to Manage Spot Risks Another route that a trader can take is to use a CME euro put option. Based on an option's volatility, where its price is in relation to the underlying asset, and the time until expiration, the value of the put option will fluctuate. In this instance, we can choose to purchase a put option at the same price as when we decide to go long the spot euro contract. This would be considered an at-themoney option purchase. The option can range in value, but a general rule is that the option price will typically fall between 10-20% of the value of the futures margin. This could range anywhere from $300 to $600 in this instance. This small upfront cost is worth spending if it will help protect you from a $3,000 loss. Because an option's loss is limited to the amount invested, the spot trader's risk exposure never exceeds the premium's value. This means that the underlying spot position can increase in value without the worry that you will lose $250 for every one-cent move against you, like you would if you had a futures contract protecting you.

Did you Know?

The Adams Express closedend mutual fund got its start as a d e l i v e r y company. During the Civil War, they d e l i v e r e d paychecks to both sides and even delivered a boxedup slave to freedom. In 1792, the Bank of the United States was first f o r m e d b y A l e x a n d e r Hamilton. It was one of the first hot issues in the I.P.O market. Trading began before the stock was even issued. During the A m e r i c a n revolution inflation was rampant. In an attempt to slow it, in November of 1 7 8 0 a "Co mmit te e of Merchants" went t h r o u g h Philadelphia and tried to dictate the v alu e of the C o n t i n e n t a l money. This was not su cc e ssful however and by mid 1781 the value was depreciated by nearly 90%.

Fig 3

In Figure 3, the euro successfully rebounds from its low and eventually exceeds the original entry price of the spot euro contract. Without the option contract as protection, there would have been a potential loss of $3,000 for a spot position, with little to no recourse. The only hope for the spot trader losing money would have been to use a stop loss-order and hope to catch the rebound in time to make up for the loss.

Chaanakya is crisp, punctual, knowledgeable and keeps the students well informed. - Arpit Jain, MBA I Year









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Did you Know?

The first U.S. coin was the Fugio copper penny. It was minted in 1787 to help deal with the problem of underweight or counterfeit copper pennies circulating at the time. By minting a national coin, a standard could be established. The Dow Jones I n d u s t r i a l Average is an average of 30 stocks. When it started there were only 12 stocks. General Electric is the only company of the original 12 still in the index.
















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Editing/Compiling News Company Review Investors Check/Stock Ratnas Student Article Coordination Arihant Patawari Chetan P. Shriya Mohammad Nimakwala Sebin Emmanuel Sebin Emmanuel Fouzia Taranum B.

Quiz Answers
1. Misery Index 2. Quadruple Witching 3. Ponzi scheme 4. Bernard Madoff 5. Pump Priming 6. Crystallization 7. Gnomes of Zurich 8. Xenocurrency 9. Balloon Option

Contributions made by 1st year:

Editing/Compiling Did you know, Quiz Quotes, Book Quotes Graphs, Buzzwords Indices Crosswords Communication Gyanesh Shroff Megha Garg Maria Fernandes Paloma Lobo Paulomi Hitesh Archana

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