Saturday, August 1, 2009

The White Knight

In business, a white knight may be a corporation, a private company, or a person that intends to help another firm.They help the firms who face a potential risk of being taken over.When a hostile bid is made by the acquiring company, the target company looks for another company which is more suitable for it.They negotiatie with this third company for taking it over inorder to escape from being taken over by the bidding company.By doing so, they also enter into a contract of avoiding the lay offs.At the same time, they may give only a part of stake to the white knight retaining the major controlling stake.

There are many types of white knights-unfriendly or friendly. Alternatively, a grey knight is an acquiring company that enters a bid for a hostile takeover in addition to the target firm and first bidder, perceived as more favorable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly bidder).

Thursday, June 18, 2009

Now IRFs in Indian Market

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) jointly agreed on enabling exchange-traded interest rate futures (IRF) this week. Interest rate futures are derivative contracts which have an interest bearing security as the underlying instrument. The introduction of this instrument will help banks, insurance companies, bond houses and provident funds manage risks arising from interest rate fluctuations in their fixed income portfolios. Foreign portfolio investors have been allowed to tradeand banks have been allowed to participate in IRFs, but limits have been put in place to keep their influence under check.

This is the second attempt to introduce IRFs. IRFs were launched over five years ago by the NSE, but did not take off due to deficiencies in product design and banks not being allowed to trade in these products. The new IRFs are based on the yield-to-maturity (YTM) curve, which is used daily by traders for their calculations. To start with, futures contracts will be based on the 10-year government bond, with a semi-annual coupon of 7%. There would be quarterly contracts worth Rs 2 lakh crore per contract. Limits have been placed on gross-open positions of clients across all contracts at 6% of the total open interest or Rs 300 crore, whichever is higher.


Credit Default Swap

Credit Default Swaps (CDS) are fast becoming the dominant vehicle for trading credit risk.Two parties enter into an agreement whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs. Credit events are typically defined to include a material default, bankruptcy or debt restructuring for a specified reference asset. If such a credit event occurs, the party makes a payment to the first party, and the swap then terminates. The size of the payment is usually linked to the decline in the reference asset's market value following the credit event.

In other words it is a specific kind of counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange of regular periodic payments.If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. In turn, the insurer pays the insured the remaining interest on the debt, as well as the principal.

CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money .However, there are a number of differences between CDS and insurance, for example:The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt.Moreover, unlike insurance, CDS are unregulated

Thursday, June 11, 2009


A complex stop-loss order in which the stop is set at some fixed percentage below the market price. If the market price rises, the stop loss price rises proportionately, but if the stock price falls, the stop loss price doesn't change.

This technique allows an investor to set a limit on the maximum possible loss without setting a limit on the maximum possible gain. It does this without requiring to pay attention to the investment on an ongoing basis.A trailing stop helps protect profits while providing downside protection.

Mechanism of Trailing loss order:

An investor decides to buy into a bull market with the possibility of losses covered by a stop loss. A prudent investor will exit the market once the perceived price is achieved losing on the chance to make any money out of the gains over and above his target. But the idea of the trailing loss order is to raise the exit barrier in the direction of trade instead of setting an absolute value on the rise. A trader using a trailing stop loss would still be hanging on to trading buy waiting for newer highs to be conquered, while the investor with the target selling would have exit the market rally by then.

When the market rises, the trailing stop loss also rises in proportion with the market, leading to escalated stop loss level. But when the market declines, the trailing stop loss doesn’t decline in line with the market. So the profits are protected under such orders. The losses are limited to the extent of the stop loss value.

Sunday, May 24, 2009

Rakesh Jhunjhunwala on market gains-May'2009

What's a Gold Bug?

Gold Bug is an individual who is bullish on gold. Gold bugs believe that gold is still a stable source of wealth like it was during the years of the gold standard international currency system. A gold bug invests in gold for what he or she perceives as financial security in the event of a currency devaluation, and often also believes that the price of gold will continue to rise in the future. The term also refers to analysts who consistently recommend gold buy

Gold bugs view gold as a safe investment that will protect them from currency fluctuations or downturns in the financial markets. The market does continue to view gold as the traditional "safe harbor" during times of economic crisis.

The term was popularized in the 1896 US Presidential Election, when William McKinley supporters took to wearing gold lapel pins, gold neckties, and gold headbands in a demonstration of support for gold against the "silver menace", though the term's original use may have been in Edgar Allan Poe's 1843 story "The Gold-Bug," about a cryptographic treasure map.

How to review MF investments before redeeming the units?

If your mutual fund investment is yielding a lower return than what you anticipated, you may be tempted to redeem your units and invest the money elsewhere. The rate of return of other funds may look enticing, but be careful: there are both pros and cons to the redemption of your MF units. Let's examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.

1. Mutual Funds Are Not Stocks

2. When Your Fund Changes

3. Change in Fund Manager

4. Change in Fund Strategy

5. Change in Fund Performance

6. When Your Personal Investment Portfolio Changes

7. The need to rebalance your portfolio

8. Need a tax break

Read here to know in details about the different circumstance..