Artibitage trade anaysis main document.doc

8/15/2019 Artibitage trade anaysis main document.doc

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INTRODUCTION

Arbitrage Pricing Theory

Definition

APT. An alternative asset pricing model to the Capital Asset Pricing Model. Unlike the

Capital Asset Pricing Model, which specifies returns as a linear function of only

systematic risk, Arbitrage Pricing Theory may specify returns as a linear function of more

than a single factor.

Fundamental Analysis

This investment strategy involves evaluating a stock by e amining the company,

especially its operations and its financial condition. !ere we look at several valuation

methods, factoring in price"earnings ratio, P#$, dividend yields, book value, price"sales

ratio, and return on e%uity.

Stoc Strategies

&earn about various strategies for investing in stocks, including the 'buy and hold

approach,( analy)ing market timing, and estimating a company*s potential for growth.

Stoc s and !our Portfolio

+ like this company, but should + add it to my portfolio This article talks about

diversification and balancing risk with your stock selections.

The Arbitrage Pricing Theory -APT was developed primarily by /oss -0123a, 0123b .

+t is a one4period model in which every investor believes that the stochastic properties of

returns of capital assets are consistent with a factor structure. /oss argues that if

e%uilibrium prices offer no arbitrage opportunities over static portfolios of the assets, then

the e pected returns on the assets are appro imately linearly related to the factor

loadings. -The factor loadings, or betas, are proportional to the returns* co variances with

the factors. The result is stated in 5ection 0. /oss* -0123a heuristic argument for the

theory is based on the preclusion of arbitrage. This intuition is sketched out in 5ection 6.

/oss* formal proof shows that the &inear pricing relation is a necessary condition for

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e%uilibrium in a market where agents ma imi)e certain types of utility. The subse%uent

work, which is surveyed below, derives either from the assumption of the preclusion of

arbitrage or the e%uilibrium futility4ma imi)ation. A linear relation between the e pected

returns and the betas is tantamount to an identification of the stochastic discount factor

-578 . 5ections 9 and :, respectively, review this literature.

The APT is a substitute for the Capital Asset Pricing Model -CAPM in that both

assert a linear relation between assets* e pected returns and their covariance with other

random variables. -+n the CAPM, the covariance is with the market portfolio*s return.

The covariance is interpreted as a measure of risk that investors cannot avoid by

diversification. The slope coefficient in the linear relation between the e pected returns

and the covariance is interpreted as a risk premium. 5uch a relation is closely tied to

mean4variance efficiency, which is reviewed in 5ection ;. 5ection ; also points out thatan empirical test of the APT entails a procedure to identify at least some features of the

underlying factor structure. Merely stating that some collection of portfolios -or even a

single portfolio is mean4variance efficient relative to the mean4variance frontier spanned

by the e isting assets does not constitute a test of the APT, because one can always find a

mean4variance efficient portfolio.

Conse%uently, as a test of the APT it is not sufficient to merely show that a setoff factor

portfolio satisfies the linear relation between the e pected return and its covariance with

the factors portfolios.

A sketch of the empirical approaches to the APT is offered in 5ection 3, while 5ection 2

describes various procedures to identify the underlying factors. The large number of

factors proposed in the literature and the variety of statistical or ad hoc procedures to find

them indicates that a definitive insight on the topic is still missing.

8inally, 5ection < surveys the applications of the APT, the most prominent being the

evaluation of the performance of money managers who actively change their portfolios. 0

Unfortunately, the APT does not necessarily preclude arbitrage opportunities over

dynamic portfolios of the e isting assets. Therefore, the applications of the APT in the

evaluation of managed portfolios contradict at least the spirit of the APT, which obtains

price restrictions by assuming the absence of arbitrage.

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Arbitrage is an often4used term in share markets. The arbitrager is an

important intermediary that helps in price discovery mechanism in all markets be it

e%uity, moneyfore or derivatives. There are three important participants that are

important in a cash market, the speculator, arbitrager and an investor. +n futures market

the investor is replaced by a hedger. Arbitrager and 5peculator are often confused and

both are termed as 5peculators. +n this article + wish to e plain the difference between the

two and show how arbitrage works in the market and its influence on market volatility.

Arbitraging in +ndia has been going on for several years. +nitially arbitrage activity

was between 5tock # change Mumbai and all other regional e changes. Mr. =abulal

=agri the founder of =&= 5ecurities and Mr. ManubhaiManeklal were legendary

arbitragers of that era. They traded between Mumbai, 7elhi and Calcutta markets.

Arbitraging in those days was done manually and not on any online system. The way thefingers of these brokers flew on tele machines giving trade instructions was an

e perience by itself. Then it shifted to cashing on price difference between >5# and =5#

limited. Today large amount of arbitrage happens between cash and derivative markets.

Arbitrage is also possible between the current month and near or far month contracts. +n

case of Commodity e changes also there is an arbitrage opportunity between the local

cash markets or mandis and the future markets which are popularly known as >ational

Commodity # changes.

5peculator is one who gives li%uidity to the markets. The buyers and sellers may

not often decide at the same time to buy or sell a security. There is a time gap as well as a

difference in price and %uantity at which the buyer and seller intend to do a transaction.

The speculator fills this time gap and gives %uotes to buyers as well as sellers on a

continuous basis. This imparts li%uidity to the market since each order has a counter offer

from a speculator even if there is no counter party to match the order.The arbitrager is

one who plays the role of balancing the price differences across the markets. The markets

may be two e changes trading in the same product or two segments such as cash and

derivatives or across international markets and local markets. The arbitrager continuously

tracks prices across the chosen segment. are momentary price differences in two markets

due to difference in level of information as well as demand supply situation in the market.

These price differences are a

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Conclusion

The Arbitrage 8und, in such uncertain times, can prove to be one of the good choices by

investors, other than putting the money in fi ed deposits. The 8und !ouse is claiming a

return of around 141.1?, which is much better than that of many other savingsinstruments. !owever, finding an arbitrage opportunity in a bear phase .

SCOP" OF T#" STUD!

The term ‘arbitrage trading’ could be misleading to novices in the feldo share

stocks trading and hence needs to be defned clearly as to bring out its

true meaningAnd implications or the individual investors, the share market and

nationalEconomy. Arbitrage trading is a phenomena which comes into play

when companiesAnd corporate houses make attempts to raise capital by o ering stocks

or sale on!ore than one stock e"change markets in a single country #or

theoretically in!ultiple countries$. %n those share markets which are not per ect in

terms o%nvestment value or price updating acilities, there e"ists a more than

air chance o&iscrepancies o share value o the same or closely related shares on

di erent stock!arkets. 'hen, an investor deliberately invests in the shares o a

particularcompany in one stock market and fnding it proftable( sells the same

in order to buy The same or closely related shares o the same company or group in

another stock !arket, it is called arbitrage trading. %n such a situation, the investor(

whether a)rivate individual, a bank or an investment frm, attempts to make

proft out o the &iscrepancies or di erence in the price o the shares across di erent

stock

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E"changes in a single country #or theoretically, in a bunch o countries$.

Need of the study$

To understand what makes for arbitrage, one need to distinguish between three types of

arbitrage. The first is pure arbitrage, where one has have two identical assets with

different market prices at the same point in time and the prices will converge at a given

point in time in the future. This type of arbitrage is most likely to occur in derivatives

markets options and futures4 and in some parts of the bond market. The second is near

arbitrage, where one has assets that have identical or almost identical cash flows, trading

at different prices, but there is no guarantee that the prices will converge and there e ist

significant constraints on investors forcing them to do so. The third is speculativearbitrage, which is really not arbitrage in the first place. !ere, investors take advantage of

what they see as mispriced and similar -though not identical assets, buying the cheaper

one and selling the more e pensive one. +f they are right, the difference should narrow

over time, yielding profits.

O%&"CTI'"S OF T#" STUD!

The ob@ective of the study is to analy)e the possibility of taking advantage of

arbitrage mechanism of the blue chip scrip*s of core sectors of +ndian economy,

traded in =5# and >5#.

Ten blue chip scrip of five core sectors are studied for evaluation.

The share prices of these scrip*s are being taken for analysis for the period of two

months, ctober 6B03 and >ovember 6B03.

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Closing prices of each share in the two e changes are taken for analysis.

The difference in the prices is analy)ed for any scope of arbitration.

The Fundamental Theorem of Arbitrage Pricing

0. +ntroduction

The =lack45chools theory, which is the main sub@ect of this course and its se%uel, is

based on the #fficient Market !ypothesis that arbitrages -the term will be defined

shortly do not e ist in efficient markets. Although this is never completely true in

practice, it is a useful basis for pricing theory, and we shall limit our attention -at least for

now to efficient -that is, arbitrage4free markets. e shall see that absence of arbitragesometimes leads to uni%ue determination of prices of various derivative securities, and

gives clues about how these derivative securities may be hedged. +n particular, we shall

see that, in the absence of arbitrage, the market imposes a probability distribution, called

a risk4neutral or e%uilibrium measure, on the set of possible market scenarios, and that

this probability measure determines market prices via discounted e pectation. This is the

8undamental Theorem of arbitrage pricing. =efore we state the 8undamental Theorem

formally, or consider its ramifications, we shall consider several simple e amples of

derivative pricing in which the #fficient Market !ypothesis allows one to directly

determine the market price.

"(am)le$ For*ard Contracts

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+n the simplest forward contract, there is a single underlying asset 5tock, whose

share price -in units of Cash at time t D B is known but at time t D 0 is sub@ect to

uncertainty.

+t is also assumed that there is a riskless asset MoneyMarket, that is, an asset whose

5hare price at t D 0 is not sub@ect to uncertaintyE the share price of MoneyMarket at t D B

is 0 and at t D 0 is regardless of the market scenario. The constant r is called the risk less

rate of return. The forward contract calls for one of the agents to pay the other an amount

8 -the forward price in Cash at time t D 0 in e change for one share of 5tock. The

forward price 8 is written into the contract at time t D B. >o money or assets change

hands at time t D B.

Proposition 0. +n an arbitrage4free market, the forward price is 8 D 5Ber.+nformally, an

arbitrage is a way to make a guaranteed profit from nothing, by short4selling certainassets at time t D B, using the proceeds to buy other assets, and then settling accounts at

time t D 0. hen an investor sells an asset short, he"she must borrow shares of the asset to

sell in return for a promise to return the shares at a pre4specified future time -and, usually,

an interest charge . +n real markets there are constraints on short4selling imposed by

brokers and market regulators to assure that the shares borrowed for short sales can be

repaid. +n the ideali)ed markets of the =lack45choles universe, such constraints do not

e ist, nor are there interest payments on borrowed shares, nor are there transaction costs

-brokerage fees . 8urthermore, it is assumed that investors may buy or sell shares -as

many as they like in any asset at the prevailing market price without affecting the share

price.

Fundamentals$ +uantitati,e and +ualitati,e

Fou could define fundamental analysis as 'researching the fundamentals(, but that

doesn*t tell you a whole lot unless you know what fundamentals are. As we mentioned inthe introduction, the big problem with defining fundamentals is that it can include

anything related to the economic well4being of a company. bvious items include things

like revenue and profit, but fundamentals also include everything from a company*s

market share to the %uality of its management.

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The various fundamental factors can be grouped into two categoriesG %uantitative

and %ualitative. The financial meaning of these terms isn*t all that different from their

regular definitions. !ere is how the M5> #ncarta dictionary defines the termsG

Huantitative I capable of being measured or e pressed in numerical terms.

Hualitative I related to or based on the %uality or character of something, often as

opposed to its si)e or %uantity.

+n our conte t, %uantitative fundamentals are numeric, measurable characteristics

about a business. +t*s easy to see how the biggest source of %uantitative data is the

financial statements. Fou can measure revenue, profit, assets and more with great

precision. Turning to %ualitative fundamentals, these are the less tangible factors

surrounding a business 4 things such as the %uality of a company*s board members and

key e ecutives, its brand4name recognition, patents or proprietary technology.

+uantitati,e -eets +ualitati,e

>either %ualitative nor %uantitative analysis is inherently better than the other.

+nstead, many analysts consider %ualitative factors in con@unction with the hard,

%uantitative factors. Take the Coca4Cola Company, for e ample. hen e amining its

stock, an analyst might look at the stock*s annual dividend payout, earnings per share,

P"# ratio and many other %uantitative factors. !owever, no analysis of Coca4Cola would

be complete without taking into account its brand recognition. Anybody can start a

company that sells sugar and water, but few companies on earth are recogni)ed by

billions of people. +t*s tough to put your finger on e actly what the Coke brand is worth,

but you can be sure that it*s an essential ingredient contributing to the company*s ongoing

success.

The Conce)t of Intrinsic 'alue

=efore we get any further, we have to address the sub@ect of intrinsic value. ne of

the primary assumptions of fundamental analysis is that the price on the stock market

does not fully reflect a stock*s 'real( value. After all, why would you be doing price

analysis if the stock market were always correct +n financial @argon, this true value is

known as the intrinsic value.


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8ollowers of the efficient market hypothesis, however, are usually in

disagreement with both fundamental and technical analysts. The efficient market

hypothesis contends that it is essentially impossible to produce market4beating returns in

the long run, through either fundamental or technical analysis. The rationale for this

argument is that, since the market efficiently prices all stocks on an ongoing basis, any

opportunities for e cess returns derived from fundamental -or technical analysis would

be almost immediately whittled away by the market*s many participants, making it

impossible for anyone to meaningfully outperform the market over the long term.

FUNDA-"NTA. ANA.!SIS G

+ualitati,e Factors / The Com)any

=efore diving into a companyKs financial statements, weKre going to take a look at some of

the %ualitative aspects of a company.

8undamental analysis seeks to determine the intrinsic value of a companyKs stock.

=ut since %ualitative factors, by definition, represent aspects of a companyKs business that

are difficult or impossible to %uantify, incorporating that kind of information into a

pricing evaluation can be %uite difficult. n the flip side, as weKve demonstrated, you

canKt ignore the less tangible characteristics of a company.

+n this section we are going to highlight some of the company4specific

%ualitative factors that you should be aware of.

%usiness -odel

#ven before an investor looks at a companyKs financial statements or does any

research, one of the most important %uestions that should be asked isG hat e actly does

the company do This is referred to as a companyKs business model I itKs how a company

makes money. Fou can get a good overview of a companyKs business model by checking

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out its website or reading the first part of its 0B4L filing ->oteG eKll get into more detail

about the 0B4L in the financial statements chapter. 8or now, @ust bear with us .

5ometimes business models are easy to understand. Take Mc7onalds, for instance,

which sells hamburgers, fries, soft drinks, salads and whatever other new special they are

promoting at the time. +tKs a simple model, easy enough for anybody to understand.

ther times, youKd be surprised how complicated it can get. =oston Chicken +nc. is

a prime e ample of this. =ack in the early K1Bs its stock was the darling of all 5treet. At

one point the companyKs C# bragged that they were the first new fast4food restaurant

to reach J0 billion in sales since 0131 . The problem is, they didnKt make money by

selling chicken. /ather, they made their money from royalty fees and high4interest loans

to franchisees. =oston Chicken was really nothing more than a big franchisor. n top of

this, management was aggressive with how it recogni)ed its revenue. As soon as it wasrevealed that all the franchisees were losing money, the house of cards collapsed and the

company went bankrupt.

At the very least, you should understand the business model of any company

you invest in. The racle of maha , arren =uffett, rarely invests in tech stocks

because most of the time he doesnKt understand them. This is not to say the technology

sector is bad, but itKs not =uffettKs area of e pertiseE he doesnKt feel comfortable investing

in this area. 5imilarly, unless you understand a companyKs business model, you donKt

know what the drivers are for future growth, and you leave yourself vulnerable to being

blindsided like shareholders of =oston Chicken were.

Com)etiti,e Ad,antage

Another business consideration for investors is competitive advantage. A companyKs long4

term success is driven largely by its ability to maintain a competitive advantage 4 and

keep it. Powerful competitive advantages, such as Coca ColaKs brand name and

MicrosoftKs domination of the personal computer operating system, create a moat around

a business allowing it to keep competitors at bay and en@oy growth and profits. hen a

company can achieve competitive advantage, its shareholders can be well rewarded for

decades.

!arvard =usiness 5chool professor Michael Porter, distinguishes between

strategic positioning and operational effectiveness. perational effectiveness means a

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company is better than rivals at similar activities while competitive advantage means a

company is performing better than rivals by doing different activities or performing

similar activities in different ways. +nvestors should know that few companies are able to

compete successfully for long if they are doing the same things as their competitors.

Professor Porter argues that, in general, sustainable competitive advantage gained byG

A uni%ue competitive position Clear tradeoffs and choices vis4N4vis competitor

Activities tailored to the companyKs strategy A high degree of fit across activities -it is the

activity system, not the parts that ensure sustainability A high degree of operational

effectiveness

-anagement

Oust as an army needs a general to lead it to victory, a company relies

upon management to steer it towards financial success. 5ome believe that management is

the most important aspect for investing in a company. +t makes sense 4 even the best

business model is doomed if the leaders of the company fail to properly e ecute the plan.

5o how does an average investor go about evaluating the management of a company

This is one of the areas in which individuals are truly at a disadvantage compared to

professional investors. Fou canKt set up a meeting with management if you want to invest

a few thousand dollars. n the other hand, if you are a fund manager interested in

investing millions of dollars, there is a good chance you can schedule a face4to4face

meeting with the upper brass of the firm.

#very public company has a corporate information section on its website. Usually

there will be a %uick biography on each e ecutive with their employment history,

educational background and any applicable achievements. 7onKt e pect to find anything

useful here. &etKs be honestG eKre looking for dirt, and no company is going to put

negative information on its corporate website.

+nstead, here are a few ways for you to get a feel for managementG

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of top e ecutives on company web sites. +dentify the companies they worked at in the

past and do a search on those companies and their performance.

Fear after year, key players in the 8ore market make a killing by picking the right

currencies I now it*s your turn. Access industry gurus =oris and Lathy*s e clusive 8/##

report, The 8ive Things That Move the Currency Market I And !ow to Profit 8rom

Them, right nowQ

Cor)orate 8o,ernance

Corporate governance describes the policies in place within an organi)ation denoting the

relationships and responsibilities between management, directors and stakeholders. These

policies are defined and determined in the company charter and its bylaws, along with

corporate laws and regulations. The purpose of corporate governance policies is to ensure

that proper checks and balances are in place, making it more difficult for anyone toconduct unethical and illegal activities.

$ood corporate governance is a situation in which a company complies with all of its

governance policies and applicable government regulations -such as the 5arbanes4 ley

Act of 6BB6 in order to look out for the interests of the companyKs investors and other

stakeholders. Although, there are companies and organi)ations -such as 5tandard

PoorKs that attempt to %uantitatively assess companies on how well their corporate

governance policies serve stakeholders, most of these reports are %uite e pensive for the

average investor to purchase.

8ortunately, corporate governance policies typically cover a few general areasG

structure of the board of directors, stakeholder rights and financial and information

transparency. ith a little research and the right %uestions in mind, investors can get a

good idea about a companyKs corporate governance

Technical Analysis

Definition

A method of evaluating securities by relying on the assumption that market data, such as

charts of price, volume, and open interest, can help predict future -usually short4term

market trends. Unlike fundamental analysis, the intrinsic value of the security is not

considered. Technical analysts believe that they can accurately predict the future price of

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a stock by looking at its historical prices and other trading variables. Technical analysis

assumes that market psychology influences trading in a way that enables predicting when

a stock will rise or fall. 8or that reason, many technical analysts are also market timers,

who believe that technical analysis can be applied @ust as easily to the market as a whole

as to an individual stock.

Related Terms

advance"decline line, head and shoulders, moving average, point4and4figure

chart, resistance, analysis, ascending bottoms, ascending tops, descending bottoms,

descending tops, breadth4of4market theory, breakout, chartist, cup and handle, saucer,

flag, pennant, double bottom, double top, #lliott ave Theory, high4low inde ,

momentum indicator, MAC7, on4balance volume, overbought, oversold,

overbought"oversold indicator, random walk theory, reading the tape, relative strength,

support, signal, technical analyst, technical indicator, test, trendline, vertical line charting,

Arms +nde , double top breakout, triple bottom, =ollinger bands

Technical Analysis

Technical analysis is the study of a stock, or the market as a whole, strictly by using the

price and volume history of a stock. Technical analysis uses little or no information

about the actual business behind the stock. The common belief is that a stock price

represents all known information about a stock. Technical analysis is an alternative tofundamental analysis.

ur service provides a very speciali)ed type of technical analysis, performing real4time

statistical analysis on all relevant market data. &ike many people we believe that changes

in the fundamentals will be visible through technical analysis.

Alert Ty)es

The methods used to analy)e securities and make investment decisions fall into

two very broad categoriesG fundamental analysis and technical analysis. 8undamental

analysis involves analy)ing the characteristics of a company in order to estimate its value.

Technical analysis takes a completely different approachE it doesnKt care one bit about the

value of a company or a commodity. Technicians -sometimes called chartists are only

interested in the price movements in the market.

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7espite all the fancy and e otic tools it employs, technical analysis really @ust

studies supply and demand in a market in an attempt to determine what direction, or

trend, will continue in the future. +n other words, technical analysis attempts to

understand the emotions in the market by studying the market itself, as opposed to its

components. +f you understand the benefits and limitations of technical analysis, it can

give you a new set of tools or skills that will enable you to be a better trader or investor.

9hat Is Technical Analysis:

Technical analysis is a method of evaluating securities by analy)ing the statistics

generated by market activity, such as past prices and volume. Technical analysts do not

attempt to measure a securityKs intrinsic value, but instead use charts and other tools to

identify patterns that can suggest future activity.

Oust as there are many investment styles on the fundamental side, there are alsomany different types of technical traders. 5ome rely on chart patterns, others use

technical indicators and oscillators, and most use some combination of the two. +n any

case, technical analystsK e clusive use of historical price and volume data is what

separates them from their fundamental counterparts. Unlike fundamental analysts,

technical analysts donKt care whether a stock is undervalued 4 the only thing that matters

is a securityKs past trading data and what information this data can provide about where

the security might move in the future.

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R"'I"9 OF .IT"RATUR"

Arbitrage is an often4used term in share markets. The arbitrager is an important

intermediary that helps in price discovery mechanism in all markets be it e%uity,

moneyfore or derivatives. There are three important participants that are important in a

cash market, the speculator, arbitrager and an investor. +n futures market the investor is

replaced by a hedger. Arbitrager and 5peculator are often confused and both are termed

as 5peculators. +n this article + wish to e plain the difference between the two and show

how arbitrage works in the market and its influence on market volatility.

Arbitraging in +ndia has been going on for several years. +nitially arbitrage activity

was between 5tock # change Mumbai and all other regional e changes. Mr. =abulal

=agri the founder of =&= 5ecurities and Mr. ManubhaiManeklal were legendary

arbitragers of that era. They traded between Mumbai, 7elhi and Calcutta markets.

Arbitraging in those days was done manually and not on any online system. The way the

fingers of these brokers flew on tele machines giving trade instructions was ane perience by itself. Then it shifted to cashing on price difference between >5# and =5#

limited. Today large amount of arbitrage happens between cash and derivative markets.

Arbitrage is also possible between the current month and near or far month contracts. +n

case of Commodity e changes also there is an arbitrage opportunity between the local

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cash markets or mandis and the future markets which are popularly known as >ational

Commodity # changes.

5peculator is one who gives li%uidity to the markets. The buyers and sellers may

not often decide at the same time to buy or sell a security. There is a time gap as well as a

difference in price and %uantity at which the buyer and seller intend to do a transaction.

The speculator fills this time gap and gives %uotes to buyers as well as sellers on a

continuous basis. This imparts li%uidity to the market since each order has a counter offer

from a speculator even if there is no counter party to match the order.

The arbitrager is one who plays the role of balancing the price differences across the

markets. The markets may be two e changes trading in the same product or two segments

such as cash and derivatives or across international markets and local markets. The

arbitrager continuously tracks prices across the chosen segment. are momentary pricedifferences in two markets due to difference in level of information as well as demand

supply situation in the market. These price differences are an

pportunity for the arbitrager.

The arbitrager has money power at his disposal. !e takes deliveries in a

particular market segment and is able to give deliveries in another market segment. There

is a time gap between giving and taking deliveries. !e holds the stock for this time and

earns an interest on the funds invested which comes by way of price differential between

buy and sell rates. The arbitrager has a particular interest return as his target. !e does not

have any open positions and all his purchases or sells in a particular market segment have

a counter position in another market segment. At the net level his position is always )ero.

This is how the arbitrager earns a risk free return.

The arbitrager does not always wait for the e piry of the contract or the settlement of the

transaction. They may reverse the position before the actual settlement date even if they

have to compromise on some percentage of the price difference earned by them. &esser

return is acceptable if it is earned with smaller or no investment. All decisions are taken

with reference to a benchmark4targeted return.

To give e ample of an arbitrage transaction, assume that the arbitrager has /s.0B

lacs available for doing arbitrage activity. !is targeted return is say 0


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a problem. therwise it is a volume game, small returns over thousands of transactions is

the name of the game. +t is advisable to study the opportunities. Fou may not act on all of

them, but it prepares you to invest your money wisely when you are a =illionaireR.

-utual Fund Feature

There have been many successful arbitrage schemes launched in the +ndian Mutual 8und

+ndustry, but OM 8inancial Mutual 8und is the pioneer in this segment. +t launched its first

arbitrage scheme 4 OM #%uity 7erivative 8und 4 and introduced the concept across the

country in 6BB;. After an overwhelming response to this scheme, where the Company

collected around /s


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discrepancy in their price relationship. +t is a risk4free transaction, as the long and short

legs of the transaction offset each other e actly. Thus, arbitrage engages in a strategy in

order to reduce risk of loss caused by price fluctuations of securities held in the portfolio.

+t involves buying and selling of e%ual %uantities of a security in two different markets,

with the e pectations that a future change in price will offset by an opposite change in the

other.

7aily turnover in the derivatives segment is around 9.; times the cash market

volumes and is to the tune of /s 9B,BBB crores. Arbitrage activity is largely concentrated

in single stock futures, while inde arbitrage is not very popular, although it contributes

about 6;49B? of the total stock futures volumes. +n +ndia, stock borrowing in the cash

market is cumbersome, making the '5ell 5tock buy 8utures( strategy difficultE hence,

almost the entire arbitrage activity is concentrated in '=uy 5tock45ell 8utures(.:Ad,antages of Arbitrage Strategy

• Capitalises opportunities of mis4pricing -cost of carry between cash and

derivatives.

• +t is safe, as it does not carry e%uity market risk, as all e%uity positions are

completely hedged.

• Potential returns are higher than comparable investment avenues with similar

risks.

• =enefits of investing in an Arbitrage 8und

• 5ince the arbitrage fund is categori)ed as e%uity fund, there will be no ta on

&ong4Term capital gainsE

• 7ividends are also ta 4free.

• Potential returns are higher than those in comparable investment avenues with

similar risks like bank

• 8i ed4deposits or li%uid schemes.

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• +t does not carry risk e%uivalent to the e%uity market risk, as all e%uity positions

are hedged.

Conclusion

The Arbitrage 8und, in such uncertain times, can prove to be one of the good choices by

investors, other than putting the money in fi ed deposits. The 8und !ouse is claiming a

return of around 141.1?, which is much better than that of many other savings

instruments. !owever, finding an arbitrage opportunity in a bear phase is very

The Fundamental Theorem of Arbitrage Pricing

0. +ntroduction

The =lack45chools theory, which is the main sub@ect of this course and its se%uel, is

based on the #fficient Market !ypothesis that arbitrages -the term will be defined

shortly do not e ist in efficient markets. Although this is never completely true in

practice, it is a useful basis for pricing theory, and we shall limit our attention -at least for

now to efficient -that is, arbitrage4free markets. e shall see that absence of arbitrage

sometimes leads to uni%ue determination of prices of various derivative securities, and

gives clues about how these derivative securities may be hedged. +n particular, we shall

see that, in the absence of arbitrage, the market imposes a probability distribution, called

a risk4neutral or e%uilibrium measure, on the set of possible market scenarios, and that

this probability measure determines market prices via discounted e pectation. This is the

8undamental Theorem of arbitrage pricing. =efore we state the 8undamental Theorem

formally, or consider its ramifications, we shall consider several simple e amples of derivative pricing in which the #fficient Market !ypothesis allows one to directly

determine the market price.

"(am)le$ For*ard Contracts

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+n the simplest forward contract, there is a single underlying asset 5tock, whose

share price -in units of Cash at time t D B is known but at time t D 0 is sub@ect to

uncertainty.

+t is also assumed that there is a riskless asset MoneyMarket, that is, an asset whose

5hare price at t D 0 is not sub@ect to uncertaintyE the share price of MoneyMarket at t D B

is 0 and at t D 0 is regardless of the market scenario. The constant r is called the risk less

rate of return. The forward contract calls for one of the agents to pay the other an amount

8 -the forward price in Cash at time t D 0 in e change for one share of 5tock. The

forward price 8 is written into the contract at time t D B. >o money or assets change

hands at time t D B.

Proposition 0. +n an arbitrage4free market, the forward price is 8 D 5Ber.+nformally, an

arbitrage is a way to make a guaranteed profit from nothing, by short4selling certainassets at time t D B, using the proceeds to buy other assets, and then settling accounts at

time t D 0. hen an investor sells an asset short, he"she must borrow shares of the asset to

sell in return for a promise to return the shares at a pre4specified future time -and, usually,

an interest charge . +n real markets there are constraints on short4selling imposed by

brokers and market regulators to assure that the shares borrowed for short sales can be

repaid. +n the ideali)ed markets of the =lack45choles universe, such constraints do not

e ist, nor are there interest payments on borrowed shares, nor are there transaction costs

-brokerage fees . 8urthermore, it is assumed that investors may buy or sell shares -as

many as they like in any asset at the prevailing market price without affecting the share

price.

Fundamentals$ +uantitati,e and +ualitati,e

Fou could define fundamental analysis as 'researching the fundamentals(, but that

doesn*t tell you a whole lot unless you know what fundamentals are. As we mentioned inthe introduction, the big problem with defining fundamentals is that it can include

anything related to the economic well4being of a company. bvious items include things

like revenue and profit, but fundamentals also include everything from a company*s

market share to the %uality of its management.

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The various fundamental factors can be grouped into two categoriesG %uantitative

and %ualitative. The financial meaning of these terms isn*t all that different from their

regular definitions. !ere is how the M5> #ncarta dictionary defines the termsG

Huantitative I capable of being measured or e pressed in numerical terms.

Hualitative I related to or based on the %uality or character of something, often as

opposed to its si)e or %uantity.

+n our conte t, %uantitative fundamentals are numeric, measurable characteristics

about a business. +t*s easy to see how the biggest source of %uantitative data is the

financial statements. Fou can measure revenue, profit, assets and more with great

precision. Turning to %ualitative fundamentals, these are the less tangible factors

surrounding a business 4 things such as the %uality of a company*s board members and

key e ecutives, its brand4name recognition, patents or proprietary technology.

+uantitati,e -eets +ualitati,e

>either %ualitative nor %uantitative analysis is inherently better than the other.

+nstead, many analysts consider %ualitative factors in con@unction with the hard,

%uantitative factors. Take the Coca4Cola Company, for e ample. hen e amining its

stock, an analyst might look at the stock*s annual dividend payout, earnings per share,

P"# ratio and many other %uantitative factors. !owever, no analysis of Coca4Cola would

be complete without taking into account its brand recognition. Anybody can start a

company that sells sugar and water, but few companies on earth are recogni)ed by

billions of people. +t*s tough to put your finger on e actly what the Coke brand is worth,

but you can be sure that it*s an essential ingredient contributing to the company*s ongoing

success.

The Conce)t of Intrinsic 'alue

=efore we get any further, we have to address the sub@ect of intrinsic value. ne of

the primary assumptions of fundamental analysis is that the price on the stock market

does not fully reflect a stock*s 'real( value. After all, why would you be doing price

analysis if the stock market were always correct +n financial @argon, this true value is

known as the intrinsic value.

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8or e ample, let*s say that a company*s stock was trading at J6B. After doing

e tensive homework on the company, you determine that it really is worth J6;. +n other

words, you determine the intrinsic value of the firm to be J6;. This is clearly relevant

because an investor wants to buy stocks that are trading at prices significantly below their

estimated intrinsic value.

This leads us to one of the second ma@or assumptions of fundamental analysisG in

the long run, the stock market will reflect the fundamentals. There is no point in buying a

stock based on intrinsic value if the price never reflected that value. >obody knows how

long 'the long run( really is. +t could be days or years.

This is what fundamental analysis is all about. =y focusing on a particular business,

an investor can estimate the intrinsic value of a firm and thus find opportunities where he

or she can buy at a discount. +f all goes well, the investment will pay off over time as themarket catches up to the fundamentals.

The big unknowns areG

• Fou don*t know if your estimate of intrinsic value is correctE and

• Fou don*t know how long it will take for the intrinsic value to be reflected in the

marketplace.

Criticisms of Fundamental Analysis

The biggest criticisms of fundamental analysis come primarily from two groupsG

proponents of technical analysis and believers of the 'efficient market hypothesis(.

Technical analysis is the other ma@or form of security analysis. e*re not going to get

into too much detail on the sub@ect. -More information is available in our +ntroduction to

Technical Analysis tutorial.

Put simply, technical analysts base their investments -or, more precisely,

their trades solely on the price and volume movements of securities. Using charts and a

number of other tools, they trade on momentum, not caring about the fundamentals.hile it is possible to use both techni%ues in combination, one of the basic tenets of

technical analysis is that the market discounts everything. Accordingly, all news about a

company already is priced into a stock, and therefore a stock*s price movements give

more insight than the underlying fundamental factors of the business itself.

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8ollowers of the efficient market hypothesis, however, are usually in

disagreement with both fundamental and technical analysts. The efficient market

hypothesis contends that it is essentially impossible to produce market4beating returns in

the long run, through either fundamental or technical analysis. The rationale for this

argument is that, since the market efficiently prices all stocks on an ongoing basis, any

opportunities for e cess returns derived from fundamental -or technical analysis would

be almost immediately whittled away by the market*s many participants, making it

impossible for anyone to meaningfully outperform the market over the long term.

FUNDA-"NTA. ANA.!SIS G

+ualitati,e Factors / The Com)any

=efore diving into a companyKs financial statements, weKre going to take a look at some of

the %ualitative aspects of a company.

8undamental analysis seeks to determine the intrinsic value of a companyKs stock.

=ut since %ualitative factors, by definition, represent aspects of a companyKs business that

are difficult or impossible to %uantify, incorporating that kind of information into a

pricing evaluation can be %uite difficult. n the flip side, as weKve demonstrated, you

canKt ignore the less tangible characteristics of a company.

+n this section we are going to highlight some of the company4specific

%ualitative factors that you should be aware of.

%usiness -odel

#ven before an investor looks at a companyKs financial statements or does any

research, one of the most important %uestions that should be asked isG hat e actly does

the company do This is referred to as a companyKs business model I itKs how a company

makes money. Fou can get a good overview of a companyKs business model by checking

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out its website or reading the first part of its 0B4L filing ->oteG eKll get into more detail

about the 0B4L in the financial statements chapter. 8or now, @ust bear with us .

5ometimes business models are easy to understand. Take Mc7onalds, for instance,

which sells hamburgers, fries, soft drinks, salads and whatever other new special they are

promoting at the time. +tKs a simple model, easy enough for anybody to understand.

ther times, youKd be surprised how complicated it can get. =oston Chicken +nc. is

a prime e ample of this. =ack in the early K1Bs its stock was the darling of all 5treet. At

one point the companyKs C# bragged that they were the first new fast4food restaurant

to reach J0 billion in sales since 0131 . The problem is, they didnKt make money by

selling chicken. /ather, they made their money from royalty fees and high4interest loans

to franchisees. =oston Chicken was really nothing more than a big franchisor. n top of

this, management was aggressive with how it recogni)ed its revenue. As soon as it wasrevealed that all the franchisees were losing money, the house of cards collapsed and the

company went bankrupt.

At the very least, you should understand the business model of any company

you invest in. The racle of maha , arren =uffett, rarely invests in tech stocks

because most of the time he doesnKt understand them. This is not to say the technology

sector is bad, but itKs not =uffettKs area of e pertiseE he doesnKt feel comfortable investing

in this area. 5imilarly, unless you understand a companyKs business model, you donKt

know what the drivers are for future growth, and you leave yourself vulnerable to being

blindsided like shareholders of =oston Chicken were.

Com)etiti,e Ad,antage

Another business consideration for investors is competitive advantage. A companyKs long4

term success is driven largely by its ability to maintain a competitive advantage 4 and

keep it. Powerful competitive advantages, such as Coca ColaKs brand name and

MicrosoftKs domination of the personal computer operating system, create a moat around

a business allowing it to keep competitors at bay and en@oy growth and profits. hen a

company can achieve competitive advantage, its shareholders can be well rewarded for

decades.

!arvard =usiness 5chool professor Michael Porter, distinguishes between

strategic positioning and operational effectiveness. perational effectiveness means a

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company is better than rivals at similar activities while competitive advantage means a

company is performing better than rivals by doing different activities or performing

similar activities in different ways. +nvestors should know that few companies are able to

compete successfully for long if they are doing the same things as their competitors.

Professor Porter argues that, in general, sustainable competitive advantage gained byG

A uni%ue competitive position Clear tradeoffs and choices vis4N4vis competitor

Activities tailored to the companyKs strategy A high degree of fit across activities -it is the

activity system, not the parts that ensure sustainability A high degree of operational

effectiveness

-anagement

Oust as an army needs a general to lead it to victory, a company relies

upon management to steer it towards financial success. 5ome believe that management isthe most important aspect for investing in a company. +t makes sense 4 even the best

business model is doomed if the leaders of the company fail to properly e ecute the plan.

5o how does an average investor go about evaluating the management of a company

This is one of the areas in which individuals are truly at a disadvantage compared to

professional investors. Fou canKt set up a meeting with management if you want to invest

a few thousand dollars. n the other hand, if you are a fund manager interested in

investing millions of dollars, there is a good chance you can schedule a face4to4face

meeting with the upper brass of the firm.

#very public company has a corporate information section on its website. Usually

there will be a %uick biography on each e ecutive with their employment history,

educational background and any applicable achievements. 7onKt e pect to find anything

useful here. &etKs be honestG eKre looking for dirt, and no company is going to put

negative information on its corporate website.

+nstead, here are a few ways for you to get a feel for managementG

01 Conference Calls

The Chief # ecutive fficer -C# and Chief 8inancial fficer -C8 host %uarterly

conference calls. -5ometimes youKll get other e ecutives as well. The first portion of the

call is management basically reading off the financial results. hat is really interesting is

the %uestion4and4answer portion of the call. This is when the line is open for analysts to

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call in and ask management direct %uestions. Answers here can be revealing about the

company, but more importantly, listen for candor. 7o they avoid %uestions, like

politicians, or do they provide forthright answers

21 -anagement Discussion and Analysis 3-D4A5

The Management 7iscussion and Analysis is found at the beginning of the annual report

-discussed in more detail later in this tutorial . +n theory, the M7 A is supposed to be

frank commentary on the managementKs outlook. 5ometimes the content is worthwhile,

other times its boilerplate. ne tip is to compare what management said in past years with

what they are saying now. +s it the same material rehashed !ave strategies actually been

implemented +f possible, sit down and read the last five years of M7 AsE it can be

illuminating.

61 O*nershi) and Insider Sales

Oust about any large company will compensate e ecutives with a combination of cash,

restricted stock and options. hile there are problems with stock options -5ee Putting

Management under the Microscope , it is a positive sign that members of management

are also shareholders. The ideal situation is when the founder of the company is still in

charge. # amples include =ill $ates -in the K


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report, The 8ive Things That Move the Currency Market I And !ow to Profit 8rom

Them, right nowQ

Cor)orate 8o,ernance

Corporate governance describes the policies in place within an organi)ation denoting the

relationships and responsibilities between management, directors and stakeholders. These

policies are defined and determined in the company charter and its bylaws, along with

corporate laws and regulations. The purpose of corporate governance policies is to ensure

that proper checks and balances are in place, making it more difficult for anyone to

conduct unethical and illegal activities.

$ood corporate governance is a situation in which a company complies with all of its

governance policies and applicable government regulations -such as the 5arbanes4 ley

Act of 6BB6 in order to look out for the interests of the companyKs investors and other stakeholders. Although, there are companies and organi)ations -such as 5tandard

PoorKs that attempt to %uantitatively assess companies on how well their corporate

governance policies serve stakeholders, most of these reports are %uite e pensive for the

average investor to purchase.

8ortunately, corporate governance policies typically cover a few general areasG

structure of the board of directors, stakeholder rights and financial and information

transparency. ith a little research and the right %uestions in mind, investors can get a

good idea about a companyKs corporate governance

Technical Analysis

Definition

A method of evaluating securities by relying on the assumption that market data, such as

charts of price, volume, and open interest, can help predict future -usually short4term

market trends. Unlike fundamental analysis, the intrinsic value of the security is not

considered. Technical analysts believe that they can accurately predict the future price of

a stock by looking at its historical prices and other trading variables. Technical analysis

assumes that market psychology influences trading in a way that enables predicting when

a stock will rise or fall. 8or that reason, many technical analysts are also market timers,

who believe that technical analysis can be applied @ust as easily to the market as a whole

as to an individual stock.

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9hat Is Technical Analysis:

Technical analysis is a method of evaluating securities by analy)ing the statistics

generated by market activity, such as past prices and volume. Technical analysts do not

attempt to measure a securityKs intrinsic value, but instead use charts and other tools to

identify patterns that can suggest future activity. Oust as there are many investment styles

on the fundamental side, there are also many different types of technical traders. 5ome

rely on chart patterns, others use technical indicators and oscillators, and most use some

combination of the two. +n any case, technical analystsK e clusive use of historical price

and volume data is what separates them from their fundamental counterparts. Unlike

fundamental analysts, technical analysts donKt care whether a stock is undervalued 4 the

only thing that matters is a securityKs past trading data and what information this data can

provide about where the security might move in the future.

INDUSTR! AND CO-PAN! PROFI."

%ombay Stoc "(change 3%S"5=ombay 5tock # change &imited is the oldest stock e change in Asia with a

rich heritage. Popularly known as =5# , it was established as The >ative

5hare 5tock =rokers Association in 05# , is tracked worldwide. #arlier an

Association of Persons -A P , the # change is now a demutualised andcorporative entity incorporated under the provisions of the Companies Act,

01;3,

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=5# -Corporati)ation and 7emutuali)ation 5cheme, 6BB; notified by the

5ecurities and # change =oard of +ndia -5#=+ . ith demutuali)ation, the

trading rights and ownership rights have been de4linked effectively addressing

concerns regarding perceived and real conflicts of interest. The # change is

professionally managed under the overall direction of the =oard of 7irectors.

The =oard comprises eminent professionals, representatives of Trading

Members and the Managing 7irector of the # change. The =oard is inclusive

and is designed to benefit from the participation of market intermediaries.

+n terms of organi)ation structure, the =oard formulates larger policy

issues and e ercises over4all control. The committees constituted by the =oard

are broad4based. The day4to4day operations of the # change are managed by

the Managing 7irector and a management team of professionals.

#istory of the %ombay Stoc "(change $

The =ombay 5tock # change is known as the oldest e change

in Asia. +t traces its history to the 0


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5ense futures contracts. The development of 5ense options along with

e%uity derivatives followed in 6BB0 and 6BB6, e panding the =5#Ks

trading platform. !istorically an open4cry floor trading e change, the

=ombay 5tock # change switched to an electronic trading system in

011;. +t took the e change only fifty days to make this transition.

NATIONA. STOC; "ational 5tock # change of +ndia &imited has genesis in the report of the !igh

Powered 5tudy $roup on #stablishment of >ew 5tock # changes, which recommended

promotion of a >ational 5tock # change by financial institutions -8+s to provide access

to investors from all across the country on an e%ual footing. =ased on the

recommendations, >5# was promoted by leading 8inancial +nstitutions at the behest of

the $overnment of +ndia and was incorporated in >ovember 0116 as a ta 4paying

company unlike other stock e changes in the country.

n its recognition as a stock e change under the 5ecurities Contracts -/egulation Act,

01;3 in April 0119, >5# commenced operations in the holesale 7ebt Market - 7M

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segment in Oune 011:. The Capital Market -#%uities segment commenced operations in

>ovember 011: and operations in 7erivatives segment commenced in Oune 6BBB.

The >ational 5tock # change of +ndia &td. is the largest stock e change of the

country. >5# is setting the agenda for change in the securities markets in +ndia. The last ;

years have seen us play a ma@or role in bringing investors from 939 cities and towns

online, ensuring complete transparency, introducing financial guarantee of settlements,

ensuring scientifically designed and professionally managed indices and by nurturing

the demateriali)ation effort across the country.

Our Technology

Across the globe, developments in information, communication and network

technologies have created paradigm shifts in the securities market operations. Technology

has enabled organi)ations to build new sources of competitive advantage, bring about

innovations in products and services, and to provide for new business opportunities.

5tock e changes all over the world have reali)ed the potential of +T and have moved over

to electronic trading systems, which are cheaper, have wider reach and provide a better

mechanism for trade and post trade e ecution.

>5# believes that technology will continue to provide the necessary impetus for

the organi)ation to retain its competitive edge and ensure timeliness and satisfaction in

customer service. +n recognition of the fact that technology will continue to redefine the

shape of the securities industry, >5# stresses on innovation and sustained investment in

technology to remain ahead of competition. >5#Ks +T set4up is the largest by anycompany in +ndia. +t uses satellite communication technology to energies participation

from around 96B cities spread all over the country. +n the recent past, capacity

enhancement measures were taken up in regard to the trading systems so as to effectively

meet the re%uirements of increased users and associated trading loads. ith up gradation

of trading hardware, >5# can handle up to 3 million trades per day in Capital Market

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segment. +n order to capitali)e on in4house e pertise in technology, >5# set up a separate

company, >5#.+T, in ctober 0111. This is e pected to provide a platform for taking up

new +T assignments both within and outside +ndia

>5#.+T is a state4of4the4art client server based application. At the server end, all

trading information is stored in an in4memory database to achieve minimum response

time and ma imum system availability for users. The trading server software runs on a

fault tolerant 5T/ATU5 main frame computer while the client software.

The telecommunications network uses .6; protocol and is the backbone of the

automated trading system. #ach trading member trades on the >5# with other members

through a PC located in the trading memberKs office, anywhere in +ndia. The trading

members on the various market segments such as CM " 8 , 7M are linked to the

central computer at the >5# through dedicated 3:Lbps leased lines and V5AT terminals.The # change uses powerful /+5C 4based U>+ servers, procured from 7igital and !P

for the back office processing. The latest software platforms like /AC 2 /7=M5,

$UPTA 4 5H&" /AC 8 /M5 :.; 8ront 4 #nds, etc. have been used for the # change

applications. The # change currently manages its data centre operations, system and

database administration, design and development of in4house systems and design and

implementation of telecommunicatiosolutions.

>5# is one of the largest interactive V5AT based stock e changes in the world.

Today it supports more than 9BBB V5ATs. The >5#4 network is the largest private wide

area network in the country and the first e tended C4 =and V5AT network in the world.

Currently more than 1BBB users are trading on the real time4online >5# application.

There are over 0; large computer systems which include non4stop fault4tolerant

computers and high end U>+ servers, operational under one roof to support the >5#

applications. This coupled with the nation wide V5AT network makes >5# the countryKs

largest +nformation Technology user.

+n an ongoing effort to improve >5#Ks infrastructure, a corporate network has been

implemented, connecting all the offices at Mumbai, 7elhi, Calcutta and Chennai. This

corporate network enables speedy inter4office communications

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Careers *ith Us

The >ational 5tock # change of +ndia &td. is the largest stock e change of the

country. >5# is setting the agenda for change in the securities markets in +ndia. The last ;

years have seen us play a ma@or role in bringing investors from 939 cities and towns

online, ensuring complete transparency, introducing financial guarantee of settlements,

ensuring scientifically designed and professionally managed indices and by nurturing the

demateriali)ation effort across the country.

>5# is a complete capital market prime mover. +ts wholly4owned subsidiaries,

>ational 5ecurities Clearing Corporation &td. ->5CC& provides clearing and settlement

of securities, +ndia +nde 5ervices and Products &td. -++5& provides indices and inde

services with a consulting and licensing agreement with 5tandard PoorKs -5 P , and

>5#.+T &td. forms the technology strength.

Today, we are one of the largest e changes in the world and still forging ahead. At

>5#, we are constantly working towards creating a more transparent, vibrant

innovative capital market. This invariably implies that our need for competent people is

continuous. As the leading stock e change and fiscal entity in the country, we believe in

recruiting the finest of talent in the industry.

e are looking for talent to be developed into future leaders of our organi)ation by cross4departmental e posure, continuous self4development opportunities and ongoing

reinforcement to develop enhance customer orientation leadership potential.

Awaiting you is an e cellent compensation package including medical benefits, super4

annotation benefits and a reward system designed to promote merit and professionalism.

Trading

>5# introduced for the first time in +ndia, fully automated screen based trading. +t uses

a modern, fully computeri)ed trading system designed to offer investors across the length

and breadth of the country a safe and easy way to invest.

The >5# trading system called K>ational # change for Automated TradingK

->#AT is a fully automated screen based trading system, which adopts the principle of

an order driven market.

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ICICI

O,er,ie*

+C+C+ =ank is +ndiaKs second4largest bank with total assets of /s. 9,::3.;< billion -U5J

21 billion at March 90, 6B09 and profit after ta of /s. 90.0B billion for fiscal 6B09.

+C+C+ =ank is the most valuable bank in +ndia in terms of market capitali)ation and is

ranked third amongst all the companies listed on the +ndian stock e changes in terms of

free float market capitali)ationW. The =ank has a network of about 1;B branches and9,9BB ATMs in +ndia and presence in 02 countries. +C+C+ =ank offers a wide range of

banking products and financial services to corporate and retail customers through a

variety of delivery channels and through its speciali)ed subsidiaries and affiliates in the

areas of investment banking, life and non4life insurance, venture capital and asset

management. The =ank currently has subsidiaries in the United Lingdom, /ussia and

Canada, branches in 5ingapore, =ahrain, !ong Long, 5ri &anka and 7ubai +nternational

8inance Centre and representative offices in the United 5tates, United Arab #mirates,

China, 5outh Africa, =angladesh, Thailand, Malaysia and +ndonesia. ur UL subsidiary

has established a branch in =elgium.

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+C+C+ =ankKs e%uity shares are listed in +ndia on =ombay 5tock # change and the

>ational 5tock # change of +ndia &imited and its American 7epositary /eceipts -A7/s

are listed on the >ew Fork 5tock # change ->F5# .

%OARD -"-%"RS

• Mr. >. Vaghul, Chairman

• Mr. 5ridhar +yengar

• Mr. &akshmi >. Mittal

• Mr. >arendra Murkumbi

#DFC %AN;

!78C =ank was incorporated in August 011: in the name of K!78C =ank &imitedK, with

its registered office in Mumbai, +ndia. The =ank commenced operations as a 5cheduled

Commercial =ank in Oanuary 011;.

The !ousing 7evelopment 8inance Corporation &imited -!78C was amongst the

first to receive an Kin principleK approval from the /eserve =ank of +ndia -/=+ to set up a

bank in the private sector, as part of the /=+Ks liberali)ation of the +ndian =anking in

011: !78C =ank has a network of over ;90 branches spread over 66< cities across

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+ndia. All branches are linked on an online real4time basis. Customers in over 06B

locations are serviced through

Tata Consultancy Ser,ices

Com)any Profile$Tata Consultancy Ser,ices 3TCS5 is one of the leading information technologycompanies in the world. ith a workforce of over 2:,BBB professionals spread across

more than ;B global delivery centers, it helps organi)ations stay ahead with new

technology. +ts clients include seven of the top ten corporations in the 8ortune ;BB list of

the largest corporations in the United 5tates.

TC5 products and services help companies in various sectors effectively meet their

business challenges. ith technical e pertise and employing a fle ible approach to client

:0


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/anba y &aboratories &imited, head%uartered in +ndia, is an integrated, research

based, international pharmaceutical company, producing a wide range of %uality,

affordable generic medicines, trusted by healthcare professionals and patients across

geographies. The Company is ranked amongst the top ten global generic companies and

has a presence in 69 of the top 6; pharma markets of the world. The Company with a

global footprint in :1 countries, world4class manufacturing facilities in 00 and a diverse

product portfolio, is rapidly moving towards global leadership, riding on its success in the

world*s emerging and developed markets.

FINANCIA.

/anba y was incorporated in 0130 and went public in 0129. 8or the year 6BB3, theCompanyKs $lobal 5ales at U5 J0991 Mn reflected a growth of 02?. The #=+7TA at

U5J600 reflected an e pansion of 03?. Profit after Ta at U5J 00: Mn registered an

increase of 1;? over the previous year.

%#ARTI AIRT".

=harti Airtel is one of +ndiaKs leading private sector providers of telecommunications

services based on an aggregate of ;1,362,192 customers as on Oanuary 90, 6BBational

5tock # change of +ndia &imited ->5# .

PARTN"RS

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The company has a strategic alliance with 5ingTel. The investment made by 5ingTel is

one of the largest investments made in the world outside 5ingapore, in the company.

The company*s mobile network e%uipment partners include #ricsson and >okia. +n the

case of the broadband and telephone services and enterprise services -carriers ,

e%uipment suppliers include 5iemens, >ortel, Corning, among others. The Company also

has an information technology alliance with +=M for its group4wide information

technology re%uirements and with >ortel for call center technology re%uirements. The

call center operations for the mobile services have been outsourced to +=M 7aksh,

!indu@a TMT, and Teletech Mphasis.

NTPC >TPC &imited is the largest thermal power generating company of +ndia. A public

sector company, it was incorporated in the year 012; to accelerate power development in

the country as a wholly owned company of the $overnment of +ndia. At present,

$overnment of +ndia holds TPC has emerged as a truly national power company, with power generating

facilities in all the ma@or regions of the country. >TPC*s core business is engineering, construction and operation of power

generating plants. +t also provides consultancy in the area of power plant constructions

and power generation to companies in +ndia and abroad. As on date the installed capacity

of >TPC is 62,1B: M through its 0; coal based -66,TPC ac%uired ;B? e%uity of the 5A+& Power

5upply Corporation &td. -5P5C& . This OV company operates the captive power plants of

7urgapur -06B M , /ourkela -06B M and =hilai -2: M . >TPC also has 6TPC, $A+&, +ndian 8inancial +nstitutions and Maharashtra 5#= !olding Co.

&td. The present capacity of /$PP& is 2:B M .

>TPC*s share on 90 Mar 6B09 in the total installed capacity of the country was 6B.0


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>TPC has set new benchmarks for the power industry both in the area of power plant

construction and operations. +t is providing power at the cheapest average tariff in the

country. ith its e perience and e pertise in the power sector, >TPC is e tending

consultancy services to various organi)ations in the power business.

>TPC is committed to the environment, generating power at minimal environmental

cost and preserving the ecology in the vicinity of the plants. >TPC has undertaken

massive afforestation in the vicinity of its plants. Plantations have increased forest area

and reduced barren land. The massive afforestation by >TPC in and around its

/amagundam Power station -63BB M has contributed reducing the temperature in the

areas by about 9Zc. >TPC has also taken proactive steps for ash utili)ation. +n 0110, it set

up Ash Utili)ation 7ivision to manage efficient use of the ash produced at its coal

stations. This %uality of ash produced is ideal for use in cement, concrete, cellular concrete, building material.

A Centre for Power #fficiency and #nvironment Protection -C#>P##P has been

established in >TPC with the assistance of United 5tates Agency for +nternational

7evelopment. -U5A+7 . Cenpeep is efficiency oriented, eco4friendly and eco4nurturing

initiative 4 a symbol of >TPCKs concern towards environmental protection and continued

commitment to sustainable power development in +ndia.

As a responsible corporate citi)en, >TPC is making constant efforts to improve the

socio4economic status of the people affected by the pro@ects. Through its /ehabilitation

and /esettlement programmers, the company endeavors to improve the overall socio4

economic status of Pro@ect Affected Persons.

>TPC was among the first Public 5ector #nterprises to enter into a Memorandum

of Understanding -M U with the $overnment in 01irvanas*4 a potential

global giant. +nspired by its glorious past and vibrant present, >TPC is well on its way to

reali)e its vision of being 'A world class integrated power ma@or, powering +ndia*s

growth, with increasing global presence(

.

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INSTA.."D CAPACIT!

A> V#/V+#

NTPC O9N"D

C A& 0; 66,


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Today, Larvy has access to millions of +ndian shareholders, besides companies,

banks, financial institutions and regulatory agencies. ver the past one and half decades,

Larvy has evolved as a veritable link between +ndustry, finance and people. +n Oanuary

011


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Corporate Advisory 8inancing Pro@ect 8inancing

/etail 8inancial Products

Larvy 7epositor 5ervices

#lectronic Custodial 5ervices7epository Participant

+nvestor 5ervices

Larvy 4 The TC#+ 7ealer

Medical Transcription

8inancial Products Marketed Through LarvyG

• +nitial Public fferings

• 8i ed +ncome Products8i ed 7eposits

7ebt +nstruments

=onds

Mutual 8unds

• Ta 5aving 5chemes

• Personal =anking Products

• Personal &oans insurance

8ROUP CO-PANI"S 4 DI'ISIONS$

;AR'! CONSU.TANTS .I-IT"D$ 7eals in /egistrar and +nvestment

5ervices

;AR'! S"CURITI"S .I-IT"D$ 7eals in distribution of various investment

products, vi)., e%uities, mutual funds, bonds and debentures, 8i ed deposits, insurance

policies for the investor

;AR'! IN'"STOR S"R'IC"S .I-IT"D$ 7eals in +ssue management,

+nvestment =anking and Merchant =anking,

;AR'! STOC; %RO;IN8 .I-IT"D$ 7eals in buying and selling e%uity

shares and debentures on the >ational 5tock # change ->5# , the !yderabad 5tock

# change -!5# and the ver4The4Counter # change of +ndia - TC#+ ,

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A..IANC"S$

Larvy has a strategic alliance with Oardine 8leming +ndia 5ecurities &imited

-O8+5& I one of Asia*s most prestigious investment bankers I to leverage on the latter*s

investment banking e pertise. This would augment the retail distribution reach and

provide the +ndian access to the best global and local insights on financial markets.

Oardine is a respected investment banker with a demonstrated track4record of delivering

value to its clients spread over :9 countries. +t is ranked amongst the world*s T P 9

8oreign +nstitutional +nvestors -8++s .

+UA.IT! PO.IC!$

To achieve and retain leadership, Larvy shall aim for complete customer

satisfaction, by combining its human and technological resources, to provide superior

%uality financial services. +n the process, Larvy will strive to e ceed Customer*s

e pectations.

+UA.IT! O%&"CTI'"S G

As per the Huality Policy, Larvy willG

=uild in4house processes that will ensure transparent and harmonious relationships

with its clients and investors to provide high %uality of services.

#stablish a partner relationship with its investor service agents and vendors that will

help in keeping up its commitments to the customers.

Provide high %uality of work life for all its employees and e%uip them with ade%uate

knowledge skills so as to respond to customer*s needs.

Continue to uphold the values of honesty integrity and strive to establish

unparalleled standards in the business ethics.

;B


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Use state4of4the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and clients.

5trive to be a reliable source of value4added financial products and services and

constantly guide the individuals and institutions in making a @udicious choice of same.

5trive to keep all stake4holders -shareholders, clients, investors, employees, suppliers

and regulatory authorities proud and satisfied.

;AR'!?;"! P"OP."$

%oard of Directors ? ;ar,y Consultants .imited

C. Parthasarathy 4 Chairman And Managing 7irector

M. Fugandhar 4 Managing 7irector M.5. /amakrishna 4 7irector

Prasad V Potluri 4 7irector

7r. P.V.5. Oaganmohan /ao I Company 5ecretary

Price ater !ouse, !yderabad I Auditors

%an ers$ UC =ank, =ank f =aroda, !78C =ank, 5tandard Chartered $rindlays

=ank.

Registered Office$ 'Larvy !ouse(, :3, Avenue :, 5treet >o.0, =an@ara !ills, !yderabad,

Andhra Pradesh, +ndia.

;AR'! -UTUA. FUND S"R'IC"S 3-FS DI'ISION5

* building a heritage of confidence –

There is a wide range of mutual fund services available at ;AR'! -UTUA.

FUND S"R'IC"S to the various categories like Asset Management Companies,

+nvestors, 7istributors and $eneral Users. e can use mutual fund services through web

also, the web site is karvymfs.com, with a click of the mouse we can enter into the karvymutual fund services, this provides +nteractive 8und 5ervice to %uery for account related

details and register specific services re%uests.

5ince its inception in 01


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and individuals. Larvy has since been performing a pivotal role as the intermediary I the

interface I between these players.

ith Mutual 8unds emerging as a distinct asset class, Larvy has made a strategic

choice to leverage the power of latest technology to provide a cutting edge to its services.

This, today, service nearly :B? of the asset management companies -AMCs across an

e tensive network of service centers with assets under service in e cess of /s.0B,BBB

crores.

Larvy*s ability to mass customi)e and offer a diverse range of products for

diverse range of customers has helped mutual fund companies to uni%uely position

themselves in the market place. These diverse range of services cut across multiple

delivery channels I service centers, web, mobile phones, call center I has brought hone

the benefits of technology to investors, distributors, and the mutual funds.

$oing forward, it shall strive to create new products and services, which would

address the needs of the end customer. +ts single4minded focus in delivering products for

customers has given the distinguished position of being the preferred provider of

financial services in the country. These services can be broadly categori)ed as belowG

♦ +nvestor 5ervices

♦ 7istributor 5ervices

♦ AMC 5ervices

♦ $eneral 5ervices or +nformation 5ervices

a5 IN'"STOR S"R'IC"S$

/ ;ee)ing ahead *ith the changing in,estor e()ectations -

+nvestor is a person who invests in the mutual funds in the mutual funds concept.

!e placed in the bottom of the structure, but he plays a pivotal role, without investor we

cannot imagine the mutual funds. There is a wide range of investor services provided by

karvy mutual fund services to the investors and also Mutual 8und +nvestors have the

convenience of logging on to the web site and utili)e various account related services. To

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utili)e these web services the investor has to first register himself with the karvymfs.com

in the investor services with the web site, the karvymfs.com gives authori)ed +7 and

Password to the registered user, with a click of the mouse he can gets the services,

without authori)ed +7 and Password he cannot get the services. The ma@or online services

for investors can be categori)ed as belowG

View their account statements online

$et a snapshot of all their investment serviced by LarvyG

Portfolio Valuation 5ervices

>AV =roadcast 5ervices

>AV Alert 5ervices

/eceive Account statements by emailApart from the afore4mentioned services, any visitor from the web site has the

option to know Mutual 8und Concepts, check out the latest >AVs of his"her favorite

Mutual 8unds, etc., obtain dividend information, get the latest load structure information

etc.

b5 DISTRI%UTOR S"R'IC"S$

/ Re/defining ser,ice -

Larvy recogni)es the distributor, as on invaluable customer, in the Mutual 8und

transaction chain. Leeping this in mind, Larvy has engineered several initiatives for the

distributors and for the benefit of his clients.

A-C S"R'IC"S $

- !our )artners in )rogress /

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There is wide range of AMC 5ervices provided by Larvy Mutual 8und 5ervices to

the registered Asset Management Company*s -AMCs .The AMC can now viewing

investor information and re%uesting various reports related to the investor, is possible

through the web site also, @ust by the click of the mouse. +n order to use the respective

AMC services on the site, Mutual 8und AMCs must enter into agreement with Larvy

Consultants &imited, whereby users are assigned a User +7 and Password at the fund

level. AMC may use this +7 and Password to access all the site services. +t provides

registered AMCs can check out various >&+># and MA+&4=ACL services and gets an

update on the investments of its investors.

Online Ser,ices$

0. +nvestor Account 5tatements

6. Huery on application number

9. Huery on investors* name

-ail/%ac Ser,ices$

0. Transaction /eports

6. >et Assets Under Management /eport

9. Asset Movement /eport

:. 5lab /eport

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