Saturday, October 5, 2019
International Business Enviroment Essay Example | Topics and Well Written Essays - 2000 words
International Business Enviroment - Essay Example It intends to make its investments in Kenya, with intent to providing cloud computing services. The essence of this work and report is to evaluate and to critically analyze how viable this idea is. It will do this by discussing a few factors such as the institution systems in Kenya, exchange regime that governs the country and the political risks involved, and how they may affect the success or failure of the iomart venture. The report shall then be submitted to the CEO of iomart Group of Companies, with a conclusion on whether the idea is viable or not, and furnished with a few recommendations. Table of Contents Executive Summary†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦2 Introduction†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â ‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦4 National Institutions Systems†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.5 Exchange Rate Regime†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦...7 Political Risks†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.9 Conclusion and Recommendations†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦10 References†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.12 International Business Environment Introduction . ... The iomart Group is keen to expand and one of its objectives is to be a globally recognized brand. The last expansion phase saw it expand to Asia and now the focus has shifted to Africa. The iomart Group is highly profitable and as a result has been able to take advantage of business opportunities around the globe through comprehensive market researches (iomart, 2013). Kenya is considered to be East Africa’s fastest growing economy, and is endowed with many resources. In the recent past, the country has witnessed many drastic changes and growth in terms of leadership, growth of industries, expansion of investments and growth in the national Gross Domestic Product (Nzwili, 2012; Nyong’o, 2007). The iomart branch, if established, is intended to be a major provider of cloud computing services to the already established and the growing businesses in Kenya (iomart, 2013). This report will serve to examine the exchange regimes that govern Kenya, determine and compare the two countries’ national institution systems and finally look at the political risks in Kenya. A conclusion shall be drawn and recommendations given. National Institution Systems It is important to know the institutions that govern businesses in a country and how different they are from what one is used to (Cullen and Parboteeah, 2009). The IT firm to be established, just like the iomart in U.K will deal with handling personal data, and hence this will be the main issue since Kenya and UK have different policies regarding how personal information is treated. The main body that regulates the operations of the IT industry in Kenya is the Communication Commission of Kenya and the National Communications Secretariat. These two regulatory bodies are
Friday, October 4, 2019
Business - WRTG-2 Assignment Essay Example | Topics and Well Written Essays - 1000 words
Business - WRTG-2 Assignment - Essay Example However, at the end of the day, one needs to work for the purpose of earning their livelihood. This is the reason why an individual gets paid for doing work. In simple words, work is defined as the process by which an individual accomplishes some activities against some financial offerings. Traditionally, there have been concepts that if one does not work, he/she may get indulged into some illegal activities. In that case work is important for every individual. Now, in the context of the study, I have been in the field of steel industry. From the graduation days I have decided that I will be getting into a sector that has global opportunities. Also, I had a feeling that I should be working for an industry that offers continuous learning and allows me to showcase my talent. Hence, I decided to work for the steel industry. Steel industry has a worldwide scope. A large number of companies operate within the steel industry. However, the steel industry does not exist alone; it collectivel y exists with iron and is known as iron and steel industry. Steel industry is also important for the economy of a country. It acts as an indicator of the national economy. The demand of steel is continuously rising. To cite an example, during the early 2000 the demand for steel increased by 6%. It is mainly due to the massive economic boom in countries such as India and China. Some of the evident players of the steel industry are Tata Steel, Shagang Group and Shanghai Baosteel Group Corporation. In the context of the steel manufacturing industry, it has a mixture of both skilled and unskilled labor force. As the industry needs high precision in the tasks, skilled labors are important. The process of manufacturing steel is complex, and there are various scientific ways of production. The industry has a diverse group of workforce; starting from engineers, it has personnel from marketing, sales and other fields of business. However, the task of different departments differs accordingly . Discussion There are eminent personalities who work in the steel industry. Some of them include Ratan Tata, who is the owner of Tata Group and Tata Steel from India. According to Ratan Tata, the demand of steel is hugely increasing in the western part of the world; therefore, the trade fall in the parts of Europe and US has diminished. However, he has also highlighted that steel is yet to get out of trouble. According to him, the financial crunch and high cost of raw material have severely affected the profit of the first quarter. Yet, the signals are encouraging, according to him. Also, according to Prasad Baji of Tata Steel, the industry is witnessing a booming period. Consumption of steel has increased by 5–6 % in the 1st quarter; moreover, it is also estimated that the demand will further increase in the present quarter by about 8–10 % (â€Å"Steel Industry Thinks the Worst Is over and Signals Are Cheery†). Some of the other eminent personalities of this i ndustry include Xu Lejiang, the chairman of Baosteel. According to him, the present situation of the Chinese steel industry is witnessing historic transformations. Nonetheless, in order to transform it for the betterment, it requires the transformation of both the steel and iron industries. He also believes that the key factor towards the development of the industry lies in its system of operation. In addition, he stated that innovation in the most
Thursday, October 3, 2019
Trends in consumption patterns Essay Example for Free
Trends in consumption patterns Essay Although no single definition of economics will ever satisfy the demands of all analysts or even of all interested parties, attempts to succinctly define economics as a science, or even as a part of nature have persisted for centuries. A good, but certainly not exhaustive, definition of economics is that it comprises the study of how human beings allocate scarce resources to produce various commodities and how those commodities are distributed for consumption among the people in society with the added provision that the essence of economics lies in the fact that resources are scarce, or at least limited, and that not all human needs and desires can be met. (Economics, 2004)            This latter observation forms a central part of all economic theories and in some cases can be regarded as the central premise for the study of economics altogether. The fact of scarce resources has its counterpart in the availability (or unavailability) of currencies, and also in the desirability of specific resources among specific consumers. The general terminology associated with such considerations is known as the law of supply and demand. From this central idea springs most of what has comprised and still comprises economic theory and practice.            The law of supply and demand is at once simple to comprehend and perilously difficult to thoroughly understand. In its simplest sense, the law of supply and demand refers to the reality that resources, goods, or commodities which are in high-demand and short supply will command higher prices than resources, goods, or commodities which are abundant but in low demand by consumers. A readily comprehensible case-in-point would be the example of a rare book, or first edition publication. Such an antiquity may be of value, but its pricing and market value will depend utterly upon demand and availability (supply): The law of supply and demand will determine the value of a first edition, in other words, by how many collectors are interested in obtaining a copy, compared with the number of copies available. Even if a book is in scarce supply, it will have little value if it is not wanted by collectors and equally, a book which has a print run of several thousand copies can still be worth a great deal if there are more collectors requiring a copy than there are copies available. (Law of Supply and, 2005, p. 13)            Such simple models grant an elementary understanding of the law of supply and demand; however, the true implications of the seemingly simple paradigm are many and the nuances of what influences trends in supply and demand is much more difficult to predict and quantify than the basic attributes of the theory itself. In some ways, entire markets are basically an extension of the law of supply and demand; a concrete representation of it in action, what is called a market is simply a label for an intersection of supply and demand correspondences, from which equilibrium allocations may be deduced but whether or not equilibrium allocations may be determined by scientific study remains ambiguous given the very real influence of psychological factors which impact demand among consumers and are perilously difficult to gauge or predict. (Loasby, 1999, p. 107)            On the supply side of the equation, it is possible to pinpoint certain trends and tendencies which lead to imbalance. The law of supply indicates that production should not exceed demand, nonetheless, Economic imbalance caused by overproduction or shortages is a recurring leading cause of business cycle downturns and despite the fact that under most economic theories, this situation should not occurthe pricing system is supposed to create an environment in which supply and demand always match at the market price the ambiguity of consumer demand proves much more difficult to anticipate to gauge with precision. (Schaefer, 1995, p. 17)            One reason for this difficulty on the supply side is that fact that When the economy is at full capacity, certain industries become carried away with the prospects of unlimited growth as they expand production capacity to meet rising demand which,in turn, often leads to overcapacity. Because most business operations tend always to experience fluctuating sales and cost pressures, they concentrate on immediate business problems-not realizing the severity of the overcapacity. (Schaefer, 1995, p. 17)            The same principle holds true for currency itself: when overcpacity is reached in forms of currency, inflation is the result: an increase in the amount of circulating currency beyond the needs of trade; an oversupply of currency is created, and, in accordance with the law of supply and demand, the value of money decreases. Deflation is brought about by the opposite condition and yet despite the working, theoretical paradigm, a balance in supply and demand is usually fleeting. Modern economics admits a new form inflation: government borrowing, the increase in the money supply, and a diminished supply of consumer goods which can increase demand relative to supply and force rising prices. (Inflation, 2004)            On the demand side, ambiguities and uncertainties flourish. The law of demand dictates that demand for a product or good or commodity plus its relative availability will create the price. However, since consumer demand is a fickle and unpredictable force shaped by myriad factors, it is often difficult to spot or predict trends which will yield a good balance between supply and demand.            An example of just how subject to vagaries and random events is the notion of consumer demand, is the notion of the umbrella company looking to sell umbrellas Contingencies open up a very wide field. Rain on May 15, 2006 certainly matters, but so does rain on May 14, since this is likely to bring forward some purchases, and therefore to affect both supply and demand on May 15 which is hardly a mathematical paradigm susceptible to logical scrutiny, much less production quotas. (Loasby, 1999, p. 110)            It becomes incumbent upon the observer to regard the demand side of the supply and demand paradigm as somewhat beholden to psychological vagaries the laws of value and exchange as dependent on the (psychological) law of diminishing returns of satisfaction as the presumed basis of the entire theoretical study of consumption. In this sense, the universal catallactic law of supply and demand involves a (psychological) linkage with the realm of consumption (Zafirovski, 2003, p. 19).            As such it is often useful to regard consumer trends as psychologically driven and to avoid using the market specification as a framework for investigating demand, and instead considering the variety of intentions among potential purchasers in order to specify the market correctly. (Loasby, 1999, p. 110) Another factor which contributes to consumer demand is personal disposable income and this aspect of economics is influenced by many things: The amount of personal disposable income that consumers have available to spend in retail outlets is influenced by a number of general economic factors including: †¢ unemployment levels; †¢ regional employment patterns; †¢ interest rate levels; †¢ inflation levels; †¢ earnings levels. (Varley Gillooley, 2001, p. 61) With such a wide range of considerations, it is no surprise that the intricacies of supply and demand have not bee reduced to formulaic consistency de spite centuries of analysis.                                                           References Inflation. (2004). In The Columbia Encyclopedia (6th ed.). New York: Columbia University     Press. Law of Supply and Demand Determines Value of First Editions. (2005, January 8). Western     Mail (Cardiff, Wales), p. 13. Poindexter, J. T. (1993). Labor and Economic Trends: Effect on U.S. Workforce. Review of     Business, 15(1), 34+. Schaefer, H. G. (1995). International Economic Trend Analysis. Westport, CT: Quorum Books. Varley, R., Gillooley, D. (2001). Retail Product Management: Buying and Merchandising.    London: Routledge. Zafirovski, M. (2003). Market and Society: Two Theoretical Frameworks. Westport, CT:          Praeger.
Impact of Credit Default Swaps (CDS)
Impact of Credit Default Swaps (CDS) Chapter 1 : Introduction A Swap is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. Swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. The main objective of the project is to understand about Credit Default Swaps (CDS), its global footprint, its role in subprime crisis, its settlement in global arena and to check the feasible settlement of CDS in India, after its introduction in India, by understanding about Indian Credit Derivatives market. Research is concerned with the systematic and objective collection, analysis and evaluation of information about specific aspects to check the feasible settlement of CDSs in India. The development of financial derivatives in recent past is astounding when we consider its volume globally. But at the same time the product once created for hedging the risk currently allows you to bear more risk sometimes making the whole financial system to tremble. May be thats why Warren Buffet called it a financial weapon of mass destruction. Whatever it may be but derivatives have grown exponentially and are necessary for the market to flourish. The credit derivatives are nothing but the logical extension to the family of derivatives and have already made its presence felt globally. The credit derivatives have played a significant role in the development of debt market but also share a blame for the proliferation of subprime crisis. A credit default swap which constitutes the major portion of credit derivatives is similar to an insurance contract which allows you to transfer your risk to third party in exchange of a premium. Right from its origin as plain vanilla product for hedging purpose it has grown to very complex products and now has posed a question mark on its credibility. The subprime crisis started in what were regarded as the worlds safest and most sophisticated markets and spread globally, carried by securities and derivatives that were thought to make the financial system safer. The subprime crisis brings the complexity of securitized products and derivatives products, the human greedy nature, inability of rating agencies to gauge the risk, inefficiency of regulatory bodies, etc. to the fore. Although CDS was not the cause of the subprime crisis but it had cascading effect on the market and was considered as the reason for the collapse of American International Group (AIG). The lessons from the consequences of subprime crisis have helped in creating awareness about the regulatory frameworks to be in place which has increased the transparency, standardization, and soundness in the market. The various measures include formation of central counterparty for CDS, hardwiring of auction protocol and ISDA determination committee. On the backdrop of global crisis the movement of CDS is being watched carefully. The various data sources now provide data even on weekly basis. The efforts are being paid off and the market size of CDS has reduced considerably. And now with the central counterparties in place the CDS market will have more transparency and better control. After opening up of the economy the equity market of India have grown significantly bringing in more transparency. But the corporate bond market is still in undeveloped mode and the efforts being taken on developing it have not provided expected returns. Under this light, India is now all set to launch Credit Default Swaps which are expected to ignite the spark which will flourish the corporate bond market. Considering the cautious nature of RBI and the havoc created by CDS in global market the move by RBI is significant. From the move of RBI one can say as the knife itself is not harmful but it depends whether its in doctors hand or a robbers hand. Similarly CDS as a product is certainly not harmful but its utility will depend on the judicious use of the same. Chapter 2: Literature Review Derivatives The global economic order that emerged after World War II was a system where many less developed countries administered prices and centrally allocated resources. Even the developed economies operated under the Bretton Woods system of fixed exchange rates. The system of fixed prices came under stress from the 1970s onwards. High inflation and unemployment rates made interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India began opening up their economies and allowing prices to vary with market conditions. Price fluctuations made it hard for businesses to estimate their future production costs and revenues. Derivative securities provide them with a valuable set of tools for managing this risk. Financial markets are, by nature, extremely volatile and hence, the risk factor is an Important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. These bases can be underlying assets (for example forex, equity, etc), bases or reference rates. It is afinancial instrument(or more simply, an agreement between two people/two parties) that has a value determined by the future price of something else. Derivatives can be thought of as bets on the price of something.Itis the collective name used for a broad class offinancial instrumentsthatderivetheir value from other financial instruments (known as the underlying), events or conditions. Essentially, a derivative is a contract between two parties where the value of the contract is linked to the price of another financial instrument or by a specified event or condition. Asecurity whose price is dependent upon or derived fromone or more underlying assets.The derivative itself is merely a contract between two or more parties. Itsvalue is determinedby fluctuationsin the underlying asset.The most common underlying assets includestocks, bonds,commodities,currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.Derivatives are generally used as an instrument to hedgerisk, but can also be used forspeculative purposes. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The transaction in this case would be the derivative, while the spot price of wheat would be the underlying asset. Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The need for a derivatives market The derivatives market performs a number of economic functions: They help in transferring risks from risk averse people to risk oriented people They help in the discovery of future as well as current prices They catalyze entrepreneurial activity They increase the volume traded in markets because of participation of risk averse people in greater numbers They increase savings and investment in the long run The participants in a derivatives market Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Types of Derivatives Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts Options: Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are : Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an options to pay fixed and receive floating. Uses of Derivatives Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge some pre-existing risk by taking positions in derivatives markets that offset potential losses in the underlying or spot market. In India, most derivatives users describe themselves as hedgers (Fitch Ratings, 2004) and Indian laws generally require that derivatives be used for hedging purposes only. Another motive for derivatives trading is speculation (i.e. taking positions to profit from anticipated price movements). In practice, it may be difficult to distinguish whether a particular trade was for hedging or speculation, and active markets require the participation of both hedgers and speculators. A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot and derivatives prices, and thereby help to keep markets efficient. Jogani and Fernandes (2003) describe Indias long history in arbitrage trading, with line operators and traders arbitraging prices between exchanges located in different cities, and between two exchanges in the same city. Their study of Indian equity derivatives markets in 2002 indicates that markets were inefficient at that time. They argue that lack of knowledge; market frictions and regulatory impediments have led to low levels of capital employed in arbitrage trading in India. However, more recent evidence suggests that the efficiency of Indian equity derivatives markets may have improved (ISMR, 2004). Development of derivatives market in India Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the worlds largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created. In the equity markets, a system of trading called badla involving some elements of forwards trading had been in existence for decades.6 However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation ( i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk control in derivatives market in India. The report, which was submitte d in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real-time monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three- decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts . To begin with, SEBI approved trading in index futures contracts based on SP CNX Nifty and BSE-30(Sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with SP CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on SP CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futur es and options (FO): †¢ Single-stock futures continue to account for a sizable proportion of the FO segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continues to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on most stocks for even the next month was non-existent. Daily option price variations suggest that traders use the FO segment as a less risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while puts rise when Satyam falls intra-day. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. SWAP In finance, a SWAP is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. Conventionally they are the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. A swap is an agreement to exchange one stream of cash flows for another. Swaps are most usually used to:- Switch financing in one country for financing in another To replace a floating interest rate swap with a fixed interest rate (or vice versa) (Litzenberger, R.H)In August 1981 the World Bank issued $290 million in euro-bonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks. The rapid growth in the use of interest rate swaps, currency swaps, and swaptions (options on swaps) has been phenomenal. Currently, the amount of outstanding interest rate and currency swaps is almost $3 trillion. Recently, swaps have grown to include currency swaps and interest rate swaps. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates. Different types of swaps:- Currency Swaps Cross currency swaps are agreements between counterparties to exchange interest and principal payments in different currencies. Like a forward, a cross currency swap consists of the exchange of principal amounts (based on todays spot rate) and interest payments between counterparties. It is considered to be a foreign exchange transaction and is not required by law to be shown on the balance sheet. In a currency swap, these streams of cash flows consist of a stream of interest and principal payments in one currency exchanged for a stream, of interest and principal payments of the same maturity in another currency. Because of the exchange and re-exchange of notional principal amounts, the currency swap generates a larger credit exposure than the interest rate swap. Cross-currency swaps can be used to transform the currency denomination of assets and liabilities. They are effective tools for managing foreign currency risk. They can create currency match within its portfolio and minimize exposures. Firms can use them to hedge foreign currency debts and foreign net investments. Currency swaps give companies extra flexibility to exploit their comparative advantage in their respective borrowing markets. Currency swaps allow companies to exploit advantages across a matrix of currencies and maturities. Currency swaps were originally done to get around exchange controls and hedge the risk on currency rate movements. It also helps in Reducing costs and risks associated with currency exchange. They are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies shop for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Credit Default Swap Credit Default Swap is a financial instrument for swapping the risk of debt default. Credit default swaps may be used for emerging market bonds, mortgage backed securities, corporate bonds and local government bond. The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument is defaulted. The seller of a credit default swap receives monthly payments from the buyer. If the debt instrument defaults they have to pay the agreed amount to the buyer of the credit default swap. The first credit default swap was introduced in 1995 by JP Morgan. By 2007, their total value has increased to an estimated $45 trillion to $62 trillion. Although since only 0.2% of Investment Companys default, the cash flow is much lower than this actual amount. Therefore, this shows that credit default swaps are being used for speculation and not insuring against actual bonds. As Warren Buffett calls them financial weapons of mass destruction. The credit default swaps are being blamed for much of the current market meltdown. Example of Credit Default Swap An investment trust owns  £1 million corporation bond issued by a private housing firm. If there is a risk the private housing firm may default on repayments, the investment trust may buy a CDS from a hedge fund. The CDS is worth  £1 million. The investment trust will pay an interest on this credit default swap of say 3%. This could involve payments of  £30,000 a year for the duration of the contract. If the private housing firm doesnt default. The hedge fund gains the interest from the investment bank and pays nothing out. It is simple profit. If the private housing firm does default, then the hedge fund has to pay compensation to the investment bank of  £1 million the value of the credit default swap. Therefore the hedge fund takes on a larger risk and could end up paying  £1million The higher the perceived risk of the bond, the higher the interest rate the hedge fund will require. Credit default swaps are used not only by investment banks, but also by other financial institutions. Corporate entities use credit default swaps either for protection purposes, to hedge or to sell. Investment banks are primarily affected by the buyers. If a number of major corporate entities have bought protection from the same investment bank, and all of them fail simultaneously, this will put pressure on the investment bank to pay out. Moreover, the credit risk caused by the above failure may lead to other risks, such as liquidity risk, market risk and operational risk. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Some of the top banks in America are carrying unknown gambling risks that no one has warned about, and they are all tied up in U.S. bank derivative portfolios (Edwards M, 2004). Commodity Swap A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a fixed price over a specified period. The vast majority of commodity swaps involve oil. A swap where exchanged cash flows are dependent on the price of an underlying commodity. This swap is usually used to hedge against the price of a commodity. Commodities are physical assets such as precious metals, base metals, energy stores (such as natural gas or crude oil) and food (including wheat, pork bellies, cattle, etc.). In this swap, the user of a commodity would secure a maximum price and agree to pay a financial institution this fixed price. Then in return, the user would get payments based on the market price for the commodity involved. They are used for hedging against Fluctuations in commodity prices or Fluctuations in spreads between final product and raw material prices. A company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. This is particularly so when the output prices may not change as frequently as the commodity prices change. In such cases, the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. There are two kinds of agents participating in the commodity markets: end-users (hedgers) and investors (speculators). Commodity swaps are becoming increasingly common in the energy and agricultural industries, where demand and supply are both subject to considerable uncertainty. For example, heavy users of oil, such as airlines, will often enter into contracts in which they agree to make a series of fixed payments, say every six months for two years, and receive payments on those same dates as determined by an oil price index. Computations are often based on a specific number of tons of oil in order to lock in the price the airline pays for a specific quantity of oil, purchased at regular intervals over the two-year period. However, the airline will typically buy the actual oil it needs from the spot market. Equity Swap The outstanding performance of equity markets in the 1980s and the 1990s, have brought in some technological innovations that have made widespread participation in the equity market more feasible and more marketable and the demographic imperative of baby-boomer saving has generated significant interest in equity derivatives. In addition to the listed equity options on individual stocks and individual indices, a burgeoning over-the-counter (OTC) market has evolved in the distribution and utilization of equity swaps. An equity swap is a special type of total return swap, where the underlying asset is a stock, a basket of stocks, or a stock index. An exchange of the potential appreciation of equitys value and dividends for a guaranteed return plus any decrease in the value of the equity. An equity swap permits an equity holder a guaranteed return but demands the holder give up all rights to appreciation and dividend income. Compared to actually owning the stock, in this case you do not have to pay anything up front, but you do not have any voting or other rights that stock holders do have. Equity swaps make the index trading strategy even easier. Besides diversification and tax benefits, equity swaps also allow large institutions to hedge specific assets or positions in their portfolios The equity swap is the best swap amongst all the other swaps as it being an over-the-counter derivatives transaction; they have the attractive feature of being customizable for a particular users situation. Investors may have specific time horizons, portfolio compositions, or other terms and conditions that are not matched by exchange-listed derivatives. They are private transactions that are not directly reportable to any regulatory authority. A derivatives dealer can, through a foreign subsidiary in the particular country, invest in the foreign securities without the withholding tax and enter into a swap with the parent dealer company, which can then enter a swap with the American investor, effectively passing on the dividends without the withholding tax Interest Rate Swap An interest rate swap, or simply a rate swap, is an agreement between two parties to exchange a sequence of interest payments without exchanging the underlying debt. In a typical fixed/floating rate swap, the first party promises to pay to the second at designated intervals a stipulated amount of interest calculated at a fixed rate on the notional principal; the second party promises to pay to the first at the same intervals a floating amount of interest on the notional principle calculated according to a floating-rate index. The interest rate swap is essentially a strip of forward contracts exchanging interest payments. Thus, interest rate swaps, like interest rate futures or interest rate forward contracts, offer a mechanism for restructuring cash flows and, if properly used, provide a financial instrument for hedging against interest rate risk The reason for the exchange of the interest obligation is to take benefit from comparative advantage. Some companies may have comparative advantage in fixed rate markets while other companies have a comparative advantage in floating rate markets. When companies want to borrow they look for cheap borrowing i.e. from the market where they have comparative advantage. However this may lead to a company borrowing fixed when it wants floating or borrowing floating when it wants fixed. This is where a swap comes in. A swap has the effect of transforming a fixed rate loan into a float Impact of Credit Default Swaps (CDS) Impact of Credit Default Swaps (CDS) Chapter 1 : Introduction A Swap is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. Swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. The main objective of the project is to understand about Credit Default Swaps (CDS), its global footprint, its role in subprime crisis, its settlement in global arena and to check the feasible settlement of CDS in India, after its introduction in India, by understanding about Indian Credit Derivatives market. Research is concerned with the systematic and objective collection, analysis and evaluation of information about specific aspects to check the feasible settlement of CDSs in India. The development of financial derivatives in recent past is astounding when we consider its volume globally. But at the same time the product once created for hedging the risk currently allows you to bear more risk sometimes making the whole financial system to tremble. May be thats why Warren Buffet called it a financial weapon of mass destruction. Whatever it may be but derivatives have grown exponentially and are necessary for the market to flourish. The credit derivatives are nothing but the logical extension to the family of derivatives and have already made its presence felt globally. The credit derivatives have played a significant role in the development of debt market but also share a blame for the proliferation of subprime crisis. A credit default swap which constitutes the major portion of credit derivatives is similar to an insurance contract which allows you to transfer your risk to third party in exchange of a premium. Right from its origin as plain vanilla product for hedging purpose it has grown to very complex products and now has posed a question mark on its credibility. The subprime crisis started in what were regarded as the worlds safest and most sophisticated markets and spread globally, carried by securities and derivatives that were thought to make the financial system safer. The subprime crisis brings the complexity of securitized products and derivatives products, the human greedy nature, inability of rating agencies to gauge the risk, inefficiency of regulatory bodies, etc. to the fore. Although CDS was not the cause of the subprime crisis but it had cascading effect on the market and was considered as the reason for the collapse of American International Group (AIG). The lessons from the consequences of subprime crisis have helped in creating awareness about the regulatory frameworks to be in place which has increased the transparency, standardization, and soundness in the market. The various measures include formation of central counterparty for CDS, hardwiring of auction protocol and ISDA determination committee. On the backdrop of global crisis the movement of CDS is being watched carefully. The various data sources now provide data even on weekly basis. The efforts are being paid off and the market size of CDS has reduced considerably. And now with the central counterparties in place the CDS market will have more transparency and better control. After opening up of the economy the equity market of India have grown significantly bringing in more transparency. But the corporate bond market is still in undeveloped mode and the efforts being taken on developing it have not provided expected returns. Under this light, India is now all set to launch Credit Default Swaps which are expected to ignite the spark which will flourish the corporate bond market. Considering the cautious nature of RBI and the havoc created by CDS in global market the move by RBI is significant. From the move of RBI one can say as the knife itself is not harmful but it depends whether its in doctors hand or a robbers hand. Similarly CDS as a product is certainly not harmful but its utility will depend on the judicious use of the same. Chapter 2: Literature Review Derivatives The global economic order that emerged after World War II was a system where many less developed countries administered prices and centrally allocated resources. Even the developed economies operated under the Bretton Woods system of fixed exchange rates. The system of fixed prices came under stress from the 1970s onwards. High inflation and unemployment rates made interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India began opening up their economies and allowing prices to vary with market conditions. Price fluctuations made it hard for businesses to estimate their future production costs and revenues. Derivative securities provide them with a valuable set of tools for managing this risk. Financial markets are, by nature, extremely volatile and hence, the risk factor is an Important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. These bases can be underlying assets (for example forex, equity, etc), bases or reference rates. It is afinancial instrument(or more simply, an agreement between two people/two parties) that has a value determined by the future price of something else. Derivatives can be thought of as bets on the price of something.Itis the collective name used for a broad class offinancial instrumentsthatderivetheir value from other financial instruments (known as the underlying), events or conditions. Essentially, a derivative is a contract between two parties where the value of the contract is linked to the price of another financial instrument or by a specified event or condition. Asecurity whose price is dependent upon or derived fromone or more underlying assets.The derivative itself is merely a contract between two or more parties. Itsvalue is determinedby fluctuationsin the underlying asset.The most common underlying assets includestocks, bonds,commodities,currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.Derivatives are generally used as an instrument to hedgerisk, but can also be used forspeculative purposes. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The transaction in this case would be the derivative, while the spot price of wheat would be the underlying asset. Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The need for a derivatives market The derivatives market performs a number of economic functions: They help in transferring risks from risk averse people to risk oriented people They help in the discovery of future as well as current prices They catalyze entrepreneurial activity They increase the volume traded in markets because of participation of risk averse people in greater numbers They increase savings and investment in the long run The participants in a derivatives market Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Types of Derivatives Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts Options: Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are : Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an options to pay fixed and receive floating. Uses of Derivatives Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge some pre-existing risk by taking positions in derivatives markets that offset potential losses in the underlying or spot market. In India, most derivatives users describe themselves as hedgers (Fitch Ratings, 2004) and Indian laws generally require that derivatives be used for hedging purposes only. Another motive for derivatives trading is speculation (i.e. taking positions to profit from anticipated price movements). In practice, it may be difficult to distinguish whether a particular trade was for hedging or speculation, and active markets require the participation of both hedgers and speculators. A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot and derivatives prices, and thereby help to keep markets efficient. Jogani and Fernandes (2003) describe Indias long history in arbitrage trading, with line operators and traders arbitraging prices between exchanges located in different cities, and between two exchanges in the same city. Their study of Indian equity derivatives markets in 2002 indicates that markets were inefficient at that time. They argue that lack of knowledge; market frictions and regulatory impediments have led to low levels of capital employed in arbitrage trading in India. However, more recent evidence suggests that the efficiency of Indian equity derivatives markets may have improved (ISMR, 2004). Development of derivatives market in India Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the worlds largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created. In the equity markets, a system of trading called badla involving some elements of forwards trading had been in existence for decades.6 However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation ( i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk control in derivatives market in India. The report, which was submitte d in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real-time monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three- decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts . To begin with, SEBI approved trading in index futures contracts based on SP CNX Nifty and BSE-30(Sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with SP CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on SP CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futur es and options (FO): †¢ Single-stock futures continue to account for a sizable proportion of the FO segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continues to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on most stocks for even the next month was non-existent. Daily option price variations suggest that traders use the FO segment as a less risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while puts rise when Satyam falls intra-day. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. SWAP In finance, a SWAP is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. Conventionally they are the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. A swap is an agreement to exchange one stream of cash flows for another. Swaps are most usually used to:- Switch financing in one country for financing in another To replace a floating interest rate swap with a fixed interest rate (or vice versa) (Litzenberger, R.H)In August 1981 the World Bank issued $290 million in euro-bonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks. The rapid growth in the use of interest rate swaps, currency swaps, and swaptions (options on swaps) has been phenomenal. Currently, the amount of outstanding interest rate and currency swaps is almost $3 trillion. Recently, swaps have grown to include currency swaps and interest rate swaps. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates. Different types of swaps:- Currency Swaps Cross currency swaps are agreements between counterparties to exchange interest and principal payments in different currencies. Like a forward, a cross currency swap consists of the exchange of principal amounts (based on todays spot rate) and interest payments between counterparties. It is considered to be a foreign exchange transaction and is not required by law to be shown on the balance sheet. In a currency swap, these streams of cash flows consist of a stream of interest and principal payments in one currency exchanged for a stream, of interest and principal payments of the same maturity in another currency. Because of the exchange and re-exchange of notional principal amounts, the currency swap generates a larger credit exposure than the interest rate swap. Cross-currency swaps can be used to transform the currency denomination of assets and liabilities. They are effective tools for managing foreign currency risk. They can create currency match within its portfolio and minimize exposures. Firms can use them to hedge foreign currency debts and foreign net investments. Currency swaps give companies extra flexibility to exploit their comparative advantage in their respective borrowing markets. Currency swaps allow companies to exploit advantages across a matrix of currencies and maturities. Currency swaps were originally done to get around exchange controls and hedge the risk on currency rate movements. It also helps in Reducing costs and risks associated with currency exchange. They are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies shop for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Credit Default Swap Credit Default Swap is a financial instrument for swapping the risk of debt default. Credit default swaps may be used for emerging market bonds, mortgage backed securities, corporate bonds and local government bond. The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument is defaulted. The seller of a credit default swap receives monthly payments from the buyer. If the debt instrument defaults they have to pay the agreed amount to the buyer of the credit default swap. The first credit default swap was introduced in 1995 by JP Morgan. By 2007, their total value has increased to an estimated $45 trillion to $62 trillion. Although since only 0.2% of Investment Companys default, the cash flow is much lower than this actual amount. Therefore, this shows that credit default swaps are being used for speculation and not insuring against actual bonds. As Warren Buffett calls them financial weapons of mass destruction. The credit default swaps are being blamed for much of the current market meltdown. Example of Credit Default Swap An investment trust owns  £1 million corporation bond issued by a private housing firm. If there is a risk the private housing firm may default on repayments, the investment trust may buy a CDS from a hedge fund. The CDS is worth  £1 million. The investment trust will pay an interest on this credit default swap of say 3%. This could involve payments of  £30,000 a year for the duration of the contract. If the private housing firm doesnt default. The hedge fund gains the interest from the investment bank and pays nothing out. It is simple profit. If the private housing firm does default, then the hedge fund has to pay compensation to the investment bank of  £1 million the value of the credit default swap. Therefore the hedge fund takes on a larger risk and could end up paying  £1million The higher the perceived risk of the bond, the higher the interest rate the hedge fund will require. Credit default swaps are used not only by investment banks, but also by other financial institutions. Corporate entities use credit default swaps either for protection purposes, to hedge or to sell. Investment banks are primarily affected by the buyers. If a number of major corporate entities have bought protection from the same investment bank, and all of them fail simultaneously, this will put pressure on the investment bank to pay out. Moreover, the credit risk caused by the above failure may lead to other risks, such as liquidity risk, market risk and operational risk. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Some of the top banks in America are carrying unknown gambling risks that no one has warned about, and they are all tied up in U.S. bank derivative portfolios (Edwards M, 2004). Commodity Swap A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a fixed price over a specified period. The vast majority of commodity swaps involve oil. A swap where exchanged cash flows are dependent on the price of an underlying commodity. This swap is usually used to hedge against the price of a commodity. Commodities are physical assets such as precious metals, base metals, energy stores (such as natural gas or crude oil) and food (including wheat, pork bellies, cattle, etc.). In this swap, the user of a commodity would secure a maximum price and agree to pay a financial institution this fixed price. Then in return, the user would get payments based on the market price for the commodity involved. They are used for hedging against Fluctuations in commodity prices or Fluctuations in spreads between final product and raw material prices. A company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. This is particularly so when the output prices may not change as frequently as the commodity prices change. In such cases, the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. There are two kinds of agents participating in the commodity markets: end-users (hedgers) and investors (speculators). Commodity swaps are becoming increasingly common in the energy and agricultural industries, where demand and supply are both subject to considerable uncertainty. For example, heavy users of oil, such as airlines, will often enter into contracts in which they agree to make a series of fixed payments, say every six months for two years, and receive payments on those same dates as determined by an oil price index. Computations are often based on a specific number of tons of oil in order to lock in the price the airline pays for a specific quantity of oil, purchased at regular intervals over the two-year period. However, the airline will typically buy the actual oil it needs from the spot market. Equity Swap The outstanding performance of equity markets in the 1980s and the 1990s, have brought in some technological innovations that have made widespread participation in the equity market more feasible and more marketable and the demographic imperative of baby-boomer saving has generated significant interest in equity derivatives. In addition to the listed equity options on individual stocks and individual indices, a burgeoning over-the-counter (OTC) market has evolved in the distribution and utilization of equity swaps. An equity swap is a special type of total return swap, where the underlying asset is a stock, a basket of stocks, or a stock index. An exchange of the potential appreciation of equitys value and dividends for a guaranteed return plus any decrease in the value of the equity. An equity swap permits an equity holder a guaranteed return but demands the holder give up all rights to appreciation and dividend income. Compared to actually owning the stock, in this case you do not have to pay anything up front, but you do not have any voting or other rights that stock holders do have. Equity swaps make the index trading strategy even easier. Besides diversification and tax benefits, equity swaps also allow large institutions to hedge specific assets or positions in their portfolios The equity swap is the best swap amongst all the other swaps as it being an over-the-counter derivatives transaction; they have the attractive feature of being customizable for a particular users situation. Investors may have specific time horizons, portfolio compositions, or other terms and conditions that are not matched by exchange-listed derivatives. They are private transactions that are not directly reportable to any regulatory authority. A derivatives dealer can, through a foreign subsidiary in the particular country, invest in the foreign securities without the withholding tax and enter into a swap with the parent dealer company, which can then enter a swap with the American investor, effectively passing on the dividends without the withholding tax Interest Rate Swap An interest rate swap, or simply a rate swap, is an agreement between two parties to exchange a sequence of interest payments without exchanging the underlying debt. In a typical fixed/floating rate swap, the first party promises to pay to the second at designated intervals a stipulated amount of interest calculated at a fixed rate on the notional principal; the second party promises to pay to the first at the same intervals a floating amount of interest on the notional principle calculated according to a floating-rate index. The interest rate swap is essentially a strip of forward contracts exchanging interest payments. Thus, interest rate swaps, like interest rate futures or interest rate forward contracts, offer a mechanism for restructuring cash flows and, if properly used, provide a financial instrument for hedging against interest rate risk The reason for the exchange of the interest obligation is to take benefit from comparative advantage. Some companies may have comparative advantage in fixed rate markets while other companies have a comparative advantage in floating rate markets. When companies want to borrow they look for cheap borrowing i.e. from the market where they have comparative advantage. However this may lead to a company borrowing fixed when it wants floating or borrowing floating when it wants fixed. This is where a swap comes in. A swap has the effect of transforming a fixed rate loan into a float
Wednesday, October 2, 2019
Themes of Prejudice and Tolerance in To Kill a Mockingbird Essay
The book To Kill a Mockingbird by Harper Lee is a Pulitzer Prize winning novel. It is set in the 1930s, a time when racism was very prominent. Harper Lee emphasizes the themes of prejudice and tolerance in her novel through the use of her characters and their interactions within the Maycomb community. The narrator of the story, Scout, comes across many people and situations with prejudice and tolerance, as her father defends a black man. Racial prejudice is widespread in the county of Maycomb, and a prime example is the Tom Robinson case. Tom, a black man, was accused of raping Mayella, a white woman. Atticus puts forward all evidence from his witnesses that clearly proves Tom was innocent, Jem even says, ?and we?re gonna win Scout. I don?t see how we can?t? (pg 206), but Tom still received a ?Guilty? verdict. Atticus tried removing the prejudiced thoughts of the jurors by saying, the assumption - the evil assumption - that all Negroes lie, that all Negroes are basically immoral beings. (pg 208). Atticus? saying insinuated the point that all of God?s children were created equal. To the jury, the only important thing was that Tom was black and the accuser was white, he never stood a chance under those conditions. These racial tensions between blacks and whites had made their way into the courtroom, a place where everyone should receive a fair trial no matter what race or colour, but an unjust verdict was reached. The prejudice that was felt towards Tom made him lose all hope of freedom, and as a result, he died upon an escape attempt. Tom was victim of racial prejudice and loss of hope. The novel not only explores racial prejudice, but also prejudice against gender and social status. Maudie is a victim of prejudice agains... ... situation from their perspective, and in this case, Atticus reveals Mrs Dubose being a morphine addict. She wanted to die without having to rely on the drug and her escapades were what it easier. Jem and Scout understood the situation and learnt the importance of tolerance. The themes of prejudice and tolerance are conveyed strongly through the characters and their dilemmas. Jem and Scout learn of the prejudice of the town Maycomb to Atticus defending a black man, Tom Robinson. However, Miss Maudie, Calpurnia and several others show that not everyone in Maycomb are so judgemental. Jem and Scout also learn how to deal with situations sensibly from their father, they learn how to be tolerant. Thus, the novel?s characters demonstrate both prejudice and tolerance. Works Cited Lee, Harper. To Kill a Mockingbird. New York City, NY: J.B.Lippincott Company, 2008.
Tuesday, October 1, 2019
GATHERING OF OLD MEN :: essays research papers
A Gathering of Old Men by Earnest J. Gaines is a great novel about race relations in the south. The novel begins with a child narrator who relates the report that there has been a shooting on a Louisiana plantation, and a white, Cajun farmer Beau Boutan, is dead. He has been killed in the yard of an old black worker, Mathu. Because of the traditional conflict between Cajuns and blacks in South Louisiana, the tension in the situation and the fear of the black people is immediately felt in the novel. I would definitely recommend this book to someone else. Gaines uses the fifteen narrators to deal with the changing relationship between the Cajuns and the blacks in Louisiana. As each narrator picks up the story, we see the tension between the past and the present, the conflict between the whites and the blacks. This allows Gaines to set up the unfolding of the depths of character and the courage of the men.      Mapes, the white sheriff who traditionally dealt with the black people by the use of intimidation and force, finds himself in a frustrating situation of having to deal with a group of black men, each carrying a shotgun and claiming that he shot Beau Boutan. In addition, Candy Marshall, the young white woman whose family owns the plantation, claims that she did it. As each person tells the story, he takes the blame and, with it the glory.      Gaines technique allows the characters to reveal themselves and their relations with others. We hear the story through the voices of the old black men, a black woman, a child, and the white narrators. We not only see the conflicts of the blacks, but also the conflicts of the Cajuns as well.      It is very interesting the Gaines didn’t give the three main characters a voice. The reason that I think that he did it this way is because Mathu knows what really happened. He is the only one who knows who killed Beau Boutan.
Homelessness and Solutions Homeless People
Let’s all help the homeless During the past decade there may have been an increase in homelessness due to the struggles of daily life. People have many ideas on ways that the government or communities can help improve these situations. It is not easy to help the homeless but any help can improve their lives and our streets. It may not take them completely off our streets but it can help them to get back on their feet.In a New York Times article, â€Å"Rooms of Their Own†on January 21, 1990 by Anna Quindlen, she reports that after observing people on the streets that all they want it a safe place to live to call home where they can have some privacy. She describes that many are mentally ill that the government cannot support any longer. Some homeless are former inmates that just need a little help getting back into society. Anna argues that the government should have to help by housing them in small studio like room to help them get back on their feet.By doing this it m ay get them back in the community and working soon to be on their own and not need the help any longer. Stuart D. Bykofsky complains in Newsweek, â€Å" No Heart for the Homeless†, on December 1, 1986 that he is fed up with the homeless laying around in the streets and making his community disgusting and unsafe to walk. He argues that why should individuals settle for these kinds of people living on there property for free and get away with it. He believes that it is not fair that they get to live on the streets for free and whileRivas 2 tax payers are getting fined for any reason. Stuart explains that the homeless need no excuse to live on the streets if there is a shelter to go to. It is their choice to go but if they choose not to then they should be fined for it as well. Not all homeless are the same because they all have different situations on why they have become homeless. Some of them have gotten laid off and simply cannot find w a job to support their families. This is all a part of Steven’s Vanderstaaty claim in his book, â€Å"Solutions Homeless People Seek†.He reveals that these unemployed people just want to work so they can get back into the community, but believe they shouldn’t have to go through all different kinds of training and programs for a job that they already have experience in. He points out that what homeless need is help getting back to society by their certain situations they may face of drug and alcohol programs or resources to help each individual that may need help mentally, physically or financially.After reading all three essays I find that any help would it be, donating time or money would help the homeless. It would show that the community does care for them as well as their surroundings to make it a cleaner and a safer place to live. Homeless or not everyone needs help may it be financially, emotionally or physically the government should have resources to help everyone!
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