Trading Times Preliminary Round - 1 1 S RCC Business Conclave 2016
Instructions: o This document consists of one case study divided into four distinct sections, each comprising of a question. o The questions are to be solved using general principles of Stocks, Mutual Funds, Forex and Derivative trading. o The questions provide sufficient information for devising a solution. However, if any assumption is made while solving the questions, the same needs to be explicitly stated with the solution. o Teams must submit their solution by 6:00 PM on 14th January 2016 by mailing it to the following email ID: tradingtimes.bc16@gmail.com o Kindly note that each team must generate a Team Code consisting of 4-6 letters, a character, and two numbers, in the stated order. The solution should be in the Portable Document Format (PDF). The solution document and subject of the mail should be named as TradingTimes_TeamCode. (For example: TradingTimes_trade!16) o The body of the mail should contain the name and contact details of all the participants in the team. o The shortlisted teams would be sent an e- mail, so keep checking your e- mail at regular intervals. o The list of the shortlisted teams will also be uploaded on the Trading Times Facebook Event page. o The decision of the organizers shall be binding on all the participants. Nothing is too high for a bull and too low for a bear. Team Business Conclave 2016 In case of any queries, feel free to contact: Arpit Goel +91 8800959896 Harry Kapoor +91 9871614851 2 S RCC Business Conclave 2016
DAY IN THE LIFE OF A STOCK BROKER 8:00 a.m. Mr. Raghav is an experienced finance professional and has been actively trading since 1990. He has been successful throughout his career and has gone through the different phases of the Indian stock market, be it the Harshad Mehta Scam or the financial crisis of 2007-08. His financial consultancy and brokerage firm, Raghav Consultancy Ltd. has various high profile clients, from CEOs to software professionals. Each of his clients trust his instinct and his technique of maintaining a perfect balance between short term trading and long term investing. Recently, a few FII's and top Indian industry leaders have joined his company's clientele. They have high expectations from him to give them maximum return on their funds, while maintaining a certain level of risk. He has a large pool of funds from various clients that needs to be invested, along with which he provides them consultancy on foreign exchange, derivatives trading and mutual funds. Mr. Raghav had a busy weekend, meeting new clients and finalizing deals. He woke up late on Monday morning and saw the opening prices of the following shares in the news: Name of the Companies Tata Motors Ambuja Cement HUL Cipla HCL technologies L&T HDFC Bank ITC Maruti Suzuki IDBI Bank TCS Airtel Opening prices (Rs) 379 199 853 650 845 1280 1073 317 4620 90 2400 320 3 S RCC Business Conclave 2016
After glancing through the news channels and flipping through pages of the newspaper, Raghav collected the following pieces of information which he thinks may influence the equity market today: Tata, along with Google, has launched a social initiative called Internet Sathi which aims to reach 3 lakh villages in India in the next 5 years, and will take Internet access to the rural areas, before the telecom companies can expand their reach. It has been announced that the NPA ratio is expected to be lower this fiscal as government has taken various measures for boosting agricultural sector and helping the farmers through numerous programmes and assistance. The real estate prices have come down and there is speculation about a possible slowdown that could lead to a recession in the entire real estate industry. We have seen the potential of the upcoming online industry, and E- commerce having become the new buzz word in the Indian market. The next wave of online startups are entering the grocery and food market which store and sell only branded consumer goods. With the advent of online businesses, we have seen various malls and shops being shut down. Online selling of pharmaceuticals is the new trend. Companies like Sun Pharma, Lupin etc. have already tied up with online sites for promotion and sale. Inflation has been moderate and commodity prices are under check since the last 12 months. Their future movements are ambiguous, something which is also reflected in the Central Bank s policy statements about the two. It is being rumored that Automobile Companies have to apply for a new license to be able to operate their plants from February 2016 in order to develop a more transparent system, and focus on quality. HDFC Bank may acquire some stake in debt laden PTP Ltd, which is rumoured to be in the process of being restructured by three top Indian companies, including HDFC Bank. The restructuring will help revive the sick company to profitability within a year, but it is yet to be confirmed by the company s management. Rural market has become significant for various consumer goods companies. However, due to the poor monsoon in 2015, there is a high chance of low sales and resulting low profitability of consumer good companies. HCL might enter into a 3 year agreement with one of the Big Four to provide it with latest insights into the foreign demand for their services, which will help them bag some big orders in the coming years. 4 S RCC Business Conclave 2016
Just like other days, Raghav must pick the best stocks for the day, and invest accordingly. His investors have entrusted him with a total of Rs 35,00,000 for such trading. Raghav charges 0.5% of the volume as his brokerage, with 0.125% of Volume charged as STT. There are some restrictions on trading: o Not more than 15% of the total trading amount can be put into one particular stock. o At least 60% of the total amount available must be utilized for trading purposes. This implies that, at maximum, only 40% can be kept idle. o No short selling is permitted. Also, Raghav has entered into an agreement with his clients, that if two or more than two of the stocks picked by him, fall, then he has to refund 50% of his total brokerage. Therefore Raghav has to choose the stocks carefully. 1:00 p.m Since trading volume and volatility diminishes as midday approaches, Raghav takes an hour off and goes for lunch. As other brokers like him are also out for lunch, therefore the markets slow down. Once the institutional traders are back from lunch and meetings, the markets picks up and the volume and price movement once again comes to life. Raghav also comes back after the lunch, and finds some reports from his Group C investors. Raghav always believed that, investing is an art which people should learn at the earliest age possible. Therefore his client base includes early birds, who are still learning about the stock market. Mr. Mehta, who has started investing in options, about 6 months ago, wanted Raghav to give his opinion over the following two trades. Reliance Pre Result Trade Reliance is expected to announce its Q4 results. The street expectation is quite positive that the numbers this quarter will be better than the last quarter. The revenues predicted by analysts should jump by 7.5% quarter to quarter as compared to 4-5% in the year- ago period. The positive sentiment has been discounted in the current share prices. 4 days prior to the announcement, Mr. Mehta wants to trade on Reliance since he wishes to profit from the pre result volatility. Based on your understanding of call and put options, provide a brief strategy for him to make profits from this trade. You also need to state the reasons for giving your strategy. The trade has to be executed and squared off as well on or before the day of result, which should be mentioned by you as 5 S RCC Business Conclave 2016
part of your strategy. On the day of result, the company's performance can be assumed favorable. State your assumptions clearly, if any. Airtel Put- Call Decision The Equity share of Airtel is currently quoted at Rs. 210. A 3 month call option is available at a premium of Rs. 6 per share and a 3 month put option at Rs. 5 per share. If the strike price in both cases is Rs. 220, calculate for Mr. Mehta how much his profit would be, if the share price on the day of exercise is Rs. 200 and Rs. 240. Mr. Mehta is not sure, where the price would move in the coming months, and is asking Raghav s opinion over the above trade. 5:00 p.m. The clock has struck the evening bell, and just like other traders, Raghav finishes his trading day by reviewing his trades and making note of what went well and what could have been done better. Before switching to financial news networks to get a recap of the day and to start making plans for the next trading session, Raghav decided to check his mail box first. Mr. Raghav also gives financial advice on the matters of foreign exchange and risk management. Domestic banks and international bank branches also ask for his consultation regarding this. In his mail box he found the following problem reports from 2 of his client banks. Problem Report 1 Yes Bank has informed you, that the bank has sold a Telegraph Transfer on Brasília for Brazilian Real 10,00,000 at the rate of Brazilian Real 1 = Rupee 16.742. The transaction can be covered through the London or New York market. The rates on that date are as under: Bid Ask Mumbai- London Rs. 98.74 Rs. 98.94 Mumbai- New York Rs. 66.29 Rs. 66.3025 London- Brasília R$ 5.91 R$ 5.925 6 S RCC Business Conclave 2016
New York- Brasília R$ 3.96 R$ 3.977 Yes Bank wants to know in which market it would be advisable to cover the transaction - London or New York? Further, what would be the exchange profit or loss on the transaction? Ignore your commission. Problem Report 2 One of your London bank HQ has surplus funds to the extent of $6,00,000/- for a period of 3 months. The cost of the funds to the bank is 6% p.a. It proposes to invest these funds in China or Russia and obtain the best yield, with less financial risk to the bank. The following rates of interest are available at the three centers, for investment of domestic funds for a period of 3 months. Markets London New York Russia Rate 7% p.a. 10% p.a. 5%p.a. The market rates in London for US dollars and Euro are as under: London on New York Spot 1.4755/85 1 month 15/18 2 month 30/35 3 months 80/85 London on Russia Spot 1.360/90 1 month 60/55 2 month 95/90 3 months 145/140 The bank is confused, whether to invest the sum domestically, or to invest the corpus in London or Russia. Guide the bank, as to where should the excess funds be invested. Ignore your commission 7 S RCC Business Conclave 2016
8:30 p.m It was a busy day for Mr. Raghav and he was finalizing the deals for the day, by entering them in the Trade Journal. He was going through the last file of the day, as he had promised his wife a dinner at Hotel Le Bereuaf. Scheme X Scheme Y Scheme Z Date of investment 1.12.2008 1.01.2009 1.03.2009 Amount Investment 500000 100000 50000 NAV on entry date 10.47 10.20 9.88 Dividend Received upto 9500 1500 NIL NAV as at 31.03.2009 10.4 10.1 9.8 Other Factors Sharpe ratio 0.77 0.97 0.85 Beta 0.91 1.9 1.2 R- squared 56 85 78 Standard Deviation 0.6 0.8 0.56 Mr. Sinha, is one of his old and trusted clients. He has invested in three mutual funds a year ago on his own volition, but the results he got were not satisfying. Mr. Sinha is a conservative investor but wants maximum returns. Thus, he wants Raghav to give his opinion over the current position of these funds and to suggest, which one among the following shoud he continue holding. Objective of the Case study 1. Calculate the maximum brokerage to be charged by Raghav, if he picks the best stocks for his clients. (Final prices will be released after the submissions and the effective brokerage will be calculated by us.) 2. Give your opinion about the Option trade by Mr. Mehta. 3. Provide your Forex consultancy to the banks. 4. Assess the mutual fund portfolio of Mr. Sinha and guide him, as to which Scheme is profitable for him. Give your holistic view on the schemes and pick the one you find is performing the best in comparison to others. 8 S RCC Business Conclave 2016