Dear Readers

In the month of November we have witnessed how big data analytics can go terribly wrong , when

Grand Alliance lead by Nitish Kumar sweeps the Bihar assembly elections with the huge margin ,

this win has exemplified that democracy can't be a variate of any methodology. But what

implications it can have at the center stage is what we have to watch out for . I strongly believe that

this assembly results will cast shadow on the upcoming winter session , the government is in the

minority in the upper house where some major bills are pending including GST. The distressed

status of government doesn't end here, we have 7th Pay commission report coming in, which has

blurred the fiscal consolidation vision for the government for the upcoming quarters. Even the Gold

monetization scheme has failed to hit the market with a bang, although it is too early to say, but so far

government has managed only 400 gms of gold under the scheme. Hence, it is very interesting to see

how these testing times are being warded off by Government and RBI at the Non Strike.

Our cover article talks about RoboAdvisory and algorithmic trading methodology, which is gaining

ground as far as Indian capital market scenarios are concerned. In this article we have tried to figure

out what implications it may have on our markets, what challenges it may face in the future and how

efficient are they not only just to beat the markets but also to minimize the losses in the bearish

market conditions.

We have come up with Japan Deflation in the series which will give you a fair

amount of idea about what factors have led Japan into dormant deflation for so long with some

macroeconomic concepts blended in. Our faculty section talk about the alternative hedging

instrument called in order to minimize the loss due to currency fluctuations

prevailing in the world currency markets.

Lastly, It gives me immense pleasure to announce from

as the Winner of Call for Articles for this edition. I would also like to thank our sponsors Finacue

Research and Education for their support ,all our readers, Faculty members and seniors for their

constant support and encouragement.

Bubble Trouble

Range Forwards

IIM Udaipur

Abhimanyu Singh Chauhan

Sidhartha Bhattacharyya

EDITOR’S NOTE

cONTENTS

EDITOR’S NOTE 2

COVER STORY 4

ARTICLE OF THE MONTH 12

ECO SECTION 15

FACULTY SECTION 21

ALUMNI SECTION 23

ARTICLE BY FINACUE 25

NEWS BUZZ 29

TRIVIA 31

FACULTY INCHARGE

EDITOR IN CHIEF

EDITING TEAM

DESIGN

: Prof. Pankaj Trivedi

: Abhimanyu Singh Chauhan

: Shreya Gupta, Tamoghna Das, ParthaBanerjee, Preyas Jain, Prateek Singh, Abhijit Khadilkar, RishiTekchandani, Gunjan Pathak

: Geetanjali, Prateek Singh, Rohit Prabhakar,Jay Khuthia

Automation Evolution

Invention of Robo-Advisors

With the evolution of technology, we are seeing a new

landscape building in the financial services industry. This

includes integrated mobile payment solutions, crowd-

based lending platforms and automated wealth

management. While this evolution has several merits, the

most promising feature is the Robo-Advisor.

A robo-advisor is similar to a personal wealth management

advisor, except it is an online automated service. It is simply

a mathematical algorithm program that manages your

money automatically, without using a human financial

planner. Robo-advisors typically offer basic portfolio management but do not offer services for any

personal aspects of wealth management, such as estate, retirement or tax planning.

To use robo-advisors, customers fill out an online questionnaire providing information about their

income, financial goals and their comfortable level when taking risks. The pre- programmed

instructions normally include:-

RISE OF ROBO ADVISORS: IMPACT, CHALLENGES AND FUTURESania Motwani PGDM B(2015-17)

COVER STORY

S I M S R

Initialprice

Exit price

TrailingStops

ALGOTRADING

Quantity

Ordertype

Profittargets

The robo-advisor software then uses its built-in algorithm to choose investments that meet the goals

and needs of the investor. Once the program matches the investor with the investments it deems as

best meeting the investor's needs, the investor confirms the choices before the program actually

initiates any investments. Once a portfolio of investments is created, the program manages the

portfolio, rebalancing it periodically as necessary. This keeps the portfolio on the right track and

properly oriented toward the investor's goals.

Robo-advisors assess a person's income and find out: how much they can afford, how much they

need to save, study the best tax structure and then decide which investments are to be made to attain

those objectives.

Features of Robo-Advisors:

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The answers are analyzed and the algorithms are processed, resulting in a tailor made

investment plan.

Users can always adjust their goals and risk tolerance as they may prefer.

Thanks to the outreach of robo-advisors compared to traditional advisors, an automated robot

can charge lesser fees.

Typically, robo-advisers invest in low-cost exchange-traded funds, or ETFs.

Robo-advisors also charge

less than the industry standard

of 1 percent of assets managed

fo r f inanc ia l adv i so ry

services.

Robots don't need to sleep

and are scanning the markets

24*7. They can make their

calculations and movements

while analyzing markets

whatever be the time.

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Types ofAlgorithms

One can broadly classify the algorithms in two types:

The algorithms falling under this category are “not truly” algorithmic in nature. By nature these

algorithms, could apply the intelligence of market data and coded logic and make a decision to

sell/buy the particular instrument at the best price, Hence the name Decision Algorithms. The

algorithms classified under this category are the USP's of a

firm and quite confidential in nature. Some of the major type

of the algorithms' which fall under this category are:

Antigaming

Automated Gaming

High-Frequency Trading

IndexArbitrage

Market Making

Pairs Trading

StatisticalArbitrage

TechnicalAnalysis

The core of Algorithmic Trading. Unlike the Decision algorithms, these algorithms are pretty much

commoditized and are customized based on client's needs.

Execution Algorithms could be defined as algorithms who

assist in executing orders

Some Examples OFAlgorithms Strategies’

Implementation Shortfall

Volume WeightedAverage Price [VWAP]

Iceberg

Time WeightedAverage Price [ TWAP]`

Decision Making Algorithms/ Systematic Algorithms

Execution Algorithms

1.

2.

1.

3.

4.

5.

6.

7.

8.

2.

3.

4.

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Impact of Robo-Advisory andAlgorithm trading:

Algorithmic trading has been around for many years now, and has been evolving with increasing

power of computers, lower latency networks and ever smarter programmers coding them.However,

it is a double-edged sword.

The main attraction of robo-advisors is its significantly lower cost compared to traditional financial

advisors. Robo-advisors can cater to a larger audience and hence enjoy low cost advantage.

FundsIndia, Scripbox and MyUniverse, currently charge no fee at all, relying on the commission

earned by selling mutual funds for their cash flow. It also increases liquidity due to low costs.

The layout and interface of robo-advisors is extremely user-friendly. Any laymen having access to

such technology would find it easy to use. Also, one does not have to go looking around for a human

advisor who needs to be trustworthy and competent.

There are algorithms that sniffs news reports on stocks, and starts placing orders before the market

gets any time to react. The speed at which they initiate and process transactions is unmatched by any

human advisor, giving them a great edge with respect to timing.

Robo-advisors provides the service of creating, updating and maintaining their portfolio from home

or on-the-go. One does not have to physically meet the advisor or go to submit the documents. One

can even make changes and rebalance the portfolio at the click of a button.Also, robo-advisors alerts

the user in case of any change in the portfolio instantly.

Algorithm trading makes trade efficient. It results in maintaining consistent prices across markets by

removing any price differences/gaps for a commodity across exchanges.

Advantages:

Low cost:

Easy Interface and layout:

Speed:

Convenience:

Efficient markets:

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Disadvantages:

Lacks holistic view:

Limited customization scope:

Lack of human touch:

Quality dependent:

Similar algorithm configuration:

Spoofing:

Robo-advisors categorize portfolios limited to certain commodities only. They do not offer a holistic

portfolio such as planning for real estate, insurance, budgeting, tax optimization, etc. However,

traditional human advisors provide these services to their clients.

Robo-advisors have a narrow scope for an individual suited portfolio customization. They typically

follow the return and risk inputs. For example, if a person is nearing retirement then it will invest in

less risky debt instruments. However, it will not consider the cash flow through pension and interest

income of the person at that time.

Robo-advisors lack the human touch, judgment enhanced by experience, and other qualities that

machines still cannot provide, such as providing a steadying influence during bear markets. A

traditional adviser, on the other hand, will be in a position to hand-hold the person and navigate a

potentially rocky financial terrain.

The quality of inputs will determine the quality of the outputs. Not all robo-advisors are associated

with quality. Some provide high quality algorithm, speed, costs, etc. Others which are not able to

compete with such quality will eventually suffer.

Often, there are more than one algorithms having the same configuration. Example, if an algorithm

is configured to sell when a stock goes below its 100 day moving average (also read as 100DMA)

and there are many such algorithms active in the market, then the day it falls below 100DMA,

everyone would start selling it and the market price would crash way beyond it needs to.

The algorithm places a large number of orders at very high or low prices having no intention to

execute it. This is done to fool other traders and algorithms involved into believing that there is a

demand for these stocks. The flash crash in the US market in 2010 is an example of this where the

market crashed almost 9% within minutes and soon recovered as well.

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Current Market Scenario:

Algorithms trading has been in existence for more than a decade in the Indian financial markets,

although their usage has been limited to a few hedge funds and portfolio managers. However, over

the last couple of years, retail participation has increased dramatically and according to the IT arm of

the National Stock Exchange (NSE), about a third of exchange trades in India are carried out using

Algorithms trading.

Current stock market has reached to the stage where the human intervention is completely erased

by the algorithms trading. 70% of trades in US are program driven trades and in Europe it is

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approximately 40%. In India, one third of the exchange trades are done through algorithms

trading in both the segments.

Robo-advisor is a logical next step for many former do-it-yourself investors. Also, for many

Millennial and emerging investors, this meets their needs at the stage of life they are at. Previously,

they had to rely on financial advisers who derived all or some of their income from the sale of

financial products. They use this model the most since the end result is similar to what a traditional

human advisor would do for them but at a lower cost i.e. collapse of commission prices.

Robo advisory is in its infancy stage in our country. However, the sheer scale of demand and lack of

other credible alternatives will help it make it to the mainstream. For retail customers, this is a

welcome change and a sure way to start securing their financial future with professional help,

irrespective of their asset size. What does this mean for our markets? With technology rapidly

evolving and high-frequency trading and other types of trades garnering speed, there have been

instances of odd and sharp price movements that cannot be explained by fundamentals. This

phenomenon cannot be ruled out. For the average retail investor who isn't savvy with these

technologies, watching their portfolio returns suddenly fall can lead to loss of faith in markets. The

Future of Robo-Advisors

best course would be to stick to fundamentals, invest in high quality and growth companies with

sound and ethical business and potential for long-term returns, while ignoring short-term sharp

movements.

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Hybrid-Advisors

In the Indian ecosystem, robo-advisers would need to wed technology with human touch points.

While 100% robo-advisory might help with a high percentage of individuals, there are always cases

where automated guidance isn't appropriate. This has led to the emergence of Hybrid-Advisors,

wherein, if you want, the human element is not completely removed from the loop with some of these

firms. The hybrid service combines asset allocation and rebalancing with access to

over the phone and via videoconferencing. At the front end, customers consult with

a human planner on goals and risk tolerance, tweaking the computerized asset allocation where

appropriate. They also can call in for help with key decisions, such as when to retire, as well as

emotional support to stay the course when the market tanks.

computerized

human advisors

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S I M S R

There is a general misconception that “doing good” and “doing well” can be used interchangeably.

That is actually not the case- “doing good” refers to saving people like superman does while “doing

well” is what we can say about successful businessmen like Anil Ambani. But, sometimes there

comes along a set of individuals who can be referred to as “doing good” as well as “doing well”.

Thus, comes along the concept of “Green Finance”- which refers to business investments which help

in improving the environment. With the influx of environmental calamities and rapid degradation of

the general ecology there is a need for improvement and green finance is the stairway to the

metaphoric environmental heaven. The companies leading the way in green finance are working on

innovative methods to create solar panels or biofuels. The evolution of technology has cut out a path

for progress in this field. With huge companies like Solar Power Inc. planning to do a $300 million

IPO in the US Stock Exchange there is a huge uproar for green financing.

The billion dollar oil companies drilling with reckless abandon might lead to the owners having

highly inflated bank accounts but the damage on mother earth definitely puts them at loss. The green

finance initiative is an integral part of green growth that is growth keeping the carbon emissions low.

This in turn is the link between the financial industry, improvement of the economy and the

economic growth of the country- all of which are essential for sustaining growth in a country like

India.

IS GREEN FINANCE VIABLE IN INDIA?Sidhartha Bhattacharyya PGP-2015-17

IIM Udaipur

article of the month

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In India, companies like SIDBI have taken initiatives in promoting green finance in budding

entrepreneurs. They provide funding for several business developers who are ready to take on the

green initiative. SIDBI promotes investment in environment friendly technologies that have huge

upward potential through lending schemes.They have

two modes of lending which include concessional

lending to boost investment in the sector as well as

“cluster specific dissemination”. In the case of energy

saving schemes, SIDBI provide financial assistance

in buying plants and machinery, on the condition that

they follow the green norms of carbon emission. The

parent company IDBI also has a devoted group

working on carbon credit advisory according to the norms of the Kyoto Protocol.

The beauty of this form of business is the levels of innovation that people can bring into their

technology. In the Indian context if we think of jute harvesting, over-maturity of stalks causes loss of

yield and quality. Thus, came up the innovative idea of creating a ribboning machine which would do

the process quickly to improve yield and productivity of the crop. The whole process became

mechanized and with low cost it was made very easily available for the farmers. The machine uses

simple technology where two sets of parallel rollers help in increasing this productivity. These kinds

of simple technology helps bring the cost down as well as improve availability of such resources to

the needy.

In terms of projects in green finance the country sees no shortage in investments. Heavy funding has

gone into projects such as creation of a green habitat which refers to a complete housing complex

that will be completely satisfied by recyclable and renewable products. Water will be derived from

rain water harvesting, energy through a system of nanoparticle based solar cells along with a

complete waste management system so that the refuse from the habitat would not pollute the

environment. More projects on biomass have taken the fore with investments seen in creation of new

technology which uses refuse materials like rice husk and molasses waste from farmers who harvest

the crops.

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Items that would be previously thrown away as waste, is now being used to produce energy. The final

aim of the project would be to make these farmers self-sustaining with no cost of electricity from the

outside.

For every ying there is a yang, so even for such a remarkable initiative there will be certain

drawbacks. The fact that the initiative is green in nature gives us the most obvious drawback that is

profit. People tend to refrain from such investments as their return in terms of monetary value would

be low. They tend to for less environment friendly investments in the hope to get rich quick. The

realization is in the fact that there the benefits of such investments may not give immediate benefits

but the environmental benefits are massive. Thus, there is a move towards increasing the returns on

such investments which can only happen through better technological innovation and possibly more

government intervention in terms of tax subsidies. On top of this government intervention in terms

of tax subsidies. On top of this there is also a problem in the risks involved in such technologies. The

market for the products might not be as large as others due to the fact that they are created taking

sustainability into consideration. Sustainability refers to usage of resources in such a way that they

do not harm the environment. Such a beautiful concept lies untapped due to the bane of productivity

loss. The risks involved with 'dirty' investments are much lower, thus investors tend to gravitate

towards it. What the investors do not realize the environmental risks involved in such investments.

With the declining environmental conditions the need for green investments should increase rather

than decrease but for the greed of money.

At the end of the day money is the driving

factor for most people just that at some

point in time some individuals come to the

forefront that will change how we

perceive the world of investments. Thus,

the torch bearers of green finance, the lone

individuals who do not ride with the herd, strive to change the world for the better. People who go by

follow the principle saying “Give hope to others, expect nothing back”, they will be the ones thriving

as the world of investments is bound to change and it will change to provide us a greener tomorrow.

S I M S R

BUBBLE TROUBLETHE RISING SUN SETS INTO THE LOST DECADE

Shrirang Lichade PGDM B (2015-17)

ECO SECTION

Hola!!! Finance aficionados…..

In the last edition of FINLY, we took a tour of CHINA's bubble economy and detailed analysis on the

recent burst. In the second article of this series, we are going to examine the two decade long

deflation in Japan which was triggered by popping of asset bubble. When we look back at the history,

the popping of asset bubbles has nearly always been tragic. Social, political and economic

turbulences have a bad habit of following asset bubbles, while wealth destruction is a guaranteed

feature.

Now let's consider the opinion of Keynes who spearheaded a revolution in economic thinking and is

considered as the father of modern economics.

“Thus Inflation is unjust and Deflation is inexpedient. Of the two, perhaps Deflation is . . . the worse;

because it is worse, in an impoverished world, to provoke unemployment than to disappoint the

rentier.”

—John Maynard Keynes (1923)

Keynes's observation aptly describes the current situation of Deflation Inflicted Japan. Many

economist and members of intelligentsia still quibble over the fact whether Japan is in deep trouble

due to its own opulent or spiritual way of life. That's the ironic part of Japan's ultra-development

saga. The 'Land of the rising sun' has the world's third-largest economy ($4.210 trillion) by nominal

GDP and the world's fourth-largest economy ($4.843 trillion) by purchasing power parity. But

startlingly, however, the Japanese economy dramatically deteriorated in what is now called the 'lost

decade' of the 1990s. The growth rate declined to less than 1 per cent per annum on average, and it

was negative in some years. The 'lost decade' has extended also into the new century. Now

economists are referring it as the 'Lost Two Decades'.

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Many problems have been pointed to as contributing factors that explain the “lost decade” in Japan.

Let's find out the key causes which lead to the chronic deflation

Financial deregulation was an important factor which established a conducive

environment for a land price bubble, which in turn enabled firms to borrow heavily in order to invest

in commercial real estate.

It also prompted the acquirement of differing financing options, which lessened the corporations'

dependency on banks for funding. In the 1980s, the Japanese banks shifted their main target of credit

supply from manufacturing to non-traded-goods industries such as real estate, finance, and other

services that were not well disciplined by global competition.

Japan is one of the excessive savings glut countries in Asia. During 1980's when Japan was growing

at faster pace, people of Japan were saving 15% of their after tax income. This contradicted with

Keynesian principle that when investment exceeds saving, there will be inflation. If saving exceeds

investment there will be recession. One implication of this is that, in the midst of an economic

depression, (in this case deflation after crash) the correct course of action should be to encourage

spending and discourage saving.

Thus this was the major problem

which is still ongoing in Japan

and PresidentAbe is urging

people to go and spend money

which could lead to higher

inflation rate.

#1.Financial Deregulation

#2.Unsolved excessive saving issue

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#3.Asset Price Deflation

In the first half of the 1980's, control on capital movements were pulled down, interest rates on

deposits was close to zero. Japanese banks lost large corporations to global capital markets, but

eventually banks found their new customers in SME's. These enterprises were able to borrow for

risky projects simply against real estate collateral. During this time, people got much more money

due to financial deregulation and easy money policy. So this excess liquidity was invested in real

estate.

1987-1990 is termed as the “bubble period”, from the viewpoint of the coexistence of three factors

indicative of a bubble economy, that is, a marked increase in asset prices, an expansion in monetary

aggregates and credit, and an overheating economy.

.

Thus, in the latter half of 1980's, central bank of Japan realized that this was not sustainable and to

check the further repercussions on the economy, tried to tighten the policy by increasing the interest

rates. Which in turn lead to burst of the asset prices and Nikkei stock index had plummeted to half its

peak. This collapse lead to a total loss in asset values of 1000 trillion yen by the middle of the decade,

or 2.4 times the country's GDP. This was a huge loss, even compared with the United States' capital

loss of 1.9 times GDPduring the Great Crisis after 1929.

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#4. Non-Performing Loans

Economic issues:

Labor problems

Investment demand Stagnation

Since the loans were disbursed against land, and land price plummeted through 1990 to 1998, the

number of loan going bad increased drastically. Japanese banks were hard hit since loans were given

mainly to industries against land. Thus, increasing bad debts for the banks. In the global circle, many

entities accused banks in Japan of cooking the books to hide the losses from the customers and

shareholders.

The list given above is non-exhaustive. Since many facets which are still debated like muddled

monetary policies, advent of ICT and liberalization. Alas, we need to consider long lasting

ramifications of deflation in terms of economic and social effects.

: Since more than two-thirds of Japanese workers are employed by SME's,

these business failures were among the most important causes of the rising unemployment in the

country. The unemployment rate in Japan increased from about 2 % in 1990 to 3.60 % in 2015.

However, the concept of unemployment in Japan is loosely defined, thus real unemployment

statistics is believe to be double the given number to be comparable with Western economies. In the

given scenario, the unemployment rate in Japan would be comparable with the depressed European

economies. Rising unemployment, bonus and overtime payment cuts and the use of cheaper part-

time workers have led to a significant reduction in household income. Unsurprisingly, domestic

consumption demand has been depressed since the beginning of the 1990s.

: Investment demand stagnated over the years, given the

existence of idle capacity. Thus, the bad loans of the Japanese banks have not been cleared up and,

instead, they have fed the deflationary spiral of the economy. The result has been a vicious circle,

with banks facing difficulties due to their bad loans and shrinking capital base, medium and small

firms running into difficulties due to the credit crunch, and the resulting deterioration in workers'

employment and income leading to depressed consumer demand and deflating real estate and share

prices.

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Social issues:

Youth is refraining from consumption

Declining birth rate

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: Traditionally Japanese people are known for content

lifestyle. But economically this is hurting the nation. Japan raised its consumption tax rate in 1997

from 5% to 8% which lead to reduction in consumption to this day. Government has started declaring

holidays so that populace can go and buy things and economy can run again.

: The financial burden of raising children and obtaining education,

medical services and care for elderly parents has not been addressed by public spending, and this

burden has increased due to the deepening fiscal crisis of the state and its imposition of neoliberal

social policies. One of its consequences is that the average birth rate of Japanese women has declined

sharply, from above two at the beginning of the seventies to 1.29 in 2003, leading to a rapidly ageing

society. Japan is grappled with what is supposed to be 'New world' problems.

Key take-away from Japan's deflationary economy

From the given data we can conclude that Japan's Two Lost Decades are a result of inappropriate

fiscal and monetary policies which are indeed need to be probed. As the world still remembers the

subprime lending crisis of 2008 which resembles to Japan's stock market crash to a greater extent.

Some of the key take away are-

S I M S R

S I M S R

#1. Popping of the bubble by central bank by tightening monetary policy was a critical

mistake: It is still a debatable topic among the economists whether a bubble should be deliberately

popped beforehand. It is universally accepted that asset price is closely related to general price level,

thus asset prices should remain stable in the long run. But using monetary policy to collapse the

booming asset prices was a severe mistake.

#2. The inadequate responses after the burst of the bubble:

Asset prices in Japan have been falling for the last two decades, which is unusual for the developed

economy as that of Japan. The policy reactions were too little too late, marked by a repetition of stop

and go, without coordination of fiscal and monetary policy, which lead to chaotic environment for

the private investors and dried up investments.

#3. Bad loan problems: The major focus during the period was the bad loan problem. It is still

debatable about the relationship between the bad loan and macroeconomic performance. The banks

were lending too much to inefficient firms and industries so that they survived unduly: Zombie

lending. Even though its economic impacts were unclear, it was no doubt that there was a series of

government's mistakes not to deal with the bad loan problem as soon as it appeared. The ministry of

finance did not recognize the magnitude of the problem,

Postponing and prolonging the necessary measures to deal with the problem lead to severe deflation

indirectly.

The main objective of this article was to give readers a brief idea about the lost decade and deflation.

I tried to keep it simple and lucid without any verbosity and hardcore finance and economics

knowledge. The subject matter was rather vast and full of complexities. But it gave me an immense

pleasure to make this article simple for the readers. So keep reading Finly and wait for the next

article.

If you can't explain it simply, you don't understand it simply- Albert Einstein

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Everyone is aware that the Indian stock market has been sliding lower since the last week of August

2015 but how many of us have been watching the currency market? The Indian rupee has been quite

volatile against the US dollar over the past four months. The dollar broke the range of 63.30 – 63.50

that prevailed in July 2015 and spiked to 66.80 in the last week ofAugust. It then subsided to 64.70 –

65 in October only to shoot upwards again in November. While such volatility is a boon for currency

traders it does not augur well for end-users of foreign currency who must look for suitable hedging

tools to protect themselves from the adverse effects of such volatility.

faculty section

S I M S R

FOUR WORDS ON FORWARDSProf. Aparna Bhat

Finance dept - SIMSR

dollars forward. Exporters, on the other hand, may choose to keep their exposure unhedged and

hope for higher levels. Of course, this plan may back-fire should the dollar suddenly reverse its

direction and start weakening against the rupee. Exporters could be reluctant to take forward cover in

the present situation because a forward contract involves a commitment to deliver the dollar at the

agreed rate. An exporter who has sold dollars forward at a rate of 66.80 would be very unhappy if the

dollar subsequently shoots up to 68. Buying call and put options on the foreign currency is an

alternative for importers and exporters respectively but it involves an upfront cost in the form of an

option premium. What both parties need is an instrument with the flexibility of an option but without

any upfront cost.

The range forward is just such an alternative which combines the best of both the worlds. Let us say

Forwards and options are some

such hedging instruments. A

forward contract is an agreement

to buy or sell foreign currency at a

predetermined rate on a specific

future date. In the current scenario

importers may rush to hedge

against a rising dollar by buying

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an exporter has a receivable of USD 5 million three months down the line. The current three-month

forward rate is 67.95. Instead of entering into an outright forward contract to sell his dollars, the

exporter can negotiate a range forward contract with his bank. As the name suggests, it is a forward

contract that is based upon a range of exchange rates rather than a single exchange rate. The contract

involves a 'floor ', at say, 67.80 and a 'cap' at say, 68.20. If on the maturity date of the range forward,

the dollar is below 67.80, say at 65.18, the exporter will receive the floor rate of 67.80 and is thus

protected against any unexpected weakening of the dollar. On the other hand, if the dollar

strengthens to 69, the exporter will receive the cap rate of 68.20. For any exchange rate within the

range of 67.80 – 68.20 the exporter has no obligation to the bank and may sell the dollar separately at

the prevailing market rate. The range forward thus offers full protection against unfavourable

exchange rate movements and also enables the hedger to participate in favourable exchange rate

movements up to a pre-determined level. Of course, the hedger will give up the benefit of a

favourable exchange rate beyond the floor rate or cap rate depending upon his exposure.

How does the bank structure a range forward? The hedger selects either the floor rate or the cap rate

according to his exposure and the bank determines the other rate. It is basically a combination of two

options. In the foregoing example the bank has effectively sold a put option to the exporter at a strike

price of 67.80 and simultaneously bought a call option from him at a strike of 68.20. The strike prices

are so arranged that the net premium is zero. The bank will gain if the dollar rises beyond the cap rate

but will suffer losses if the dollar weakens below the floor rate.

Range forwards are an over-the-counter (OTC) product and as such are subject to the guidelines of

the RBI regarding OTC derivative contracts.

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First of all, I would like to congratulate Team Finly for this great initiative as it not only helps the students

preparing for their placements by getting insights about what the corporate world has in store for them but also

gives the alumni community a chance to reflect on our experiences of past few months and compare our

peaceful and fun filled life at SIMSR with the fast paced life of the corporate world.

Hearty congratulations to Paridhi, Venkat and Shweta for sharing their wonderful experiences in the previous

editions of Finly and when Tamoghna asked me for this article I could not deny it as I also wanted to join this

elite group of writers and share my experiences with my readers.

I am currently employed with BA Continuum India Private Limited, a non-banking subsidiary of Bank of

America - Merril Lynch (BofA- ML) which visited our campus in November last year. Presently I am part of

Global Investment Banking- Pitchbook division and working for Real Estate, Gaming and Logistics Sector

(REGL).

As the name suggests I am involved in preparation of Pitchbook for REGLsector. Basically it is an Investment

Banking backend department.

It involves:

Maintaining Trading Comparable (Comps) for multiple sub sectors such as Lodging REITs, Real Estate

Finance Companies, Casinos etc. Trading comps involves pulling in numbers from Earning Release of

comparable companies to come out with different multiples as an output.

2) Transaction Comparables which involves analysis of past deals in the Real Estate sector to come out with

appropriate multiples.

3) Company profiling of various companies.

4) Benchmarking of comparable companies for different metrics.

1)

Alumni section

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Investment Banking: My experience at BA Continuum IndiaPrivate Limited (A non-banking subsidiary of Bank of

America)Utkarsh Ojha

PGDM - FinanceBatch 2013-15

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As far as company culture is concerned, Bank of America scores over other organizations in the

Investment Banking sector. The company culture is quite accommodating and gives a chance for

overall development. Organization is quite flexible as far as location is considered. Working hours

are not fixed and your workday can range from 6 hours to 15 hours depending on the volume of work.

At this time of the year most of you will be busy preparing for the placement season. So now it is time

for some GYAAN. Specifically for the Investment Banking interview preparation keep yourself

abreast with the latest happenings in the M&A sector. Keep yourself updated with the data and

rationale behind various deals that have taken place recently. Brush up your accounting concepts.

Financial StatementAnalysis is a crucial part of any Investment Banking interview.

Never fear rejection as every rejection teaches us something new. (I myself was selected in my 10th

interview).

When it's your day everything will fall into place. Don't feel the pressure when people around you get

placed. Keep calm and enjoy your life at SIMSR because you will never get these golden moments

back in life. Cherish each and every moment and make the most of it.

Lastly, I would like to thank Team Finly and Finstreet for giving me an opportunity to pen down my

experiences. All the best guys for the days ahead. Have fun and enjoy your life at SIMSR. You can

write to me at utkarsh.ojha87@gmail.com for any queries. Cheers!

ALIBABA – Built to Last*

It may not be early to say thatAlibaba is in the league of those built to last, after close two decades of

keeping investors and consumers positively surprised.

Alibaba was a home brewed business started by Jack Ma in 1999. In the early years Ma developed his

core skills in English language and International trade and proceeded to take a formal education in

Cheung Kong Graduate School of Business. In the year 1995 Ma was amazed by the possibilities of

VBN which was one ofAmerica's first internet service providers, and hence started a website: China

Pages. This was an online directory for domestic businesses interested in building overseas business

relationships. But Ma was forced to give up control of the company eventually, to the Govt. In 1999

Ma pushed again and this time with a fleet of 17 co-founders determined to execute the theme 'help

businesses find businesses', formed Alibaba. The earliest funding came from Goldman Sachs for $5

million followed by Softbank for $20 million. To attract investors Ma incorporated VIE (Variable

Interest Entity) which was the bellwether for investments and funding that followed. China restricts

foreign investments in sectors it may consider sensitive and internet was one of those. Ma set up an

off-shore entity in Cayman Islands a tax haven, where investors were entitled to profit under the

contract, despite the US regulator raising an eyebrow.

In early 2000's Jack Ma tested his strategic predisposition by putting Ebay on the edge of

withdrawal. He launched Taobao where businesses could register completely free for a few years.

Ebay's partner in China Eachnet lost ground as the customers moved for better profits through

Taobao.

Jack Ma believed in sustainable opportunities that an internet services provider could bring in and

transform business processes. Ma was able to engage Yahoo who invested $1billion in cash but in

exchange for a 40% stake in 2005. Things went awry in the following years as Yahoo volunteered in

The Beginning

Time before the listing

marketing activities that was detrimental toAlibaba. Ma tried avenues to get the control back but in

(*Title inspiration from Jim Collins book - Built to Last)

Article by finacue

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vain. An attempt for listing in HKSE failed too due to regulatory bottlenecks. Finally five years

of struggle ended in 2010 when Ma spun off Alipay through a controversial move. Founded in

2004 Alipay dealt with the payments, and provided escrow services to customers of Alibaba. The

Alipay offshoot was one of Ma's best laid plans as today it controls almost half of China's online

payment market. The spin-off was under affiliation of Zhejiang Small and Micro Financial

Services Co. (ZSMF) and eventually Ma had to share 51% of its profits between Yahoo and

Softbank. Till early 2014 ZSMF Services Co. expanded with wealth management and lending

services and finally had China's biggest money market funds. Thus when the bell rang in NYSE

on 18th Sep 2014 Alibaba (NYSE: BABA) emerged as the biggest IPO ever in NYSE with $21.8

billion.

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Deals, deals and deals

Today looking at Jack Ma's history one would begin to think he has an obsessive compulsive deal-

making disorder, only in his case it proved beneficial. Partners from ZSMF Services helped Ma build

Yungfeng Capital a PE firm in 2010 and it served as a route for the deals that followed. Cainiao was

formed in 2013 to shape China's logistics structure with collaboration from Fosun and Yintai which

are both successful enterprises in China. Alibaba's acquisitions each year included something from

most industry sectors be it navigation systems or a sports team. To solve any itches that Beijing may

have raised all this while Ma had nurtured ties in the city since long. One such collaboration was

eminent during a well thought out deal of buy back of shares from Yahoo. The buy- back was

executed from Yahoo in 2012 for a hefty consideration and a sizable portion was resold to a PE firm

Boyu Capital founded by the grandson of a former president.

In recent times Alibaba managed to stay afloat despite the national slowdown. A key move during

this rough weather was executed by capturing the shift of consumer spending as well as

advertisements at the right time on mobile devices. Analyst's data shows non-manufacturing sector

continuing in growth mode. The services portion alone accounted for about 51% of GDP in the three

quarters of this year, which is a 15% rise from last five years. Thus this giant beat analyst

expectations with its 3Q15 results of 32% y-o-y revenue growth and 30% y-o-y EPS growth.

Alibaba and India

India had been on Jack Ma's mind and even had a Memorandum of Understanding (MoU) with CII

(Confederation of Indian Industry). 300 million people in India have an online presence which is a

25% (an estimate) of total population. In 2010 Alibaba took over Easy Business India E-commerce

and put a footprint in the B2B space. Over the years Alibaba India housed 1.3 million suppliers and

made a profit of 1Cr against sales of 20Cr in 2014. Analyst expectations point towards a $43 billion

ecommerce market by 2019, with a 50% share of online business.

Indian policy frameworks do not allow foreign investment in retail online business, but this does not

pose a challenge to Alibaba to grab a share of the B to C space. Alibaba would run its model without

any inventory at all. Ma's dreams took shape with his first round of investments close to $500 million

in Snapdeal after year long negotiations this year, though the larger share of the pie is held by

Amazon and Flipkart. Ma's deal making disorder prevailed and within a month he grabbed a stake in

One 97 communication the parent of payment services provider Paytm.

Stake shares and growth in GMV's (Gross Merchandize Value ) aside Ma's 360 approach of tying up

all loose ends has setAlibaba to be 'Built to Last' for a long time now.

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news buzz

7th Pay Commission ReportThe 7 pay commission submitted its report to the

finance ministry on 19 November 2015. The

recommendations are likely to increase the salary

of government employees by 23.5%. The impact

of this salary hike on the fiscal policy is estimated

to 102000 crores. It will be implemented from

January, 2016.

th

th

Gold demand plummetedDemand for gold slipping to all time low in 8 years

despite festive season round the corner. This can be

attributed to poor investment demand and back-to-

back droughts that have slashed earnings for the

country's millions of farmers. The Indian rupee has

fallen over 5 percent this year, restricting the drop in

local gold prices to 5.5 percent, compared with a 9.3

percent drop in U.S. dollar denominated gold.

India's gold imports, which account for nearly all of its demand for the precious metal, could fall to

around $5.7 billion in the December quarter, the Federation's Bamalwa said. Two gold dealers

forecast a similar fall.

RBI Allows Foreign Investors To Buy BondsRBI has permitted foreign investors to buy corporate

bonds. It is a step taken for debt restructuring of the

distressed companies and is a part of the bankruptcy

code formulated by the RBI. The maturity of the bonds

will be 3 years or more.

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news buzz

Euro on shaky ground, stocks up on talk of

aggressiveECB easing has sent ripples in the market as the euro slipped back towards seven-

month lows, bond yields fell and European shares rallied as talk of aggressive

stimulus from the European Central Bank next week gained ground. Against this

backdrop, the euro remained on the back foot, dipping 0.15 percent to

$1.0626EUR.

China's biggest broker Citic probed for 'rule violations'

The China Securities Regulatory Commission

(CSRC) is investigating Citic Securities for

allegedly violating the Supervision and

Management Regulation for Securities

Brokerages. The probe into the brokerage giant

was announced as part of a wave of measures

targeting the financial sector, following the

spectacular meltdown of the Chinese stock

market this summer.

Bihar Election 2015: Nitish – Lalu stop Modi – Shah

Juggernaut

The Bihar election was billed as a grudge match between 'secular' and 'communal' forces. Nitish

Kumar led the 'secular' GrandAlliance to a landslide win over BJP-led NDA.

The Bihar Election results are perceived to influence the course of reforms and questions are being

raised as whether the government will succeed in getting the key bills like GST and Bankruptcy code

passed. However, irrespective of the election results markets have recovered in anticipation of

mellowing down of BJP which may bring consensus and also because India is the only high growth

country across international markets.

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trivia

1. Singapore has the world's highest

percentage of millionaires with 1 out of 6

households having at least USD one million in

disposable wealth.

2. The portrait of Abraham Lincoln on the

penny faces to the right and all other portraits of

presidents on U.S. circulating coins face to the

3. Ikea is the world's largest and richest

"non-profit charity."

4. 40% of McDonald's pr ofits come from

the sales of Happy Meals.

5. The note with the most zeroes is a

Yugoslavia 500,000,000,000 Dinara, issued in

199 3 with 11 zeroes.

6. One of the highest-priced single

purchases ever charged to anAmerican Express

card was $2.5 million for a painting by Roy

Lichtenstein.

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www.finstreet.weebly.com

Finstreet, Finance Committee of SIMSR

finstreet@somaiya.edu

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