OPEN INTEREST F AND O TRICKS

Derivative Trading Rules :   OPEN INTEREST TRICKS

1.

When open interest rises during a rally, it confirms the uptrend and gives a signal that it is safe to add to long positions.

It shows that more short sellers are coming into the market. When they bail out, their short covering is likely to push the rally higher.

2.

When open interest rises while prices fall, it shows that bottom-pick­
ers are active in the market. It is safe to sell short because these bar­
gain hunters are likely to push prices lower when they throw in the
towel.

Open interest rising during a downtrend, it shows that shorts are aggressively selling while bottom-pickers are buying. Those bargain hunters are likely to bail out when falling prices hurt them, and their selling will push prices even lower.

3.

When open interest rises while prices are in a trading range, it is a
bearish sign. Commercial hedgers are more likely to sell short than
speculators. A sharp increase in open interest while prices are flat
shows that savvy hedgers are probably shorting the market.

4.

When open interest falls sharply while prices are in a trading range, it
identifies short covering by major commercial interests and gives a
buy signal. When commercials start covering shorts, they show that
they expect the market to rise. 

5.

When open interest falls during a rally, it shows that both winners and
losers are getting "cold feet." Longs are taking their profits, and shorts
are covering. Markets discount the future, and a trend that is accepted
by the majority is ready to reverse. If open interest falls during a rally,
sell and get ready to sell short.

6.

When open interest falls during a decline, it shows that shorts are cov­
ering and buyers are taking their losses and bailing out. If open interest
falls during a slide, cover shorts and get ready to buy. 

7.

When open interest goes flat during a rally, it warns that the uptrend is
getting old and the best gains have already been made. This gives you
a signal to tighten stops on long positions and avoid new buying. 

8.

When open interest goes flat during a decline, it warns you that the 

downtrend is mature and it is best to tighten stops on short positions. 

9.

Flat open interest in a trading range does not contribute any new infor­
mation.

A 10 percent change in open interest deserves serious attention, while a 25 percent change often gives major trading messages. The meaning of rising, falling, or flat open interest depends on whether prices are rallying, falling, or flat at the time of change in open interest.

More on Open Interest à

The higher the open interest, the more active the market, and the less slippage you risk while getting in and out of positions. Short-term traders should focus on the markets with the highest open interest. In the futures markets, it pays to trade the delivery months with the highest open interest.

Open interest falls when a trader who is long trades with someone who is short. When both of them close out their positions, open interest falls by one contract because one contract disappears. If a new bull buys from an old bull who is getting out of his long position, open interest remains unchanged: Open interest also does not change when a new bear sells to an old bear who needs to buy because he is closing out his short position.

Buyer ------ Seller -----                                       Open Interest

New buyer  --   New seller           ---                       Increases

New buyer   --  Former buyer sells --                      Unchanged

Former seller buys to cover New seller ---               Unchanged

Former seller buys to cover Former buyer sells----    Decreases

OPTIONS is one of the safer derivative tool to take profit out of stock market, in options you will have minimum risk higher Profit..Loss is minimum..

Future trading is very risky..

BASEL 3

Basel 3 will be implemented by next year is a Successor of Basel 1 and Basel 2 Norms for Banking regulation.


Basel III" is a comprehensive set of reform measures, developed by the Basel Committee (Bank for International standards) on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.


 These measures aim to:

1.    improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source

2.    improve risk management and governance

3.    strengthen banks' transparency and disclosures.

4.    Reduce high Leveraging of the Financial institution.

5.    Increase the Tier 1 Bank Capital ratio.

The Basel agreement is the cornerstone of efforts by BIS following the 2007-2009 financial crisis to make sure the global banking system is more robust.

JPMorgan's announcement last month that a hedging strategy had gone crooked, producing at least $2 billion in unexpected trading losses, has been pointed to as a reminder of the need for substantial capital cushions.

The new capital standards would force banks to rely more on equity than debt to fund themselves, so that they are able to better withstand significant losses.

The banking industry has complained that the rules could limit their ability to lend, since that would require most banks to hold more cash relative to their total assets.

So, the idea is to have bigger buffers against losses, and to make it harder for financial institutions to fail, bringing down the world's financial system.

The accord, which is to be phased in from 2013 through 2019, will require banks to maintain top-quality capital equivalent to 7 percent of their risk-bearing assets, about three times what they are required to hold under existing rules

It is up to each country to write rules to implement the Basel agreement for its banks.

This provision would hit the largest international financial institutions in US such as JPMorgan Chase & Co, Goldman Sachs Group Inc.. 

PROS:

1.    Ensuring that all banks have a minimum amount of capital, equal and transparent between countries.

2.    Financial stability in the world.

3.    Recession free world.

CONS:

1.    While the intention to strengthen capital and liquidity buffers for the banking system is appropriate, the implementation of such metrics and their combined effects on the economy at large bear close scrutiny and further analysis. In fact, one concern that seems to go unnoticed is the cumulative effect of regulation on amplifying procyclical outcomes to the loss of consumers, investors and ultimately taxpayers.

2.    Banks holding cash as a buffer would make it harder for them to lend

3.    Will reduce the GDP of the country by minor basis points.

4.    While full implementation of the standards is years away, the study estimated that banks would need to raise an additional $500 billion in capital to comply with the requirements.

5.    Bank’s returns to fall by more than 3% under the new Basel III regulations or about one quarter of what their returns are currently. 

Most of the Banks in different countries already met Tier 1 capital requirements like Australia :
They are on an accelerated timetable compared to most other global banks, who will have until 2015 and also most Islamic Banks : Already exceeded the requirement.
The worst hit Banks in the world who could fail to meet :
European banks like Spanish, Italy Banks.

Recent News: Recently US federal reserve approved most of the Basel 3 norms, now even small Banks too in US need to soon follow Basel 3

Tagged as:BASEL, BASEL 1, BASEL 2, BASEL 3, BANK LAW, BIS, US BANK

Foreign Currency Convertible Bond - FCCB

FCCB's are nothing but a BOND, it's convertible means it can be converted into Stocks upon redemption or future date totally depends on investor interest if they want it to be converted into Stocks or not.

This bond is having Warrants attached to it, that means if stock price of the company reaches the one that is mentioned in the bond investors have the choice to convert this Bond into Shares getting benefits of appreciation of the stocks, if not than any how Principal will be given back to the investor by the company.

Investor also has the advantage of getting regular Coupon payments each year. 

It is foreign currency means A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency.

Companies issue's FCCB's to raise money in foreign currencies.

FCCB's appear on the liabilities/debt side of the issuing company's balance-sheet.

It's very risky for the company see below example :

Eg : Suzlon issued FCCB, redemption of which is going to be happen on june this year, now since Dollar is already surpasses 55 ( they have issued FCCB when dlr is below 50 ), company facing severe pressure of getting default, since they have issued in dollar and need to pay in dollar...company got the payment in USD/INR BELOW 50 and they need to pay back amount in usd/inr 56..

suppose Suzlon got 1 LAC Dollar = 50 LAC inr

now Suzlon need to pay 1 LAC Dollar = 56 LAC inr..

12 % Loss...also they have paid interest as coupon to investor..
Since Suzlon price is also not appreciated instead it got 70 % reduced..


Many companies in India is facing trouble as FCCB's date near maturity..

Tagged as:FCCB, BONDS

Credit default swap

A Credit Default Swap (CDS) is now a days one of the most widely traded form of credit derivative, it's one more example of Hedging tool. It is similar to an insurance contract, providing the buyer need to pay to buy (insurance) protection from another party for losses that may occur as a result of the ( loan, sovereign debt, company bond ) default, bankruptcy or credit rating downgrades.

The "buyer" of protection pays a fixed fee or premium for the protection, and in return, the "seller" of protection promises to make a payment equal to the losses incurred upon the occurrence of credit events

The "buyer" of protection = XXX Bank 

The "seller" of protection = YYY Insurance Company 

Suppose Bank XXX buys corporate bonds issued by a IT Company ZZZ.

In order to hedge the default risk of ZZZ, Bank XXX buys a CDS from Insurance Company ZZZ.

XXX pays a periodic fee to ZZZ, in exchange for a credit default protection

In return, ZZZ agrees to pay XXX a set amount if a credit default event occurs.

Tagged as:CDS, FINANCIAL, CREDIT

US Quantitative easing (QE)

2008 Financial crisis – SEP/OCT 2008

After Crisis, FED wanted to improve the economy, business sentiments and labour conditions in the US. Started rounds of QE :

QE1: Nov. 25, 2008 - March 31, 2010

FED purchased a total of 1.25 Trillion dollar Mortgage backed securities to lower mortgage interest rates and increase the availability of credit for homebuyers to help support the housing market and improve financial market conditions.

QE2: Nov. 3, 2010 - June 30, 2011

The Fed continued to reinvest payments on securities purchased during the QE1 program. In addition, it began the purchase of $600 billion of longer-term Treasury securities to promote a stronger pace of economic recovery.

Operation Twist: Sep 21, 2011 – June 30, 2012:

Fed announce to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed's own portfolio.

This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and without expanding the Fed's balance sheet, therefore hopefully avoiding the inflationary pressure associated with QE

QE3 ?? Next soon..

Tagged as:QE, QE1, QE2, QE3, CRISIS, US

Volcker Rule

Proposed Rule Regarding Prohibitions and

Restrictions on Proprietary Trading (Volcker Rule)

 Section 619 of the Dodd-Frank Act, among other things, generally prohibits two activities of banking entities.

1.  · It prohibits federally insured depository institutions, bank holding companies, and their subsidiaries or affiliates (banking entities) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account, subject to certain exemptions. 

2.  · It prohibits owning, sponsoring, or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions. 

This provision restricts banks' ability to trade for their own profit, a practice known as proprietary trading. It is named for former Federal Reserve Chairman Paul Volcker.

Analyst say proprietary trading was not a cause of the 2008 financial crisis and the rule is a means of political revenge on an unpopular industry. Advocates of stronger regulation argue that the rule would have prevented JPMorgan's loss. They say the trades were made to boost bank profits, not to protect against market-wide risk.

JPMorgan announced this month a trading loss of at least $2 billion on a botched hedging strategy. Since that announcement, potential losses have mounted. Advocates of stronger regulation argue that the rule would have prevented JPMorgan's loss. They say the trades were made to boost bank profits, not to protect against market-wide risk.Many Question's have been raised after JPMorgan, the largest U.S. bank, revealed that a faulty hedging strategy had generated a loss 2 Billion dollar that could reach $5 billion.

The rule was slated to be finalized by July but regulators have indicated they will likely miss the deadline. Banks will have until 2014 to fully comply

Tagged as:VOLCKER, JP MORGAN

FATCA - Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The act will require foreign financial institutions to look for and report American account holders or face a 30 per cent witholding tax on American investments from 2013.
(1) undertake certain identification and due diligence procedures with respect to its accountholders;

(2) report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Tagged as:FATCA, US TAX

FATCA US FOREIGN US REGULATION World TAX TAX VOLCKER Related Link