Grp 2 Financial Market Institutions Rev

8/8/2019 Grp 2 Financial Market Institutions Rev

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Financial Market &Financial Market &InstitutionsInstitutions

A PresentationBy

Group 2

Abhijeet Mohan (09BM8001)

Mohamed Abdullah (09Bm8080)

Ravi Shankar (09BM8088)

Shashi Kant (09BM8095)

Shuddha Satwa Haldar (06NA3816)


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Topics to be Discussed.Topics to be Discussed.

1. Stock Index Creation & Reporting

2. Index P / E Ratio, its Calculation & Relevance

3. BSE IPO, Dollex and India VIX. Why use them?

4. Correlation between major stock indices of the word

and interpretation of these relations.


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What is Index?

y It is portfolio of securities that represent particular marketor a portion of a market.

y It acts as reference point against which calculation is donefor making future adjustments.

y Since it reports value market as whole, Value of indexincreases when aggregate value of underlying securitiesincreases and decreases when aggregate value ofsecurities deceases.

P/E Ratio, Its Calculation & RelevanceP/E Ratio, Its Calculation & Relevance


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Stock Index Creation & ReportingStock Index Creation & Reporting

How Stock Index is created?

1. Price Weighted Method:

y Sum of weighted prices of the stocks that are componentsof the index.

y Does not take into consideration the market capitalization.

y Does not reflect the underlying equity market values.

Price Weighted Method: Sum of Weighted Share Price

Examples:

y Dow Jones Industrial Average.

y Amex Major Market Index.

y NYSE ARCA Tech 100 Index.

BY: RAVI SHANKAR


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2. Free Float Capitalization Method:

y Free Float Market Capitalization Method calculates theweights proportional to floating equity value of thecompanies.

y Free Float method excludes the locked in shares from thetotal equity value while calculating the weights.

Capitalization Method: Average of {Share Price x (#SharesOutstanding)}

FF Capitalization Method: Average of {Share Price x(#Shares Outstanding-Locked In Shares)}

Examples: S&P 500

Stock Index Creation & ReportingStock Index Creation & Reporting


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How to calculate Index P/E Ratio:

y Calculate each stocks market capitalization in that indexand add them.

Market capitalization=no. of shares *price

y Calculate the net earning of each stock and add them.Net earning= no. of shares*earning per shares

y Index P/E =



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y Example:Calculate PE ratio of sensex when it is 16000.

1-Consider SENSEX stocks worth Rs 16000.2-In this basket of Rs 16000, put each stock according toits weightage in the SENSEX.

3-company XYZ has weightage of 10%...then in this basketof RS 16000,

10% of XYZ = Rs 1600 of XYZ.

4-Then calculate earnings of Rs 1600 of XYZ.

5-Similarly calculate earnings of all 30 SENSEXcomponents and add them up to get earnings of SENSEX.

6-Find ratio.



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Relevance:y Higher earnings growth leads to the stock being traded at a

high P/E.y P/E = NA means company is making losses.y Low P/E means

Companys Stock is undervalued. Companys earnings are thought to be in decline. Current earnings may be substantially above historic trends. Company may have profited from selling assets.

y Medium P/E ratio may be considered fair value.y High P/E means

Stock is overvalued. Companys earnings have increased since the last earnings figure

was published. The stock may also be a growth stock with earnings expected to

increase substantially in future.


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BSE IPO

y Tracks the value of companies for two years after listingsubsequent to successful completion of IPO.

y According to guidelines by BSE, a company seeking listingafter completion of IPO shall be considered eligible for

inclusion in the index, but not the follow-on public issues.

y Required min. free float capitalization of Rs. 100 croreson first day of listing. Inclusion in index on third day of listing,

Exclusion on 2nd Monday of month after completion of two years.

BSE IPO, DOLLEX & INDIA VIXBSE IPO, DOLLEX & INDIA VIX


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y In case, there are less than 10 companies on account of

possible exclusion after two years, the exclusion of suchcompany shall be delayed till a new inclusion is made inthe index.

y The maximum weight of any scrip max. 20 per cent and

the constituent weight-age shall be reviewed at the time ofinclusion/ or exclusion and on monthly rebalancing.



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DOLLEX

y Dollar version of BSE Sensex, benchmark index of equitymarkets in India.

Base year 197879, Base value 100 points.

y Dollex 30 emerged from the background of: a) equity

markets getting integrated with global markets and b)need to assess market movements in terms of internationalbenchmark.

y Sensex reflects market growth in Rupee terms while Dollex30 reflects the change in share price as well as currency

value. Useful for foreign investors measure returns in real terms.



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INDIA VIX

y Volatility index (VIX) based on Nifty 50 Index option prices.Represents the risk associated with equity market.

y When market is moving steadily upside, the value of volatilityIndex have been found to be low. Vice versa is also true.

y India VIX indicates the investors perception of the marketsvolatility in the near term.

y The index depicts the expected market volatility over the next 30calendar days



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y The correlation between any two variables (or sets of variables)

summarizes a relationship, whether or not there is any real-worldconnection between the two variables.

y The correlation coefficient will always be between -1 and +1. Anegative coefficient means that the two variables, or sets ofvariables, will move in opposite directions (if one variable

increases, the other will decrease); a positive coefficient willmean that the two will move in the same direction (as oneincreases, the other will increase).

CorrelationCorrelation b/wb/w MajorMajor worldworld IndicesIndices &&InterpretationInterpretation ofof thesethese relationsrelations


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y If we compare the Dow Jones Industrial Average (DJIA) and thevalue of Nasdaq, S&P 500 over a 20-year period, the averagecorrelation coefficient calculated for the DJIA versus the Nasdaqand S&P 500 is always greater than 0.7, meaning a highcorrelation between these indices. (As the value ofthe DJIA increases the value of other indices also increase, with

almost the same trend).y There is a strong correlation between BSE and NSE(10 year

average)

CorrelationCorrelation b/wb/w MajorMajor worldworld IndicesIndices &&InterpretationInterpretation ofof thesethese relationsrelations


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CorrelationCorrelation b/wb/w MajorMajor worldworld IndicesIndices


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THANK YOU

THANK YOU

Grp 2 Financial Market Institutions Rev

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