Stock Market Performance and Fundamentals of top Infrastructure Companies in ...
TEXDEX
1. A Project Report Submitted to Devi Ahilya Vishwavidhyalaya, Indore
towards partial fulfillment of the degree in
Masters of Management Science 2007-2009
Designing A New Index (TEXDEX)For Stock Markets
and Devising Options Trading Strategies using its Options
:MANEUVERED BY:
Dr. YAMINI KARMARKAR
Reader, Management
:PREPARED BY:
RAJKUMAR RAMLANI
FT-2K7-42
International Institute of Professional Studies
Devi Ahilya Vishwavidhyalaya, Indore
2. A Project Report Submitted to Devi Ahilya Vishwavidhyalaya, Indore
towards partial fulfillment of the degree in
Masters of Management Science 2007-2009
Designing A New Index (TEXDEX)For Stock Markets
and Devising Options Trading Strategies using its Options
:MANEUVERED BY:
Dr. YAMINI KARMARKAR
Reader, Management
:PREPARED BY:
RAJKUMAR RAMLANI
FT-2K7-42
International Institute of Professional Studies
Devi Ahilya Vishwavidhyalaya, Indore
3. CERTIFICATE
This is to certify that research project christened “Designing A New Index
(TEXDEX)For Stock Markets and Devising Options Trading Strategies
using its Options ” was done with sincere efforts and dedication and is being
submitted by Rajkumar Ramlani of MBA (MS) 2 Yrs as major research
project at IIPS, DAVV, Indore (M.P).
:Date of Submission: Dr. Yamini Karmarkar
2009 (Project Mentor)
4. Acknowledgement
I hereby take the opportunity, to extend my sincere gratitude to the research mentor and
guide, Dr. Yamini Karmarkar, without whose support and guidance, this research
would not have seen its successful completion. My wholehearted thankfulness to the
mentor for providing me with a fruitful association by way of research training. She not
only gave valuable feedback at all stages of the research work, but also was a source of
immense learning that I had, during this research project at IIPS.
This research provided me a comprehensive insight of the constantly expanding Stock
markets, market sector growth, Textile being the most specific, how valuation of options
is done using various models and the growth of Derivatives markets with initiation of
trading strategies.
I am extremely thankful to all the support that I got from all other Faculty Guides,
specifically Ms. Muskaan Karamchandani for her guidance in helping me complete this
endeavor.
I would like to extend my sincere gratitude to Mr. Akhilesh Rathi, Head-Angel
Broking who always made me feel comfortable in his organization and for his untiring
help, valuable guidance and support throughout the duration of the project.
Rajkumar Ramlani
FT-2K7-42
MBA (MS) 2 Yrs Full Time
International Institute of Professional Studies
5. Executive Summary
In an increasingly inter-dependent world, all countries will vigorously pursue policies to
optimize comparative factor endowments. The rapid technological changes, while
making transactions more seamless, will reinforce the process of global integration. It has
been said that the battles of this century will be fought and won on the “power of ideas.”
Societies will increasingly become knowledge-based and promote knowledge-based
industries.
The Prevailing market scenario unfolds the reality of a market wherein the Bears have
taken over the Bulls and have left markets into a Bearish Trend. Factors like the
increasing Interest Rates, Inflation Rates, Global Economic Factors, Crude Oil Demand,
etc. have become some of the very powerful reasons for the markets to react negatively
and also have lead the market to continuously break the daily lows which have impacted
the overall Economic Slowdown to some extent.
India has a distinct comparative factor advantage as a vast reservoir of skilled manpower.
The Demographic differentials reveal that over the next 20-30 years, India has distinctive
advantages in a population profile concentrated in the younger age group. Thus, taking
into consideration the fact that markets undergo a cyclic phase of ups and downs (Dow
Theory), with a prediction of favorable market movements, an index has been designed to
capitulate the movements of the textiles sector and represent it through this model.
6. Contents
• 1. INTRODUCTION
• 2. TEXTILE SECTOR – An Insight
o 2.1 The Indian Advantage
o 2.2 Textiles and Apparel trade
o 2.3 Investments in the Textile sector
o 2.4 Government Initiatives
• 3. OBJECTIVE
• 4. SCOPE
• 5. LITERATURE REVIEW
• 6. METHODOLOGY
o 6.1. DESIGNING THE INDEX
§ 6.1.1. Basic Terminology
§ 6.1.2. Selection of a SECTOR
§ 6.1.3. Selection of the required Scrips
§ 6.1.4. Ascertaining the Values of the Scrips for a time span
§ 6.1.5. Volatility Calculation
§ 6.1.6. Calculation of Beta Coefficients
§ 6.1.7. Calculation of R2
§ 6.1.8. Return Calculation and Averaging
§ 6.1.9. Calculation of Free Float Market Capitalization
§ 6.1.10. Weight age of the scrips in the Index
§ 6.1.11. Base Value for the Index
o 6.2. DEVISING OPTIONS TRADING STRATEGIES
§ 6.2.1. Determining the Value of Options
§ 6.2.2. Strategy Formulation
• 7. FINAL OUTCOME
o 7.1. Performance Check of the INDEX
o 7.2. Valuation of the INDEX OPTIONS
o 7.3. Performance Analysis of the STRATEGIES
• 8. CONCLUSION AND SCOPE FOR IMPROVEMENT
o 8.1. Conclusion
o 8.2. Improvement Scope
• 9. BIBLIOGRAPHY
7. 1. INTRODUCTION
The Indian textiles industry has significantly contributed to the economic life of the
country. Liberalization in India and the impact of growth of imports and exports has
paved a new path for the growth of Textiles Sector. Textile Sector is one of the most
dominant sectors of the Indian economy and has its roots attached to the heart of the
economy as a whole. This is the sector which holds an importance of superiority and can
be said to be one of the most Fundamental Sectors for any economy, exclusively in India.
Liberalization and Globalization in the world trade of textiles and clothing has bolstered
growth for the sector.
India has a distinct comparative factor advantage in the Textiles segment as a huge chunk
of Textile material is exported from India. The industry size has expanded from US$ 37
billion in 2004-05 to US$ 49 billion in 2007-08. In this period, while the domestic market
increased from US$ 23 billion to US$ 30 billion, exports increased from around US$ 14
billion to US$ 19 billion. Big players like the US, UAE, UK, etc. are importers of the
clothes, jute, yarn, etc. and this makes this sector a real hot and a buzzing area to be
worked upon. Textile contributes 14 per cent to industrial production, 5 per cent to the
GDP and around 20 per cent to the total export earnings. It is, in fact, the largest foreign
exchange earning sector in the country. In addition, it provides direct employment to over
35 million people. And with continuing growth momentum, its role in the Indian
economy is bound to increase. Thus, this sector can be named as one of the important
Looking at the boom and its current importance in this inter-dependent world and
predicting turbulence in this sector (IMPACT OF THE CRISIS), a research, with an aim
to understand the comparative factor advantage of this sector for the Indian economy, is
being carried out. This research aims at developing a specific tool which would help
establish some relation with this sector, by keeping into consideration the turbulence
going on in the textiles segment and would also help an investor to take the advantages, if
any, by using this tool in the capital markets.
8. The research is all about designing a new index for the stock markets and linking the
performance of the same with the textile sector. The index is designed using various
concepts of volatility, Beta coefficients, Regression, Correlation and Free Float Market
Capitalization factors. Various Scrips of Grade ‘A’ (having the maximum Market
capitalization) are selected from the Textile Sector and an analysis of their daily turnover
has been done, which acts as a prime characteristic for the scrips to be, the components of
the index. Scrips are allotted weigthage according to their free float market capitalization
and a value of the index is derived, which when correlated and regressed with Nifty,
gives the overall performance Schedule of the index which is helpful in determining the
Beta Component and the Volatility of this index, TEXDEX.
Then this index is launched into the Options segment via induction of Call and Put
Options of the index. There are various models and tools which help in the valuation of
such Options but being explicit to this research, Black-Scholes model is used as an
apparatus to Value the Options of Texdex.
Finally, a few important, lucrative and cost-effective strategies are designed and
incorporated which are helpful for an investor to gain unforeseen revenues and minimize
the losses, which may be borne by him, if he only sticks to the Cash segment of the
market.
The Overall performance of the textile industry (e.g. The working of the industry, the
impact of favorable governmental policies like providing bailout packages for the sector,
transfer of funds to domestic companies as a help measure, removal of quotas, etc.,
reasons for advancement or collapse of companies and any news related to the textile
sector) is done and a relative performance of the same on Texdex is analyzed. The
Valuations of the index Options are done and the estimation of Earnings is done using the
payoff schedules and graphs prepared using the Strategies. This complete research
provides an altogether new avenue of investment for an investor. He can fundamentally
analyze the textile sector and the impact of various factors on it, invest into this index and
take positions into the derivatives segment using options trading strategies and earn
surprising profits.
9. 2. OBJECTIVE
The stock markets in India have passed through both good and bad era. The voyage in the
21st
century has not been an easy one. Till the decade of eighties, there was no measure or
scale that could precisely measure the various ‘ups and downs’ in the Indian stock
markets. Bombay Stock Exchange Limited (BSE) in 1986 came up with a Stock Index,
that subsequently became the barometer of the Indian Stock Markets.
Textile industry is an industry which is a perpetual one and will always exist in any given
economy. This would lead the companies of this industry (no matter how turbulent the
markets are) to flourish, which would escort the industry to a relatively higher growth in
the Stock markets.
Stocks Markets possess various indices reflecting the relative performance of the sectors
for which they are formed. Textile sector being one of the main sectors of the Indian
economy, which has a great potential to grow, has no such device to reflect its
performance. Thus, the Objective of the research is
§ To design an index for the stock markets, by which the volatility and the level
of the turbulence in the textile sector of the Indian economy can be tacit, which
would act as a barometer of the textile sector and would reflect all the information
about any recent and important events going on in the textiles segment of the
Indian economy.
§ To keep a check on the performance of this index, by comparing it with the
textile segment up comings and inspecting whether these are reflected in this
index or not, by establishing its correlation with the stock market index, S&P
Nifty.
§ Determination of OPTIONS values for this index and development of various
OPTION TRADING STRATEGIES, via which an investor would be able to
yield revenues and offset his losses, by taking counter positions using these
Strategies which include buying and selling of the Texdex Options.
10. 3. TEXTILE SECTOR – An Insight
The textile industry is the single largest foreign exchange earner for India. Currently it
accounts for about 8 % of GDP, 20 % of the industrial production and over 30 % of
export earnings of India and it has only 2-3 % import intensity. About 38 million people
are gainfully employed with the industry making it the second largest employment
providing sector after agriculture.
3.1 The Indian Advantage
The textiles and apparels sector is a major contributor to our economy in terms of foreign
exchange earnings and employment. Moreover certain natural advantages and external
factors have fuelled the growth of this industry with a clear competitive edge.
India has overtaken the US to become the world's 2nd largest cotton producing country,
after China, as per a study by International Service for the Acquisition of Agri-biotech
Application. BT cotton was a major factor contributing to higher rate of production, from
15.8 million bales in 2001-02 to 31 million bales in 2007-08.
India accounts for
61 per cent of the global loom age
22 per cent of the global spindle age
12 per cent of the world's production of textile fibers and yarn.
25 per cent share in the total world trade of cotton yarn.
3.2 Textiles and Apparel trade
The global textiles and apparel trade estimated at US$ 450 billion and expected to touch
US$ 700 billion by 2010 with demand for textiles and apparels expected to grow to 25
per cent from current figures where Asia will contribute 85 per cent. The sudden growth
and demand for textiles and apparels will prompt international brands and buyers will
look to source low cost producing countries
India's textiles and apparels industry is estimated to be worth US$49 billion where 39 per
cent is accounted by the exports market. The domestic and exports markets in this sector
11. are expected to grow at 6.5 per cent and 12 per cent CAGR respectively. The growth has
continued with total exports increasing to US$ 19.62 billion in 2006-07. Currently India
has a 3.5-4 per cent share in world export of textiles and 3 per cent in clothing exports.
Indian textiles and products handlooms and handicrafts are exported to more than a 100
countries, Europe continues to be India's major export market with 22 per cent share in
textiles and 43 per cent in apparel, the US is the single largest buyer of Indian textiles and
apparel with 19 per cent and 32.6 per cent share respectively. Other significant countries
in the export list include the UAE, Saudi Arabia, Canada, Bangladesh, China, Turkey and
Japan. A recent study of the textile industry predicts growth for the sector form US$ 19
billion in 2006-07 to US$ 50 billion by 2012.
The textile industry is the single largest foreign exchange earner for India. Currently it
accounts for about 8 % of GDP, 20 % of the industrial production and over 30 % of
export earnings of India and it have only 2-3 % import intensity. About 38 million people
are gainfully employed with the industry making it the second largest employment
providing sector after agriculture.
Growth rate in exports of textiles/ clothing during 1996-97 was 11%. Introduction of a
soft loan scheme during the 7th plan called Textile Modernization Fund Scheme (TMFS)
facilitated the process of modernizing textile industry significantly. Indian textile industry
has performed remarkably well during the last one decade, but it still needs to carve a
competitive edge through quality output and high value addition especially when today
India is on the fast track of globalization.
Indian textiles, handlooms and handicrafts are exported to more than a 100
countries. During the April-September period of 2008-09, the US continued to be the
single largest buyer of Indian textiles with a 20.31% share. The US is followed by
UAE with 8.27 per cent share, UK with 7.53 per cent, and Germany with 6.11 per
cent and France with 3.80 per cent. The other countries that make the top 10
include Italy (3.76 per cent), China (2.54 per cent), Spain (2.76 per cent),
Bangladesh (2.45 per cent) and Netherlands (2.44 per cent).
12. During April-May 2008-09, the Readymade garments (RMG) exports were worth US$
1.567 billion, an increase of 11.56 per cent over the corresponding period of 2007-08.
Another segment in which India has excelled in the export market is carpets. Exports of
carpets have increased from US$ 654.32 million in 2004-05 to US$ 919.70 million in
2007-08. During April-May 2008-09 carpet exports (including silk carpets) stood at US$
152.92 million, an increase of nearly 25 per cent over the corresponding period last year.
Exports of cotton textiles have increased by nearly 42 per cent to US$ 1.075 billion in
April-May 2008-09, up from US$ 756.16 million in the corresponding period of the
previous fiscal.. During April-May 2008-09, exports of silk increased by 16.65 per cent
to US$ 117.35 million, export of wool increased by 28.67 per cent to US$ 75 million and
exports of jute increased by 35.31 per cent to US$ 55.44 million.
“ Investing ” is picking ‘good stocks’ at ‘good times’, and Staying with them as long as
they remain ‘good companies’.
3.3 Investments in the Textile sector
India's liberalized policies and the government's decision to allow 100 per cent FDI in the
emerging textiles industry has led to an increase in the investment inflows into the sector.
The domestic textiles and apparels market in India is witnessing strong growth owing to a
young population, an increase in disposable incomes and a rapid growth in organized
retail which has fueled the growth of the textiles market.
Consequently, the domestic market is estimated to grow to over US$ 50 billion by 2014.
Significantly, the textile sector is estimated to offer an incremental revenue potential of
no less than US$ 50 billion by 2014 and over US$ 125 billion by 2020.No wonder this
industry has been attracting huge investment. During the three years 2004-05 to 2006-07,
investments in the textile sector has increased from US$ 2.94 billion to US$ 7.85 billion.
The total investments in the textiles sector were estimated to be US$ 16.32 billion during
this period.
By 2012, investment in the textiles and clothing industry is estimated to touch US$ 38.14
billion. Even the Government has increased the plan allocation for textiles by 66.27 per
13. cent in 2007-08 over that of 2006-07, making it one of the only two ministries that have
seen such a high level of increase in budgetary support.
3.4 Government Initiatives
In an effort to increase India's share in the world textile market, the Government has
introduced a number of progressive steps.
• 100 per cent FDI allowed through the automatic route.
• De-reservation of readymade garments, hosiery and knitwear from the SSI sector.
• Technology Mission on Cotton has been launched to make available quality raw
material at competitive prices.
• Technology Up gradation Fund Scheme (TUFS) has been launched to facilitate
the modernization and up gradation of the textiles industry.
• Scheme for Integrated Textile Park (SITP) has been started to provide world class
infrastructure facilities for setting up textile units through the Public Private
Partnership model.
• The Apparel International Mart, in Gurgaon, will provide world class facility to
apparel exporters to showcase their products and to serve as a one-stop-shop for
reputed international buyers.
• The Indian Textile Plaza is being built, to encourage exports to overseas markets.
• 50 textile parks are being established to enhance manufacturing capacity and
increase the industry's cost competitiveness.
In current times of a global meltdown, the government has come out with an
economic stimulus package for the textile industry. This includes:
• Additional allocation of US$ 285.66 million to clear the entire backlog in the
TUF Scheme, which would enhance cash flow of the exporters.
• Extension of interest rate subvention of 2 per cent on pre and post shipment
credit
• Additional fund of US$ 224.42 million for refund of terminal excise duty
14. 4. Scope
The current indices present in the Stock market, furnish an idea, that an impact of change
in the Macro and Micro factors for an industry, has a relative impact on the index of that
sector
For eg.
... A Favorable Policy for the Fertilizer industry leads the whole pack of fertilizer stocks
present like CHAMBLFERT, NAGARFERT, RCF, etc. to go up as a whole.
... A Government Budget having a positive impact on the banking sector leads the
Banking sector to run up and All the Stocks of this index, i.e. BANKEX show a positive
return..
... At times, all the Pharmaceutical Stocks advance in the spell wherein the sales of the
companies increase as a result of people getting more ill causing the Healthcare Index to
shoot Up.
By 2012, investment in the textiles and clothing industry is estimated to touch US$ 38.14
billion. Even the Government has increased the plan allocation for textiles by 66.27 per
cent in 2008-09 over that of 2006-07, making it one of the only two ministries that have
seen such a high level of increase in budgetary support.
The textile and apparel industry contributes significantly to the Indian economy
accounting for 14 per cent of total industry output and nearly 5 per cent of gross domestic
product (GDP). The industry is also the largest foreign exchange earner, contributing
nearly 20 per cent to India's total exports. India contributes to nearly 4 per cent of
total textile exports and 3 per cent of total apparel exports in the world.
The sector has attracted a total investment of US$ 5,770 million in last 3 years. The
cumulative FDI made in this sector between 1991 and 2007 has been US$ 575 million,
representing 1.22 per cent of the total FDI attracted by the country.
India thus presents a large and vibrant market for textiles and apparels, with a
potential for sustained growth. It is estimated that this industry will require US$ 22
billion of new capital investments over the next five years.
15. Scope of Designing This Index
Textiles sector is a sector which possesses great potential to grow in the coming future.
There is no index, specifically designed in the stock markets for this sector. Thus, the
Scope of designing this index, i.e. TEXDEX is that, this would be helpful for investors,
whose investments in the Stock markets are news based and fundamental. The
investments could be made in this index after comprehending the positive and negative
impacts of Governmental Policies, Monetary Policies, Development News, Quotas and
all other factors having impact on the textile sector. Investments would be beneficial
as, if any positive sentiment for the textile industry emerges, an investor can go long on
this index and vice-versa to generate incomes from the stock markets. The strategies
developed in this research, would be valuable for the same.
Scope of Devising Option Trading Strategies
Exchange traded options form an important class of options which have standardized
contract features and trade on public exchanges, facilitating trading among large number
of investors. They provide settlement guarantee by the Clearing Corporation thereby
reducing counterparty risk. Options can be used for hedging, taking a view on the future
direction of the market, for arbitrage or for implementing strategies which can help in
generating income for investors under various market conditions.
The Strategies devised and formulated, have introduced an opportunity for the
investors which would be helpful for them in generating income in various markets
conditions and would help them minimize their losses, if any, by using the ‘Options’ of
Texdex as tools for hedging. By taking counter positions in these Options, an investor
would not only be minimizing losses but would be able to generate unanticipated and
unlimited profits. The payoff schedules and Payoff graphs would help a person
understand the impact of use of these strategies in the markets and would also provide
a clarity to the fact that how can these strategies, be used for minimizing losses and
generating revenues.
16. 5. Literature Review
As per the reviews done by Mr.Berna Kocaman, in October 2005, in his research papers,
stating the impact of Financial crisis on the Export Sectors, there is no doubt that there
are various events effecting the performance of the stock markets. These may be
completely specific to the country where the stock market is located but it is also certain
that there is a correlation between the stock markets of the world. Especially, in recent
years, as a result of the high speed of information flow and ease of trading in different
stock markets this indicated relation increased considerably. One may think that since
exporting firms have more contact with the rest of the world their performances may be
more sensitive to the events occurring in different stock markets so they may behave in a
different way than the non-exporting firms. In a more general context, there is also the
possibility that different sectors can react in different ways to the crises. After
investigating various stock market indices, it became possible for him to illuminate on the
sector specific effects and the role of exportation. It is found that for some of the events
exporting firms behaved in a different way than the other firms but for some other events
or periods the behavior of all firms are in the same way.
Consistent with the abstracts of Dariusz Wójcik, where he lays emphasis on the most
important question that Do Stock markets have any relation with the economies of the
world, a series of stock market representativeness indices as a new method for analyzing
stock market development are found out, and he applies this method to data on stock
markets and economies. Not withstanding these general findings, stock market
representativeness varies considerably between individual countries, highlighting the
significance of country-specific factors. In his Papers and abstracts, he uses the
relationship between economies and stock markets which are measured with the ratio of
market capitalization to gross domestic product (MC/GDP ratio). This ratio has been the
most popular measure of stock market development according to him and one of the
principal measures of financial development in general, used frequently in the studies on
finance and growth. (Rajan and Zingales 2003, Stulz 2005).
17. In studies performed by Robert T. Kleiman, James E. Payne and Anandi P. Sahu, in
2002, tests of the random walk hypothesis for international commercial markets utilizing
stock market indices are used. The augmented Dickey-Fuller and Phillips-Perron unit root
tests and Cochrane variance ratio test have been used to find that each capital market (as
well as associated broader stock markets) exhibits random walk behavior. Moreover, a
non parametric runs test provides support for weak-form market efficiency in the
markets. In addition, Johansen-Juselius co-integration analysis reveals that all markets
appear co-integrated and share a common longrun stochastic trend. Results of co-
integration analyses and vector error correction models suggest that diversification
benefits through securities can only be achieved in the short run.
According to the review done by Sanjay Kathuria, Will Martin, and Anjali Bhardwaj on
December 19-21, 1999 in New Delhi, the basic economics of the MFA, highlights the
importance of the discriminatory character of the arrangements of imports and exports.
The review highlights the fact that while exporting countries can gain from some quota
rents, these gains have to be offset against losses in exports to unrestricted markets, and
the likely losses arising from rent-seeking behavior, or rent-sharing with industrial
country importers. Further, the restrictions curtail the ability of countries to generate
sorely needed employment opportunities in these labor-intensive sectors. In their
findings, some facts and figures emerged. Recent estimates for India of the export tax
equivalents of the quotas suggest that they have increased in 1999, after a couple of years
around lower levels. Modeling results suggest that South Asia as a whole would gain
from the abolition of the quotas, although there may be different experiences in different
countries. Unambiguously, however, the gains from domestic reform will increase after
abolition of the MFA, Multi Fiber Arrangement, which would have a great impact on the
Textile Sector. This would help develop an insight of understanding the textile sector and
all the quotas and the barriers present in this segment.
In paper abstracts and reviews of Andreas A. Jobst in January 17,2007, the recent
development of equity derivative markets in Emerging Asia in areas of cash market
liquidity, trading infrastructure as well as legal and regulatory frameworks based on a set
of principles for the capital market development of derivatives, the findings were that
18. amid benign monetary policy in mature market countries and high liquidity induced
demand, lower risk premia have encouraged risk diversification of alternative asset
classes outside the scope of conventional investment (see JEL classification: D81, G15,
M20). The development of derivative markets in emerging economies plays a special role
in this context as more institutional money is managed on a global mandate, with more
and more capital being dedicated to emerging market equity.
However, according to S.Bhaumiky, M.Karanasosy and A.Kartsaklas in their research
papers of September 2008, the important structural problems in the markets persisted.
Perhaps the most important of these problems was the existence of leveraged futures-type
trading within the spot or cash market. This was facilitated by the existence of trading
cycles and, correspondingly, the absence of rolling settlement. Given a Wednesday-
Tuesday trading cycle, for example, a trader could take a position on a stock at the
beginning of the cycle, reverse her position towards the end of the cycle, and net out her
position during the long-drawn settlement period. In addition, the market allowed traders
to carry forward trades into following trading cycles, with fanciers holding the stocks in
their own names until the trader was able to pay for the securities and the intermediation
cost, which was linked to money market interest rates (details, see Gupta, 1995, 1997).
As a result of both academic and practical interest there are several papers that study the
restrictions one can impose on the price of options. In their empirical study, Mr. Andrew
G. Sutherland, Jeffrey R. William in September 2008 said that growth opportunities and
future strategies can comprise a significant proportion of a firm’s valuation. At the end of
2006, the median company in the S&P 500 and Russell 3000 had 25% and 40% of their
valuation, respectively, attributed to Future Growth Value (FGV®), the capitalized value
of future profit growth. Acquisition premiums can also be interpreted as estimates of
value creation attributed to new tactics and operational improvements under a new
regime. Unfortunately, managers often find static Net Present Value tools and trading
multiples to be too rigid to evaluate the contingent nature of strategic decisions and the
cash flow recovery profiles associated with possible outcomes. For example, Microsoft
as willing to develop its Xbox platform at a loss because it expected subsequent game
and peripheral offerings linked to it to generate significant profits. Similarly,
19. commodities producers frequently choose to delay extraction until output prices swing in
their favor. Academics and practitioners have recognized the similarities of payoff
functions between such contingent decisions about real assets, classic examples of “real
options,” and those of financial securities whose value is derived from the price of
something else. The Black-Scholes model and Binomial Lattices have emerged as the
most frequently prescribed and used tools for evaluating real options within both capital
budgeting and enterprise valuation contexts. With the classic real option decision
growing increasingly complex, and managers becoming more sophisticated, a frank
assessment of modern valuation tools is timely.
As per the abstract titled Good Deals and Margin Calls by Pedro Santa-Clara and Alessio
Saretto, they did an investigation for the risk and return of a variety of trading strategies
involving options on the S&P 500, etc. Overall, they found that strategies that short
options constitute very good deals. However, exploiting these good deals can be
extremely difficult. Trading costs and margin requirements severely condition the
implementation of the option strategies. Margin calls in particular have a double impact
on trading strategies: they limit the notional amount of short-sale positions and they force
investors out of trades precisely when they are losing money. These frictions limit the
capacity of sophisticated investors to arbitrage away the mis-pricings in options markets.
This research is related to research in Stock Markets and for the development of new
avenues of investment. In particular, there is a literature report that shows the application
of competitive algorithms, calculations and formulae in the context of investments. An
argument emerges, that one should think of these trading algorithms, strategies, methods
as ways to super replicate options under different conditions. A result of various
researches provides with a result that one can derive an equivalent of the Black-Scholes
formula, provided that in addition to the stock and the bond, a new derivative, whose
payoff is related to the realized volatility of the stock, is traded. This research shows how
an index, having its relation with the sector can be designed, how can Options be valued
using various models and how can the devising of new option trading strategies be done,
for generating profits and minimizing losses as hedged tools.
20. 6. Methodology
This research aims at developing a specific tool which would help establish some relation
with this sector, by keeping into consideration the turbulence going on in the textiles
segment and would also help an investor to take the advantages, if any, by using this tool
in the capital markets. For this, the research has been bifurcated into these two segments:
• Designing the new index
• Development of Options Trading Strategies
The Methodology of the research would help understand, how the index is designed,
what is the process of the generation of its Options Values and how are the strategies and
their payoffs prepared.
6.1. DESIGNING THE INDEX
The Method of Creating the index starts with identifying the need of the index, collecting
the data for the same, Assigning the data values to various Variables and then
Establishing suitable relations between them to reach to a specified objective.
The Method of Designing a New index requires the following steps to be taken into
consideration :
§ Selection of a SECTOR
§ Selection of the required Scrips
§ Ascertaining the Values of the Scrips for a time span
§ Volatility Calculation
§ Calculation of Beta Coefficients
§ Calculation of R2
§ Return Calculation and Averaging
§ Weight age of the scrips in the Index
§ Calculation of Free Float Market Capitalization
§ Base Date and Value with Finalized Design
21. 6.1.1. Before Understanding the Method of designing and working of TEXDEX,
it is first necessary to increase an understanding of the following terms:
Market Capitalization
Previously Market Capitalization was the Current Market Price of a Share Multiplied by
The Number Of Shares Issued By the company. Weightage was assigned to the scrips in
the index according to this Market Capitalization.
But this Calculation did not lead to a fair calculation as a part of shares issued by the
company was kept in the hands of the people, promoters and directors as an investment
tool due to which these shares are not traded.
Thus the concept of Free Float Market Capitalization came into Existence where in only
those Number of shares are taken into account which are available in the market for
trading and then this number is multiplied by the CMP to reach at the figure of Free Float
Market Capitalization.
Weightage :
Weightage means the part of Any Individual Script in the Complete Index and is
calculated by dividing the FREE FLOAT MARKET CAPITALIZATION of a single
company by the Total FREE FLOAT MARKET CAPITALIZATION of the complete
index.
For Example:
BRFL holds 2.27% weightage of TEXDEX, i.e. if BRFL increases by 1% then the
TEXDEX will increase [(1/2.27%) = 0.4405% assuming that other scrips don’t change.
In other words, weightage is the contribution of the stock in Index for moving up or down
respectively.
Volatility:
The percentage change in price of a Script for a particular Time Being. Volatility is the
most important factor for selection of the stock in the Index because a low volatile stock
is needed which represents the impact of a trend, policy and an environmental factor on
the stock.
22. Average Return of the Index.
The list of Scrips present in any index show Either a Positive Return Or a negative Return
for a particular time being as compared to a Past Date. When an Averaging of this return,
shown by the list of stocks of the index is done, it helps one understand the overall return,
the Index has shown For a time being.
This is done by Dividing the Summation of the Returns shown by all the scrips for a
defined time range, by the number of the Scrips present in the index.
Beta Value ( )
The Beta Coefficient, describes how the expected return of a stock is correlated to the
return of the National Stock Exchange as a whole.
This is Calculated by comparing the daily volatility of the specific script in percentage
with the Daily change in the Volatility of the MAJOR Stock index as a whole, i.e. The
NIFTY, in this case.
The Beta of a stock measures the sensitivity of returns if a security to market returns. For
eg. If BETA of a stock is 1, it implies that when market returns increase/decrease by
10%, the security returns also increase or decrease by the same percentage during that
period. The higher the risk of the security, the greater the value of BETA.
The Beta of a stock refers to the dependence of one variable (security returns) on another
(market returns). The dependence can be estimated statistically through a simple linear
regression.
R-Squared( R2
)
It is the correlation between the Individual scrips of the index and TEXDEX. It shows
what is relation of the TEXDEX to the scrips and what moment of stocks is prevailing in
respect to the Index.
R-squared values range from 0 to 1. An R-squared of 1 means that all movements of a
security are completely explained by movements in the index. A high R-squared
(between .85 and 1) indicates the fund's performance patterns have been in line with the
index. A fund with a low R-squared (.7 or less) doesn't act much like the index.
23. A higher R-squared value will indicate a more useful beta figure. For example, if a fund
has an R-squared value of close to 1 but has a beta below 1, it is most likely offering
higher risk-adjusted returns. A low R-squared means you should ignore the beta.
After Getting Acquainted to these terms of the market, it would be quiet easy for a person
to understand the Designing and Working of The Stock Index, TEXDEX which involves:
Ø 6.1.2. Selection of The sector
After Studying the Market, it was found that an index could be designed for the stocks of
the textile Sector so as to understand the overall impact of Economic Factors on the same.
Thus TEXILE sector was Selected for the same.
Ø 6.1.3. Selection of the required Scrips
Scrips whose Daily Turnover Value was above a price range of Rs. 50 Lakhs, were
selected. These Scrips were Found from the Already listed Companies.
Ø 6.1.4 Ascertaining the Values of the Scrips for a time span
The Prices of each of these scrips were taken, for a date ranging from June 1,2008 to June
30, 2008, so as to do further calculations and ascertaining the Values for other Variables.
Ø 6.1.5. Volatility Calculation
A Percentage change in the prices of each Script was taken into consideration on a Daily
basis for the concept of calculation of the Volatility. Volatility is the most important
factor for selection of the stock in the index.
The Formula For Calculating Volatility in Percentage Terms
(Share Price Today – Share Price on the Previous Date) * 100
Share Price on the Previous Date
24. Ø 6.1.6. Calculation of Beta Coefficients
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to
the market as a whole. Also known as "Beta Coefficient".
Beta is calculated using regression analysis. Beta is the tendency of a security's returns to
respond to swings in the market. A beta of 1 indicates that the security's price will move with
the market. A beta of less than 1 means that the security will be less volatile than the market.
A beta of greater than 1 indicates that the security's price will be more volatile than the
market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the
market.
The Per Day Volatility of the script when divided by the per day volatility of the major
Index, i.e. Nifty gives the Value of The Beta Coefficients. On the other hand, Average
Volatility for the month can be taken and divided by the Average volatility for the month of
the index.
The Formula For Calculating Beta Coefficients
n( XY ) – ( X * Y )
n( X^2 ) - ( X)^2
Where, n = Number Of Observations, X = Per day Return of Nifty
Y = Per Day Return Of Texdex
Ø 6.1.7. Calculation of R2
This is the Square of the Correlation Co-efficient which is calculated through the given data
points. R2
is directly calculated by using the Function RSQ present in the MS-Excel Sheet. It
takes into consideration the various data points available in the excel sheet which are pre-
defined as X array and Y array and uses these arrays containing the values which are
equivalent to the amount of change which has occurred in the price of the scrip on day-to-day
basis.
25. Ø 6.1.8. Return Calculation and Averaging
The Value of the share was taken as on July 15,2007 and was compared with the price of the
share as on July 15,2008 and thus a return for the year is calculated using the formula:
(Price on July 15,2007 – Price on July 15,2008) * 100
Price on July 15,2007
Ø 6.1.9. Finding Out Free Float Market Capitalization of the scrips
The traded value of these scrips were taken, and multiplied with the FREE FLOAT
ADJUSTMENT FACTOR, to calculate the Free Float Market Traded Value. This was then
multiplied with the average Price of all the individual securities to reach at the figure of the
FREE FLOAT MARKET CAPITALIZATION.
Ø 6.1.10. Weightage of scrips in the Index
Weightage is assigned to each Scrip using the FREE FLOAT Market Capitalization.
Market Capitalization of each Scrip is divided by the Total Market Capitalization to
Calculate its Weightage.
Ø 6.1.11. Base Value for the Index
An Amount of Rs. 1 Crore (Rs. 99,96,158 exact as the quantities cannot be taken into
decimals) was invested in the scrips present in the index according to their weightage and
with the help of this value , a Benchmark for the index has been determined i.e. 1000
points. This implies that if the value of the Portfolio of these stocks increases by Rs. 1
Lakh (1%), there would be a Rs.10 increase in the value of TEXDEX as well, (Rs.10
being 1% of 1000).
26. 6.2. DEVISING OPTION TRADING STRATEGIES
This segment of methodology deals into the pricing of OPTIONS (calls and puts) of
TEXDEX and formulation of Some Important and Profitable Strategies for investment.
Ø 6.2.1. Determining the Value Of OPTIONS
Options are one of the actively traded derivative instruments in the financial markets. The
model used for calculating the value of options has earned a prominent position among the
widely accepted financial models. BLACK-SCHOLES model is proposed by Fischer
Black and Myron Scholes by deriving a differential equation that must be satisfied by the
price of any option on a non-dividend paying index.
Based on the model used above, the values of Texdex Options are determined as follows:
C = SN(d1) – Xe-rT
N(d2)
P = Xe-rT
N(-d2) - SN(-d1)
Where,
d1 = ln(S/X) + (r + sigma2
/2)T
sigma T
d2 = d1 – sigma T
C is the Call Option Price
P is the Put Option Price
S is the Spot Price of the underlying asset
X is the Strike price of the Option
r is the risk-free rate
T is the Time to Expiration expressed in terms of Years
sigma is the analyzed standard deviation, i.e. Volatility Measure
N(d) is the cumulative standard normal distribution
e is the exponential function (2.7183)
ln is natural logarithm
27. The model used for the calculations has a number of advantages as it is easy to use. It
does not promise to produce the exact prices that show up in the market, but it does a
remarkable job of pricing options that meet all the assumptions of the model.
Ø 6.2.2. Strategy Formulation
The use of options enables an investor to achieve unique risk-return patterns which cannot be
achieve by taking investment positions only in the underlying assets. This is the rationale for
the existence of Options.
The Trading Strategies can be headed under Elementary ones and Advanced ones. The
elementary strategies comprise of taking a long or a short position in the underlying asset.
They include:
Long CALL
Investments on the consideration that the markets are bullish and the prices of securities
would advance. Call Option is purchased for a horizon of some time span when the prices of
the underlying assets are predicted to move upwards.
Short CALL
The strategy of writing Call Options without owning the underlying assets. Investment is
done on the thoughtfulness that the markets are bearish and the investor wants to gain profit
by speculating on his belief that prices of securities would fall.
Long PUT
The strategy involves buying PUT options- the right to sell the underlying asset at the
specified price. Investment is done on the contemplation that the markets are bearish. If on
the Expiry ,Markets fall, the investor gains, and if not, he just looses the Premium amount.
Short PUT
This strategy involves writing a Put Option. In contrast to the put buyer, put writer is bullish
about the markets and earns an income in the from of PUT Premium by speculating on his
prediction.
28. We can create more unique risk-return patterns by combining two or more of these
elementary strategies. These strategies can be called “COMPLEX STRATEGIES” and the
methodology of devising these policies include:
• Combination of various elementary strategies to derive various strategies like
§ LONG STRADDLE
§ LONG STRANGLE
§ COLLAR
§ BULL CALL SPREAD STRATEGY
§ BULL PUT SPREAD STRATEGY
§ BEAR CALL SPREAD STRATEGY
§ BEAR PUT SPREAD STRATEGY
§ LONG CALL BUTTERFLY
§ SHORT CALL BUTTERFLY
§ LONG CALL CONDOR
§ SHORT CALL CONDOR
Long Straddle Strategy
A Volatility strategy used then the index prices are expected to show large movements. This
strategy involves BUYING a CALL as well as PUT on the same stock / index for the
same maturity and strike price, to take advantage of market movement in either
direction. The worst possible outcome for a straddle is that the price of the underlying at
expiry is the exercise price. In this case both options expire worthless (at the money), so the
total price of both is lost. If the price of the stock / index increases, the call is exercised while
the put expires worthless and if the price of the stock / index decreases, the put is exercised,
the call expires worthless. With Straddles, the investor is direction neutral. All that he is
looking out for is the stock / index to break out exponentially in either direction.
Long Strangle Strategy
A Strangle is a slight modification to the Straddle to make it cheaper to execute. This
strategy involves the simultaneous BUYING of a slightly out-of-the-money (OTM) PUT
and a slightly out-of-the-money (OTM) CALL of the same underlying stock / index and
expiration date. Here again the investor is directional neutral but is looking for an increased
volatility in the stock / index and the prices moving significantly in either direction. Since
OTM options are purchased for both Calls and Puts it makes the cost of executing a Strangle
cheaper as compared to a Straddle, where generally ATM strikes are purchased. Since the
29. initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher.
However, for a Strangle to make money, it would require greater movement on the upside or
downside for the stock / index than it would for a Straddle. As with a Straddle, the strategy
has a limited downside (i.e. the Call and the Put premium) and unlimited upside potential.
Collar Strategy
A Collar involves BUYING a PUT to insure against the fall in the price of the stock/index .
It is a Covered Call with a limited risk. So a Collar is BUYING an INDEX, insuring
against the downside by BUYING a PUT and then financing (partly) the Put by
SELLING a CALL. The put generally is ATM and the call is OTM having the same
expiration month and must be equal in number of shares. This is a low risk strategy since
the Put prevents downside risk. However, do not expect unlimited rewards since the Call
prevents that. It is a strategy to be adopted when the investor is conservatively bullish.
Bull CALL Spread Strategy
A bull call spread is constructed by BUYING an in-the-money (ITM) CALL OPTION,
and SELLING another out-of-the-money (OTM) CALL OPTION. Often the call with
the lower strike price will be in-the-money while the Call with the higher strike price is out-
of-the-money. Both calls must have the same underlying security and expiration month.
The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long
Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish,
because the investor will make a profit only when the stock price / index rises. If the stock
price falls to the lower (bought) strike, the investor makes the maximum loss (cost of the
trade) and if the stock price rises to the higher (sold) strike, the investor makes the maximum
profit.
Bull PUT Spread Strategy
A bull put spread can be beneficial when the stock / index is either range bound or rising.
The strategy protects the downside of a Put sold by BUYING a lower strike PUT, which
acts as an insurance for the PUT SOLD. The lower strike Put purchased is further OTM
30. than the higher strike Put sold ensuring that the investor receives a net credit, because the Put
purchased (further OTM) is cheaper than the Put sold. This strategy is equivalent to the Bull
Call Spread but is done to earn a net credit (premium) and collect an income.
If the stock / index rises, both Puts expire worthless and the investor can retain the Premium.
If the stock / index falls, then the investor’s breakeven is the higher strike less the net credit
received. Provided the stock remains above that level, the investor makes a profit. Otherwise
he could make a loss. The maximum loss is the difference in strikes less the net credit
received. This strategy should be adopted when the stock / index trend is upward or range
bound.
Bear CALL Spread Strategy
The Bear Call Spread strategy can be adopted when the investor feels that the stock / index is
either range bound or falling. The concept is to protect the downside of a CALL SOLD by
BUYING A CALL of a higher strike price to insure the Call sold. In this strategy the
investor receives a net credit because the Call he buys is of a higher strike price than the Call
sold.
The strategy requires the investor to BUY out-of-the-money (OTM) CALL OPTIONS
while simultaneously SELLING in-the-money (ITM) CALL OPTIONS on the same
underlying stock index. This strategy can also be done with both OTM calls with the Call
purchased being higher OTM strike than the Call sold. If the stock / index falls both Calls
will expire worthless and the investor can retain the net credit. If the stock / index rises then
the breakeven is the lower strike plus the net credit. Provided the stock remains below that
level, the investor makes a profit. Otherwise he could make a loss. The maximum loss is the
difference in strikes less the net credit received.
Bear PUT Spread Strategy
This strategy requires the investor to BUY an in-the-money (higher) PUT OPTION and
SELL an out-of-the-money (lower) PUT OPTION on the same stock with the same
expiration date. This strategy creates a net debit for the investor. The net effect of the
strategy is to bring down the cost and raise the breakeven on buying a Put (Long Put). The
strategy needs a Bearish outlook since the investor will make money only when the stock
31. price / index falls. The bought Puts will have the effect of capping the investor’s downside.
While the Puts sold will reduce the investors costs, risk and raise breakeven point (from Put
exercise point of view). If the stock price closes below the out-of-the-money (lower) put
option strike price on the expiration date, then the investor reaches maximum profits. If the
stock price increases above the in-the-money (higher) put option strike price at the expiration
date, then the investor has a maximum loss potential of the net debit.
Long CALL BUTTERFLY Strategy
SELL 2 ATM CALL OPTIONS, BUY 1 ITM CALL OPTION AND BUY 1 OTM CALL OPTION.
A Long Call Butterfly is to be adopted when the investor is expecting very little movement in
the stock price / index. The investor is looking to gain from low volatility at a low cost. The
strategy offers a good risk / reward ratio, together with low cost. A long butterfly is similar to
a Short Straddle except your losses are limited. The strategy can be done by SELLING 2
ATM CALLS, BUYING 1 ITM CALL, AND BUYING 1 OTM CALL OPTIONS. The
result is positive in case the stock / index remains range bound. The maximum reward in this
strategy is however restricted and takes place when the stock / index is at the middle strike at
expiration. The maximum losses are also limited.
Short CALL BUTTERFLY Strategy
BUY 2 ATM CALL OPTIONS, SELL 1 ITM CALL OPTION AND SELL 1 OTM CALL OPTION.
A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call
Butterfly, which is a range bound strategy. The Short Call Butterfly can be constructed by
SELLING one lower striking in-the-money CALL, BUYING two at-the-money CALLS
and SELLING another higher strike out-of-the-money CALL, giving the investor a net
credit (therefore it is an income strategy). There should be equal distance between each
strike. The resulting position will be profitable in case there is a big move in the stock /
index. The maximum risk occurs if the stock / index is at the middle strike at expiration.
The maximum profit occurs if the stock finishes on either side of the upper and lower strike
prices at expiration. However, this strategy offers very small returns when compared to
straddles, strangles with only slightly less risk.
32. Long CALL CONDOR Strategy
BUY 1 ITM CALL OPTION (LOWER STRIKE), SELL 1 ITM CALL OPTION (LOWER MIDDLE),
SELL 1 OTM CALL OPTION (HIGHER MIDDLE), BUY 1 OTM CALL OPTION (HIGHER STRIKE)
A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two
middle sold options have different strikes. The profitable area of the pay off profile is wider
than that of the Long Butterfly.
The strategy is suitable in a range bound market. The Long Call Condor involves BUYING 1
ITM CALL (lower strike), SELLING 1 ITM CALL (lower middle), SELLING 1 OTM
CALL (higher middle) and BUYING 1 OTM CALL (higher strike). The long options at
the outside strikes ensure that the risk is capped on both the sides. The resulting position is
profitable if the stock / index remains range bound and shows very little volatility. The
maximum profits occur if the stock finishes between the middle strike prices at expiration.
Short CALL CONDOR Strategy
SHORT 1 ITM CALL OPTION (LOWER STRIKE), LONG 1 ITM CALL OPTION (LOWER MIDDLE),
LONG 1 OTM CALL OPTION (HIGHER MIDDLE), SHORT 1 OTM CALL OPTION (HIGHER STRIKE)
A Short Call Condor is very similar to a short butterfly strategy. The difference is that the
two middle bought options have different strikes. The strategy is suitable in a volatile market.
The Short Call Condor involves SELLING 1 ITM CALL (lower strike), BUYING 1 ITM
CALL (lower middle), BUYING 1 OTM CALL (higher middle) and SELLING 1 OTM
CALL (higher strike).
The resulting position is profitable if the stock / index shows very high volatility and there is
a big move in the stock / index. The maximum profits occur if the stock / index finishes on
either side of the upper or lower strike prices at expiration.
• Deriving the payoff Schedules and payoff graphs
Consistent with the Spot price and the Exercise Price of the options, net payoffs of call
options purchased/sold, net payoffs of put options purchased/sold and the net payoffs
from the strategies are calculated at various closing prices of Texdex on the Expiry date
which shows the Increased Revenue or the Minimized Loss, in the investor’s Account.
33. 7. FINAL OUTCOME
7.1. Performance Check of the Index
The Performance Check of the index includes a check and analysis of all the parameters
taken into consideration, during the formation of the index. The check includes inclusion of
securities, observing their values for some time span, their volatility calculation both in real
and percentage terms, determining beta coefficients, R2
Factor, Return calculation &
averaging, free float market capitalization, weightage and base value for the index, drawing
graphs for the same and finally correlating and regressing its performance with the NIFTY.
Ø 7.1.1. Selection of the required scrips
The scrips for the index are selected on the basis of their daily turnover. If the scrips in the
textile segment have a daily turnover of more than 50 lakhs, the scrip is entered into the
index. The details of the companies entered into this index are:
COMPANY COMPANY NAME
BRFL Bombay Rayon Fashions Limited
SELMCL SEL Manufacturing Company Limited
BOMDYEING Bombay Dyeing & Mfg Co. Ltd
ARVIND Arvind Limited
ALOKTEXT Alok Industries Limited
CENTURYTEX Century Textiles & Industries Ltd
RAYMOND Raymond Ltd.
SKUMARSYNF S. Kumars Nationwide Ltd
SRF SRF Ltd.
PROVOGUE Provogue (India) Limited
WELGUJ Welspun Gujarat Stahl Rohren Limited
GRASIM Grasim Industries Ltd.
RAJESHEXPO Rajesh Exports Ltd.
KOUTONS Koutons Retail India Limited
36. 4500.95 -1.14 1.14 334.95 0.7 0.7
4449.8 1.66 1.66 337.3 -0.65 0.65
4523.6 0.35 0.35 335.1 1.54 1.54
4539.35 -0.49 0.49 340.25 1.19 1.19
4517.1 1.23 1.23 344.3 2.72 2.72
4572.5 1.76 1.76 353.65 4.67 4.67
4653 -1.52 1.52 370.15 -1.2 1.2
4582.4 -1.71 1.71 365.7 -1.8 1.8
4504.25 -3.48 3.48 359.1 -4.18 4.18
4347.55 -1.87 1.87 344.1 -3.69 3.69
4266.4 -1.76 1.76 331.4 -2.52 2.52
4191.1 1.47 1.47 323.05 1.47 1.47
4252.65 1.49 1.49 327.8 -6.21 6.21
4315.85 -4.15 4.15 307.45 -0.15 0.15
4136.65 -2.32 2.32 307 -7.51 7.51
4463.79 -0.78 1.77 337.4 -0.88 2.76
Graphs Showing Comparison of Volatility of Different Scrpis with that of NIFTY
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
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-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
NIFTY
BRFL
44. RAYMOND 0.01
SKUMARSYNF 0.14
SRF 0.08
PROVOGUE 0.01
WELGUJ 0.34
GRASIM 0.29
RAJESHEXPO 0.14
KOUTONS 0.01
Ø 7.1.8. Weightage of every scrip
Ø 7.1.9. Entry of Scrips in The Index and Their Initial Values
StockS.No.
(as on 24/07/2008)
Qty Av.
Price
Inv. Amt.
1 Bombay Dyeing 5861 650.2 3,810,822
2 Bombay Rayon 686 331.3 226,941
3 Provogue 47 858.35 40,342
4 Koutons Retail 45 765 34,425
5 Arvind 8348 33.9 282,997
6 Raymond 172 208.2 35,810
7 Grasim 596 1,826.60 1,088,654
8 SEL Manufacturing 825 507.5 418,688
9 Alok Industries 4665 41.15 191,965
BRFL
SELMCL
BOMDYEING
ARVIND
ALOKTEXT
CENTURYTEX
RAYMOND
SKUMARSYNF
SRF
PROVOGUE
WELGUJ
GRASIM
RAJESHEXPO
45. 10 SRF 2323 129.1 299,899
11 Rajesh Exports 9452 55.75 526,949
12 S Kumars Nation 7715 70.25 541,979
13 Welspun Guj 3943 327.35 1,290,741
14 Century 2487 484.9 1,205,946
Total 9,996,158
Ø 7.1.10. FORMATION OF TEXDEX.
TEXTILE INDEX
TeXDeX
COMPANY BETA Coefficient Of Avg Daily Returns Weightage Free Float
Determination Volatility (in 1 Year) in Texdex Adj. Factor
( R2 ) (in %) (in %) 30-06-08 30-06-08
BRFL 0.78 0.17 2.76 20.76 2.27 0.06
SELMCL 0.44 0.11 2.67 273.78 4.19 0.11
BOMDYEING 2.19 0.66 4.64 -16.07 38.11 1.00
ARVIND 1.48 0.62 2.86 -36.87 2.83 0.07
ALOKTEXT 1.46 0.42 2.80 -36.87 1.92 0.05
CENTURYTEX 1.66 0.58 3.37 -39.34 12.06 0.32
RAYMOND -0.01 0.00 1.38 -29.2 0.36 0.01
SKUMARSYNF 1.60 0.26 3.98 -35.95 5.42 0.14
SRF 0.58 0.19 2.47 -31.2 3.00 0.08
PROVOGUE 0.63 0.15 1.53 63.47 0.41 0.01
WELGUJ 1.30 0.40 2.98 18.32 12.91 0.34
GRASIM 0.60 0.25 1.62 -41.3 10.90 0.29
RAJESHEXPO 1.60 0.26 4.22 -91.4 5.27 0.14
KOUTONS 0.39 0.45 1.00 25.06 0.35 0.01
TEXDEX 1 2.73 43.19 100.00
The benchmark of TeXDeX is 1000 & trading countdown starts from 25 July 08
Base Date and Value
The base period selected for TEXDEX index is the close of prices on July 25, 2008,
which marks the completion of one month of operations of NSE's Capital Market
Segment. The base value of the index has been set at 1000 and a base capital of
Rs. 1 Crore.
46. 7.1.11. PERFORMANCE
(TEXDEX)
This segment of the project work, includes observing the values of TEXDEX from the period of its initiation, analyzing the change in the
value of each component of Texdex and finally Correlating and Regressing the data of Texdex with the Market data, i.e. S&P Nifty, to
analyze the relative impact of Texdex with the Present Situation and Movements of the Textile index and the Markets.
54. Beta, R2
, Volatility and Returns of TEXDEX Scrips for One MONTH Period
(July 25,2008 - Aug 28,2008)
S.No. COMPANY Company Name BETA Coefficient Of Average Daily Weightage Free Float
VALUES Determination Volatility in Texdex Adj. Factor
( R2 ) (in %) On 28-08-08 On 28-08-08
1 BRFL Bombay Rayon Fashions Limited 0.63 0.13 2.16 3.52 0.08
2 SELMCL SEL Manufacturing Company Limited 0.50 0.01 6.57 42.38 1
3 BOMDYEING Bombay Dyeing & Mfg Co. Ltd 1.06 0.37 2.14 19.60 0.46
4 ARVIND Arvind Limited 0.85 0.23 2.45 1.97 0.05
5 ALOKTEXT Alok Industries Limited 0.38 0.06 1.93 1.40 0.03
6 CENTURYTEX Century Textiles & Industries Ltd 1.58 0.65 2.70 9.43 0.22
7 RAYMOND Raymond Ltd. -0.14 0.03 0.93 0.28 0.01
8 SKUMARSYNF S. Kumars Nationwide Ltd 0.69 0.22 2.05 1.11 0.03
9 SRF SRF Ltd. 0.78 0.35 1.73 2.70 0.06
10 PROVOGUE Provogue (India) Limited 0.29 0.06 1.41 0.17 0.004
11 WELGUJ Welspun Gujarat Stahl Rohren Limited 0.81 0.28 2.03 6.42 0.15
12 GRASIM Grasim Industries Ltd. 0.83 0.32 1.88 7.93 0.19
13 RAJESHEXPO Rajesh Exports Ltd. 0.91 0.45 1.92 2.99 0.07
14 KOUTONS Koutons Retail India Limited 0.22 0.14 0.74 0.08 0.002
TEXDEX 1.24 0.62 2.19 100.00
S.No. COMPANY Free Float Market Cap
1 BRFL 72606955.79
2 SELMCL 874005717.4
3 BOMDYEING 404077679.5
4 ARVIND 40613070.57
5 ALOKTEXT 28972645.82
6 CENTURYTEX 194554008.5
7 RAYMOND 5811541.517
8 SKUMARSYNF 22921795.16
9 SRF 55660815.72
10 PROVOGUE 3549030.606
11 WELGUJ 132473690.8
12 GRASIM 163445001.8
13 RAJESHEXPO 61725022.67
14 KOUTONS 1727501.741
2062144478
55. COMPARISON OF VOLATILITY OF ‘TEXDEX’ WITH THAT OF ‘NIFTY’
(July 25,2008 - Aug 28,2008)
-6.0000
-4.0000
-2.0000
0.0000
2.0000
4.0000
6.0000
NIFTY TEXDEX
59. Beta 1.06
R^2 0.70
Beta Coefficient and R^2
( 02 March,2009 - April 24,2009 )
BETA Coefficient Of
VALUES Determination
( R2 )
TEXDEX 1.06 0.70
Volatility Comparison
-6.0000
-4.0000
-2.0000
0.0000
2.0000
4.0000
6.0000
8.0000
M
M
M
M
M
A
A
A
Nifty TEXDEX
