### 100% equity(NIFTY50) VS. dynamic allocation (65-90% equity, 35-10% gold)

Did some data crunching and used some calculation matrix so ascertain whether Equity (here NIFTY50) outperformed XAU * INR (Gold in \$ multiplied to INR). Below is the outcome.

Returns

 Asset Class Investment Date Investment Amount Current Date Current Value NIFTY50 19jul1996 100 17Oct2016 757 XAU*INR 19jul1996 100 17Oct2016 614 NIFTY+(XAU*INR)! 19jul1996 100 17Oct2016 892

!asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))

Risk (Standard Deviation)

Equity – 28.42%

XAU * INR – 15.65%

NIFTY+(XAU*INR)! – 23.11%

!asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))

Period wise Out performance

Out of 4821 days, 354 days only NIFTY portfolio would have yielded more where else 4467 days NIFTY+(XAU*INR)!would have outperformed.

!asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))

What data crunching? What analysis?

Data used (last twenty years; Total data points used 4821)

1. NIFTY 50
2. XAU Gold (in \$) * INR (MCX spot wasn’t available from 1996 also MCX spot would include duty impact as well which could tweak relation matrix.

Steps followed

1. NIFTY – Calculated 50D moving average and respective 1Y returns thereafter
2. XAU * INR – Calculated 50D moving average and 1Y returns thereafter

What about chart above? -> 50D 1YMA returns always mean revert

Assuming 40%, a higher end number, on 50D1YMA(50D 1 year moving average return for NIFTY50) I ran following calculation:

IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))

Which says, a fund will not go below 65% and above 90% in equity at any point in time and higher the 50D1yMA nifty returns lower will be the allocation to equity. At 40% 50D1YMA equity allocation would be minimum, which is 65%.

My Myth which disentangled

Gold is not negatively, rather positively correlated to equity(On a long term basis – 20years)

 NIFTY 50 DowJ XAU INR XAU*INR NIFTY 50 1 DowJ 0.86 1 XAU 0.86 0.64 1 INR 0.75 0.84 0.61 1 (XAU*INR)! 0.90 0.75 0.97 0.77 1

!asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))

However correlation turns negative for most of the times when equity 50D1YMA moves northward of 20% and that is the reason why it is successful in generating alpha vis-à-vis NIFTY50 with relatively less risk(Standard deviation)

Again below is the returns matrix

 Asset Class Investment Date Investment Amount Current Date Current Value NIFTY50 19jul1996 100 17Oct2016 757 XAU*INR 19jul1996 100 17Oct2016 614 NIFTY+(XAU*INR)! 19jul1996 100 17Oct2016 892

Suggestion/Feedback is welcome

### Working Capital Limit Computation & Interpretation

Attaching a worksheet wherein one can calculate amount of working capital financing possible from banks. Need some more input on it. Would be glad if you can drop down your knowledge pertaining to aforesaid issue below in the comment box.

Working Capital Limit Calculation

### Liquidity Monitor – May 2014

Read my note on Currency,  India Macro & Debt

### Monthly : Currency, India Macro & Debt

Read my note on Currency,  India Macro & Debt

### Monthly : Currency, Opinion Polls, India Debt & Money Market

Read my note on Currency, Opinion Polls, India Debt & Money Market

### Monthly Liquidity Monitor – April 2014

Read my note on liquidity for April.

Interbank Liquidity APR 2014

### Standby Letter of Credit – Concept & Maneuvering

The content presented below is not prepared by the author of the blog and is rather taken from relevant sites(sources mentioned).

Concept (Source)

• Banker’s Guarantee/Standby Letter of Credit

Provide payment assurance to your beneficiaries

Reassure your buyer or seller of payment with a Banker’s Guarantee/Standby Letter of Credit. In the event that you fail to fulfil your contractual obligations, we will honour payment to your beneficiaries upon receipt of a claim that complies with the guarantee terms.

How does a Banker’s Guarantee/Standby Letter of Credit work?

1. Applicant and beneficiary enter into a contract and agree that a Banker’s Guarantee is required
2. Applicant approaches DBS (issuing bank) to issue a Banker’s Guarantee in favour of the beneficiary
3. DBS issues the Banker’s Guarantee, and
1. sends a financial instruction to an advising bank, which is usually located in beneficiary’s country, or
2. couriers the hardcopy Banker’s Guarantee to the beneficiary, or
3. notifies the applicant of self-collection at any of branches

Why choose DBS Banker’s Guarantee/Standby Letter of Credit?

• Grow your business with the Best Trade Finance Bank in India and the bank that was named the Rising Star for the Transaction Bank category, both awarded by The Asset in 2013
• Leverage DBS Bank’s AA- and Aa1 credit rating to provide your beneficiary with payment assurance upon receipt of claims made out in compliance with the guarantee terms
• Submit your application through any DBS Branch, or IDEAL™ (our online banking platform) for greater convenience

There are two types of SBLOC

1. Performance SBLOC (Source) – Used to guarantee some sort of performance of a contractual obligation. For example, a construction company building a highway bridge might be required by the highway department to put up a performance standby letter of credit ensuring that they will complete the project contracted or to warranty the work. Under normal circumstances the standby would not be drawn upon, however if the contractor abandoned the project midway through completion or if the bridge were unsafe, the standby letter of credit could be drawn upon for its specified dollar amount.

2. Financial SBLOC (Source) – Financial standby letters of credit are irrevocable undertakings by a bank guaranteeing the beneficiary repayment of the purchaser’s financial obligation.

• Pricing
Item Pricing
Issuance Performance: 1.80% p.a., min one quarter and INR 1,500
Financial: 2.00% p.a., min one quarter and INR 1,500
Amendments Financial: 2.00% p.a., min one quarter and INR 1,500
Non-financial: INR 1,500 flat
Payment INR 1,500 flat
Cable INR 750
Courier – Local Local: INR 250
Overseas guarantee Additional 0.25% per quarter, min USD 500

• Product Features
• A Banker’s Guarantee/Standby Letter of Credit can be used as a:
• Payment Guarantee – This protects the beneficiary in the event that the applicant fails to honour the payment under their contract
• Bid Bond – This enables the applicant (bidder) to use DBS’ credit to support the bid, and can also be used to insure the successful bidder that the contract will be met
• Performance Bond – Some bidding contracts require the successful bidder to provide a performance guarantee to protect against a default
• Financial Guarantee – This helps the applicant’s overseas subsidiaries obtain financing or credit facilities from banks
• The Guarantee can be issued by DBS India or by our overseas branches/correspondents, according to the guarantee format provided by the applicant
• Guarantees issued in favour of beneficiaries must be for a specific amount, expiry date and claim period
• Guarantees should not be assigned to other parties
• Guarantees are subject to Indian law and the jurisdiction of the Indian courts

Tricks (Source)

In banking parlance, SBLOC – or, standby letter of credit – is no different from a guarantee that a bank gives; it’s an instrument that has been in vogue for years. But today, it’s emerging as a tool to avert default, downgrade, erosion in market cap, and, of course, bad press. It keeps the banker as well the borrower happy. And, no rules are broken.

What is the deal they cut? Consider a bank in India with Rs 3,000-crore loan exposure to a company that is unlikely to fork out the Rs 1,000-crore that would fall due in the next one year. Both the lender and borrower know that a default is staring in the face. That’s when SBLOC comes in handy. The lender issues an SBLOC on behalf of the company, promising to pay another bank if the company fails to pay up. Unlike usual letters of credit, SBLOC may not be linked to trade and is not contingent on the company doing anything.

The company uses its wholly-owned, offshore subsidiary to discount the SBLOC from a bank abroad. The local bank – which issues the SBLOC – communicates through the SWIFT, the Society for Worldwide Interbank Financial Telecommunication, to inform financial institutions across markets and authenticates the veracity of instrument. The funds obtained by encashing the SBLOC is remitted by the overseas arm to the parent India. The money goes into repaying the local bank.

Three senior bankers and an investment banker ET spoke to confirmed that the SBLOC route is being used selectively by some of the large public sector banks as well as a few private ones to ‘evergreen’ accounts of big borrowers belonging to sectors like steel, pharma and energy equipment. The bankers did not wish to be named as the transactions involve peers and clients.

Offshore banks have no qualms in discounting SBLOCs because they have to recover the money from another bank and not from a company. “What the India bank does is that it converts its fund exposure that would have turned into non-performing asset and impacted earnings, into non-fund exposure… Technically, it is not violating RBI norms,” said the CEO of a leading private bank.

The terms of SBLOCs are between eighteen months and two years. This is the time the bank and the corporate buy in pushing back the problem. If the borrowing company does not repay the local bank by then, the Indian bank takes a hit as it has to pay the offshore bank on the due date. Lenders realise that in many cases they are simply postponing the inevitable. Lest RBI inspectors and auditors describe the deals as a variant of “asset evergreening”, they back it up with statements like “the lender believes that the borrower is facing only a temporary mismatch in cash flow and has faith in intrinsic strength of the company”.

According to an analyst, while such deals are difficult to point out, they will manifest in the off balance-sheet exposure of some banks and show up in their final numbers for FY14.

Refinancing

In certain cases, companies use their clout to obtain refinance from the lending bank – or local banks in the consortium – months before a slice of the loan becomes due. “If Rs 3,000 crore is coming for repayment as against the outstanding of Rs 6,000 crore, the banks give a fresh loan with the stated purpose of ‘refinancing’ the old loan. Here, the fresh loan is given on easier terms and has a staggered repayment schedule,” said the credit head of a private bank. This too is a way to help a company tide over difficult liquidity situation without referring it to the corporate debt restructuring (CDR) forum. “CDR carries a stigma and many large companies want to avoid it. It suits the bank as no extra provisioning is needed on the loan account,” said the person.

According to India Ratings & Research, a Fitch Group company, bank loans worth an estimated around Rs 2 lakh crore to many top corporates are due for refinancing in the next 12-15 months. This amount is around 27-29% of the aggregate net worth of the banking system as of end-FY13.

### CD Valuation!! What Am I Missing?

Just did a math. When I buy a 60Day CD at 9%, it cost me INR 24,63,55,292. Now because asset managers value investment on accrual basis I did the same.

Accrual income per day  = (25,00,00,000-24,63,55,292)/60

= INR 60745.

So every day I will add 60745 to my portfolio. I did this for next 50days and my portfolio then was valued at 24,63,55,292+(60745*50) = 24,93,92,567.

Now the maturity of the paper drops to 10days. When I value the price of CD at 9%, it comes at 24,93,85,078 which is lower than what I valued above by ~INR 7488. Why is it so?

If I sell the paper at 9% than probably I add only +60745-7488 = 53256 for the day which pulls down my daily(for that particular day) return at 7.9%.

What is that I am missing?

CD Valuation  – Excel for reference

### Monthly Liquidity Monitor – January 2014

Read my note on liquidity for December.

Liquidity Monitor Jan 2014