CRR Cash Reserve Ratio (RBI Monitory Policy)

RBI hiked the cash reserve ratio for banks by 50 basis points to 7%. But it failed to affect the Stock market bull momentum. When the news came on the television screen stock market fell down by almost 1% but after ½ hour it bounced back and went up by 2%. Here RBI wanted to drain access money from the banking system to control inflation between 4% to 4.5% . But due to Positive global cues, enthusing quarterly numbers and a strong bullish sentiment , it didn’t affect the market momentum.
The CRR revision will come into effect from Aug 4.

CRR: The percent of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the India is RBI. The reserve ratio affects the money supply in a country.

For example, if the CRR in the India is determined by the RBI to be 7%, this means all banks must have 7% of their depositors' money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $70 million on reserve.

Currency Carry Trade

It is an arbitrage mechanism in which one party borrow fund in one currency and trade in other currency. In this trader borrow funds from low interest rate country and invest in higher interest rate country and exploit the opportunity of difference in the interest rate of two countries.
Let’s take the example of Japan and India. In Japan the interest rate is 0.50% and India the interest tare is about 8%. Arbitrager can borrow funds in YEN from Japan at the rate of 0.50% and convert that funds from YEN to RUPEE and then buy Indian stocks or bonds which can give return more than or equal to 8%. These types of trade are funded by leveraged fund, the gains or losses are huge, so it is very risky trade too.
The main issues of concern in these types of trade are change in exchange rate and change in interest rate. We have seen the small crash in March 2007, when there was an appreciation in YEN and central bank of Japan Had increased the interest rate from 0.25% to 0.50%, those days trader were reversing their YEN Carry Trade. They were selling their long position in Equity and bond market because:
1-They had to pay more DOLLARS against a YEN.
2-Cost of Borrowing has been increased.

When and Why to Exercise the Option Derivatives??

Before expiry, option of Exercising Option Derivative is available with American Option. In American Option the buyer of the option has a right to exercise the option. In stock Market Index options are European option and stocks option are American option

When to Exercise?
The chances of exercise increases, when the future of the option trades in discount and the Option reaches to expiry.

Why to Exercise?
There are two reasons to exercise the option:
1- The market Price of the option is less then the intrinsic value (i.e. Spot-Strike) of the option because by exercising the option buyer of the option would get better price then selling is the market.

2- Synthetic value of the put is more than the market price of the same strike put.
Here the arbitrager can exploit the Put-Call Disparity (PCD) by selling the synthetic put and buying actual put in the market

Example:

Company XYZ
Spot=160
Future=155
Strike=150
Call Price=9
Put Price=3

Synthetic Put=Call-(Future-Strike)
Synthetic Put=9-(155-150)
Synthetic Put=4

In the Above Example the stock is in discount of 5 (i.e.160-155), arbitrager can sell synthetic put at Rs 4 and buy the actual put at Rs 3 in the market , in this trade he collects net Rs 1 and reverse the position on expiry because on expiry the would not be any Put Call Disparity. This trade is risk free trade.

Comment:
In this trade we should also see the other costs like STT and Brokerage, if the net received value is more then the all cost any one go for it.

What is Reverse-Mortgage?

In a normal mortgage bank lend money or sanction loan against security or Mortgage and borrower pay EMI to the bank and pay their loan amount and the interest part.
But in the reverse mortgage system bank will pay EMI to the customer against the Mortgage. Here Customer would receive a fixed amount over a period of their life and at the end of their life (i.e. after death) of the customer; bank will takeover the property or mortgage of the customer. This facility is only available to the Senior Citizen. In this case relatives of the Senior Citizen can pay the full amount paid by the Bank to the Senior citizen and release the property from the bank custody.

This concept is very popular in western country. But in India also few banks are coming with such type of concept

Comment:
It is very difficult to comment on the success of this concept, in India we prefer to stay in joint family and we make agreement of transfer of property to our relative before death.

Market at 15000 level- Fear or Fun??

Why Fear

1- Market at All time High.
2- VIX (Volatility Index) Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. Is at their all time high level. Which is negative correlated to the Indian stock Exchange (I.e. if VIX is high Market would be low and vice versa)

Why Fun

1- Lower implied volatility in Indian stock Market. (Nifty IV is 19% as on 16-07-2007)
2- July is a Result Month (Good Expectation from the Companies)
3- Lover PE Multiple (Which is going to come down after the results)


In the view of various fund managers from various top mutual funds and the brokerage houses 16000 level is not impossible.

What is Volatility ??

Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. Whereas a lower volatility would mean that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

There are two type of volatility measure

1- Historical Volatility
Based on the Historical Return from the Index. Its shows the past uncertainty in the market. Some times it is called as realized volatility.

2- Implied Volatility (IV)
This is the current Volatility in the market. we can calculate it by using Black-Scholes Model. It shows the current uncertainty in the market. If the market is volatile the people would be ready to pay more than the normal intrinsic plus time value, this is called High IV and v-a-v.

When the market crashes then the IV in in the market tends to increase and when the market touches to their high level this IV tends to decrease, Because people who have long position they come in the market and ready to pay any price to cover their position.