What GOVT. should do?

The no of suicide cases are more from the financial crisis arising out of stock market meltdown compared to farmers. Therefore the need of the hour is to restore confidence.

Ask FII's to reverse all their lending within 30 days. 30 days time frame is more sufficient to cover all lending in the light of the fact that FII's themselves agree that selling is more due to redemption pressure. This act will provide exit to all wanting to sell due to forced sell. It will act as balancer.

Reduce STT to pre budget level to bring back jobbers which used to provide handsome amount of liquidity. Govt can afford to forgo small amounts of tax worth Rs 300 to 1000 crs on capital gains and STT as they are now saving over Rs 1 lac crores in OIL.

Make short term capital gains tax zero as this will help only domestic investors and help divert savings. FII's are in any case using tax heavens to avoid tax in India.

Bank lending against shares to be raised from Rs 20 lacs to Rs 200 lacs and the margin should be only 30 pc instead of 50 pc to restored to 50 pc after market reached 10000 plus.

All M F investments should be made dividend tax free. All savings diverted to MF will get IT benefit upto Rs 5 lacs across the board from the existing Rs 1 lac selectively.

Cut the CRR rate repo rate and interest rate simultaneously to create across the board impact on liquidity and consumption.

Use the market stabilization funds by investing in the stock market which is being done by all Govt's world over.


What exchanges and market regulators can do…

Differentiate between long and short by imposing double margins on shorting. The margin on long had been increased to 25% in case of nifty recently which has also triggered in huge winding up of long due to margin as well as mark to mark. At the same time shorting has seen mark to mark credit giving upper hand to short sellers. Margins should be made 50 pc in case of shorting which could provide level plying. This will help short covering.

Increase the creeping acquisitions limits to 15% across the board so that all promoters wish to provide exit to investors mat use this opportunity to buyback their shares.

Introduce physical settlement immediately. JPC in 2003 has directed FNIMIN and market regulator to introduce the physical settlement which has till date not been implemented. This has been used to distort the share prices on the last day of the settlement. If this is not possible then the derivative market be renamed as speculative markets as the very purpose of hedge is missing.

There is mechanism to bring the price rigging to book where even Rs 50000 benefit has met with market regulators action in rising market but there is no mechanism in vertical fall in scrips. There is no instance where investigation has resulted in action in shorting.

All IPO should have a condition of market making for 12 months. The price band be fixed. This will allow Govt funds, PF, ESI, trusts and small savings to enter capital markets to make it healthy. This will also stop R Power and Resurger like episode in the market.

Bring all foreign broking houses under insider trading rules for making any comments in any share where they have executed buy or sell transactions on behalf of their foreign clients. Typically it is seen they execute huge buy and/or sell orders for weeks and months after the event is getting over they come out with reports and issue comments of weakness and firmness as the case may be. Recently it is seen in Tisco and RIL.

Why Lehman & Merrill Fell

IT all began with the sub-prime crisis.

If you lost your money in the market crash of January 2008, here's the route to your loss, in chronological order.
2001-2005: House prices in the US begin to rise rapidly. Banks lend aggressively and create a subprime industry.Sub-prime lending refers to lending (at slightly higher interest rates) to people who may not be eligible for a loan under normal circumstances. Maybe they don't have a regular job or income, or have defaulted in the past.Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they good sell the mortgaged property.2005: The booming housing market halted abruptly in many parts of the US.2006: Prices are flat, home sales fall.February 2007: Sub-prime industry collapses in the US; more than 25 sub-prime lenders declare bankruptcy, announce significant losses, or put themselves up for sale.While they were lending, banks did not factor in the possibility of a fall in property prices. When the Federal Bank (the US equivalent of RBI) started increasing interest rates, the sub-prime borrowers started defaulting and banks started selling off the mortgaged properties. As more and more properties came into the market for selling, the property prices fell.August 2007: Many leading mortgage lenders in the US filed for bankruptcyMarch 2008: Bear Sterns falls.September 2008: Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.Between 2001 and 2006, the US financial markets had developed a new product - a bond securitised against the mortgages.In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merrill Lynch) who in turn sold retail bonds to individuals.Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honoured, the banks could not repay these financial institutions who in turn could not repay retail investors.

The Stock Market - FAQ

There have been some dramatic events happening in the stock markets recently. The papers are full of news like “Sensex sees largest fall” and similar things that don’t make sense. And so, I’ve applied my higher powers of reasoning to figure out just what is going on.
For your benefit, here’s a short FAQ on the stock market.
Q: What is this SENSEX?
A: SENSEX is short for SENSeless EXperience. It summarizes what that stock brokers and investors feel when they are trading. Trading in the stock market is like putting a rabbit on a roller coaster. It just goes round and round and upside down, and the rabbit has no idea whatsoever of just what the hell is happening. But that doesn’t stop the rabbit from enjoying the whole experience.
Q: OK, then why is this SENSEX falling?
A: This is really a huge cover up by the government. If you ask the regular media, they’ll tell you some weird reasons like the “sub-prime crisis” or “credit market squeeze” or some random thing like that, but let me tell you, all that stuff is not true. The real reason the SENSEX is falling is something else. It’s falling because of an ancient Egyptian mummy curse.
That’s right folks, you heard it here first. The Ancient Mummies were not very big fans of the stock markets. We know this because they built pyramids, and as everyone knows, you can’t trade in a pyramid scheme. It’s illegal. Anyway, so they cursed all the stock markets, and here’s the actual curse: (Translated)
A thousand moons from now, beyond hell’s stairs,
The world will be ruled by the bulls and the bears!
By the power of the sun, I put upon them this curse,
May their stupid stock market one day go in reverse!

And that’s the reason the stock markets are falling.
Q: Is that a bad thing? Does this mean there is a recession? All the stock markets worldwide are falling!
No, not all the markets are falling, only the ones in the Northern Hemisphere.
Everyone knows that stock market movements are cyclical - They go up and down. Much like the seasons - When it’s summer in the Northern Hemisphere, it’s actually winter in the Southern Hemisphere. It’s the same with the stock markets. The Northern Hemisphere is experiencing a recession, but the Southern Hemisphere is all booming. Soon, the boom will return to the Northern Hemisphere (because of the earth’s revolution), and everything will be fine once again.

Q:But what about till then? Am I going to get laid off?
A:Yes, you’re going to get laid off. Because you’re reading this blog instead of working

Black Scholes Model-An insight into Financial Engineering

In 1973, Fischer Black and Myron Scholes published their groundbreaking paper the pricing of options and corporate liabilities.Not only did this specify the first successful options pricing formula, but it also described a general framework for pricing other derivative instruments. That paper launched the field of financial engineering. Black and Scholes had a very hard time getting that paper published. Eventually, it took the intersession of Eugene Fama and Merton Miller to get it accepted by the Journal of Political Economy. In the mean time, Black and Scholes had published in the Journal of Finance a more accessible (1972) paper that cited the as-yet unpublished (1973) option pricing formula in an empirical analysis of current options trading.The Black and Scholes Option Pricing Model didn't appear overnight, in fact, Fisher Black started out working to create a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. Black and Scholes can't take all credit for their work, in fact their model is actually an improved version of a previous model developed by A. James Boness in his Ph.D. dissertation at the University of Chicago. Black and Scholes' improvements on the Boness model come in the form of a proof that the risk-free interest rate is the correct discount factor, and with the absence of assumptions regarding investor's risk preferences.
The Model:

where c is the Call option value.




where p is the put option value.






Here, log denotes the natural logarithm, and:
s = the price of the underlying stock
x = the strike price
r = the continuously compounded risk free interest rate
t = the time in years until the expiration of the option
v = the implied volatility for the underlying stock
N = the standard normal cumulative distribution function.
e = Exponential term(2.71828)

In order to understand the model itself, we divide it into two parts. The first part, SN(d1), derives the expected benefit from acquiring a stock outright. This is found by multiplying stock price [S] by the change in the call premium with respect to a change in the underlying stock price [N(d1)]. The second part of the model, xe(-rt)N(d2), gives the present value of paying the exercise price on the expiration day. The fair market value of the call option is then calculated by taking the difference between these two parts.
Assumptions of the Black and Scholes Model:
1) The stock pays no dividends during the option's life
Most companies pay dividends to their share holders, so this might seem a serious limitation to the model considering the observation that higher dividend yields elicit lower call premiums. A common way of adjusting the model for this situation is to subtract the discounted value of a future dividend from the stock price.
2) European exercise terms are used
European exercise terms dictate that the option can only be exercised on the expiration date. American exercise term allow the option to be exercised at any time during the life of the option, making American options more valuable due to their greater flexibility. This limitation is not a major concern because very few calls are ever exercised before the last few days of their life. This is true because when you exercise a call early, you forfeit the remaining time value on the call and collect the intrinsic value. Towards the end of the life of a call, the remaining time value is very small, but the intrinsic value is the same.
3) Markets are efficient
This assumption suggests that people cannot consistently predict the direction of the market or an individual stock.
4) No commissions are charged
Usually market participants do have to pay a commission to buy or sell options. Even floor traders pay some kind of fee, but it is usually very small. The fees that Individual investor's pay is more substantial and can often distort the output of the model.
5) Interest rates remain constant and known
The Black and Scholes model uses the risk-free rate to represent this constant and known rate. In reality there is no such thing as the risk-free rate, but the discount rate on U.S. Government Treasury Bills with 30 days left until maturity is usually used to represent it. During periods of rapidly changing interest rates, these 30 day rates are often subject to change, thereby violating one of the assumptions of the model.
6) Returns are lognormally distributed
This assumption suggests, returns on the underlying stock are normally distributed, which is reasonable for most assets that offer options.
The Black and Scholes Model:
Delta:

Delta is a measure of the sensitivity the calculated option value has to small changes in the share price.
Delta for a call is

Delta for a Put is


Gamma:
Gamma is a measure of the calculated delta's sensitivity to small changes in share price.
Gamma for a Call and put is one and the same..



Theta:
Theta measures the calculated option value's sensitivity to small changes in time till maturity.

Theta for a call is


Theta for a put is
Vega:
Vega measures the calculated option value's sensitivity to small changes in volatility. Vega for a call and put is one and the same..

Rho:
Rho for a call is

Rho for a Put is