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Vinod Gupta School of Management, IIT KHARAGPUR: About Fin-o-Menal
Vinod Gupta School of Management, IIT KHARAGPUR: About Fin-o-Menal
August 1, 2011
About Fin-o-Menal
Fin-o-Menal is the Fortnightly Financial News Letter of VGSoM which is published by Finte`est, the Finance Club.
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Editors
Harish Thangaraj Lavanya Rajasekaran
44.27
63.02
72.10
6.87
Editors Note
A warm welcome to the Batch of 2013! Heres wishing you all the very best from team Finte`est!
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Fin-0-Menal
Volume 2, Issue 1
August 1, 2011
Equity research @ irevna Irevna, a division of CRISIL, is worlds leading research and analytics outsourcing service provider. Founded in 2001, the company was initially known as Irevna solutions Private Limited. In 2005, it was acquired by CRISIL and renamed as Irevna, a division of CRISIL. They work by the KPO business model. Irevna supports worlds leading commercial and investment banks, as well as insurance companies, corporations, consulting firms, private equity players and asset management firms. They provide Financial, corporate and Analytical services. Financial Services primarily concentrates equity and credit research. Apart from them several other research divisions are provided like commodities research, derivatives, retail risk management etc. I joined one of the teams in Equity Research division for my internship. During my internship I had opportunity to work on live projects. My assignments in Irevna were primarily about building financial models and updating them. On my first week at Irevna, I was given a sample financial model for understanding. And after a week I was asked to build a model right from scratch for one of their clients. Building model typically involved aggregating the financial data from filings, linking the financials, analysing, forecasting the values for future and valuation. My mentors helped me in understanding when a financial model is built from scratch, how and why the financials are linked with each other, how forecasting can be done and the various valuation methods that can be used. Financial modelling done was a sellside analysis. Recommendations are made whether to Buy/Sell/Hold their shares in a company from the results obtained by the modelling. Financial models are updated whenever annual filings are released from company. This is to know their accuracy of forecasting and valuation. With my managers support and mentors guidance, I completed my assignment within the deadlines. I was provided with feedback about my work at each stage of work which helped me to proceed in the right direction during my assignment. Apart from project, I had opportunity to participate in the weekly newsletter of my team, knowledge sharing sessions and Friday evening floor parties. I also had an opportunity to be a part of CSR initiative of Irevna with SMILE foundation, where a day was spent with kids by organising various activities for them like dance, painting competition and educating them about healthy daily habits to be followed. My internship at Irevna was a very pleasant learning experience. (Contributed by Lavanya Rajasekaran. Summer Internship at Irevna, Equity Research)
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18109
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23500
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10 gm
SILVER
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Kg
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4159
Barrel
Sectors this week INDICES BSE IT AUTO BANKEX BSEPSU METAL LAST 5797 8827 12269 8289 13587
Derivatives @ Irevna Udit and I joined Derivatives division of Irevna for our internship program. Our project was in quantitative finance. We were assigned the task of building a mathematical model for Portfolio optimization based on regimeswitching. The project required knowledge of advanced concepts in statistics and econometrics, which were not part of the curriculum in our first year. With guidance from our project guide regarding reading material for the concepts, efforts were put in to understand the concepts for implementation. Desired results for the project were obtained by implementing the concepts. The model build by us predicted the next regime for various assets like equity, index, and commodity. Based on the predicted regime the returns for the next period were predicted. The returns predicted could lead to portfolio optimization by usage of Mean-Variance theory. The internship provided us with opportunity of working with tools and software like EViews and MATLAB. Our assignment also involved exhaustive use of MS-Excel and VBA. Altogether it was a great experience and learning working with Irevna. (Contributed by Sagar Jha. Summer Internship at Irevna, Derivatives)
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Fin-0-Menal
Volume 2, Issue 1
August 1, 2011
INTERNSHIP @ Bank of India I had a wonderful internship experience at Bank of India. I worked on Credit appraisal An analysis of the project Working Capital financing to SMEs & Principles of the Management for credit risk. I would like to logically divide the project into two phases, the learning phase and the implementation phase. Phase 1: Learning My project intends to give an in depth knowledge about the Credit Appraisal process at Bank of India, the working capital financing for Small and Medium Enterprises (SMEs). I understood the credit rating models (SBS model and LC model) in practice for rating SMEs. Credit rating given by the bank affects the interest charged on SMEs. I learnt about SME Policy of Bank of India and the methods used for working capital assessment such as Turnover Method, MPBF Method, projected balance sheet method. I also reviewed Basel committee reports on Principles of the Management for credit risk. Phase 2: Implementation I performed the following steps while analyzing the working capital credit proposal. As the first step, I analyzed the balance sheet and the financial position of the SME. Next, I analyzed the Credit rating (LC scoring) of the SME. Then borrowers profile / guarantors information was studied and a SWOT analysis of the exposure/ advance was conducted thoroughly. Details of existing borrowings were gathered. Reports / recommendations from existing Bankers on the application were studied. Industry Exposure regulations were taken into account. Caution lists and other recommendations were applied. Valuation certificates of assets and working capital of the enterprise by turnover method were analyzed. Credit risk assessment of the SME was done. Value of existing relationship with the borrower was analyzed. Details of the principal security and collaterals were studied. Finally a set of recommendations were deliberated upon and presented as a proposal to the company. The guide seemed quite happy with the approach followed and the end recommendations. All in all, the experience at BOI was quite satisfactory. Also because, during this phase, I cleared two certifications on Commercial Banking and Investment analysis & portfolio management by the National stock exchange (NSE). (Contributed by Satyam Khatri. Summer Internship at Bank of India)
US Dow Jones
London LSE
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Japan Nikkei 225
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HongKong Hang Seng
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Quote Un-Quote
It's going to take years to come out of this. We're sitting in the terminal waiting for the economy to take flight and instead it's just being delayed month after month after month. - Greg McBride, senior financial analyst at Bankrate.com
Toon of the week
Q u i c k Q u o t e : Raising the Debt Ceiling is kind of like increasing Blood Alcohol Levels to Solve Drunk Driving - Unknown
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Fin-0-Menal
Internship @ ING Vysya
Volume 2, Issue 1
August 1, 2011
ING (International Netherlands Group) is a global financial institution which offers insurance, banking and asset management services. It acquired 44% stake in Vysya Bank in 2002. ING Vysya bank provides services like private banking, wholesale banking, insurance, asset management and it also has financial markets division. I worked in the financial markets division. This department consists of the treasury management team and the sales team. Coming to the project details, my project guide asked me to analyse two or three bonds trading strategies and back-test those strategies in the Indian scenario. Being enthusiastic, I started downloading various books and papers on bonds. For the first two weeks I was going through the material, understood the examples and I found some 15-20 strategies on bonds portfolio management. I was really confused about what strategies to select because in two months, you have to do a scenario analysis of these strategies, back-test them and at the end those
Basel-II accord allows banks to calculate their credit risk capital based on standardized approach and an Internal Rating Based (IRB) approach. Standardized approach uses agency ratings for risk-weighting assets while IRB approach which allows a bank to use internal estimates of components of credit risk. The IRB approach is based on four parameters1. PD- The probability of default of a borrower over a one-year horizon 2. LGD-The loss given default 3. EAD- Total Exposure at default 4. M- Maturity LGD is the fraction of EAD that will not be recovered if there are defaults. The loss given default (LGD) is generally defined asLGD= 100% - Recovery Amount / EAD =100% - recovery rate While Expected loss as an amount: EL = PD*LGD*EAD
might not turn out to be profitable. Another problem is, the bond market in India is very illiquid and a profitable strategy based on U.S. markets might not work in India because of so many restrictions by RBI e.g. short selling for more than one day. So I asked my guide about what strategies to select and he replied that he wants to make money and the ball is in my court. Again I was confused, but this time one thing was clear that whatever I recommend to the bank, it should return good profits. Otherwise there is no use of me sitting there for two months. I selected some strategies, did analysis, collected data from Bloomberg, CCIL and back-tested those strategies which gave good returns. The associate guide helped me very much in my work and gave me valuable suggestions. In the end, I found two strategies which gave decent profits but I was not sure whether they will like/use those. When it was still one week to go, I gave the presentation and they really liked my work and asked me to build models for the two strategies so that they can use them at their trading desk. I have built them and was very much satisfied. I learnt so many new things from my mentors and it was a great experience to work in the dealing room. You often find the dealers and ALM people analyzing news and sometimes you find the Economist and Head of FM giving interviews on rate hikes etc. in CNBC, ET Now and we people listening to them. Overall, it was a great learning experience to work with ING. In many of the internships, you will not have any concrete idea of the project or how to proceed but the success depends on the determination and enthusiasm you have, to do something useful for the company. (Contributed by MSC Arun. Summer Internship at ING Vysya)
LGD is an important determinant of credit risk, and is the degree of uncertainty about recovery owing to borrower defaults. Empirically it has been observed that recovery rate (and hence LGD) is dependent on1. 2. 3. 4. The banks behavior in terms of debt renegotiation with debtors, compromise and settlements which are country specific. The quality of collateral attached to loans. Firm specific capital structure- Seniority standing of debt in the firm's overall capital structure, leverage etc. Industry tangibility- The value of liquidated assets dependent on the industry of the borrower.
The three approaches to obtain average LGD for a portfolio are: Dollar-weighting- for a given period (say one year) = (total $ lost) / (total $ exposure of defaulted loans) Default-weighting-for a given period (say one year) assuming the LGDs of the instruments in the portfolio are known= LGDs / (# of LGDs) Time-weighting- the average over time of either dollar-weighted or default-weighted LGDs of the instruments in the portfolio. Of the three, the last (time-weighting) is the least desirable as it smoothes out high LGD years with low ones and may therefore understate expected LGD. A drawback of default-weighting is that loan size information is averaged out (and hence lost). More sophisticated approaches involve formal modeling using regressions or more complicated techniques such as neutral networks. (Contributed by Manoj Singh. Summer Internship at Brickwork Ratings)
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