Category Archives: Finance

Economics, Finance, Forex, Remittances

USD INR Carry – have you thought about it?

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Forex trading and carry trade go hand in hand. A few years back it was USD against JPY, then the turn came for AUD against USD and recently people have been talking about EUR against USD on the prospects of US interests remaining low and Euro zone increasing rates to reign in inflation.

The key in all scenarios being large interest rate differentials that allow cheap borrowing in one currency and invetsing in the other. The usual trend is that the currency with the higher interest yield slowly gains against the lower interest rate currency.

AUD-USD moved from lows of 0.80 to 1.05 range gaining whopping 25%, the theme was similar for USD-JPY or EUR-USD.

The Reserve Bank of India has gradually raised interest rates to 7.5% from lows of 3.5% over past 2 years and US still is at lows of below 0.5%. USD INR on the other hand has fluctuated between 44 – 47 in the same time with the

Now given that the interest rate differential is 7% and how other currencies have gained with the carry trade there is no reason why something similar would not happen with USD – INR. Indian Rupee should be strengthening against USD in line with how other currencies have performed.

Yes INR is a currency of a developing country and uses USD to pay for the Oil that it imports but that still does not completely negate the interest rate differential.

Using a simple calculation 1USD invested in India @ Rs.45 would grow to Rs48.37 in one year and seeing the trend of USD-INR fluctuating in a close 3% range there is every reason to enter the USD-INR carry trade.

What does this mean in layman terms?

1. It makes sense to borrow in US and invest in India

2. If you are earning in USD and do not have any need to hold US dollars its beneficial to remit to India and invest

3. If you want to trade then a USD INR carry looks like a low risk trade

Finance, Remittances

Banks in India offering more than 9% p.a. on a Term Deposit

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Here is a list of banks in India that are offering more than 9% in Fixed Deposits / Term Deposits as of 30 April 2011.

RBI is due to meet on 3rd May 2011 and the consensus is that the rates will be increased by 25 basis points in RBI’s announcement which can potentially push these Term Deposit Rates upwards.

Finance, Forex

Go Long on USD/JPY @ 88.00

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At the time of writting USD/JPY is trading at 88.06 after having tested 86 in the past few days. There is a general concern of yen stregnthening further but I would place my bets other way round.

My recommendation is to but USD/JPY in two tranches. first one now at 88 and again if it drops around 86. There should be a quick bounce back to 90 giving around a 3 – 5 % gain.

Over the next 3 months USD/JPY should make a move towards 93-95 range.

Detailed analysis

The USD JPY chart below shows that the pair is trading near its 2 years lows. From a pure technical perspective this is a reason good enough to initiate long position.

 

From the fundamental perspective the risk of inflation has started to look very real in next few months. The central banks would have to increase interest rates in the coming months. The trend has already staretd in the Asian economies.

With Fed tightening the interest rates the carry trade between USD and JPY will be back in vogue. One can argue that Japan can increase the interest rates as well – but seeing the latest GDP and export numbers, Japan has every incentive for a weaker currency.

It is very difficult to say if the pair would return back to the 120 – 123 mark in near future but a good 10% upside from the current levels of 88 is what I am expecting.

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Update – 15 Dec 2009

The USD/JPY achieved the first target of 90.00. People can hold position for the longer term. Over the next 6 months period it would not be surprising to see USD/JPY flirt with the 98 – 101 levels.

happy trading.

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UPDATE: 4th Jan 2010

The Pair has touched 93 and the next target is now 96 and then 98. Though i must say I was not expecting the move to be this quick. I would reduce half of my position at 95 and look to buy again if it drops to 90 -91 range

Bullion, Commodities, Finance, Investment

Relative Value arbitrage – Gold, Silver and Platinum

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Bullion space has been really volatile in the past few days. Gold has given better returns than silver and Platinum in the upmove during the past 5 years.
Gold lost around 10% from the highs of last year but silver and Platinum have both come down 30% and 50% approximately from their highs of 2008.

Historically Gold, Silver and Platinum have maintained a value ration amongst them and this seems to be out of sync at the moment.

Doing some number crunching on the historical data here is a trade strategy that exploits the relative mispricing and is geared to give near positive returns when tracing the past data.

The bullion trio is priced at:
Gold – US$ 948/oz,

Silver – US$13.45/oz and

Platinum – US$1182/oz at the time of writting.

I am recommending creating a strategy where one is 60% short on Gold and 20% long on both silver and platinum by value.

The strategy should yield an absolute return of around 25% when the bullion trio traces back to the historical ratio’s and the mispricing in relative value is resolved. Gold: Silver – 60 and Platinum: Gold – 1.75

We shall trace the strategies pay out on a weekly basis. So as of date we start with
Short Gold – worth 600US$
Long Silver and Platinum – worth 200US$ each

The ratio now as we create the trade is 70.48 for Gold Silver and 1.24 for Platinum Gold

Watch out in a week to see how the strategy is doing.

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Week 1 – 29th July 2009:

Gold – US$931: Silver – US$13.51: Platinum – US$1166

Gain – 10.75$ on Gold, Loss of 2.7$ on Platinum and 0.44$ on Silver

percentage gain – 0.76%

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Week 2 – 5th August 2009

 Gold – US$965: Silver – US$14.64: Platinum – US$ 1267

Gain – $16.25 on Silver and $14.38 on Platinum; Loss – 10.75 on Gold

Percentage gain – 1.98%

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Week 3 – 13th August 2009

Gold – $949.50; Silver – $14.56; Platinum – $1254

Gain – $15.06 on Silver; $12.18 on Platinum; Loss – 0.94 on Gold

Percentage Gain – 2.63%

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Week 5 – 25th Aug 2009

Gold : 944.50; Silver: 14.10; Platinum: 1237

Gain on Gold – $2.215; gain on Silver $8.27; gain on Platinum – $9.30

Percentage Gain – 1.98%

Changing strategy to 50% short gold and 25% long each Silver and Platinum. Both strategies will be tracked.

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Week 6 – 3rd September 2009

Gold – 977; Silver – 15.37; Platinum – 1229

Gain on Silver – 27.03; platinum – 7.65; Loss on Gold – 15.18

Gain on Strategy – 1.98%

(With ratio’s of Short Gold 50% and Long Silver and Platinum 25% each the strategy would yield 3.11%)

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Week 7 – 8th September 2009

Gold – 1000.70; Silver 16.54 and Platinum – 1285

Loss on Gold – 33.35; gain on Silver – 44.31 and Platinum – 17.42

Gain on strategy – 2.83%

(With ratio’s of Short Gold 50% and Long Silver and Platinum 25% each the strategy would yield 4.94%)

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Week 8 – 15th Sep 2009

Gold – $1007.40; Silver – $17.04; Platinum – $1328

Loss on Gold – $31.33; Gain on Silver – $64.62; Platinum – $30.87

gain on Strategy – 6.42%

(strategy of 60% short gold and 20% each long silver and platinum would yield 3.88%)

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After 9 months – 23 April 2010

Gold – $1140; Silver – $17.96; Platinum – $1731

Loss on Gold – $101.26; Gain on Silver – $81.61; Platinum – $116.11

gain on Strategy – 9.65%

Derivatives, Finance

Exotic Option Strategies – Long Iron Butterfly

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Have you ever wondered what happens if you combine two simple options trade together or if you combined them would they create something new and exotic? Well, the answer is both yes and no.
Some strategies when combines would give you a new strategy – One such strategy is Long Iron Butterfly.

The Simple Long Butterfly
A simple butterfly spread is when a trader would Buy put (or call) A, sell two puts (or calls) at higher strike B, buy put (or call) at equally higher strike C. The pay off is to limit the downside on extreme moves but gain if the market remains rangebound.

 

Long Iron Butterfly
On the other hand a Long Iron Butterfly is when a trader would Buy Straddle, sell Strangle with strike points outside the upper and lower strikerange of the Straddle, e.g. Sell a put (A), buy a put and a call at higher strike (B), sell a call at equally higher strike (C).

 

The payoff here is that the trader expects a move on either sides of the trade and gains on the premium.

 

Interetingly the payoff’s for both the strategies is in opposite directions.

So much for the identical strategy names but for opposite pay off’s!!

Economics, Finance

I like deflation and so should you!!

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Well the news of India hitting sub zero inflation or more technically a deflation has been making rounds. The general sentiment around this news is negative, implying that its not a good thing to happen.
Before going further lets explore the economic definition of deflation.
In economics, deflation is a sustained decrease in the general price level of goods and services resulting in an increase in the real value of money — a negative inflation rate.
Now that sounds good. I definitely want the value of my money to increase and would be happy if i could buy things at a cheaper price. So why are people not happy about hitting deflation?
Well the real worry is that theoretically deflation is caused by fall in demand and in turn results in lower demand as buyers wait on the sidelines before committing to a new purchase thereby causing a deflationary spiral.
Before going any further lets see what is inflation and how is the inflationary figure calculated. Inflation is the increase in prices of a basket of goods over a period of time. So something that cost ed 100 units of currency costs 103 after a time period indicating that their is more demand than what supply can keep up with and purchasers are willing to pay more. This is technically supposed to prompt investment to increase supply.
Let me ask you this – what is the objective of increasing supply efficiencies? Simplistically speaking – to ensure there is enough goods that can satisfy the demand. If the demand matches supply then theoretically there should be zero inflation. So what growth is really aiming at is to eliminate inflation.
Looking back at historical data prices of a lot of goods have fallen absolute basis as efficiencies increased thereby prompting growth.
One classic example would be computers – just a few years back a PC with 1/10th the power costed around the same price as today. Same with medicines.
So I think deflation once a while is a good thing. It improves the purchasing power of money.

I like my groceries, cars,  ipod’s,  jewellary cheap and the house at an affordable rate (bet you do too!!).
So feel good that we are headed for a deflation and lets hope its not a deflationary spiral but just an adjustment of suppy, demand and prices.

Finance, Forex, SGD INR

Right time to convert your SGD to INR

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The Singapore dollar has held a pretty steady rate averaging Rs.32.25 / SGD in the past few months. We try to explore why borrowing in SGD and converting to INR is a good idea at this point in time.

The Historical Rate perspective
It first crossed the Rs.32 barrier mid July ‘08 and quickly retraced back around 10% to Rs.29.5 by mid August ’08. The SGD was quoting 1.35 and INR at 42.66 against the dollar, giving a cross rate of Rs.31.60 against the Singapore dollar as on 18th July 2008.
Then the financial crisis gathered steam and till date USD gained 11.37% against the SGD and 13.65% against the INR.
From the historical lows the USD has gained 22.65% against the Indian Rupee and just 11.37% against the SGD (sees charts below)

    usdsgd

  usdinr

 

 

 

 

 

 

 

 

The Economic Perspective
The Singapore economy has slipped into technical recession and the growth rates are projected to be within the 2% mark for 2009. India on the other hand projects a growth rate of 6-7% for the current year. In a nutshell the Indian economy is still growing which should result in a greater demand for Indian currency as compared to the Singapore dollar.

The Interest Rate Perspective

The average bank savings rate in Singapore hovers around the 1% mark as compared to 4% in India.
The long term fixed deposit rates for upto a year fetch appx. 2.5% in Singapore and 8.5% in India.
A one year return analysis will show that SGD against INR should move to 34.40 in a year’s time to maintain exchange rate equilibrium:
sgdinr-projection

 

 

 

Conclusion
Given the growth rate differential of around 4% between the two economies and the weakening of INR against the USD by twice as much as SGD, there is every probability that either the SGD will weaken further against the dollar or INR will appreciate against the USD to achieve equilibrium, by around 10% – giving a target rate of around Rs.30 against the Singapore dollar.
So if you convert your SGD to INR now you stand to gain:
         1. 14.67 % if the SGD/INR comes down to Rs.30 and you invested your converted proceeds in 8.5% Fixed deposit for a year in India
         2. 5.85 % if the exchange rate stays at 32.5 and you invested your converted proceeds in 8.5% Fixed deposit for a year in India
         3. 0% if SGD/INR moves to 34.40 (the probability of this is really low

Derivatives, Finance

Lesser Known Derivative Strategies for volatile times – Jelly Roll and Put Ladder

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Most of us would have heard about the classical derivatives strategies like Straddles and Strangles, but the world of derivatives trading has much more to offer. Jelly Roll and Put Ladder are two of the lesser known strategies which are quite useful in volatile times.

 

Long Jelly Roll

This is a time value trade (involving the sale and purchase of options with different expiry months) and as such cannot be adequately plotted in terms of its risk/reward profile.

 

The trade:

Buy put, sell call at same strike price in near expiry month, sell put, buy call at same strike in far expiry month (the strike price in the far expiry need not be equal to the strike price in the near expiry).

 

Market expectation:

Direction neutral/volatility neutral. This trade consists of a short synthetic underlying in the near month and a long synthetic underlying in the far month. The holder will benefit if the differential between the futures prices of the two expiries (or the cost of carry differential in the case of premium up front options) widens.

 

Profit & loss characteristics at expiry (of near synthetic):

The potential profit of this trade is restricted as it arises from a widening of the futures price differential of the expiry months in question. After the expiry of the near term options, the holder is left with a long synthetic underlying position. The holder will therefore benefit from a rising market after the first expiry, and will be adversely affected by a falling market after the first expiry.

 

Long Put Ladder

 

ladder1

 

The trade: Sell put (A), sell put at higher strike (B), buy put at an even higher strike (C).

 

Market expectation: Direction bullish/volatility bearish. Holder expects underlying to(continue to) be between strikes A and B and firmly believes that the market will not fall.

 

Profit & loss characteristics at expiry:

 

Profit: Limited to the difference B-C, plus (minus) net credit (debit). Maximised between

strikes A and B.

 

Loss: Unlimited if underlying falls. At C or above, loss limited to net cost of position.

 

Break-even: Lower break-even reached when the intrinsic value of the purchased put C

plus (minus) net credit (cost) is equal to the intrinsic value of the sold options A and B.

Higher break-even reached when underlying falls below strike C by the same as the net cost of the position.

 

 

 

 

 

 

Derivatives, Finance

Low Risk Options

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Strangles and Guts are widely used strategies in the derivative markets. Both of these are option strategies using a Call option and a Put option each.
 
Here we explore the difference between these two strategies and see how they can be used together to produce low risk returns.
 
What is a s Strangle? Strangles are created by either buying or selling, a call option and a put option. When we create this position by buying options, we call it a Long Strangle.
 
Similarly, when we create it by selling options, it is called a Short Strangle. The important point here is that the Put option has a lower strike price than the Call option. Table 1 and Chart 1 explains the pay off of a Long Strangle on the Nifty. The total premium outlay is Rs 70 + Rs 25 = Rs 95. The break-even points are 4004 and 4295 (calculations not shown here). 

read full text at : http://www.businessstandard.com/india/storypage.php?autono=285772