mark2market_spring_edition_volume_ii

FROM THE EDITOR’S DESK

EDITORSMOULI GHATAK

RAHUL RAVI

SAGAR KAPOOR

SUMIT PAL SINGH

MENTORS

HARISH THANGARAJ

LAVANYA R

TEAM MARK2MARKET

Alka KatiyarAbhinav Gupta

Abhinav MinnalaAkash Krishnatry

Balajee RaoDiwakar ShuklaGaurav Widhani

Kunal VermaPartha PratimRucha PundleSahil Bansal

Shilpa TanejaSohini BanerjeeSoumitra Sahu

Srinjoy SahaVenkat Raman

“Derivatives are financial weapons of mass destruction” - Warren Buffet

It’s a while sinceMark2Market took its first step. The encouragement we received from the readers was infec-tious! We would like to express our heartfelt gratitude for that. The time now is ripe for it to march on with its second edition. We have gleaned some intriguing topics from the realm of Finance for your perusal.

Warren Buffet, one of the most ven-erable investors of recent times once reflected, “Derivates are a weapon of mass destruction”. The proponents of these instruments would like to believe otherwise. Like wise the shady world of Derivatives brings in both its advocaters and naysayers in equal measure. The cover story for this issue does an indepth analysis of a particular type of Derivative, Credit Default Swaps. The impending launch of these derivatives in India and the manner in which the market reacts, would be a riveting thing to follow.

The finventory section has articles on diverse topics by students rang-ing from the tool of transfer pricing to the equation between two very different sectors of Finance and social media, to shedding some light on the recommendations analysts give to the companies, to some gyan on PIP and last but not the

least, a brief follow up on the Euro-pean financial turmoil. A special thanks to all the contributors for their efforts! On the lines of the first edition, the best three articles in this issue will also be awarded prize money. Apart from these, the section on Industry Interaction features the viewpoints of Sanjay Dutt, CEO of Jones Lang Lasalle wherein he opines on some mantras for wealth creation through Real estate invest-ment. The recent events at VGSoM section finds a mention of the very popular Brown Bag sessions and Gurukool lecture sessions started recently by Finterest, the Finance club of VGSoM. The Fin-Cross chal-lenges you all again to an interesting crossword puzzle. Hope you find this issue enthralling to read and Mark2Market achieves the stan-dards it set out for itself in its maiden edition!

Happy Reading!

MARK2MARKETVOLUME II

02

04 ___ COVER ARTICLE 04 INTRODUCTION TO CREDIT DEFAULT SWAPS IN INDIA

06 ___ INDUSTRY INTERACTION AT VGSOM 06 WEALTH CREATION THROUGH RESIDENTIAL REAL ESTATE INVESTMENT

07 ___ FINVENTORY 07 TRANSFER PRICING 10 SOCIAL NETWORK AND FINANCIAL SERVICES 13 ANALYSTS GIVE BUY RECOMMENDATIONS FOR THEIRCLIENT COMPANIES 17 PIP AND THE CURRENCY TRADING 19 IS GREEK EXIT FROM EURO INEVITABLE

22 ___ RECENT FINTEREST EVENTS AT VGSOM 22 BROWN BAG SESSIONS 24 GURUKOOL SERIES OF LECTURES

25 ___ FIN-CROSS 25 FIN-CROSS, VOL II 26 FIN-CROSS SOLUTION, VOL I

CONTENTS


03

ABOUT THE AUTHOR

Vinodh Madhavan

Assistent ProfessorVinod Gupta School of ManagementIIT Kharagpur

Research Areas

i. Nonlinear Time Series Analysisii. Long-Term Depen-denceiii. Credit Default Swap Indices

Awards (2010)

2009-2010 Outstanding Graduate Student Doctor of Business Administra-tion Program, Golden Gate University, San Francisco (2010)

Publications (2010-11)

Implications for Risk Management and Regulation: A study of long-term dependence in Credit Default Swap (CDS) Indices market by Vinodh Madhavan and Henry(Hank) Pruden International Federation of Technical Analysts (IFTA) Journal, (2011)

INTRODUCTION OF CREDIT DEFAULT SWAPS IN INDIA

COVER STORY

CDS came into existence in 1990, with early trades carried out by Bankers Trust in 1991. Its modern format came into existence with JP Morgan extending $4.8 billion credit line to Exxon Mobile, then a team of J.P. Morgan bankers led by Blythe Masters then sold the credit risk from the credit line to the European Bank of Reconstruction and Development in order to cut the reserves that J.P. Morgan was required to hold against Exxon's default, thus improving its own balance sheet.

As indicated in the draft guidelines made public by RBI in February 2011, Credit Default Swaps are bound to be introduced in India. Credit Default Swaps are instru-ments that help investors buy or sell protection on an underlying obligation(s).

For example, a firm that has a certain amount of investment in bonds pertaining to an outside corporation can protect itself from the credit risk of the underlying bonds by enrolling in a CDS contract as a protec-tion buyer. In the case of a default of under-lying bonds during the life of the contract, the firm (protection buyer) would then be compensated for any loss incurred in underlying obligations by the counterparty of the CDS agreement. The counterparty of CDS contract that takes on the credit risk of the underlying bonds is the protection

seller.

Having studied the experience of western economies with regard to CDS-centered products during the 2007-2008 global financial crisis, RBI has prohibited introduction of CDS based on non-bond obliga-tions.

In other words, CDS can be written only on corporate bonds in the case of India. Further, unlike western economies, CDS in India should be based only on INR-denominated bonds issued by legal resident firms in India. Further, the minimum maturity for CDS should be 1 year. In other words, counterparties would not be in a position to enter into a CDS agreement wherein the underlying obliga-tion has a maturity of less than 1 year.

Further, RBI has bifurcated the participants into two categories namely market makers and users.

The market makers would be in a position act both as protection buyers or protection sellers in a CDS contract. On the other hand, the users can only serve as protec-tion buyers.

Further, a firm subsequent to entering into a CDS contractual agreement with a bank cannot unwind its position by entering into an offsetting CDS agreement with a differ-ent bank/counterparty. The concerned firm has to approach the same bank so as to unwind its position in the CDS contract. Although this is understandable from a macro-prudential policy perspective, it gives less motivation for the concerned bank to offer a competitive unwinding price to the firm.

Further, restructuring will not be considered as a credit event in the case of India. And CDS could be written only on rated, listed corporate bonds, with the exception being unrated unlisted infrastructure bonds issued by special purpose vehicles.

Policy makers view introduction of CDS markets in India as a step towards helping corporations hedge their credit exposures in the right manner, which in turn would moti-vate such corporations to issue more credit.

Free flow of credit coupled with a macro-prudential regulatory framework with appropriate checks and balances in place would go a long way in enhancing the depth of the corporate bond market.

This would then pave way for enhanced availability of credit for infrastructure projects – a bridge that an emerging economy such as India needs to cross to make it big in the global arena. It would be interesting to see if CDS market in India would take off at a pace and a scale similar to the level of activity witnessed in western economies subsequent to introduction of these instruments.


04

As indicated in the draft guidelines made public by RBI in February 2011, Credit Default Swaps are bound to be introduced in India. Credit Default Swaps are instru-ments that help investors buy or sell protection on an underlying obligation(s).

For example, a firm that has a certain amount of investment in bonds pertaining to an outside corporation can protect itself from the credit risk of the underlying bonds by enrolling in a CDS contract as a protec-tion buyer. In the case of a default of under-lying bonds during the life of the contract, the firm (protection buyer) would then be compensated for any loss incurred in underlying obligations by the counterparty of the CDS agreement. The counterparty of CDS contract that takes on the credit risk of the underlying bonds is the protection

seller.

Having studied the experience of western economies with regard to CDS-centered products during the 2007-2008 global financial crisis, RBI has prohibited introduction of CDS based on non-bond obliga-tions.

In other words, CDS can be written only on corporate bonds in the case of India. Further, unlike western economies, CDS in India should be based only on INR-denominated bonds issued by legal resident firms in India. Further, the minimum maturity for CDS should be 1 year. In other words, counterparties would not be in a position to enter into a CDS agreement wherein the underlying obliga-tion has a maturity of less than 1 year.

Further, RBI has bifurcated the participants into two categories namely market makers and users.

The market makers would be in a position act both as protection buyers or protection sellers in a CDS contract. On the other hand, the users can only serve as protec-tion buyers.

DID YOU KNOW

Mindful of the concentra-tion of default risk as one of the causes of the S&L crisis, regulators initially found CDS's ability to disperse default risk attractive.In 2000, credit default swaps became largely exempt from regulation by both the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commis-sion.

DID YOU KNOW

The Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole,specifically stated that CDSs are neither futures nor securities and so are outside the remit of the SEC and CFTC

Further, a firm subsequent to entering into a CDS contractual agreement with a bank cannot unwind its position by entering into an offsetting CDS agreement with a differ-ent bank/counterparty. The concerned firm has to approach the same bank so as to unwind its position in the CDS contract. Although this is understandable from a macro-prudential policy perspective, it gives less motivation for the concerned bank to offer a competitive unwinding price to the firm.

Further, restructuring will not be considered as a credit event in the case of India. And CDS could be written only on rated, listed corporate bonds, with the exception being unrated unlisted infrastructure bonds issued by special purpose vehicles.

Policy makers view introduction of CDS markets in India as a step towards helping corporations hedge their credit exposures in the right manner, which in turn would moti-vate such corporations to issue more credit.

Free flow of credit coupled with a macro-prudential regulatory framework with appropriate checks and balances in place would go a long way in enhancing the depth of the corporate bond market.

This would then pave way for enhanced availability of credit for infrastructure projects – a bridge that an emerging economy such as India needs to cross to make it big in the global arena. It would be interesting to see if CDS market in India would take off at a pace and a scale similar to the level of activity witnessed in western economies subsequent to introduction of these instruments.


05

SANJAY DUTTCEO-BusinessJONES LANG LASALLE

The interview was done as part of interaction with industry experts and Finterest, VGSOM would like to share the opinion of these industry experts.

INDUSTRY INTERACTION AT VGSOM

Wealth Creation Through Residential Real Estate Investment

In order to mitigate most of the investment risk, one should restrict one’s residential property investment to Tier 1 and select Tier 2 cities. It is also most prudent to invest in properties where the price tag falls between Rs. 2500-5000/sq.ft., since such a price tag provides downside protection against any capital value erosion. Simply put, the cost of construction and minimum cost of land literally makes this price segment safe, and almost guarantees capital appreciation.

What are the recommended guide-lines for an Investor?1. The property cycle needs to be understood so as to identify the best entry point.2. Leasehold titles issued by the Government must be fathomed.3. The investor needs to have a clear com-prehension of unearned increase or capital gain and the consequently higher stamp duty implication at the time of conveyance from the developer.4. The quality of the development is impor-tant, because depressed markets often result in poor design and construction quality.5. Availability of the project’s development plans and all statutory approvals is de rigueur. If approvals are not yet in place, the investor should monitor them closely during the investment cycle.6. The developer’s arrangement for all the finances for completion of the project must be verified.7. The title’s due diligence by a qualified and reputed legal firm is now a given. One can no longer rely solely on the due diligence of home loan firms, as they have targets just like developers.8. The location of the development may be important, but so is the location of the plot or apartment within the complex. Investors should avoid buying flats on the top floors of high-rise buildings, as these artificially add to the cost due to floor-rise concepts.9. The credibility and track record of the developer need to be researched, since even the best ones have failed to deliver under the current market conditions.

10. The price band of the development should be lower than the last highest peak in 2008(exceptions can and should be made for quality, delivery date and location).11. The time of conveyance of land and deliv-ery (possession) must be explicitly clear.12. The penalties in case of delay must be well understood; not everyone can fight legal battles.13. The investor must clearly understand the delta between soft launch, launch and current price of the developer (the resale of existing ready projects may be actually cheaper).14. The investor must understand the sale agreement along with the transfer charges in case he wishes to sell the apartment during construction or prior to registration. He should establish whether the agreement captures within the official cost all the ameni-ties, parking, etc. that the developer prom-ised at the time of sale, or whether these are mentioned separately.15. The investor should employ usable carpet area vis-à-vis chargeable area as the price benchmark vis-à-vis other projects

Finally, the investor should keep an eye onthe market and sell the residential property at the right time in order to multiply wealth. If all the above precautions have been taken, the property should have appreciated at a consistent rate of 15% per annum for three years. It is important to remember that one can almost never sell at the peak, just as it is impossible to always catch the lowest price.


06

Transfer PricingThe Way Multinationals Cheat The World

ABOUT THE AUTHOR

AMIT GARG

MBA

MANAGEMENT DEVELOP-MENT INSTITUTE

GURGAON

E mail- [email protected]

FINVENTORYArticles Contributed By Students From B-schools Across The Country

1. Transfer Pricing - The Way Multinationals Cheat The World2. Social Network And Financial Services3. Analysts Give Buy Recommendations For Their Client Companies4. Pip And The Currency Trading5. Is Greek Exit From Euro Inevitable?

OECD defines transfer price as A transfer price is a price, adopted for bookkeeping purposes, which is used to value transactions between affiliated enterprises inte-grated under the same manage-ment at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises.

To simplify things it is the price which one division/subsidiary of a firm charges to another division or its parent when products or services are transferred internally within the firm e.g.

If Suzuki Japan manufactures gear-boxes to be used in its Manufactur-ing plant in India, then the price Maruti Suzuki would be paying for it would be the transfer price and a similar analogy can be applied when transfer of whole of an outsourcing contract is done from a parent com-pany like IBM to its Indian operation

IBM India.

Let’s look at an illustration to see how a multinational operating in two countries can use the transfer pricing to change its profit by taking advantage of differential tax rates in the countries.

Consider a hypothetical firm MultiCon Global headquartered in Mauritius where the corporate tax rate is 15% and its subsid-iary MultiCon India which is operating in India as the name suggests where the corporate tax rate is 33 %( including cess).

Consider three cases Case 1, Case 2, Case 3 as given on the next page.

As you can see MultiCon Global increased its profits by just adjusting the transfer price and paying less Tax. Ultimately the profits made by tax avoidance are borne by the citizens of the country in this case India, as the loss of revenue is ultimately recovered by various forms of taxation on people like you and me.

In 2009-10 TCS recorded a net profit of Rs. 4.3 Lac per employee, and Capgemini recorded a net profit of 1.5 Lac per employee. The difference is equally wide on

2nd PRIZE

other factors like net profit margin, revenue per employee and operating profit margins. This is the effect of “Transfer Pricing” according to tax experts.

So how does the system work?

Most Indian subsidiaries of foreign companies work as “captives” – The parent company is US or Europe receives the contract from client and this is then sub-contracted to the Indian Subsidiary on ‘cost plus’ basis i.e. the Indian subsidiary would be reimbursed all the expen-diture plus some margin.

At least 90% of revenues of the Indian subsidiaries of Accenture, IBM and Capgemini were such related party trans-actions with group companies. The result clearly shows in numbers , while these firms have around 30% of their work force in India on paper the Indian Unit contrib-utes only 4-5% in the total profit of the enterprise.

Most of the countries including Indian laws (Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income tax Act, 1961) to prevent tax avoidance through transfer pricing are based on OECD guidelines, which state that such transactions should be recorded at “Arms Length Price” which should represent the price charged in com-parable transactions between inde-pendent parties, where price is not influenced by the relationship or business interest between the parties in the transaction.

However the Arms Length Price is always a contentious issue and the matters often get entangled in litigation.

In 2009 NASSCOM created a plat-form to address the transfer pricing litigation through introduction of

safe harbours. Safe harbour means that the Government would provide indicative price points for transac-tions between group entities to reduce transfer pricing litigation for Multinationals.

However disputes arose in determining a mutually accepted safe harbour. Due to the wide variance in the ground level under-standing of transfer pricing aspects, safe harbour limits proposed were so different that no consensus could be reached. The result - According to E&Y Global Transfer Pricing Survey India has the maximum transfer pricing litigations, almost two times that of the number two country.


07




IBM India.






DID YOU KNOW

Its surprising to know that companies priced flash bulbs at $321.90 each, pillow cases at $909.29 each and a ton of sand at $1993.67, when the average world trade price was 66 cents, 62 cents and $11.20 respectively

DID YOU KNOW

Google, the owner of the world’s most popular search engine, uses a strategy that takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax










MultiCon India MultiCon

Global

Price of good

bought

Transfer

Price

Selling Price

Rs. 500 Rs. 1000 Rs. 1500

Profit Before Tax Rs. 500 Rs. 500

Consolidated profits before Tax Rs.1000

Tax Rs. 166.7 Rs 75

Profit After Tax Rs. 333.3 Rs. 425

Consolidated MultiCon Global

And Profits

Rs. 758.3


Global

Price of good

bought

Transfer

Price

Selling Price

Rs. 500 Rs. 700 Rs. 1500



Tax Rs. 66.7 Rs 120

Profit After Tax Rs. 133.3 Rs. 680


Profits

Rs. 813.3


Global

Price of good

bought

Transfer

Price

Selling Price

Rs. 500 Rs. 500 Rs. 1500



Tax Rs. 0 Rs 150

Profit After Tax Rs. 0 Rs. 850


Profits

Rs. 850

Case 1

Case 2

Case 3


08




IBM India.






DID YOU KNOW

The giant drug MNC, Glaxo Smith Kline, agreed to pay the US government $3.4 billion to settle a long-running dispute over the tax dealings between the UK parent company and its American subsidiary. This was one of the largest settlement of a tax dispute in the US.

DID YOU KNOW

In India the penalty on transfer pricing assess-ment is One hundred percent to 300 percent of additional tax. Penalty for failure to maintain or furnish prescribed information and docu-mentation is 2 percent of the value of international transaction. The penalty for failure to furnish with the return a report from an accountant is INR 0.1 million.











09

have already planned to dedicate funds for these initiatives.

This is expected to cover around 90% of firms by 2012 and predicts that they would be spending between 2 to 10% of their overall marketing budgets on this.

Financial pundits reckon that in developed financial services markets, social media is all set to supercede call centres as an effective customer service channel behind only to branches. In many developing markets it may even lead the branch.Adoption Inertia

Financial services industry has been among the pioneers in the adoption of technology. However it maintained a healthy scepticism about the efficacy of social networks in catapulting its business. It sat on the fence and maintained a wait and watch attitude towards this playground for juveniles, unravelling whether this wave is a fad or a trend.

But all this agnosticism was not unfounded. While many social networking platforms may be free to join but their monitoring and maintenance is a costly proposition. If not handled properly, this potent asset may soon turn out to be a liability leading only to public embarrassment.

The product-focussed organisational set up of financial firms also lacked the requi-site support structure and a holistic view of how customers could be engaged on such dynamic platforms. The other reason for reluctance on their part was regulatory barriers. Privacy concerns owing to the sensitive nature of information being dealt with led to apprehensions of stepping upon legal landmines.

An Imminent Espousal Financial firms gradually realized that quintessentially they are following an ostrich strategy. Their customers and pros-pects are already on all those platforms they are avoiding, where their perceptions, performance of their investments and experiences with the firm are being talked about loud and clear.

The need for better communication is further accentuated in these times of finan-cial crisis characterized by erosion of trust. Investors are expecting higher levels of disclosure, transparency and opportunities for peer review in selecting their service providers. Thus there is a good opportunity for whole new roles to be created as social exchange on financial matters is contin-gent on the availability of domain experts for review and recommendation purposes.

Unlocking Potential

Financial services firms are slowly turning into social media believers, willing to move up the ‘engagement pyramid’ and harness the potential of social networks for knowl-edge integration, generating value for their businesses and reshaping the future of customer service.

Listening to the Market

A plethora of social networking tools are readily available today12 to be deployed for gathering real time, first-hand informa-tion on brand perception about the firm, customer experiences with its product offerings, market sentiments, emerging trends and competitor activities. This is a faster, more authentic and lesser expen-sive route for driving critical customer

insights that may pave way for product innovations and discovering early warning signals for potential issues.

Dissemination of Information

Social networks are empowering firms to share with their stakeholders the latest news, initiatives, company results, invest-ment ideas and research studies in an interactive and collaborative media format. In the last quarter, more than 50 firms used networks like Twitter and StockTwits to live tweet their earning results and half of them were non-US companies like Roche Hold-ing Ltd. (Switzerland), Allianz SE (Germany), Telstra Corporation (Australia), Standard Bank Group (South Africa), and Tech Mahindra (India).

Strategic Implementation

In the words of Marshall McLuhan, "The medium is the message".

Introduction of financial institutions on social networks drives home the message that the firm is poised for an active engagement with its stakeholders: ready to listen, learn and reciprocate.

Contingency Plan

“Conventional marketing wisdom long held that a dissatisfied customer tells ten people. But…in the new age of social media, he or she has the tools to tell ten million” - Paul Gillin, author of ‘The New Influencers’. Detractors and disgruntled customers may resort to hostile “flaming” on social networks. A forethought mitigation plan thus needs to be in place for fire fighting such occasions. As the ownership of most successful social media sites lie with the community members, it is advised to approach such emergency situations with an empathic face towards customer griev-ances. Internally organisations need rigor-ous and well-articulated procedures to ensure that issues are dealt with in a co-ordinated manner, quickly and effec-

tively.

Even in normal circumstances, proactive listening should be encouraged and the approach should be to reward people for their suggestions and support in improving company’s processes. Thus adoption of a co-operative strategy and bestowing an advisory role to the customers is expected to minimise damage and avoid unneces-sary and unwanted proliferation of negative sentiments on social networks.

Conclusion

Thus, in nutshell we conclude that social networks hold great promise for financial firms in the coming days but exact to be leveraged intelligently for unlocking their true potential.

Refrences1.http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Social-Banking-Retail.pdf

2.http://www.europeanfinancialreview.com/?p=4130

3.http://www.brandchannel.com/images/papers/530_edelman_wp_social_media_financial_communications_0911.pdf

4.http://www.forbes.com/sites/tomtaulli/2011/04/09/linkedfariding-the-social-media-wave-in-financial-services/

5.http://www.cnbc.com/id/44701381/The_Fed_Wants_to_Be_Your_Facebook_Friend

6.http://www.socialbakers.com/facebook-pages/brands/india/type/156-bank-financial-institution/?interval=last-week#chart-intervals

7.http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Social-Banking-Retail.pdf

8.http://about.datamonitor.com/media/archives/3756

9.http://london.fleishmanhillard.com/2011/09/13/finance-communications-in-a-social-media-world/

10.http://www.aitegroup.com/Reports/ReportDetail.aspx?recordItemID=723

11.http://www.vrl-financial-news.com/retail-banking/retailbanker-intl/reports/social-media-in-financial-serv.aspx

12.http://www.tripwiremagazine.com/2011/07/social-media-monitoring-tools.html

13.http://irwebreport.com/20110816/live-tweeting-quarterly-earnings/

The Early Adopters Chicago based CME group is known to be using social media since mid-2007. Swed-ish merchant bank SEB Group launched ‘The Benche’ in 2008 – a social media site aiming for some 250 users involved in trade finance (today it attracts over 20,000 visitors a month). Wells Fargo unveiled its corporate blogging strategy in 2009 and Putnam Investments forayed into the world of tweets the same year.

2010 welcomed the birth of linkedFA – an exclusive social network for Financial & Insurance Professionals and Investors.

Leading asset managers Vanguard and Fidelity are offering customer service and are answering questions from Twitter users via their company profiles. One of the largest insurers in the world, New York Life is also using social media to improve prospecting, lead generation and customer service.

Even the most traditional and conservative organizations are now planning to join the network. The Federal Reserve Bank of New York is requesting proposals for a “Social Listening Platform” for sentiment analysis of online social networks. Indian financial institutions have slowly started warming up to the possibilities offered by this new media.

New Trends

A recent research by Forrester suggests that 42% of adults using social networking sites are willing to engage with financial service providers on this new platform. Datamonitor has revealed that 41% consumers globally and 50% in the UK are already using a variety of online tools for financial decision making.

Financial information remains among the most searched items on search engines and business media, a prominent stake-holder in the financial world, is vigorously mining social media platforms like blogs (81%) and tweets (40%) for researching and sourcing new stories. These exciting trends have caught the attention of leading industry observers and are being regularly reported by The Financial Brand, IR Web Report, StockTwits and Visible Banking.

The Aite Group in its 2010 study has pointed out that though 60% of financial services firms consider themselves to be novices in the field of social media, 70% of them

Social Network And Financial ServicesFinancial information remains among the most searched items on search engines and business media, a prominent stake-holder in the financial world, is vigorously mining social media platforms like blogs (81%) and tweets (40%) for researching and sourcing new stories.

ABOUT THE AUTHOR

KHALID KAMAL RUMI

MBA

INDIAN INSTITUTE OF MANAGEMENT,

INDORE

E mail:[email protected]

3rd PRIZE

Facebook Page Name Fans

IDBI BANK 84399

MAGMA 59188

Jiyo Befikar! 50479

Kotak Mahindra Bank Ltd. 7064

HDFC RED 503


10

DID YOU KNOW

According to comScore’s 2010 “State of Online Banking” paper, there was a steady increase in use of online banking from approximately 40 million users in 2006 to more than 58 million users in 2010. It seemed as though the best way for financial institutions like banks and insurance companies to engage consumers online was through service offerings.

DID YOU KNOW

Three-in-five of the executives, however, still view themselves as novices or beginners with social media and only eight percent claim competency with it.









Unlocking Potential










Contingency Plan


tively.


Conclusion



















New Trends





11









Unlocking Potential










Contingency Plan


tively.


Conclusion















DID YOU KNOW

Even the “big guys” are joining the conversation. As first reported in Zero Hedge, The Federal Reserve Bank of New York is soliciting propos-als for a “Social Listening Platform” that will monitor primary social media platforms such as blogs, Facebook, forums, Twitter, and YouTube. According to the request for proposal, sentiment analysis – a measure of positive, negative, or neutral comments – will be a central feature of the proposed platform.

DID YOU KNOW

Forty percent of their financial institutions expect to invest 2 percent to 10 percent of their overall marketing budget on social media next year.





New Trends





12

Clearly, banks are giving more optimistic targets for their clients in India. To some extent, we can even say that for clients in USA on average are not getting higher estimates as 0.15% is almost 0.

One interesting picture that emerges from here is that in India Debt and FPO offering clients are more preferred than IPO where as in USA, it is other way around. Hence, from here we conclude that:

Overall – Ratings From the analysis in table 6, we observe that on an average, Underwriters give higher target recommendations in India as compared to US. Also in India, the under-writers give more Buy recommendations for Debt offerings. On the other hand, Underwriters in US give more Buy recom-mendations for IPO and FPO.

At the next level, we tried to see whether there is a difference in the recommendation patterns of Underwriters and Market for companies. For this, we checked whether the underwriters are biased towards their company as compared to market. We considered underwriters biased if they

have given better recommen-dation as compared to the market. For ex- if underwriter has given Buy recommendation whereas market consensus is Hold or Sell. Similarly if under-

writer has given Hold and market consen-sus is Sell. We analyzed the data at individual IPO, FPO and DEBT level and also at overall level.

From this, we see that Underwriters in India tend to be more biased as compared to their counterparts in US. Also this trend is observed in firms underwriting FPOs as compared to IPOs and Debt offerings. Hence, from here we conclude that (using a cut off of 20%):

ConclusionFrom joining table F.1 and F.2, we get the following table:

We clearly see that H1 hypothesis for India can be rejected but not for USA. So, clearly the underwriters/banks are biased in giving

ABOUT THE CO-AUTHORS

ANKIT GOYAL

MBA

INDIAN INSTITUTE OF MANAGEMENTBANGALORE


ABOUT THE CO-AUTHORS

SURBHI GARG

MBA

INDIAN INSTITUTE OF MANAGEMENTBANGALORE


Objective

In this project, the hypotheses we plan to test are:

H1: Bank do not give biased recommenda-tion on their client companiesH2: For a company being an Debt side customer to a Bank has more bearing on the recommendations than being a Equity side customer.

The objective is to try and reject these hypotheses – H1 and H2.

Methodology

In this section, we present a methodology we used to find out if the bank is actually biased for its clients.

Who is the client?But before we proceed, the first task is to know who the client of the bank is. This issue was addressed as follows. We assumed that if a particular company has gone for some offering – debt/equity through a bank(s), then the company is a client for that particular bank. Henceforth, we will use the term underwriter and bank interchangeably.

Checking BiasnessNow to find out the biasness – we have two set of information which is provided by

the analyst. First is the rating – ‘Buy/Hold/Sell’ and the second is the Target Price. We have made use of both these set of information independently. The methodology is presented in sections below.

Target PriceWe take the target price given by the underwriter’s analyst and the average target price given by all other analysts. Then we calculate % extra return forecasted by bank when compared to the return forecasted in market. The formula used is as follows: Based on this % Change information, we have classified two cases:

Overall: For each of the offering type, we calculate the % extra return given on an average.Underwriter: In this the task is to find out which particular underwriter is giving higher % extra return.Company: In this we find out those compa-nies which are consistently given high % extra return.

Buy RatingWe now find whether the rating given to the client is better than the rating given by the market. We recognise bias in ratings in two circumstances: Market consensus rating is Hold /Sell but

Analysts Give ‘Buy’ Recommendations For Their Client Companies

Less than 1% of the recommenda-tions by brokerage firm analysts during the 2000 and 2008 market plunges recommended that investors sell shares. Even during the 2008 slowdown, when the Nasdaq was way down, 2.1 percent of recommen-dations were to sell and 71 percent of the ratings were to buy.

the underwriter accords ‘Buy’ rating. Market consensus rating is Sell but the underwriter accords ‘Hold’ rating.

Hence, we coded bias with the following algorithm described in table 1.

Biasness Indicator is then defined as follows:

Based on the rating information, we have classified three cases: Overall: Similar to the analysis in the Target Price, for each of the offering type in both countries, we calculate biasness indicator on an average.Underwriter: We find out biasness indicator for each underwriter type both in India and USA. This will help us zoom in on the underwriter who is giving bias recommen-dation to the clients. Company: In this the task, is to find out the set of companies which are being constantly given better recommendation by their analysts. This is to figure out if the % of companies which are getting better recommendation then market is high or low.

We will use a cut off of 20 for biasness indicator to reject the hypothesis. If indica-tor is greater than 20, then hypothesis can be rejected. Further, we used a cut off of 0.5% for % extra return as a cut off to reject the hypothesis.

DataFor our study, we have

i. Covered several companies for which either debt or IPO or FPO offering was done.ii. Selected two regions – USA and India were selected for analysis to find out if there are systematic differences between the behavior of banks in one region over another.iii. Companies which fall in Medium to Large Cap market cap category in their respective regions.iv. Have offered equity/debt in last 3 years – the rationale being that analyst estimate data from Bloomberg older than 3 years is not available.

The details about the companies are given in table 2.

The list of companies we analyzed is in Appendix A with details about their offer-ings and country. The list of banks we analyzed is given in table 3.

Issues with dataBanks use different rating criterions for covered companies. To resolve this issue, we have rerated different types of ratings into just one kind of rating - Buy/Hold/Sell. The mapping is shown in table 4.

Results

Overall – Target Price We observe from table 5, that the extra return forecasted for clients in India is much higher than extra returns in USA.

preferential ratings for their clients in India but not in USA.We also notice that to some extent H2 hypothesis can be rejected in USA but definitely not in India. This does mean that

whatever the biasness banks show in USA, that is more prevalent in equity offerings than debt. Hence, we are able to reject the hypothesis in very restricted set of cases.

1st PRIZE


13

DID YOU KNOW

Both regional and national brokerage firms, which have conflicts of interest emerging from their activities in both underwriting securities and making investment recommendations, produce more optimistic recommendations than non-brokerage firms.

DID YOU KNOW

Sell-side analysts’ long-term growth forecasts are overly optimistic around seasoned equity offerings and analysts affiliated with the lead underwriter make the most optimistic forecasts.










Objective




Methodology


















Results




Bank Rating Market Rating (Majority) Biased (1-bias,0-unbiased)

Buy Buy 0

Buy Hold/Sell 1

Hold Buy/Hold 0

Hold Sell 1

Sell Buy/Hold/Sell 0

Table 1: Biasness rating algorithm

100*

given ratings totalofNumber ratings biased of totalSum

Offering Type USA India Debt 5 5 FPO 8 8 IPO 12 15

Table 2: Number of companies for different offering type across two regions


14










Objective




Methodology


















Results




Banks

Barclays DB ICICI Macquarie Barclays Bradsc Edelweiss IDFC NOMURA Bradsc

Citi Enam JM Fin RBC Citi CLSA GS JPM RBS CLSA

Table3: List of Investment Banks we covered in our study

Table 4: Mapping of different ratings intoone single rating type

Bank Rating1 Bank Rating 2 Final Rating Used

Overweight Outperform Buy

Equal Weight Neutral Hold

Underweight Underperform Sell

Suspended Coverage Restricted NA

Type India USA Total Debt 3.33% -1.19% 0.35% FPO 4.74% 0.18% 1.67% IPO -1.45% 1.24% 0.18% Total 1.96% 0.15% 0.79%

Table 5: Average extra return forecasted by banks for their clients

India USA H1 Rejected Not Rejected H2 Not Rejected Rejected

Table F.1: Hypothesis conclusion 1

India USA

IPO 2.46% 10.74% FPO 20.11% 17.58% Debt 2.44% 13.75% Total 22.89% 14.24%

Table: 7: Biasness Indicator on an overall basis

% of favorable Recommendations India USA IPO 44.05% 71.17% FPO 56.89% 63.69%

DEBT 72.95% 47.08% Total 69.17% 55.40%

Table 6: Percentage of Favorable Recommend-ations (Number of timestarget by underwriter is higher than the target in the market) across regions and categories


15

DID YOU KNOW

Buy-side analysts typically work for institutional money managers—such as mutual funds, hedge funds, or investment advisers—that purchase securities for their own accounts. They counsel their employers on which securities to buy, hold, or sell and stand to make money when they make good calls.

DID YOU KNOW

The Securities Industry Association (SIA) when unveiling new voluntary guidelines for analysts said that they should not have their pay directly linked to the investment banking transactions handled by their firms for companies they covered.










Objective




Methodology


















Results




Table F.1 India USA Table F.2 India USA H1 Rejected Not

Rejected H1 Rejected Not

Rejected H2 Not

Rejected Not

Rejected H2 Not

Rejected Rejected

Table F: Combination of table F.1 and F.2

IPO/FPO/Debt Name Bloomberg Ticker Debt ICICI BANK ICICIBC IN EQUITY Debt Tech Mahindra TECHM IN EQUITY Debt Sterlite STLT IN EQUITY Debt ONGC ONGC IN EQUITY Debt Reliance

Industries LTd. RIL IN EQUITY

FPO Engineers India Limited

ENGR IN Equity

FPO Power Grid Corporation

PWGR IN Equity

FPO REC India RECL IN Equity FPO NTPC Ltd NTPC IN Equity FPO Ansal

Properties and Infrastructure

Ltd

APIL IN Equity

FPO Tata Motors Ltd TTMT IN EQUITY FPO IndusInd Bank

Ltd IIB IN EQUITY

FPO IDFC LTD. IDFC IN EQUITY IPO MOIL Ltd. MOIL IN EQUITY IPO Shipping Corp

of India SCI IN EQUITY

IPO Coal India Ltd. COAL IN EQUITY IPO Prestige

Estates Projects PEPL IN EQUITY

IPO Pipavav Shipyard

PIPV IN EQUITY

IPO NMDC Ltd NMDC IN EQUITY IPO Jaypee

Infratech Ltd JPIN IN EQUITY

IPO MHRL IN MHRL IN EQUITY IPO NHPC LTD NHPC IN EQUITY IPO OIL India OINL IN EQUITY IPO SKS

Microfinance Ltd

SKSM IN EQUITY

IPO Standard Chartered PLC

Ltd.

STAN IN EQUITY

IPO Reliance Power RPWR IN Equity IPO Jyothi

Laboratory JYL IN Equity

IPO Godrej Properties Ltd.

GPL IN EQUITY

IPO/FPO/Debt Name Bloomberg Ticker

Debt Ford motors F US EQUITY Debt Intel Corp INTC US EQUITY Debt 3M Co MMM US EQUITY Debt Micron Tech MU US Equity Debt John Dere DE US Equity FPO Ecolab inc ECL US EQUITY FPO Wells Fargo &

Co WFC US EQUITY

FPO General Electric Co

GE US EQUITY

FPO Petroleo Brasileiro SA

PBR UN EQUITY

FPO Apache Corp APA US EQUITY FPO Metlife Inc. MET US EQUITY IPO Verisk Analytics,

Inc VRSK UW EQUITY

IPO SHANDA GAMES

GAME UW EQUITY

IPO Talecris Biotherapeutics

TLCR US EQUITY

IPO Hyatt Hotels Corp

H US EQUITY

IPO Cobalt International Energy Inc

CIE US EQUITY

IPO Starwood Property Trust

Inc

STWD UN EQUITY

IPO Mead Johnson Nutrition Co.

MJN US EQUITY

IPO Dollar General Corp

DG US EQUITY

IPO Artio Global Investors Inc.

ART US EQUITY

IPO General Motors GM US Equity IPO VISA INC. V US EQUITY IPO ENERGY

RECOVERY ERII US EQUITY

FPO M &T Bank Corp

MTB US EQUITY

FPO General Growth

Properties

GGP US EQUITY

Appendix A: List of Indian Companies Studied Appendix B: List of US Companies Studied


16

DID YOU KNOW

HBS professor Mark Bradshaw and collabora-tors Scott Richardson and Richard Sloan found that forecasts and recommendations done by Wall Street research analysts universally tend to be more optimistic for companies their firms are issuing securities for—or hope to do business with

DID YOU KNOW

56% of new buy recom-mendations underper-form the appropriate benchmark 12 months after the recommenda-tions are changed and, of these, more that 6 out of 10 stocks (62%) under-perform the benchmark by at least 20% by month 12. On the other hand, 70% of new sell recom-mendations perform as expected over the 12-month period and only 16% outperform the benchmark by at least 20% by month 12.

By tighter pricing we mean that the spread between the bid price and the ask price is low. Usually the spread in the interbank market, often the market makers, is one pip. The smaller institutions which are involved in trading with these banks get an access to around 2-3 pips spread. These institutions have many corporates’ as their clients and the pass, on the spread, to the corporates is somewhere between10-30 pips. The individuals on the other hand usually get a spread of around 100-500 pips.

Lets make this more clear with an example. Say at any given point EURUSD = 1.3209.

Suppose a trader wants to trade at this price. The trader will place an order with the broker and the broker will buy from the market maker to complete the process. If the market maker will buy at 1.3209 and sell at 1.3208, that’s 1 pip difference. The market maker will pass this on to the institution by a buy price of 1.3209 and a sell price of 1.3206, that is a 3 pip difference.

The market maker usually makes money from the difference in spread or buying at lesser price and selling at a higher price. Note that this is only difference in spread, the brokerage charges for individuals are additional.

Therefore the smaller the spread, the more beneficial it is for clients and hence, a larger volume of trade can be seen. A pip movement is so significant that if an Indian national is trading in EURUSD or any other major currency pair like GBP or YEN through international brokers, he can earn in dollars and then convert it to the Indian currency. The profit will therefore swell.

Currency trading is mainly done in eight pairs of the major currencies i.e. USD, EURO, GBP, JPY, CHF, Canadian Dollar, Australian dollar and NZ dollar. Rupee is still used for domestic trading only. How-ever, central banks of different countries do sign contracts with RBI for rupee trading for different purposes. Dubai Gold & Commod-ity Exchange (DGCX) is one exchange which provides futures of Indian currency.

References1.http://www.traderupee.in/rupee_markets.htm2. http://www.forex.com/Learn

DID YOU KNOW

The GBPUSD currency pair is known as cable. This is because – before global satellites and fibre optics – the London and New York stock exchanges were connected using a giant steel cable under the Atlantic.

Out of the various trading instru-ments available in the market, currency market is one where pip is often used and is very effective in making money.

Firstly, all currency pairs, except Japanese Yen, are quoted to the fourth decimal point. Example USDEUR is 1.3116 on any given day. If this value changes by .0001 in either direction, we say the currency has moved by a pip in the given direction.

As mentioned before, a one pip move is the smallest move a currency pair can make in either direction. So if such a small move is possible in the currency market, the point of intrigue is how one can make money from such a small move. Herein comes the second factor: contract size. The contract size in a currency market is usually large. We would consider various examples to elucidate this aspect.

In case of Japanese yen, which is quoted till only 2 decimal places, the .01 move-ment is called a pip movement.

In India the currency futures came in August 2008, with only the USDINR pair allowed for trading purposes. Later in January 2010 the RBI introduced the Euro, Japa-nese Yen and Sterling GBP to the Indian market.

Similarly, in July 2010 the RBI approved options in currency trading. The lot size is

standard and is 1000 units for USD, EUR and GBP pairs. In case of Japanese yen the lot size is 100000 units. Now with such large sizes of contracts’ a slightest move in the currency pair can incur profit or loss.

We would take another example of USDINR pair to understand how the large contract size can have effects on profit or loss. Say at any given day 1 USD = 49.00 INR. A one paisa gain in the dollar will take the value to 49.01. A one paisa gain is equivalent to Rupee 0.01/lot. Thereby, a full 1 rupee movement will make an INR gain or loss of 1000 per lot. The 1000 rupees is excluding the taxes and broker-age fee charged against every contract.

Some trading platforms are also providing fractional pip to the customer. A Fractional pip is less than one pip and it basically helps in spread. Instead of absolute number of spreads, with fractional pips we can spread 2.5 instead of 3 points in spread. Before the online currency trading very few people used to take part in currency trading. The transaction cost was high and also the spread was big enough to reduce the individual profit.

Pip spread at different levels of participation

The higher the level of volume of trade in the currency of any bank or firm, the tighter price they will get to assess and because of this they would be able to pass on this to their clients.

“PIP”And The Currency TradingThe word Pip has more than one conno-tation in the English language. But when it comes to the world of finance it has one literal meaning. Pip is the abbreviation for “Price interest Point” and is defined as the smallest gain or loss a person can incur in the exchange rate of any currency pair.

ABOUT THE AUTHOR

PRANAY KUMAR

MBA

INSTITUTE OF FINAN-CIAL MANAGEMENT

AND RESEARCH



17

DID YOU KNOW

How big is the market? More than $3.98 TRILLION are traded on the foreign exchange market each day. That’s about 53 times more than the New York stock exchange, where a measly (!) $74 billion changes hands daily.

DID YOU KNOW

The origin of the "$" sign has been variously accounted for. Perhaps the most widely accepted explanation is that it is the result of the evolution of the Mexican or Spanish "P's" for pesos, or piastres, or pieces of eight. This theory, derived from a study of old manuscripts, explains that the "S," gradually came to be written over the "P," developing a close equivalent to the "$" mark. It was widely used before the adoption of the United States dollar in 1785.

By tighter pricing we mean that the spread between the bid price and the ask price is low. Usually the spread in the interbank market, often the market makers, is one pip. The smaller institutions which are involved in trading with these banks get an access to around 2-3 pips spread. These institutions have many corporates’ as their clients and the pass, on the spread, to the corporates is somewhere between10-30 pips. The individuals on the other hand usually get a spread of around 100-500 pips.

Lets make this more clear with an example. Say at any given point EURUSD = 1.3209.

Suppose a trader wants to trade at this price. The trader will place an order with the broker and the broker will buy from the market maker to complete the process. If the market maker will buy at 1.3209 and sell at 1.3208, that’s 1 pip difference. The market maker will pass this on to the institution by a buy price of 1.3209 and a sell price of 1.3206, that is a 3 pip difference.

The market maker usually makes money from the difference in spread or buying at lesser price and selling at a higher price. Note that this is only difference in spread, the brokerage charges for individuals are additional.

Therefore the smaller the spread, the more beneficial it is for clients and hence, a larger volume of trade can be seen. A pip movement is so significant that if an Indian national is trading in EURUSD or any other major currency pair like GBP or YEN through international brokers, he can earn in dollars and then convert it to the Indian currency. The profit will therefore swell.

Currency trading is mainly done in eight pairs of the major currencies i.e. USD, EURO, GBP, JPY, CHF, Canadian Dollar, Australian dollar and NZ dollar. Rupee is still used for domestic trading only. How-ever, central banks of different countries do sign contracts with RBI for rupee trading for different purposes. Dubai Gold & Commod-ity Exchange (DGCX) is one exchange which provides futures of Indian currency.

References1.http://www.traderupee.in/rupee_markets.htm2. http://www.forex.com/Learn

The DCGX

Out of the various trading instru-ments available in the market, currency market is one where pip is often used and is very effective in making money.

Firstly, all currency pairs, except Japanese Yen, are quoted to the fourth decimal point. Example USDEUR is 1.3116 on any given day. If this value changes by .0001 in either direction, we say the currency has moved by a pip in the given direction.

As mentioned before, a one pip move is the smallest move a currency pair can make in either direction. So if such a small move is possible in the currency market, the point of intrigue is how one can make money from such a small move. Herein comes the second factor: contract size. The contract size in a currency market is usually large. We would consider various examples to elucidate this aspect.

In case of Japanese yen, which is quoted till only 2 decimal places, the .01 move-ment is called a pip movement.

In India the currency futures came in August 2008, with only the USDINR pair allowed for trading purposes. Later in January 2010 the RBI introduced the Euro, Japa-nese Yen and Sterling GBP to the Indian market.

Similarly, in July 2010 the RBI approved options in currency trading. The lot size is

standard and is 1000 units for USD, EUR and GBP pairs. In case of Japanese yen the lot size is 100000 units. Now with such large sizes of contracts’ a slightest move in the currency pair can incur profit or loss.

We would take another example of USDINR pair to understand how the large contract size can have effects on profit or loss. Say at any given day 1 USD = 49.00 INR. A one paisa gain in the dollar will take the value to 49.01. A one paisa gain is equivalent to Rupee 0.01/lot. Thereby, a full 1 rupee movement will make an INR gain or loss of 1000 per lot. The 1000 rupees is excluding the taxes and broker-age fee charged against every contract.

Some trading platforms are also providing fractional pip to the customer. A Fractional pip is less than one pip and it basically helps in spread. Instead of absolute number of spreads, with fractional pips we can spread 2.5 instead of 3 points in spread. Before the online currency trading very few people used to take part in currency trading. The transaction cost was high and also the spread was big enough to reduce the individual profit.

Pip spread at different levels of participation

The higher the level of volume of trade in the currency of any bank or firm, the tighter price they will get to assess and because of this they would be able to pass on this to their clients.


18

The eurozone, officially called the euro area and a monetary union of 17 European Union (EU) member states, came into existence in 1998 with the official launch of the euro on 1st January, 1999. Greece quali-fied in 2000 and was admitted in January, 2001.

It was one of the fastest growing econo-mies in the eurozone during the early 2000s. The decline of the Greek economy began in the later part of 2000 when the evil forces of disruption raised their ugly heads-- rising government debt levels, trade imbalances, monetary policy inflex-ibility and loss of confidence by the inves-tors took their toll on the country, thereby transforming Greece into one of the worst affected economies in the ongoing euro-zone financial crisis. The crisis, which started with widespread claims of corrup-tion and financial fraud has now given birth to the most debatable issue of the euro-zone – “Should Greece exit the euro?” This contention has invited mixed feelings from economists and financial analysts worldwide.

Just a few months ago, the chance of Greece defaulting and exiting the single European currency was considered to produce disastrous effects on the entire euro area. Eurozone leaders have long been involved in talks with US, China and

Japan to contribute more to the Interna-tional Monetary Fund (IMF) which can be used as a shield against the ongoing crisis. But the severe oppositions from America, Tokyo and Beijing have wiped off all rays of hope and hence there is an even greater need for Greece to undertake more effec-tive austerity measures. Times have apparently changed and now it is thought that the exit of Greece might be laden with some potential benefits.

Greece’s exit from the euro area has to be voluntary. According to the EU guidelines, the other mem-bers cannot push the country out of the monetary union. On the other hand, Article 50 of the Lisbon Treaty (2007) allows a member to leave the EU after informing the European Council accordingly.

What Greece gains by exiting the euro

In the event of Greece abandoning the common currency, a shift to a new currency called drachma would bring about substantial devaluation and in turn enhance the country’s competitiveness. The tourism industry in Greece contributes to around 18% of the country’s GDP and the export industries include agriculture, manufacturing and pharmaceuticals.

Is Greek Exit From Euro Inevitable?

In the event of Greece abandoning the common currency, a shift to a new currency called drachma would bring about substantial devaluation and in turn enhance the country’s competitive-ness..

players. Moreover, a Greek exit may become very costly for Europe because it will not only break the notion that no coun-try ever leaves the eurozone, but other countries may also follow the same course, thereby causing the single currency to shake itself apart.

Lastly, when Greece shifts to a new currency called drachma, a huge disparity will be created between the financial instruments denomi-nated in drachma and euro. Corpo-rates exposed to these kind of imbalances will have a high prob-ability of default which in turn poses considerable threat for the Euro-pean economy.

The Way Forward

Although re-drachmatisation poses some apparent benefits for Greece, it is a costly alternative. The new currency will be valued at much less than that of euro and can lead to an expansion of the tourism and export industry only in the presence of abundant natural resources and a prosperous world economy to bank upon.

Since Greece lacks both these advantages at present, the fortunes associated with shifting to a new currency are placed under the scanner. It also requires mention that

the benefits of devaluation will not bear fruit unless the Greek government undertakes structural reforms for the economy and labor market as prescribed by the Troika.

The other side of the coin also reveals that Europe will be blessed with only limited benefits in the event of a Greek exit and the impacts will be mostly negative as discussed in the previous sections.

Thus, exiting the eurozone will submerge Greece into deeper financial turmoil and at the same time spell an end to the expan-sionary European economy.

Thus, if the relative prices of Greek prod-ucts and services fall rapidly due to devaluation, all these sectors would benefit immensely. Moreover, when the relation-ship between Greece and Troika (IMF, EU and ECB) comes to an end, some attrac-tive financial incentives will be provided by the latter to restore the financial stability of the country.

What Greece gains by staying within the eurozone

In contrast to the beneficial aspects consid-ered above, it can be said with some amount of certainty that the citizens of Greece can also acquire considerable benefits by sticking to the euro rather than switching to the drachma.

The European Central Bank (ECB) is a source of extensive funding capabilities and Greece will be denied the services of the same if it leaves the euro area. Moreover, the wealth of the Greek citizens are measured in euros and an exit from the eurozone would expose this entire wealth to exchange rate fluc-tuations.

Last but not the least, Greece will also lose

numerous political, social and economic benefits provided by EU as well as the fortunes of simplified international trade policies.

What Europe gains from a Greek Exit

Although a Greek exit may cause an imme-diate banking crisis across entire Europe, a reformed and extensive European Finan-cial Stability Facility (EFSF) – would help to prepare the remaining EU members to restore their banking systems.

Attempts by other EU members to save Greece enhances the vision of mutual support and solidarity within the eurozone, but at the same time puts forward the glaring question to the world as to whether Brussels is capable enough to maintain a viable economic and monetary union.

What Europe loses from a Greek Exit

Most of the EU members, especially Germany, are sceptical about extending further financial support to Greece. But all these objections should be considered with a pinch of salt because in reality Europe

will lose as much as Greece itself from an exit of the latter from the eurozone.

Greece is Europe’s invincible barrier to the illegal immigra-tion originating in Asia and it has carried out this duty with very little or no assistance from the remaining EU mem-bers.

Hence, a Greek exit will cause huge turmoil along the frontiers. The city of Cyprus, being largely dependent on Greek economy, will also collapse in case of a Greek exit and Europe will have to continue without two internationally significant

ABOUT THE AUTHOR

SOHINI BANERJEE

MBA Ist YEAR

VINOD GUPTA SCHOOL OF MANAGEMENTIIT KHARAGPUR



19

DID YOU KNOW

In 2012, Greece debt is forecasted to be 198.2% of its GDP, whereas GDP growth is forecasted to shring by 2.8%.

DID YOU KNOW

In the early-mid 2000s, Greece's economy was strong and the govern-ment took advantage by running a large deficit, partly due to high defense spending amid historic enmity to Turkey.










The Way Forward





















20

DID YOU KNOW

When economic crises arised in late 2000, Greece was unable to recover because its main industries shipping and tourism were sensitive and its debt began to pile up.










The Way Forward





















21

RECENT FINTEREST EVENTS AT VGSOM

The first session which was on Euro Debt Crisis attracted many finance enthusiast of Vinod Gupta School of Management, IIT Kharagpur to brain storm on various aspects of the crisis and the possible measures that should be taken to contain it.

The energy level witnessed was nothing less than amazing .The Leaders in making ,convincingly put forwards their points and debated the pros and cons of various mea-sures that could be taken.

Gist of the Session:

In the 2000s, Greece had abundant access to cheap capital, fueled by flush capital markets and increased investor confidence after adopting the euro in 2001. Capital inflows were not used to increase the com-petitiveness of the economy, however, and European Union (EU) rules designed to limit the accumulation of public debt failed to do so. The global financial crisis of 2008-2009 strained public finances, and subsequent revelations about falsified statistical data drove up Greece’s borrow-ing costs. By early 2010, Greece risked defaulting on its public debt.

EU, European Central Bank, and IMF officials agreed that an uncontrolled Greek default could trigger a major crisis. In May 2010, they announced a major financial

assistance package for Greece, and the Greek government committed to far-reaching economic reforms. These measures prevented a default, but a year later, the economy was contracting sharply and again veered towards default. Euro-pean leaders announced a second set of crisis response measures in July 2011. The new package calls for holders of Greek bonds to accept losses, as well as for more austerity and financial assistance.

Additionally, the policy responses have not contained the crisis. Ireland and Portugal turned to the EU and IMF for financial assis-tance. In the summer of 2011, interest rates on Spanish and Italian bonds rose sharply.

The second Brown Bag Session was focused on FDI in Retail which kicked off with presentation of two short videos.

The first one was on FDI and collaboration with foreign players asserting that the opportunity is huge, and that FDI is like an untapped resource for sustainable develop-ment. The second one was a clipping from a debate on India Tonight which talked about impact of FDI on India, its integration into the value chain of our system. The debate also raised questions on whether our system needed foreign investors in retail.

Gist of the Session :

BROWN BAG SESSIONSGURUKOOL SERIES OF LECTURES

The Finance Club of VGSOM, IIT Kharagpur has been involved heavily in knowledge sharing among the finance enthusiasts at IIT Kharagpur. Through initiatives like “Brown Bag Sessions” and “Gurukool Series of Lec-tures” it is encouraging the finance fraternity at VGSOM and in the industry to learn and share simultaneously.

BROWN BAGS

In January, 2012 Finterest introduced Brown Bag Sessions- A series of weekly sessions aiming at discussing the major issues and topics from finance domain where every participant is expected to do his/her research on the topic which results in a healthy exchange of ideas during the session.

The parameters which were widely discussed were Infrastructure, Employ-ment, Public Policy.

With examples of FDI’s success story in China, Indonesia, Germany and other nations, the discussion tilted in favour of FDI in retail with its perceived positive impact on backend infrastructure. As India’s backend infrastructure in retail, especially cold storage facilities, is in a nascent stage, FDI in retail is thought to bring in new technology and years of expe-rience from the big retailers of the world which would help upgrade the backend infrastructure and find a way around the high gestation period such initiative demands.

But, questions arose on why not we could improve the infrastructure on our own. Whether the government wanted the foreign players to come in and clean the mess or is it just lack of effective policy making on the government’s behalf?The discussion also ventured into the 30 % restriction imposed in single brand FDI in retail on local sources of raw material and infrastructure. Surely some percentage is needed to be set aside to be sourced from within India, for FDI in retail to not harm the “kirana” shops or affect their business on a large scale.

The discussion took a turn against FDI when voices were heard for the people who may get unemployed due to overhaul of the value chain and the backend infra-structure. It is thought that huge supermar-kets, mega stores adversely affect the local businesses containing the “kirana” shop onwers, street vendors, etc.

On the point of jobs being lost or actually made, two more videos were displayed which changed the perception that FDI in retail would only kill jobs. People started developing a point of view which showed them that jobs made be lost in certain places in the value chain, but FDI in retail had the potential to create more jobs in other places in the value chain. Therefore, the question which was pondered changed to whether this is a job loss scenario or job shift scenario. Taking the long-term view,

this was looking as a job shift scenario with ample opportunities being created elsewhere in the value chain.

Increase in organized retail sector, result-ing in increased tax paid to the government was one of the reasons FDI in retail was being supported. Also, FDI vs manufactur-ing sector debate raged on for some time, pondering on why India cannot improve its manufacturing sector infrastructure (which would take considerable effort from the government and require a huge amount of time) rather than going for the easier and potentially riskier option of FDI in retail.

The intentions of the governments over the years to introduce the bill effectively and get it passed were questioned on the grounds of vote-bank politics and inability to form policy which would lure foreign giants to set up house in India.

Third session was organized on Currency Fluctuations and its Impact, in which participants discussed about how the currencies in the world fluctuate with respect to each other, what are the measures governments take to control the fluctuation.

Along with this the discussion also moved towards the forex trading and fluctuations’ impact on exports and imports. Apart from it participants also discussed about the interests of some countries behind deliber-ately keeping their currency’s value low.


22

The first session which was on Euro Debt Crisis attracted many finance enthusiast of Vinod Gupta School of Management, IIT Kharagpur to brain storm on various aspects of the crisis and the possible measures that should be taken to contain it.

The energy level witnessed was nothing less than amazing .The Leaders in making ,convincingly put forwards their points and debated the pros and cons of various mea-sures that could be taken.

Gist of the Session:

In the 2000s, Greece had abundant access to cheap capital, fueled by flush capital markets and increased investor confidence after adopting the euro in 2001. Capital inflows were not used to increase the com-petitiveness of the economy, however, and European Union (EU) rules designed to limit the accumulation of public debt failed to do so. The global financial crisis of 2008-2009 strained public finances, and subsequent revelations about falsified statistical data drove up Greece’s borrow-ing costs. By early 2010, Greece risked defaulting on its public debt.

EU, European Central Bank, and IMF officials agreed that an uncontrolled Greek default could trigger a major crisis. In May 2010, they announced a major financial

assistance package for Greece, and the Greek government committed to far-reaching economic reforms. These measures prevented a default, but a year later, the economy was contracting sharply and again veered towards default. Euro-pean leaders announced a second set of crisis response measures in July 2011. The new package calls for holders of Greek bonds to accept losses, as well as for more austerity and financial assistance.

Additionally, the policy responses have not contained the crisis. Ireland and Portugal turned to the EU and IMF for financial assis-tance. In the summer of 2011, interest rates on Spanish and Italian bonds rose sharply.

The second Brown Bag Session was focused on FDI in Retail which kicked off with presentation of two short videos.

The first one was on FDI and collaboration with foreign players asserting that the opportunity is huge, and that FDI is like an untapped resource for sustainable develop-ment. The second one was a clipping from a debate on India Tonight which talked about impact of FDI on India, its integration into the value chain of our system. The debate also raised questions on whether our system needed foreign investors in retail.

Gist of the Session :

The parameters which were widely discussed were Infrastructure, Employ-ment, Public Policy.

With examples of FDI’s success story in China, Indonesia, Germany and other nations, the discussion tilted in favour of FDI in retail with its perceived positive impact on backend infrastructure. As India’s backend infrastructure in retail, especially cold storage facilities, is in a nascent stage, FDI in retail is thought to bring in new technology and years of expe-rience from the big retailers of the world which would help upgrade the backend infrastructure and find a way around the high gestation period such initiative demands.

But, questions arose on why not we could improve the infrastructure on our own. Whether the government wanted the foreign players to come in and clean the mess or is it just lack of effective policy making on the government’s behalf?The discussion also ventured into the 30 % restriction imposed in single brand FDI in retail on local sources of raw material and infrastructure. Surely some percentage is needed to be set aside to be sourced from within India, for FDI in retail to not harm the “kirana” shops or affect their business on a large scale.

The discussion took a turn against FDI when voices were heard for the people who may get unemployed due to overhaul of the value chain and the backend infra-structure. It is thought that huge supermar-kets, mega stores adversely affect the local businesses containing the “kirana” shop onwers, street vendors, etc.

On the point of jobs being lost or actually made, two more videos were displayed which changed the perception that FDI in retail would only kill jobs. People started developing a point of view which showed them that jobs made be lost in certain places in the value chain, but FDI in retail had the potential to create more jobs in other places in the value chain. Therefore, the question which was pondered changed to whether this is a job loss scenario or job shift scenario. Taking the long-term view,

this was looking as a job shift scenario with ample opportunities being created elsewhere in the value chain.

Increase in organized retail sector, result-ing in increased tax paid to the government was one of the reasons FDI in retail was being supported. Also, FDI vs manufactur-ing sector debate raged on for some time, pondering on why India cannot improve its manufacturing sector infrastructure (which would take considerable effort from the government and require a huge amount of time) rather than going for the easier and potentially riskier option of FDI in retail.

The intentions of the governments over the years to introduce the bill effectively and get it passed were questioned on the grounds of vote-bank politics and inability to form policy which would lure foreign giants to set up house in India.

Third session was organized on Currency Fluctuations and its Impact, in which participants discussed about how the currencies in the world fluctuate with respect to each other, what are the measures governments take to control the fluctuation.

Along with this the discussion also moved towards the forex trading and fluctuations’ impact on exports and imports. Apart from it participants also discussed about the interests of some countries behind deliber-ately keeping their currency’s value low.


23

DID YOU KNOW

The earliest introduction of energy market concepts and privatiza-tion to electric power systems took place in Chile in the early 1980s, in parallel with other market-oriented reforms associated with the Chicago Boys.

The platform provided an excellent opportunity to students to explore niche areas in finance industry. First in the series of lecture was taken by Prof. Prabina Rajib of VGSoM, IIT Kharagpur on "Electric-ity Derivative".

Prof. Rajib explained in detail how in India, regulation allows electricity derivatives to be traded in spot market only.The fact that it cannot be stored easily and must be produced virtually at the same instant it is consumed makes it unique when com-pared with the markets for other energy commodities, such as natural gas, oil, and coal, in which the underlying commodity can be stocked and dispensed over time to deal with peaks and troughs in supply and demand.

She went on to discuss how pricing is done for different time zones and different regions over the course of a year or even a day, electricity demand cycles through high and lows corresponding to changes in season.

Regulators also play key role in reducing inherent volatility of electricity prices by tweaking demand-side management programs. Electricity prices are likely to be

most volatile during the on-peak hours of the day and substantially more stable (and lower) during the off-peak periods.

Second in the Gurukool series of lectures were conducted by Mr. Gaurav Sekhri, Vice President at IndiaVenture Advisors (a Private Equity firm promoted by the Pira-mal Group) on how to build your career in the exciting world of Private Equity Funding.

Mr Gaurav met an enthusiastic student audience waiting to brain storm about the PE industry in India.The students discussed in depth the deal flow and deal ratinale of a PE across various sectors .Fine elements of Term sheet like Right to firts refusal Drag along right and variou exit option of a PE were the the highlights of the discussion.

Mr. Gaurav Sekhri enjoyed answering all queries and concerns and advice on the steps you can take apart from the regular coursework to build your career in the world of Equity Markets and Private Equity funding. He also shared his experiences and learnings while working in the niche domain.

Gurukool Series Of Lectures

Finterest took another novel intiative in February this year and introduced "Gurukool" Series of lectures. These sessions were aimed to foster greater interaction between finance enthusiasts of VGSoM and stalwarts from finance industry and academia.


24

FIN-CROSS

5

6 7

8

9 10

2 3 41

13

17

14

1615

11

12

Across

1. Burden2. A transportation medium5. Kind of cow6. Secure8. Get on9. Free trading11. Business maga-zine 12. 24-karat15. Obligation16. Euro forerunner17. Redemption (10 letters comprising of 2 words attached)

Down

1. Hint2. Bargain-basement 3. Declared but not paid4. In Jeopardy7. Injured10. Reply to acaptain 12. A thump13. Deposits14. Component of an asset

Check out the answers in the next issue.


25

FIN-CROSSSolution, Vol I

5 6 7 8 9 10

2 3 41

23

25 26

2422

21

13

17

19

18

14

16

15

20

10 11 12

Across

1. A bookkeeping worksheet5. Having less than five years to run before redemption8. First-rate10. Amalgamation11. Ingests13. Ordinary shares16. Legally established as a corporation17. Act of selling again18. Effective19. Type of a rock music20. Euro forerunner21. Cake-Walk22. Wrestling hold23. Nice to have this24. Accept25. Common Market inits.26. Burden

Down

2. Gap3. Conversion of a liability4. Affirmative vote6. Notes, coins7. Deduction Rate9. Similar to10. Leadership post12. A Union14. A four sided shape15. A business profes-sional22. Plenty


26

T R I A L B A L A N C E

S H O R T D A T E D T I P

C O N S U M E RM E R G E R

C O M M O N S T O C K

R E S A L ER E N T

I N C

E A S Y

P R O F I T

E C U

B U Y

T A XE E C

L O C KOT

Y L N E

N I A RR S R A

R

N O Y

A E N I A

A D I O C U

A U V UG N E T T

N A

E

O

FI

NTE EST

VG

SO

M

I I T K H A R AG

PU

RVINOD GUPTA SCHOOL OF MANAGEMENT established in 1993, was the first school of management to be setup within the IIT system. It was initiated by a distinguished alumnus & a Life Time Fellow of the Institute, Mr. Vinod Gupta, whose generous endowment was matched by liberal support from the Government of India.Today, VGSOM is one of the best and leading B-Schools in India.

FINTEREST, the Finance club of VGSoM, is dedicated to nurturing and enhancing the fin-quotient of students and also to increase industry interaction with our college. The club keeps its members updated on the latest trends and developments in corporate finance, capital mar-kets, investment banking and other related areas.

Contact InformationVinod Gupta School Of Management

IIT Kharagpur, KharagpurWest Bengal - 721302

Mark2Market: [email protected]: [email protected]

mark2market_spring_edition_volume_ii

Documents

vgsom section

fincross solution

credit default swaps

finance club of vgsom

finventory section

recent events

fincross challenges

recent finterest events