Auto Car: April 2015

Tuesday, April 28, 2015

Cops fear stock mkt! Experts aid with handy investment tips

One portion of your investments does need to go into areas which are high risk and high reward.

According to research conducted by CNBC-TV18 across various cities with police officers, of various carders and ranks, it was found that 71% of the police officers were not at all comfortable investing in the stock markets.

While 23% were somewhat comfortable and this is something, which is affecting their risk profile is the fact that most of them were single-income families, which means that our target groups were the only earning members of that family having three or more dependents.

It was also found that half of those who were surveyed preferred to invest in bank FDs and about a quarter of them opted for investments in insurance products as well. So, Informed investor not only focused on just their financial fitness, but some tips on physical fitness were also provided.

Here are some investment strategies.

Q: It is not surprising that the participation in the equity markets is so low, but I am surprised that out of all the communities that we meet with and interacted so far this is one community, which does not even invest in mutual funds or any investments of that matter. For a single-income family I realised that they wouldn't want to invest in equities per se. How can equities or mutual funds incentivise for people with this kind of a risk profile?

Anand: It is about budgeting. You have an income, you have your expenses, you have EMIs, you should buy insurance and after that is really what you have is savings. Most Indians - they put their money away in fixed deposits. Yes, capital is absolutely safe; no bank has ever gone bust in India. However, savings and fixed deposit is getting killed by two factors the return is taxable and it is not even beating inflation.

In that context, this is not necessarily to this group, but to the larger audience as well that it does make sense to move some money away from fixed deposits into slightly more riskier assets. There is a myth that mutual funds are for the rich. You can actually buy a mutual fund for as little as Rs 1,000 today. So, you can start investing even Rs 1,000 per month over a period of time and that will in a sense start to build a corpus, which if not anything else will at least help you start beating inflation.

Q: You have dealt with a lot of people with the similar risk profile. What's the one common investment mistake that you have seen and how can it be rectified?

Roongta: When you look at an investor profile, you will have people with all kind of preferences which they have basically been inherited with - there are some things which come through generations into their culture.

So, we do hear people saying that equities, my family has never invested, so I am not going to venture out into it. My forefathers told me equity is not for people like me. So, what is important is that once a person is living in a particular century if I may put so, he needs to understand that there are certain things which he needs to do which are relevant to present times.

In India, we have had situations wherein there were a lot of scams if I may put that word, 'a lot' but things are changing now. Regulatory things are turning around, we are seeing stringent norms. There needs to be confidence that needs to be coming in at this point keeping in mind that regulatory environment has changed.

Coming back to this specific group - we know that there are a large number of people who are earning less than Rs 5 lakh - that's the data that we have. A majority of them are less than 29 years of age. So, average age of the group that we see is about 30 years of age. So, if age is to your side and if you are comfortable understanding what kind of products are available today in the industry, listen to it with an open mind, accept it with an open mind.

If they can allocate some funds out of their total corpus, it does work for them. Another reason why it is even more necessary if I may put so, we are seeing that the large numbers have an annual income of less than Rs 5 lakh.

Secondly, if you are going to invest into a product which does not even beat inflation then you are really going to be struggling very hard to meet your goals. So, with that less corpus that you have, you need your money to work harder.

Unless you do that, it is going to be very difficult to achieve your targets. So, one portion of your investments does need to go into areas which are high risk and high reward, but as long as you have restricted it to a small portion of your total corpus, it should not be a cause of concern.

Abidi: It doesn't matter the amount of investment that you are making but a percentage of that needs to go into assets that will work for you, give you much higher returns than other assets would. So, it may not be a very large percentage but a percentage for sure.

Rajiv raised a very interesting point, he said invest in the century that you live in. There is a myth about bank fixed deposits (FD) being safe when they are not even safeguarding the value of your capital.

Anand: Absolutely, I think bank FD is saving and you have to differentiate between saving and investing. Yes, in a bank FD, your capital is safe but the return that is pretty much worthless as you go into time. The other is, ofcourse, taxes and there is nothing much that we can do about taxes. Every rupee of income that we have, we have to pay taxes on and I think we must look at investment as a return on post tax basis. What are the most efficient tools that are available such that I am able to mitigate or minimize the tax that I am paying? I am already paying a fairly large amount of my salary as tax, I certainly don't want to pay too much more on the interest or investment income that I am making and there are numerous tools there.

Section 80C is available which gives you tax breaks. Use those instruments, public provident fund, which gives you tax free income. Utilize those to the maximum and in that sense at least your post tax income is beginning to go up. It's a subsidy which the government is giving back some of the taxation that is taken from you. Utilize all that and then start to use some of the market instruments that are available.

Abidi: So, like they say debt and taxes are the only certainty so I suppose one of the certainties atleast we can try and minimize and till we arrest inflation, let's try and beat that.

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Monday, April 20, 2015

Gel-Squeezing Cyclists in Lycra Fuel Science in Sport IPO

Science in Sport Ltd. broke away from its parent company, Provexis Plc (PXS), and began trading today after an initial public offering as the maker of nutritional sports gels rides a surge in Britain's Lycra-clad cyclists.

Provexis, a maker of nutritional additives, spun off the company so SiS could focus on expanding the market for Go brand gels, powders and bars. SiS rose 8 percent to 60.5 pence in London, giving the Windsor, England-based company a market value of about 11.7 million pounds ($18.1 million).

More Britons have taken up cycling than any other sport, according to Mintel International, the market research firm where the term Mamil -- middle-aged man in Lycra -- was coined in 2010. SiS Chief Executive Officer Stephen Moon, a former GlaxoSmithKline Plc (GSK) manager, became a Mamil himself to better understand his customers when he joined the company. He owns two carbon-fiber road bikes, a Legend Giau and a Legend HT9.5.

"What do they say now, 'Cycling is the new golf'? I don't care what the phrase is, it's working for us," Moon said in an interview yesterday. "We're in a market that keeps growing."

Cenkos Securities Plc (CNKS) is running the spinoff and the share sale. Royal DSM NV (DSM), the world's largest maker of vitamins, holds about 9 percent of SiS, while U.K. venture-capital trust Downing LLP owns 16.7 percent, Moon said. Provexis stockholders received one share of Science in Sport for every 100 shares of Provexis.

Andy Murray

Science in Sport was created by cycling enthusiast Tim Lawson in a kitchen in 1992 and was bought by Provexis two years ago. About 60 percent of sales come from cyclists, though the brand has been raising its profile among other athletes with help from the London Olympics last year and from Wimbledon champion and Go gel user Andy Murray. SiS has also widened its appeal to soccer fans, supplying products to Manchester United Plc (MANU) players, Moon said.

Provexis halved its underlying ope! rating loss for the year ending in March to 1.1 million pounds, helped by an 11 percent sales gain in Science in Sport products to 5.5 million pounds. The products include versions with caffeine, nitrates to increase stamina or choline to help the body derive energy from fat, the company said. SiS gels are sold online, at cycling shops and in grocery chains including Tesco Plc. (TSCO)

The U.K. is just the beginning. The company aims to expand in the U.S. market through online sales next year. The gels will appear in stores in cycling-friendly pockets of the U.S. such as northern California and Boulder, Colorado, by 2015. SiS is in talks with two companies for a potential joint venture in the Asia-Pacific region including Australia, Moon said.

Elite Equipment

A Mamil is a man between 35 and 45 with a family, who might opt for a high-end bike instead of a sports car as he hits middle age, according to Mintel. At an amateur cycling event recently, Moon said he struggled to spot a bike valued at less than 3,000 pounds.

"Everyone wants what the elites use," he said. That drove a decision in February to sign six-time British Olympic Gold Medal track cyclist Chris Hoy as a brand spokesman. "Mamils know Chris Hoy, they look and see him using our products and that's huge for us."

Moon said he has dismissed several potential suitors "poking and prodding" for assets to buy. Instead, he wants to achieve a goal of 20 percent annual sales growth.

"We sat down with our investors and we said, let's get Science in Sport and push it hard and in three years, let's see where we are then," Moon said. "We haven't had a chance to really grow the business yet."

Tuesday, April 14, 2015

Breaking Down The Binomial Model To Value An Option

In the financial world, the Black-Scholes and the binomial option models of valuation are two of the most important concepts in modern financial theory. Both are used to value an option, and each has its own advantages and disadvantages.

Some of the basic advantages of using the binomial model are:

multiple-period view transparency ability to incorporate probabilities In this article, we'll explore the advantages of using the binomial model instead of the Black-Scholes, provide some basic steps to develop the model and explain how it is used.

Multiple-Period View
The binomial model enables a multi-period view of the underlying asset price as well as the price of the option. In contrast to the Black-Scholes model, which provides a numerical result based on inputs, the binomial model allows for the calculation of the asset and the option for multiple periods along with the range of possible results for each period (see below).

The advantage of this multi-period view is that the user can visualize the change in asset price from period to period and evaluate the option based on making decisions at different points in time. For an American option, which can be exercised at any time before the expiration date, the binomial model can provide insight into when exercising the option may look attractive and when it should be held for longer periods. By looking at the binomial tree of values, one can determine in advance when a decision on exercise may occur. If the option has a positive value, there is the possibility of exercise, whereas if it has a value less than zero, it should he held for longer periods.

Transparency
Closely related to the multi-period review is the ability of the binomial model to provide transparency into the underlying value of the asset and the option as it progresses through time. The Black-Scholes model has five inputs:

Risk-free rate Exercise price Current price of asset Time to maturity Implied volatility of the asset price When these data points are entered into a Black-Scholes model, the model calculates a value for the option, but the impacts of these factors are not revealed on a period-to-period basis. With the binomial model, one can see the change in the underlying asset price from period to period and the corresponding change caused in the option price.

Incorporating Probabilities
The basic method of calculating the binomial option model is to use the same probability each period for success and failure until option expiration. However, one can actually incorporate different probabilities for each period based on new information obtained as time passes.

For example, there may be a 50/50 chance that the underlying asset price can increase or decrease by 30% in one period. For the second period, however, the probability that the underlying asset price will increase may grow to 70/30. Let's say we are evaluating an oil well; we are not sure what the value of that oil well is, but there is a 50/50 chance that the price will go up. If oil prices go up in Period 1, making the oil well more valuable, and the market fundamentals now point to continued increases in oil prices, the probability of further appreciation in price may now be 70%. The binomial model allows for this flexibility; the Black-Scholes model does not.

Developing The Model
The simplest binomial model will have two expected returns, whose probabilities add up to 100%. In our example, there are two possible outcomes for the oil well at each point in time. A more complex version could have three or more different outcomes, each of which is given a probability of occurrence.

To calculate the returns per period starting from time zero (now), we must make a determination of the value of the underlying asset one period from now. In this example, we will assume the following:

Price of underlying asset (P) : $500 Call option exercise price (K) : $600 Risk-free rate for the period: 1% Price change each period: 30% up or down The price of the underlying asset is $500, and in Period 1, it can either be worth $650 or $350. That would be the equivalent of a 30% increase or decrease in one period. Since the exercise price of the call options we are holding is $600, if the underlying asset ends up being less than $600, the value of the call option would be zero. On the other hand, if the underlying asset exceeds the exercise price of $600, the value of the call option would be the difference between the price of the underlying asset and the exercise price. The formula for this calculation is [max(P-K),0].

Assume there is a 50% chance of going up and a 50% chance of going down. Using the Period 1 values as an example, this calculates out as [max($650-600, 0)*50%]+[max(350-600,0)*50%]=50*50%+0*50%= $25. To get the current value of the call option we need to discount the $25 in Period 1 back to Period 0, which is $25/(1+1%)=$24.75. You can now see that if the probabilities are altered, the expected value of the underlying asset will also change. If the probability should be changed, it can also be changed for each subsequent period and does not necessarily have to remain the same throughout.

The binomial model can be extended easily to multiple periods. Although the Black-Scholes model can calculate the result of an extended expiration date, the binomial model extends the decision points to multiple periods.

Uses For The Binomial Model
Besides being used for calculating the value of an option, the binomial model can also be used for projects or investments with a high degree of uncertainty, capital-budgeting and resource-allocation decisions, as well as projects with multiple periods or an embedded option to either continue or abandon at certain points in time.

One simple example is a project that entails drilling for oil. The uncertainty of this type of project arises due to the lack of transparency of whether the land being drilled has any oil at all, the amount of oil that can be drilled, if oil is found and the price at which the oil can be sold once extracted.

The binomial option model can assist in making decisions at each point of the oil drilling project. For example, assume we decide to drill, but the oil well will only be profitable if we find enough oil and the price of oil exceeds a certain amount. It will take one full period to determine how much oil we can extract as well as the price of oil at that point in time. After the first period (one year, for example), we can decide based on these two data points whether to continue to drill or abandon the project. These decisions can be continuously made until a point is reached where there is no value to drilling, at which time the well will be abandoned.

The Bottom Line
The binomial model allows multi-period views of the underlying asset price and the price of the option for multiple periods as well as the range of possible results for each period, offering a more detailed view. While both the Black-Scholes model and the binomial model can be used to value options, the binomial model simply has a broader range of applications, is more intuitive and is easier to use.