Axis Ahead Internship

Program 2016
Derivative Sales and Structuring

Mentor: Saibal Sengupta Sandeep Srinivas

Buddy : Seeteez Mohapatra FMS Delhi
Contents
• Overview
Sector-wise • Scope

Identification of • Methodology
• Total Forex Exposure
Clients • Priority Sectors
• Results and Recommendations

• Overview

Development of • Features
• Net Premium

Option Pricer • Payoff

• Working
• Limitations

• Overview

Construction of • Features
• Bootstrapping

Zero Curve • Plot Zero Curve

• Working
• Assumptions
 Sector-wise Identification of Clients

• To prepare a database Approach • Companies were

with client names, sorted sector wise
foreign exposure and • Priority sectors were
contact details that identified based on the
could help in sector- • The data needed for total foreign
wise identification of the database was exposure and
clients for derivative extracted from the recommendations from
products in the SME Capitaline database the SME team
segment • Based on the number
• The list of clients with of companies under
sufficiently recent data each sector and the
available was compared current trend of the
with he list of Axis’ sector,
clients recommendations were
made

Objective Result
 Sector-wise Identification of Clients - Scope

General details Forex data Contact details

Client Name
Earnings in forex Website
Incorporation Year
Expenses in forex Mail ID
Sector

Business Group
Cash outflow Telephone No.
Banker
Registered Office
Cash inflow
Credit Rating details
 Sector-wise Identification of Clients- Methodology

Determine total forex exposure of the

IT
companies in each sector

FMCG Chemicals

Set a limit on the forex exposure of the

clients
Capital
Goods Textiles
(Non-Elect)
Sectors Compare the list with the credit clients,
forex clients and trade clients list of Axis
Bank
Capital
Pharmaceut
Goods
icals
(Electrical)

Auto
Identify non-clients in each sector and
Automobile
Ancillaries get information on their present banker
and forex position
 Sector-wise Identification of Clients –
Results and Recommendations
IT
Non-Clients • World's largest sourcing destination for IT
153 • More than 45 per cent in total services export in
148 2015-16
115 • Small and medium businesses worth US$ 11.6 bn in
107 2015, expected to grow to US$ 25.8 bn in 2020
81 84 90
Pharmaceuticals
59
• Revised Cap on FDI
• Expected CAGR of 20% over the next five years
14 • High growth expected from the Bio Pharma sector

Textiles
• Large employee base : high reliance on the SME
segment
• Huge & stable industry; high growth expected in the
industry

Auto Ancillaries
• High growth rate of exports in the sector
• Huge employee base in the SME segment
• High expected inflow of FDI
 Development of Option Pricer

• To build an option Approach • The option pricer

pricer using VBA that developed could output
can output the price of the price of all the
options when spot major option structures
price, strike prices, • Black Scholes equation dealt with by Axis Bank
volatility, risk-free rate for pricing of Call and
and time to maturity Put options is used • Conduct a scenario
were provided as inputs analysis by plotting the
using the Black • Combination of buying gain/loss for the client at
Scholes Model and selling call and put different spot prices at
options at different maturity
strike prices

Objective Result
 Development of Option Pricer - Features
Plain Vanilla Spread Risk Reversal Straddle
• Call Option • Call spread • Exporter • Long straddle
• Put Option • Put spread • Importer • Short straddle

Strangle Seagull
• Long strangle • Importer Seagull
• Short strangle • Exporter Seagull

Spot Price Sum of Variable Spot Plot of Payoff

Inputs

Scenario Analysis

Payoff Curve
Net Premium

Strike Price individual Prices against the

premiums Gain/Loss from strike price at
Time to maturity
Maturity each option
Volatility Net Gain/Loss
in each case
Risk free rate
Development of Option Pricer - Working
Development of Option Pricer – Limitations
 Future Scope
The results for ATM Call and Put
options were verified from Functions to attribute for changes in volatility,
Bloomberg terminal so that the pricer can work independently

Manual input of the volatility for

pricing the options

Changes in volatility not

accounted for (a limitation of
original BS model)

Separate volatility for each option

can be entered manually

Once the model is able to adjust

to changes in volatility, this can be
used as a handy tool for the
pricing of options
 Construction of Zero Curve

• To determine the
Approach • Plot the zero rates
zero curve from against the time to
the yield curve that maturity
can be used for the • The module
pricing of swaps • Yield rate needs to developed can be
be calculated from used for the pricing
the excel function for of swaps involving
yield rate single or multiple
payments – POS,
• Linear Interpolation COS, CCS etc
and exponential
Bootstrapping
were used to
determine the zero
rates

Objective Result
 Construction of Zero Curve - Features
Inputs
Principal Time to Maturity Coupon Rate Yield Rate Payment Frequency

Discounted Cash Flow

Separately discounts each cash flow using yield rate Sum of all these gives the total discounted cash flow

Zero Rate Calculation

Calculates sum of all cash flows except the one of the last Calculates the zero rate for the last period by comparison,
period, discounted using zero rates using the exponential function

Zero Curve
Plots the zero rate obtained for each period against the Zero rate for any period lying in between two consecutive
time periods can be determined using linear interpolation
Construction of Zero Curve - Working
 Construction of Zero Curve – Assumptions

The model uses linear Future Scope

interpolation; can be improved by
incorporating the code for Cubic-  A customized module can be built
Spline interpolation for different kinds of swaps which can
enable their pricing using the zero
rates obtained
 The module can be extended for the
The zero rates obtained from the
model were compared with the pricing of Basis Swaps
zero rates from Superderivatives
and were found to be reasonably
accurate

This can be used as a handy tool

for determination of zero rates and
can be even shared with the clients
Thank You