According to the interest rate parity theory, the currency margin is dependent mainly on the prevailing interest rate (for investment for the given time period) in the two currencies. The forward rate can be calculated by the following formula: F/S = (1+Rh)/ (1+Rf) Where, F and S are future and spot currency rate. Rh and Rf are simple interest rate in the home and foreign currency respectively. Alternatively, if we consider continuously compounded interest rate then forward rate can be calculated by using the following formula: F = S*e (rh- rf)*t Where, rh and rf are the continuously compounded interest rate for the home currency and foreign currency respectively, T is the time to maturity and e = 2.71828 (exponential). If the following relationship between the futures rate and the spot rate does not hold, then there will be an arbitrage opportunity in the market. This will force the futures Continue reading
Investment Management
An Overview of Indian Commodity Exchanges
A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spots, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts. Commodity exchanges are institutions which provide a platform for trading in ‘commodity futures’ just as how stock markets provide space for trading in equities and their derivatives. They thus play a critical role in robust price discovery where several buyers and sellers interact and determine the most efficient price for the product. In India there are 21 regional exchanges and three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed Continue reading
Security Analysis Phase in Investement Portfolio Management
Security Analysis in Portfolio Management There are different types of securities are available to an investor for investment. In Indian stock exchanges shares of more than 7000 companies are listed. Traditionally, the securities were classified into ownership such as equity shares, preference shares, and debt as a debenture bonds etc. Recently companies to raise funds for their projects are issuing a number of new securities with innovative feature. Convertible debenture, discount bonds, Zero coupon bonds, Flexi bond, floating rate bond, etc. are some of these new securities. From these huge group of securities the investors has to choose those securities, which he considers worthwhile to be included in his investment portfolio. So for this detailed security analysis is most important. The aim of the security analysis in portfolio management is to find out intrinsic value of a security. The basic value is also called as the real value of a Continue reading
Trading, Clearing and Settlement Transactions at NCDEX
Trading The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. Order matching is essential on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to finds a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and Continue reading
Major Participants in Foreign Exchange Market (Forex Market)
Participants in Forex Market The participants in the foreign exchange market comprise; Corporates Commercial banks Exchange brokers Central banks Corporates: The business houses, international investors, and multinational corporations may operate in the market to meet their genuine trade or investment requirements. They may also buy or sell currencies with a view to speculate or trade in currencies to the extent permitted by the exchange control regulations. They operate by placing orders with the commercial banks. The deals between banks and their clients form the retail segment of foreign exchange market. In India the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 permits retention, by resident, of foreign currency up to USD 2,000. Foreign Currency Management (Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 requires a resident in India who receives foreign exchange to surrender it to an authorized dealer: Within seven days of receipt in case Continue reading
Classification of Equity Shares in Terms of Anticipated Earnings
In terms of the anticipated earnings of the companies, shares are generally classified on the basis of their market price in relation to one of the following measures: Price/Earnings Ratio is the price of a share divided by the earnings per share, and indicates what the investors are willing to pay for the company’s earning potential. Young and/or fast growing companies usually have high P/E ratios. Established companies in mature industries may have lower P/E ratios. The P/E analysis is sometimes supplemented with ratios such as Market Price to Book Value and Market Price to Cash Flow per share. Dividend Yield for a stock is the ratio of dividend paid per share to current market price. Low P/E stocks usually have high dividend yields. In India, at least in the past, investors have indicated a preference for the high dividend paying shares. What matters to fund managers is the potential Continue reading