HDFCB-IDBI Pair Strategy Report

8/22/2019 HDFCB-IDBI Pair Strategy Report

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Manish Kumar

+91-22-43003922

[email protected]

[email protected]

Strategy (Sell HDFCB IN and Sell Buy IDBI IN)

We recommend a SELL on HDFCB IN and BUY on IDBI IN at the price ratio range of 17.800 to

18.000 at neutral exposure levels. The first target price ratio will be 17.1, which will give a return

of 2.4% on gross total exposure. Second price target ratio will be 16.300, which will give a return

of 5% on gross exposure. We recommend maintaining a stop loss of 18.200 for the cash price

ratio. One should initiate a value neutral strategy by selling minimum 10 lot of HDFCB IN

and buying 11 lot of IDBI IN or in the multiples of that.

Strategy Rationale

As seen in the below charts the price ratio of HDFCB IN- IDBI IN (HDFCB IN / IDBI IN) has

touched the moving upper 3-sigma level of 1.550 (Chart 1). It is currently trading at a ratio of

17.890 and is likely to top out. Historically also this price ratio has declined after hitting upper 3-

sigma level (Chart 1). The one month price correlation of these stocks is at 0.03, while the one

year price correlation is at 70, which is likely to retract. The two year Price correlation of the pair

is 80. Historically, whenever one month price correlation catapults to current levels, the ratio drifts

back.

Chart I: Moving Price Ratio (HDFCB IN / IDBI IN)

Risk Reward

At the first target level the rewards to risk ratio will be 3, and for second target level the rewards

to risk ratio will be 6.3

1

Crnt Ratio 17.915 1 Month 17.115 1 Month 3% 1 Month 79%Expd Ratio 16.300 3 Month 16.358 3 Month 64% 3 Month 71%

% Return 5.0% 1 Year 15.631 1 Year 70% 1 Year 64%

Price Ratio Mean Ratio Price Correlation Return Correlation

9.0

11.0

13.0

15.0

17.0

19.0

21.0

01-Ju

n-11

27-Apr-11

18-Mar-11

10-Fe

b-11

05-Ja

n-11

30-Nov-10

25-Oct-10

20-Se

p-10

13-Au

g-10

09-Jul-10

04-Ju

n-10

30-Apr-10

23-Mar-10

15-Fe

b-10

08-Ja

n-10

01-De

c-09

26-Oct-09

15-Se

p-09

11-Au

g-09

07-Jul-09

P r Ratio 3M MVG M U B S1 L B S1 U B S2 L B S2 U B S3 L B S3

Pair Strategy Report___________________

1st June 2011Fortune

Out/under

Perf.

05 Day 5.9% 0%

10 Day 5.4% 4%

1 Month 7.2% 9%

3 Month 12.1% 15%

1 Year 29.4% 9%

Relative out/under performance is calculated

HDFCB IS v/s IDBI IS

2397.00

6 Month Beta* 1.12Market Cap 111681

Avg. 3M Cash Vol

HDFCB IS (HDFC BANK LTD)

Bloomberg Code HDFCB IS

Price

847996

6 Month Beta* 1.26

Avg. 3M Futures Vol 1107666

52 Week High/Low 1808.35

IDBI IS (IDBI BANK LTD)

Bloomberg Code IDBI IS

Price 133.80

Market Cap 13174

Avg. 3M Cash Vol 2636923

52 Week High/Low 202.25 / 109.05

MktCap in INR crore & * beta relative to Nifty

Volume In No. of shares traded in NSE

RETURN MATRIX(%)

Period

-1.9%

-2.4%

20.6%

Avg. 3M Futures Vol 8889246

HDFCB IS IDBI IS

5.8%

1.6%


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In Bollinger chart we can see that the pair ratio is trading near upper 3 sigma level, from where it retraced in the past too. Minimum margin

required for initiating this trade of 10 lot of HDFCB IN and 11 lot of IDBIIN is ~INR 907K.

Chart II: Historical Ratio

Chart III: Bollinger Upper and Lower levels

Pair Disclaimer

1. This Pair Strategy is based on Mean reversal basis.

2. While undertaking the pair strategy it should be on cash neutral basis.

3. All calculation are based on pure Statistical analysis on historical data and no fundamental aspect has been taken into account.

M V G M Moving Mean of Price ratio

H M V G M Historical Moving Mean of Price ratio

U B S 1 Upper band Sigma Level 1

L B S 1 Lower band Sigma Level 1





Glossary

9.0

11.0

13.0

15.0

17.0

19.0

21.0

01-Jun-11

27-Apr-11

18-Mar-11

10-Feb-11

05-Jan-11

30-Nov-10

25-Oct-10

20-Sep-10

13-Aug-10

09-Jul-10

04-Jun-10

30-Apr-10

23-Mar-10

15-Feb-10

08-Jan-10

01-Dec-09

26-Oct-09

15-Sep-09

11-Aug-09

07-Jul-09

U B S1 L B S1 U B S2 L B S2 U B S3 L B S3 Pr Ratio H MVG M

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

01-Jun-11

27-Apr-11

18-Mar-11

10-Feb-11

05-Jan-11

30-Nov-10

25-Oct-10

20-Sep-10

13-Aug-10

09-Jul-10

04-Jun-10

30-Apr-10

23-Mar-10

15-Feb-10

08-Jan-10

01-Dec-09

26-Oct-09

15-Sep-09

11-Aug-09

07-Jul-09

Boll UB Boll LB P r Ratio Boll Mean

2

Pair Strategy Report___________________

1st June 2011Fortune

Boll Upper Band 18.8966

Boll Mean Pr Ratio 16.7874

Boll Lower Band 14.6782

3M Moving Upper Band 18.3017

3M Moving Lower Band 14.4643

Bollinger & Moving Sigma Band


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HDFCB-IDBI Pair Strategy Report

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