My research original ,review and copy pastes

PSU Bank' Capital Constraints - Right time now for a Pfandbriefe in India

2011-11-05T09:49:00.000-07:00

Was at Bancon2011 today and couldnt but overhear the murmur of the requirement of capital of PSU Banks,considering that the govt has said tighten belts now and Banks need capital anyways (Govt must hold 51% in PSU Bank mind you), i would think that the time is right now for some one at say a large bank like SBI which is also now a force to reckon in the Mortgage market in India to look at innovative yet not 'those shadyderivativestuff' kind of product.

I would say that SBI needs to just look at the German Pfand Briefe Market.

Pfandbriefe or covered Bonds is a unique German(Prussian) Invention popularized on the streets of Westend and cafe' on alte gasse on Frankfurt am Main - The Pfandbrief (plural: Pfandbriefe), a mostly triple-A rated German bank debenture, has become the blueprint of many covered bond models in Europe and beyond. The Pfandbrief is collateralized by long-term assets such as property mortgages or public sector loans as stipulated in the Pfandbrief Act. Total volume outstanding in Pfandbriefe was EUR 806 billion as at end-2008.Pfandbrief bonds make up the third largest segment of the German bond market after public sector bonds and unsecured bank debt.

The roots of the German Pfandbrief system reach back to the year 1769. In the aftermath of the Seven Years' War (1756–1763) that had ravaged the country Prussian King Frederick the Great introduced the Pfandbrief system with a ”cabinets-order” to ease credit shortage for the nobility. Based on his royal decree, Prussia set up so-called ”Landschaften,” compulsory public-law associations of noble landowners, within the individual provinces. To refinance loans to their members Landschaften issued debentures that largely correspond with the present-day mortgage Pfandbrief since the creditor acquired a direct claim over the estates the member had pledged as security. This Pfandbrief system rapidly spread throughout all of Europe. Towards the end of the nineteenth century, it was widely adopted for the refinancing of public sector loans. The second decisive boost to the development of the Pfandbrief occurred when Landschaften outside Prussia started issuing Pfandbriefe for which all the properties lent against by the Landschaft served jointly as security. As before the loans raised by the Landschaften were not paid out in cash, but in Pfandbriefe. In 1862, the first German mortgage bank, Frankfurter Hypothekenbank in Frankfurt am Main, opened its doors. Numerous other mortgage banks followed in rapid succession in almost all German federal states. By the beginning of the twentieth century 40 private mortgage banks existed. Mortgage banks concentrated from the outset on real estate financing. The rapidly expanding towns and cities in the area of industrialization were in need of the housing construction and commercial properties financing. The 1900 Mortgage Bank Act (HBG) is deemed pioneering legislation until today. It provided a legally prescribed, uniform organizational framework for this group of credit institutions. It was in force for more than a century until the Pfandbrief Act entered into force in 2005.
In their cover business, Pfandbrief banks grant property finance, public sector, ship and aircraft loans. Pfandbriefe have an average maturity of about five to seven years. While Pfandbriefe tend to be associated with asset-backed securities they are fundamentally different. Pfandbrief cover-assets remain on the bank's balance sheet. By contrast, asset-backed securities are typically off-balance-sheet transactions. Another difference: Pfandbrief cover pools are dynamic. Their composition can and usually does change over time, depending on the maturities and on the newly registered cover assets. Due to the stringent legal provisions that govern their issuance Pfandbriefe are deemed particularly safe.
An independent cover pool trustee appointed by the Federal Financial Supervisory Authority (BaFin) records cover assets and cover asset replacements in the cover register. In the event of the Pfandbrief issuer's insolvency, Pfandbrief investors have a preferential claim on the cover assets in the cover register because cover pool assets are not included in insolvency proceedings. There has not been a SINGLE Pfandbrief default since 1901. Property financings may be included in the cover pool only up to 60% of the prudently calculated mortgage lending value. The same holds true for ship and aircraft financings. Public sector loans are 100% eligible for cover

So Mr.Whatisyour name who spokeveryfast' sir, from SBI - Innovate!

PS: The 2008 crisis - Pfandbriefe saved the DAY!
PPS: I also belive that in context of india low cost housing,middle cost housing blah blah ... this is the solution and this is definetly Financial Inclusion!

2011-02-13T22:01:00.003-08:00

2011-02-13T22:01:00.001-08:00

Climate Change Sector - Investment Opportunities.

2010-08-08T11:52:00.001-07:00

I know this sounds really vulgar! firstly to publicly acknowledge the fact that we are screwing our planet and secondly to have Investmen Opportunities trying to reverse it!
However the recent Hot Investing Topic is that of Investing into the the Climate Change Sector for abnormal alpha!!

What is Climate Change Sector Investing ?

Investing into one of the following three sectors is what the modern economists refer to as Climate Change Sector Investments Energy Efficency, Clean Energy and Agribusiness.

Energy Efficency is using less energy to provide intutively the same level of energy service. For example, insulating a home allows a building to use less heating and cooling energy to achieve and maintain a warm temperature inside home during cold winters, or say installing fluorescent lights and/or skylights instead of incandescent lights to attain the same level of illumination.( btw Compact fluorescent lights uses just about 20% energy and lasts almost 10 times longer than incandescent light bulbs so next time do buy OSRAM Lights(I dont get paid for commercials on my Blog).
Efficient energy use is all about achievieng more efficient technology or processes rather than by changes in our individual decadent behaviour of screwing nature, at which we all are bettering year by year!

Clean Energy

Yours truly passed out in 1996 as a Chemical & Electrochemical Engineer, and found it more sexy to take a career that involved numbers which meant money!so this write up on Clean energy could be the most biased pitch that i have ever made!

Clean Energy obviously has been corrupted (i like it though) by Green piece(correct spelling) activists as Sustainable Energy, which energy is the provision(one cannot create from zero ! remember fundamental laws of Energy! Energy cant be created nor destroyed only converted! sounds more like the scientologist pitch but anyways) of
energy such that it meets immediate needs without a trade off to the future generations needs.

Sustainable energy sources are most often regarded as including all renewable sources, such as Electro Chemical,Bio, solar power, wind power, wave power, geothermal power and tidal power.( It can also includes technologies that improve energy efficiency, inspite of the fact that my father in law retired from a Nuclear plant in Kalpakkam I am not including Fission
power here).

Agri Business

In agriculture, agribusiness is a generic term for the various businesses involved in food production, including farming and contract farming, seed supply, agro chemicals, farm machinery, wholesale and distribution, processing, marketing, and retail sales. The term has two distinctly different connotations depending on context.

Investing into any of these three above sectors is reffered to as Investing into the Climate Change Sector.
As of now needless to say there is tremandous opportunity in this however the fact is that there are not many reliable financial products or benchmarks availible for investors who are invested or intend to invest into this.

Muthukumarn Mani at the World Bank Blog talks about a very interesting technology linked investment opportunity on climate change sector , sounds good but to be honest would work only if one of those money making machines from wall street can really productize this and pimp it to investors.

Cheers
Venkat

PS: Be sure you can expect more on this topic from me.

Muthoot Finance raises capital from PE Barings, Therefore Buy JRG

2010-07-29T10:26:00.000-07:00

Muthoot Finance Ltd (MFL) has raised Rs.157 Cr from Baring Private Equity Partners India and Matrix Partners India.

The percentage of stake dilution for this fund raising has not been disclosed, but last year, there was an announcement by Muthoot group, that it plans to dilute a 10% stake in Muthoot Finance to PE players in FY10 and a further 25% stake through an IPO in FY12.

Now this makes me very very bullish on JRG Securities !!!
Ask me why ? well JRG is another portfolio of BEP and BEP has this unique strategy of generating value by leveraging synergies in its portolio'.

We had observed that last in the Mphasis-BFL transaction which has so much similarity to what is happening in this transaction that one seriously thinks if this Bollywood trend of remaking old movies is now spread to the PE Business as well.

Well done.... Lets see how the endgame evolves.

Cheers
Venkat

I am back

2010-07-29T10:23:00.000-07:00

Had been one long break thanks to my MBA, I am back! and hope to share and learn some new stuff in that process!

cheers
venkat

EFP

2009-12-04T07:18:00.000-08:00

I had alway personally believed that only with a product like EFP will our futures market develop.(Esp in Agriculture). I had written about this in the past(actually 2 years back) was really happy to note that this was finally happening in India by MCX

Is this going to be a first mover advantage or first mover disadvantage game ? Well I think the Game that needs to be played by the winner is the 'Burning Bridge Game'

Prediction Markets for Gold 2009

2009-06-22T12:42:00.000-07:00

Wolf! Wolf!

2009-04-09T22:51:00.000-07:00

This was from deal curry

The Chicago Mercantile Exchange (CME), the world’s biggest exchange, is looking at entering India. It is in talks with several Indian exchanges to explore the possibility of picking up equity stake.

Well what else to say this is a good move no doubt and like what lalu dis to the railways by which one day in the future at guntakal railway station you might get Rathna cafe idly sambhar

Let hope for the best, in a business which in the Indian context is mired with venal authorities lets hope cme brings in a whiff of change.

Committe for commodity trading in India

2009-03-27T07:32:00.000-07:00

So far there have been half a dozen committee formed to try to improve stake holders value in the areas of Commodity trading but so far....

This, Committee is like a Commode.
First There is a sitting,
Followed by a lot of noise;
Finally the matter is Dropped.

Nortel & Telecom industry Raju and Satyam Software

2009-01-15T09:12:00.000-08:00

Exactly 8 Days after (Raju's confession letter)Satyam went officially 'BUST',today Nortel too went bust.

Later tonight the Telecom Industry is going to approach the Congress(US) for a bail out package and later tommorow night Ramalinga Raju is going to approach the Congress(India) with a package for his bail!!

Happy Kanu Pongal esp for my sisters and all the other women folks in my family have a great year !

CHEMEX

2009-01-02T04:12:00.000-08:00

The recent global economic crisis has defined a new paradigm for the Chemicals Industry in General and the plastics industry in particular.

The need for a global chemicals(plastics) derivatives exchange(CHEMEX).

The thermoplastics market as of 2007 was worth upwards of approximately $200 billion, a comparable size to that of nonferrous metals. PP global capacity is about 46 million tons, compared to an output of 23 million tons for aluminium. Similarly, the production capacity of LL is analogous with copper, their figures being 15 million tons and 16 million tons respectively.

Price volatility has been a significant issue for the plastics industry for several decades and it exposes both buyers and sellers of polymers to a high level of price risk. With volatility rising to over 50% in recent years, many in the plastics industry supply chain are finding this difficult to manage. Futures contracts provide industry with the ability to manage this volatility.

Futures markets neither increase or decrease volatility, they merely reflect the volatility in the underlying physical market and provide industry with greater price transparency. The Global Chemex plastics contracts will provide a tool for managing exposure to that price volatility through hedging on Chemex’.

Plastics futures contracts will enable the plastics industry to hedge against volatility in plastics prices:

– Hedging is the process of managing the risk of a price change by offsetting it in the futures market

The ability to hedge gives producers, converters and consumers in the industry the choice of how much price risk they are prepared to accept.
Why suppliers owned plastics futures markets?
The lesson post Global Economic crisis, New paradigm!

Suppliers will no more compete in the market place, supply chains will have to compete. Hence the need for transparent efficient futures plastics markets.
The futures and options markets in metals, as well as in agricultural and energy commodities, are widely used with prices fully accepted and embedded in standard industry practice. For the plastics industry, however, the process of managing price risk through hedging has yet to become well established.

Hedging is a risk management tool that offers a similar level of certainty; enabling organizations to lock-in future prices and therefore more confidently focus investment on research, development and other capital expenditure.

The acceptance of these plastics contracts will be important if the plastics industry is to make use of a tool that these Chemex facilitate – hedging.

Hedging

This is the most common term used for a company’s activities on a futures exchange intended to limit the impact of adverse price movements. Hedging is a common practice in the foreign exchange markets for multi-nationals, as well as medium-sized companies with exposure to the fluctuations in currencies that their business requires them to deal in.

Plastics producers and converters,along with the end customer,protect their businesses from price movements in currencies on a daily basis. The hope held out by the such plastics futures market is that they can also protect themselves against movements in plastic (like PP or LL) prices, which have been highly volatile in the past few years .

Another phrase for hedging,“price risk management”, indicates the active nature of a company’s involvement in the strategy, planning and monitoring of a hedging programme and not just the act of trading on a futures exchange.

Price Risk management - the principles of hedging

Through its trading members, the Chemx will serve those at all stages of the plastics supply chain, including both buyers and sellers, the opportunity to hedge their material price risk, and therefore gain protection from future adverse price movements.

Hedging is the process of offsetting the risk of price movements in the physical market by locking-in a price for the same commodity in the futures market. The reasons for doing this are clear: for a converter, for example, it allows for better control of their raw material costs and for a producer, better management of product pricing.

There are predominantly two motivations for a company to hedge:

1) To lock-in a future price which is attractive, relative to an organization’s costs

2) To secure a commodity price fixed against an external contract

When hedging, an organization starts with price risk exposure from its physical operations, and will buy or sell a futures contract to offset that price exposure in the futures market. The ability to hedge means that an organization can decide on the amount of risk it is prepared to accept. It may wish to eliminate price risk entirely and it can generally do so quickly and easily on such Global Chemex’.

Hedging by trade and industry is the opposite of speculation as its primary purpose is to offset risk. Speculators, however, come to the futures market with no initial risk; they assume risk by taking futures positions. Hedgers reduce or eliminate the chance of future losses or profits, while speculators risk losses in order to make profits.

To be successful, a hedging programme must be devised in conjunction with a sale or purchase plan, and all pricing must be basis the Chemex settlement price in order to achieve the most effective hedge and to meet the requirements for international accounting standards.(FASB)

The programme can be as simple or as complex as a company wants to make it, but it will be unique depending on that company’s appetite for risk, internal practices, pricing policies and hedging motives. Not only must a hedging programme be well devised, but it must also be managed continuously in line with the changing circumstances of a company’s physical operations.
It has been observed that companies that use futures contracts to manage price exposure enjoy advantages over those that do not, or that rely on suppliers alone for price protection.
These advantages include :using a transparent and globally recognised 'chemicals' exchange price as the reference for settling supply contracts; flexibility in modifying the level of price protection depending on changes in the market or the company’s strategy; the ability to offer firm prices to a customer while offsetting this commitment in the futures market.

A company needs to decide what its aims are in its hedging programme. There are two main strategies: hedging to fix a price and hedging to offset a price.

Price-fixing hedge

The price-fixing hedge, referred to as a “fair value hedge” by accountants,seeks to eliminate the impact of future price changes in plastics on a business. An example is a film converter wanting to lock in a price for LLDPE which it will need to buy in six months time (December) to fill incoming orders.

A price-fixing buy hedge is put in place through buying LLDPE December futures now, and then selling out the futures contract

in December, at the moment the supplier gives the converter a firm price for its LLDPE delivery.

A price-fixing sell hedge may be undertaken, for example, by an integrated petrochemical company concerned that the price of PP may have declined in three months time after its production has been ramped up. The company would sell futures now and then buy back the futures when the PP is priced out to customers.

Price Offset Hedge

A price offset hedge is known as a “cash flow hedge” by accountants and it offsets the price risk consequence of making a

fixed priced purchase or sale of physical material. In contrast to the previous hedge, an offset hedge is undertaken when the company buys or sells physical material,rather than some time ahead of an expected physical transaction.

A company may use an offset hedge when it is accumulating plastic inventory that has a certain price, selling futures to hedge the risk of price declines and later buying back the futures when the inventory levels decline.

Another converter may find its customer wants a firm price for purchases only when market prices are low. The converter could then buy futures to cover those low priced product sales and then sell back the futures hedge in pieces to achieve an average price over the whole budget period.

The intense price volatility that the industry has suffered post the new economic order in recent years is starting to become unmanageable for many parts of the supply chain.

Producers attempting to pass on rising prices are meeting resistance as the converters themselves are typically under pressure from consumers to maintain previously agreed prices. This means that converters are increasingly ‘squeezed’ in the middle, and supply chains, rather than the suppliers, are competing.

Whilst the plastics industry supply chain grapples with these issues, the emergence of new world economies, such as China, India and their demand for industrial raw materials is fundamentally changing the global balance of supply and demand. With these new market conditions, and with no indication of when they will end, the global plastics industry desperately needs a long-term solution to the problem of price volatility.

Now here is where I Stick my neck out !

I believe the Duponts and the Dows and the monsantos which seize the initiative and form a global electronic market place that trades on carefully designed plastics futures and options contracts would be the New leaders in the Plastics market place, or rather Survivors ?

The Author S.Venkataraghavan is currently with ACE Clean Energy Ventures,New Delhi. as an Entrepreneur in Residence.
Venkat finished his B.Tech in Chemical and Electrochemical Engineering from the Central Electro Chemical Research Institute Karaikudi, and has been with the Altos Group of companies Since 1996.The views expressed here are his personal and need not be the views expressed by his employers.

Mumbai the Day after,Dont blame politicians!

2008-11-29T11:09:00.001-08:00

The fallout of the Mumbai Terror attack has definitely made people ask questions, the amount of venom and invectives that are spewed on our politicians is quite understandable, however an analysis in to what is wrong with the system? Makes me conclude that the real villain is not the politician, not we the people, not even the terrorist, but infact is our administrative class and the system that they propagate.
Pay commission Bureaucracy Vs The Armed Forces

A retired civil servant once told me that India is a great democracy and will never get into a Pakistaniske dictatorship situation since It is to the credit of Indian civilian and military leaders and to our burgeoning democracy that the concept of civilian control of the military has been maintained in independent India. Unfortunately, its exact contours still remain unclear, leading to unavoidable incidents of civil-military confrontation.

The Armed Forces argue that while they accept political control, they rightly feel that "bureaucratic interference" is unacceptable. That much of the civilian bureaucracy—particularly the Indian Administrative Service—is seen as conniving and scheming, concerned only with furthering its parochial interests(which is actually fine by the theory of public choice), further inflames the Armed Forces' sense of injustice. As seen in the imbroglio on the recommendations of the Sixth Pay Commission, this resulted in a confrontation between the bureaucracy and the military brass

Angry over what they describe as a deliberate attempt by the bureaucracy to erode the parity of the crucial middle-rung officers — army lieutenant colonels
and their equivalents in the air force and the navy — with the civil servants, the three Defence services decided not implement the new central pay rules, notified on August 30.

The defence services pointed out that four successive pay commissions, including the recent one, had placed lieutenant colonels(The next rank that the NSG Commando Late Major Unni Krishnan would have got on promotion ) on a par with directors(selection grade) from the Indian Administrative Service(Equivalent of State HOD's and takes about 12 years to achieve and who can indefinitely delay passing the reward cheque that Unnis Father has been promised by the political class ). Expressing surprise at the decision of the committee of secretaries, which reviewed the Sixth Pay Commission report to change the award, the services have said that the civil officers of 'group A' services and the central paramilitary forces have also been placed in the higher pay band.

According to the burgeoning bureaucracy, the military's attitude towards the civil service stems from a fundamental misunderstanding of its nature and role. German thinker Max Weber believed that bureaucratic organizations were an attempt to align the decision-making process to "calculable risks", as rationality was inseparable part of the bureaucratic order. While Weber's rather romanticized vision of bureaucracy has been modified by later-day thinkers, the concept of "rational bureaucracy" has continued relevance in an era of increasingly complex decision-making process.

Bureaucrats are believed to act as a bridge between legislative intent and implementable policy—they are supposedly involved with all three functions of formal policymaking: agenda-setting, policy formulation and its implementation.

The civil servants have convinced the system that the tasks of modern governance are too complex, technical and enormous to be left either to the legislature or political heads of departments. Moreover, the political executive and Parliament may lose sight of the broader and serious questions of national importance if they were to enter into the details of routine administration.' The Devil in the Detail'

Therefore, the argument put forward by the armed forces that civilian control of military is restricted to politicians thanks to the prevailing bureaucracy has been made to look as blithe ignorance of basic tenets of public policy as well as the provisions of the Indian Constitution which provides an explicit constitutional basis to bureaucratic services—India's parliamentary form of government is enmeshed intractably with the support of the civil bureaucracy

Where did the civil service go wrong? Was it inheriting the British legacy?

When the country attained freedom, a major concern of our visionary founding fathers was to ensure that there was no disruption in administration and that the unity and integrity of the country was not undermined.

The task was not easy with over 600 Princely States spread all over the country, and each State having an administrative structure of its own. Besides achieving the integration of Indian States, the country had to face the aftermath of Partition
and look after millions of refugees who had to flee Pakistan.

To add to the problems, the country had to fight a war in Jammu and Kashmir, with a depleted Indian Army. The British Indian Army as it existed in colonial India was divided between India and Pakistan, and British Officers left India. So also the
officers of the Indian Civil Service.

Remember this, the so called administrators (Government servants) had an adversarial relation with the national political parties during the fight for Independence the travesty was that post independence it was the same class of adversaries whom the political founders used for implementing the policies of the national government.

Much of the credit for the creation of the All India Services, particularly the IAS and the IPS should go to the first Home Minister of the country, Sardar Vallabhai Patel.

The administrative system was strengthened by the creation of the Indian Administrative Service and the Indian Police Service - as all-India Services. They were conceived as meritocracies. Selections were made on pure merit, on the basis of
competitive examinations, followed by interviews.

The officers were posted to different States after training. While the States had control over them, as far as disciplinary matters were concerned the Centre retained authority. This gave rise to a classic situation, a slave who had two masters becomes completely free.

The worst of the ills that followed were high level of corruption, increasing politicization and absence of accountability(read performance linked pay).The rationale for new pay commission was that these best and bright government officers needed to be benchmarked with say an IT Professional.

(Whereas during this slow down we are seeing these high paid IT Professionals being "laid of" and given "pink slips" what about the Civil Servant?)

Whereas a politician who does not 'deliver' is either kicked ( or atleast can be kicked) out by the real masters(people) or is chased by his vindictive political adversary(I am from Tamil Nadu!) and that a high paid corporate executive can be given a 'pink slip'. The civil servant neither has performance targets nor can technically ever be 'sacked' (at max only suspended or transferred).

There was a time when government servants/civil servants were universally respected. Their honesty, integrity and devotion of duty were taken for granted. This is no longer the case. They do not stand out from the rest of the bureaucracy any more; there are as good or bad as the rest of the system. Degeneration has crept into its cadre since the service no more continues to attract best of talents in the country.

The main reasons for the change that has occurred are

Overwhelmed by the constant feed of praise and adulation, the maturing entrant tends to lose his head and balance. He believes that he is infallible, thanks to his intellectual superiority and his gathered wisdom accumulated while working in different fields of government.
The rather enthusiastic diffident youngster of early idealistic years, in course of time, is transformed into an arrogant senior fond of throwing his weight around; he becomes a conceited prig.

The national emergency between 1975 and 1977. when the leadership spoke of a 'committed bureaucracy' that was running the country irrespective of the political instability.

The value systems crumbled further in the 1980s and early 1990s, when degeneration of political leadership created an ethos of unashamed corruption. The corrupt politician started working hand in glove with the corrupt civil servants and the two
blatantly threw political integrity and Service honesty completely overboard.(Remember the Lage Raho Munna bhai sequence where an old retired government employee strips himself bare to get his pension?)
The official does not realize that some time in the future the hunter would invariably end up getting hunted. This was shown beautifully in the 80's by the national award winning Girish Kasarvallis Kannada film Tabarana Kathe.

Tabarana Kathe is the story of Tabara Shetty, a government servant in the ranks of a watchman. Tabara Shetty serves the Government till his retirement period. He is a dedicated worker and respects the system that sustained him for so long. But problems emerge after his retirement. Tabara never gets his pension money(The System as of Today : A Pensioner even if from the Armed Services needs to prove every month that he is alive by submitting a life certificate collecting the pension in person is not a sufficient proof that one is alive).In his failing old age, Tabara approaches the officials he had served during his tenure. Except for a few sympathisers, nobody helps Tabara get his pension. Matters worsen when his wife and only companion in the world falls sick with diabetes. She has a sore foot which turns to gangrene. Tabara tries all means to get his pension to treat his wife(When Tabara fails to manage his wife's operation, in a moment of desperation, he goes to a local butcher and asks if he would ampute his wife's leg. This intense scene was shot brilliantly.). After a few months, his wife dies. The pension money arrives after that. Tabara curses his higher officials and the administrative system which ruined his life.
The climax was the highlight of the film as in all Girish Kasaravalli's films. Tabara finally receives his pension. But everything is over. His sole companion has left this world. Standing in front of his past government office, Tabara shouts at the office staff and holds them responsible for his wife's death.

The dilution of the original concept of meritocracy has crept in over a period of time.
The first blow to Patel's merit scheme came from the Constitution, which reserved seats for scheduled castes and tribes in the competitive examinations. Next, was the step taken by Charan Singh in 1979 when the promotion quota for the state civil
services was increased from 25 percent to 33 percent.

This was followed by the Late V.P. Singh(who infact died on the 2nd day of the Mumbai terror attack) who brought the total reservation to 50 percent by reserving seats for a new category of 'other backward classes'. Further additions to the list were made by the 'humble farmer' Deve Gowda who proposed to slash the percentage of direct recruits, and Dr Manmohan Singh who has declared reservation of three percent for physically handicapped persons.

The Service lost the habit of taking initiatives and became blind executors or "Dilbert's" of policy, perhaps because a larger proportion of the annual intake drawn from technical disciplines and premier engineering institutions(yours truly a Chemical Engineer) found itself incapable of intellectual initiative and people skills.
They were excellent test takers who could beat by hook or crook any psychometric test(Again Remember Munna Bhai?) but unlike their courses they did not have an exam to be graded end of the year.Blind execution without any application might be good but it also gives rise to comical situations.

The British bureaucracy had a post for a person to climb the cliff of Dover daily and report if Napoleon was coming The post was abandoned in 1946!

The Degeneration has continued unchecked, the service has reached such a deplorable stage that the government and the people would (if not already) refuse to accept it as the premier service if the 'real' truth got out .
Hence the whole strategy has been very cleverly evolved to blame the political class for all ills that ails the system wait for events like these terror attacks stand back and wait for the emotionally charged gullible public (who just want to give vent to their feelings for about 48 or in this case 62 hours) to further make the politicians look like villains, when infact Politicians are really simpletons, puppets who have always been frustrated with the Sir Humphry Appelbys and Bernards of the Burecrautic class.

The Great Britain as a standing Example.

If it can be done in Britain the birthplace of 'using the art of game theory by bureaucrats we can try to do it as well right here in India'.

The British Political class thought that they achieved significant progress by trying to make the civil service considerably streamlined and efficient atleast however it was just another classical case of government servants gaming the theory of public choice.

Public choice in economic theory is the use of modern economic tools to study problems that are traditionally in the province of political science.
In particular, it studies the behavior of voters, politicians, and government officials as (mostly) self-interested agents and their interactions in the social system either as such or under alternative constitutional rules

All these theories tended to support the beliefs of what were then fringe economists such as Friedrich von Hayek, whose economic models left no room for altruism, but depended purely on self-interest, leading to the formation of public choice theory.
The economist James M. Buchanan decries the notion of the "public interest", asking what it is and suggesting that it consists purely of the self-interest of the governing bureaucrats. Buchanan also proposes that organizations should employ managers who are motivated only by money. He describes those who are motivated by other factors—such as job satisfaction or a sense of public duty—as "zealots".

This( as well as works of other leading social engineers like Laing (who was infact a shrink) led to a widespread popular belief that the state created by these bureaucrats was purely and simply a mechanism of social control which calculatedly kept power out of the hands of the public and made it appear to the public that all the powers was with the political bosses and that the bureaucrat was infact a humble public servant. Documentary maker Curtis in this three part Documentary The Trap, shows that it was this belief that allowed the theories of Hayek to look credible, and underpinned the free-market beliefs of Margaret Thatcher, who sincerely believed that by dismantling as much of the British state as possible—and placing former national institutions into the hands of public shareholders—a form of social equilibrium would be reached. This was a return to the mathematician Nash's work, in which he proved that if everyone was pursuing their own interests, a stable, yet perpetually dynamic, society could result. The documentary ends with the suggestion that this mathematically modeled society is run on data—performance targets, quotas, statistics—and that it is these figures combined with the exaggerated belief in human selfishness that has created "a cage" for Western humans.

Way ahead.

'The First step in solving a problem is accepting there is a problem'-Anonymous Alcoholic! We cannot fight terror, with a pathetic back up system.

It must be recognized that a complete overhaul of the civil services structure at this time is neither feasible nor possible and hence the best alternative is to scrape the system completely and start out with a new system of administrative governance with proper checks, balances and performance linked pay.

Suggestions for 'transforming' the civil services into an effective instrument of good governance and hence our Society

1) make the Service politically neutral and to insulate it from political influences or interferences that distort its proper functioning.
2) Raise the level of accountability so that the performance of the civil servants in administrative delivery at every level are objectively analysed to decide their individual future. The third
3) bring about systemic changes designed for qualitative improvement of the Service and the performance of its men and women.

Angry Mumbaikars and Ms.Shobha De.
Hence Ms.Shobha De The reason why the cops dont have proper protection gear is not politicians, it is the Multi layered process which is followed by the treasury and its secretaries by which even if protection gear were available they would have to sign a register which has green colour paper and red check boxes to get that by which time.......

Forgive 'em politicians they are simpletons.

P.S: Do you blame politicians or the administrative system that shepards our pride NSG commandos in BEST Buses? Are we not missing something here and blaming the wrong side?

Bombay

2008-11-27T06:42:00.000-08:00

Spot Gold has been going up, We have seen in recent years that Precious metal command a "Terror Premium" and we have seen rallies in precious metals during such acts of terror.

Precious metals Futures markets in New York is closed today on account of Thanks Giving wouldn't be surprised to see the Gold Market re open with a Large Gap tomorrow.

Have been reading lot of Blogs and micro blogs on the Mumbai attacks.
Cant help noticing the anger which these guys show in the form of Invectives in their messages.

I think there is only one and quite a simple approach that we as citizens of India can adopt to win this war on Terror.
Just go out and Vote,doesnt matter who you support just go out and Vote and tell all educated people you know to come out and Vote whatever be the election, councillor,legislative,Parliament....

Terrorists hate the spirit of Democracy.

Dedicate this blog to the spirit of Bombay(ya ya you can keep renaming but it will always remain Bombay) and my late dad a true blue Bombayite who introduced me to Cafe Leopold and to Shamiana at The Taj (Cannot forget the unlimited rounds of coffee refils from 200 am (after a mondegar beer,bademiya dinner) till the guys start laying the table for breakfast.

Rafi:
Aye dil hai mushkil jeena yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Ha haa, ha ho ho, ho hi haa ha haa
Hm hm hm hm, hm hm hm , hm hm hm hm hm
Aye dil hai..

(Kahin building kahin traame, kahin motor kahin mill
Milta hai yahan sab kuchh ik milta nahin dil)
Insaan ka nahin kahin naam-o-nishaan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Aye dil hai..

(Kahin satta, kahin patta kahin chori kahin res
Kahin daaka, kahin phaaka kahin thokar kahin thes)
Bekaaro ke hain kai kaam yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Aye dil hai..

(Beghar ko aawara yahan kehte has has
Khud kaate gale sabke kahe isko business)
Ik cheez ke hain kai naam yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Aye dil hai..

Geeta:
(Bura duniya woh hai kehta aisa bhola tu na ban
Jo hai karta woh hai bharta hai yahan ka yeh chalan)
Tadbeer nahin chalne ki yahan
Yeh hai Bombay, yeh hai Bombay, yeh hai Bombay meri jaan
Rafi:
Aye dil hai mushkil jeena yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Geeta:
Aye dil hai aasaa jeena yahan
Suno mister, suno bandhu, yeh hai Bombay meri jaan
Rafi:
Aye dil hai mushkil jeena yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan

commodityonline.com will be the number one portal for commodities by 31 Dec 2009 ?

2008-11-13T05:38:00.000-08:00

Global Derivatives markets have gone to the next step indeed.

Organized Markets have existed to establish a fair value for a service or produce.
Now we have what are reffered to as prediction markets.

Prediction markets are sophisticated markets on which binary contracts are traded.

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of an underlying asset. The underlying asset on which derivatives are based can be commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates. Credit derivatives are based on loans, bonds or other forms of credit.

Binary contracts are double derivatives, i.e derivatives of derivatives.
Binary contracts on expiry either yield 100 or 0.

Currently one of the largest prediction market is The Ireland based Intrade(Intrade.com).

Intrade.com has created an exchange for participants to trade (speculate on) events that directly affect our everyday life, like politics, entertainment, financial indicators, weather, current events and legal affairs - these are the various trading categories.

Within each category Intrade.com lists a set of contracts, a contract is an event that will have an unambiguous result.

One trades (speculates on) what one thinks the outcome of that event will be.

For example a political contracts - Will Obama be re-elected President in 2013. There are only two possible outcomes for this contract - Yes, he will be re-elected or No, he will not.

If Obama gets re-elected that contract will close at 100. If on the other hand he fails to win the general election in 2013, the contract - Will Obama be re-elected President - will close at 0.

However, until the election is over that contract will fluctuate in value between 0 and 100 just like a stock, reacting to the news of the day and buying & selling by traders and speculators.

Other contracts listed on them included

1) Will the US economy head into a recession during 2008.(The most active contractlast traded price 91.3 on 13 Nov, this means that participants on Intrade are predicting that there is 91.3 % that US will head into a recesion in 2008, you think they are correct you buy , you think otherwise you sell (Depending on where the prevailing bid and ask are for eg in this contract it is at 91-92)
2) Will Gold close on or above 1000 on 31 Dec 2008.(currently at 15% and quite an active contract)
3) Who will win the Indian elections in April 2009? (not much liquidity)
3) will Britney spears go to the Rehab by 31st Dec 2008? (Dont wish to comment!!)

What the prices mean

Since these contracts trade between 0 and 100, One can think of the price at any time to be the percentage probability of that event occurring.
Going back to our Obama, example, lets say on December 1, 2013 the Obama re-election contract was trading at 63, meaning, traders gave him a 63% chance of being re-elected.

If you thought President Obama will be re-elected you would expect that price to go up - towards 100. In that case, if you bought one contract at 63 and Mr. Obama did get re-elected you would make the difference between your purchase price - 63 - and the closing price - 100 - or 37 points.

Who determines the prices?

Participants decide the price - along with thousands of traders around the world. Just like the price of Google stock is determined by the buying & selling activities of thousands of traders in the financial markets, the price of Intrade contracts are determined by traders,who are confident enough to back up their opinion by risking real money

How does one calculate profits and losses?
Profits are calculates in terms of PIPs, price in points, when a contract trades from 63 to 73 - that's 10 points. Each point is worth 10¢.

If you bought one Obama re-election contract at 63 and he does win the election, that contract will close, or settle, at 100. Your profit will be 37 points x 10¢ per each point or $3.70.

Settlement price – purchase price = your profit
OR
100 – 63 = 37 points X 10¢ per point = $3.70 a profit
On the other hand, if he does not win re-election that contract will settle at 0 and your loss would be 63 points.
0 – 63 = – 63 X 10¢ per point = – $6.30 a loss

Remember, One does NOT have to hold onto any contracts you buy or sell until the election, you can trade out of them any time!

Let’s take another example, you buy 6 contracts at 50 in the morning and sell them out at 73 later that day. You collect 23 points (73 – 50) times 6 contracts times $.10 for each point or $13.80 in profit.

23 points X 6 contracts X $.10 = $13.80.

Coming to contracts of our Relevance, Namely commodities contracts, there are a few active commodity contracts especially in Oil and Gold.

For serious Gold and Oil traders here is a tip, do keep checking every day these markets, they are definetly a clear indicator of the trend and also tell you what one could expect(or not expect) from the market.

Being a new market, Intrade also has a feature called suggest contracts.
And hence i plan to mail them "Commodityonline.com will be the number one portal for commodities by 31 Dec 2009" ? Any one for this bet !

The Intelligent Investor.

2008-10-29T07:23:00.000-07:00

First they came chasing the commodity broker
and I did not speak out
because I was not a commodity broker.

Then they came chasing the p-note FII broker,
and I did not speak out
because I was not a p-note FII broker.

Then they came chasing the local Stock broker
and I did not speak out
because I was not a local stock broker.

Then they came chasing for me
and there was no one left
to speak out for me!

Inspired by Niemoller

Watch out for the Commodity boom ahead

2008-10-19T12:14:00.000-07:00

Bail out Good for Commodities.We will see huge run up on commodity prices.

The recent argument that all this financial crisis will lead to economic slow down, causing a soft landing it is also believed that this is going to bring down the price of commodities, however contrary to popular perception people are over looking one fundamental fact, or rather the basic definition of the term INFLATION

In economics, inflation or price inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation.Inflation can also be described as a decline in the real value of money—a loss of purchasing power.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.Views on which factors determine moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. The consensus view is a sustained period of inflation is caused when money supply increases faster than the growth in productivity in the economy.

Now is this not the case; The whole world is talking of slow down economic recession et all,lowering of productivity which is causing markets all over the world to tank, and how do the biggies try to solve this 'pseudo liquidity' problem.Presto by printing more notes.Which is extremely inflationary.

One will see the effect of this inflationary measure hitting back at the markets,and leading to a boom in commodities.

SU rep Ron Paul said to CNN " Something has to give. You just can't create more money out of thin air and propping up everybody. It's an immoral system. You're asking the poor people to bail out the rich. You're asking the innocent people to bail out the guilty. You're asking people to just totally defy the Constitution because there's no place in the Constitution that says that we can do these things.

Besides, economically, it's a disaster. This is going to cause a great deal of harm. It's like a drug addict taking a strong fix, and he feels better for a day or two, but believe me, we're going to kill the patient. And the patient here is the dollar system and our entire world economy. I would say let's get off this addiction.

credit markets seem to start loosening a bit to some degree in the short run, but that just means we'll have more inflation. You can't create $5 trillion out of thin air and not expect inflation. So although the dollar may be up a little bit right now because the markets are a little calmer, this just means that in time we're going to all suffer and pay for this, and we're going to pay for it with higher prices"

Obviously Gold investors are going to be very happy about this, since the best hedge against inflation is Gold.
After all The Fed and Treasury are merely cushioning the massive deflationary forces in the financial system by printing more notes!!!

I have been talking to my circle this logic and impressing on them as to why it is still a very good time to be buying into gold and commodities.
After all this is just the beginning of the Commodities Boom,would definitely be surprised if commodity investors do not endorse my view on this! or come with an alternative argument against the commodity bulls who are being now pampered by the global central banks.And definitely the commodity bulls are going to be laughing all the way to the bank.

And then Sachin created God!

2008-10-17T14:47:00.001-07:00

4 E's That Determine Gold Prices

2008-09-25T19:22:00.000-07:00

In 2006, My paper 4 E's that cause the Gold Prices to Rise was treated with utmost contempt.
I can now say after 2 years that though I dont consider myself as a clarivoyant atleast I now believe that Markets are after all about common sense which is pretty uncommon.

Thanks to Sangeetha Shah of Financial times for this write up.

Impact of sporting Events on Commodity Prices. Singapore F1 GP ?

2008-09-21T11:02:00.000-07:00

Beijing olympics had a huge impact on prices of commodities as China had to procure
previously unheard quantities of Steel,copper, Cement etc ahead of the Beijing Olympics.

Similary Singapore ,started the Same, Last year August 2007,which saw a considerable run up in prices of commodities,My Colleague Manoj and I had the opportunity to see the construction activity of the First Night Race GP at Singapore in person way back in July and had come out with our advisory on the same, Due to Compulsions we had to keep these details in private till now, now that there is Just a week away for the Singapore f1 GP here I share my view as well as Snaps of the same,

The 5.05km long street circuit would offer a number of 'twin side' overtaking
opportunities, fast turns and technically challenging sections for F1 race drivers would definetly make this wet race hot!

More than 70 per cent of the street circuit is made up of Singapore’s existing road network. The Paddock building houses the control tower, garages for the teams, hospitality lounges, Press Room and other facilities( A beautiful view of this from the Singapore Flyer is presented above, thanks manoj for this lovely shot taken on a very ordinary SLR)
i. Construction of a 1.2 km road that will form the eastern section of the circuit
ii. A new vehicular/pedestrian underpass and service road leading to the Pit Building
iii. Widening of a stretch of the promenade between the existing outdoor seating gallery and floating platform in Marina Bay
iv. Widening a section of Raffles Boulevard from Nicoll Highway to Temasek Avenue
v. Modifications to existing road kerbs and traffic islands.

Any guess on the quantity of commodities used, the unofficial news is that the Contractors Chan & Chan Co Pte Ltd estimated almost about 77 million dollars to raw material consumption alone :) !!! (Does not include the Lighting,energy and related tertiary commodity consumption)

Definetly a race that would have delighted Senna(and his fans as well), Afterall you can be 100% sure that it is going to rain in Singapore,not to rule out Proffessor and schumi as well.

There were a section of tracks that I observed (The new 1.2 km eastern section you can view that section from the verandah of the Indian Restaurant at the singapore Flyer).This section inspite of it being new I think would be extremely bumpy hopefully it is safe one.(and not end up a tamborella!)

As of rubber burning be sure that you would go back home with that 'incense' deep in yournose adicttive and making you want more and more of that smell!!

Dont miss out this 'commodity prices sensitive' Race Next week!! !!

More Snaps at http://picasaweb.google.co.in/dindiz/F1GPTrack

Will she save America from the Oil Crisis ?

2008-08-31T11:17:00.000-07:00

Was really surprised when i came to know about McCains mate, Sarah Palin(pronounced Pay lin),I first read about her a few years back when i was tracking Crude oil.

I read about this alaskan pipe line (apparently her pet project) and also how prosperous Alaska would become due to high oil prices (Every citizen of Alaska was promised that they will get some 1000-1500$ of Oil Debit Cards).

She was also some kind of Miss USA or Something (Sandra Bullock Miss Congeniality types).

Will her capable administration and ability to handle sensitive Oil Policy on which she is an expert (yes yes when she becomes the president, afterall Mc Cain has had some hundreds of surgeries!!) help America out of the Oil Glut.

Will The NSE "Rentseekers" be future of the Indian Democracy ?

2008-08-29T17:09:00.001-07:00

The NSE has successfully launched the currency futures contract.
In about a couple of decades, if What Robin Hanson predicts comes true,it would be this seemingly innocous building which is currently a rent seeker in the Indian derivatives market that would become the seat of all Political Action.
Laws and policys would not only get vetted by servers at Bandra Kurla Complex but also get official thumbs up or down?
And who would give this thumbs up or down ?Politiciants? Officials ? Voters? No SPECULATORS would !!!

Robin Hanson had coined the term Futarchy way back in 2000 however at that time we would have only laughed at that idea! Here is his argument

This short "manifesto" describes a new form of government. In "futarchy," we would vote on values, but bet on beliefs. Elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare.

Democracy seems better than autocracy (i.e., kings and dictators), but it still has problems. There are today vast differences in wealth among nations, and we can not attribute most of these differences to either natural resources or human abilities.

Instead, much of the difference seems to be that the poor nations (many of which are democracies) are those that more often adopted dumb policies, policies which hurt most everyone in the nation. And even rich nations frequently adopt such policies.
These policies are not just dumb in retrospect; typically there were people who understood a lot about such policies and who had good reasons to disapprove of them beforehand. It seems hard to imagine such policies being adopted nearly as often if everyone knew what such "experts" knew about their consequences. Thus familiar forms of government seem to frequently fail by ignoring the advice of relevant experts (i.e., people who know relevant things).
Would some other form of government more consistently listen to relevant experts?

Even if we could identify the current experts, we could not just put them in charge. They might then do what is good for them rather than what is good for the rest of us, and soon after they came to power they would no longer be the relevant experts. Similar problems result from giving them an official advisory role.

"Futarchy" is an as yet untried form of government intended to address such problems. In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be:

When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.

Futarchy is intended to be ideologically neutral; it could result in anything from an extreme socialism to an extreme minarchy, depending on what voters say they want, and on what speculators think would get it for them.
Futarchy seems promising if we accept the following three assumptions:
1)Democracies fail largely by not aggregating available information.
2)It is not that hard to tell rich happy nations from poor miserable ones.
3) Betting markets are our best known institution for aggregating information.

GDP is today the most common measure of national wealth. It seems hard for frequent travelers to escape the impression that people in high GDP nations tend to be richer and better off than those in low GDP nations. Economists thus tend to be willing to recommend policies that macroeconomic data suggest are causally related to increasing GDP. It seems that it is not that hard to, after the fact, tell rich satisfied nations from poor miserable ones. GDP may be good enough, and with the full attention of our elected representatives, we should be able to do even better, such as by including happiness, inequality, health, leisure, and environment measures.
If we can measure how rich nations are, we can use such measurements to settle bets. This is good because betting markets, and speculative markets more generally, seem to do very well at aggregating information.

To have a say in a speculative market, you have to "put your money where your mouth is." Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up. Speculative markets in essence offer to pay anyone who sees a bias in current market prices to come and correct that bias.
Speculative market estimates are not perfect. There seems to be a long-shot bias when there are high transaction costs, and perhaps also excess volatility in long term aggregate price movements.

But such markets seem to do very well when compared to other institutions. For example, racetrack market odds improve on the predictions of racetrack experts, Florida orange juice commodity futures improve on government weather forecasts, betting markets beat opinion polls at predicting U.S. election results, and betting markets consistently beat Hewlett Packard official forecasts at predicting Hewlett Packard printer sales. In general, it is hard to find information that is not embodied in market prices.

A betting market can estimate whether a proposed policy would increase national welfare by comparing two conditional estimates: national welfare conditional on adopting the proposed policy, and national welfare conditional on not adopting the proposed policy.
Betting markets can produce conditional estimates several ways, such as via "called-off bets," i.e., bets that are called off if a condition is not met.

Whether this is just fancy write up or the prediction of the future ? Any one wanting to bet on this ?

p.s:However The Trap a three part BBC Video documentary by Adam curtis is definetly an eyeopener, and answers the question is Market economy the real panacea of all ills ?(will definetly post it in My blog)

Commodity Futures Markets,Singer-Prebisch thesis and Jevons Paradox

2008-08-03T05:34:00.000-07:00

The Singer-Prebisch thesis (often referred to as the Prebisch-Singer thesis or sometimes the Prebisch-Singer hypothesis) is the observation that the terms of trade between primary products and manufactured goods tend to deteriorate over time. Developed independently by economists Raul Prebisch and Hans Singer in 1950, the thesis suggests that countries that export commodities (such as most developing countries for agriculutral commodities ) would be able to import less and less manufactured goods for a given level of exports.

Singer and Prebisch examined data over a long period of time suggesting that the terms of trade for primary commodity exporters did have a tendency to decline. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

Some regard the Singer-Prebisch thesis as important because it implies that it is the very structure of the market which is responsible for the existence of inequality in the world system. This provides an interesting twist on Wallerstein's neo-Marxist interpretation of the international order which faults differences in power relations between 'core' and 'periphery' states as the chief cause for economic and political inequality. As a result, the Singer-Prebisch Thesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-marxist developmental Economists and provided a justification for import substitution industrializing (ISI) policies and an expansion of the role of the commodity futures exchange as a tool for development.

Properly understood, the Singer-Prebisch thesis is an observation, not a theory. Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his highly influential career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry. Few economists today would agree that an import-substitution stance is the correct response to declining terms of trade.

The Singer-Prebisch thesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa. For this reason, much of the recent research inspired by the Singer-Prebisch thesis focuses less on the relative prices of primary products and manufactured goods, and more on the relative prices of simple manufactures produced by developing countries and complex manufactures produced by advanced economies.(CHINA AND DENGISM(my friend says dengism is a bad word in telegu!))

However I was not able to personally think about the relevance of this to Crude Oil,which made me think more,get more confused and make me further search for answers.

I finally did hit upon an answer which made my confusion permanent! (and not temprorary as usually the case).
It was the Jevons Paradox,

In economics, the Jevons Paradox (sometimes called the Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource. It is historically called the Jevons Paradox as it ran counter to popular intuition. However, the situation is well understood in modern economics. In addition to reducing the amount needed for a given output, improved efficiency lowers the relative cost of using a resource – which increases demand. Overall resource use increases or decreases depending on which effect predominates.

What this means is that Because we think crude oil is expensive and hence make investments in enhancing energy efficeny then contrary to popular perception, the Demand for Crude oil would INCREASE FURTHER!!!!(yeah I am right and I smoke only tobacco nothing else mixed).

One way to understand the Jevons Paradox is to observe that an increase in the efficiency with which a resource (e.g.,Fuel/ crude oil) is used causes a decrease in the price of that resource when measured in terms of what it can achieve (e.g., work). Generally speaking, a decrease in the price of a good or service will increase the quantity demanded .
Thus with a lower price for work, more work will be "purchased" (indirectly, by buying more fuel).

The resulting increase in the demand for fuel is known as the rebound effect. This increase in demand may or may not be large enough to offset the original drop in demand from the increased efficiency.
Jevons Paradox occurs when the rebound effect is greater than 100%, exceeding the original efficiency gains.

Consider a simple case: a perfectly competitive market where fuel is the sole input used, and the only determinant of the cost of work. If the price of fuel remains constant, but the efficiency of its conversion into work is doubled, the effective price of work is halved and so twice as much work can be purchased for the same amount of money. If the amount of work purchased more than doubles (i.e. demand for work is elastic, the price elasticity is larger than 1), then the quantity of fuel used would actually increase, not decrease. If however, the demand for work is inelastic, the amount of work purchased would less than double, and the quantity of fuel used would decrease.

A full analysis would also have to take into account the fact that products (work) use more than one type of input (e.g. fuel, labor, machinery), and that other factors besides input cost (e.g. a non-competitive market structure) may also affect the price of work. These factors would tend to decrease the effect of fuel efficiency on the price of work, and hence reduce the rebound effect, making Jevons Paradox less likely to occur. Additionally, any change in the demand for fuel would also have an effect on the price of fuel, and also on the effective price of work.

Bottom line let commodity analysts keep worrying about the supply and demand of crude oil,we proletarians will keep using it anyway it is all about the degree of crib at the petrol bunk as they say.

Soyabean Crush

2008-08-02T04:31:00.000-07:00

There was this very interesting question posted to me by a gentleman who had asked me a question based on one of my earlier posts on EFP.

I had an opportunity to work on a similar problem when I was in Indore,this was my answer,comments as usual welcome.

Dear Srinivasan,

The query is related to Soybeans Hedging.

The scenarios is:

Supplier "A" in Latin America wants to sell 65,000 MT of Soybean seeds. Processor "B" is into Crushing the Soybeans and selling principal by-products such as Soymeal and Soy Oil.

1. Supplier "A" is already short on CBOT with equivalent Future lots (say 475 Lots) at say 13.5 $ per bushel.
2. Procesor "B" negotiates with Supplier "A" to buy the Soybeans at say CBOT + 20 cents
3. Supplier "A" transfers these lots to Processor "B". Thereby, Supplier "A" selling the Soybeans at (13.5$ + 20 cents) per bushel.
4. Processor B, curshes the seeds and sells the Soymeal and Soy Oil at existing market prices.
5. Whenever a physical sale for the Soymeal is made, Processor buy equivalent number of Soybean lots, to close out the long positions.

My query here is to understand, how is the hedge working for the processor "B" when the underlying commodity bought is Soybean seeds, but the sale is of Soymeal and Soy Oil.

It would be of great help, if you could help me understand the above scenario.

Thank you Srinivasan.

Best regards,
Jinendra

Firstly i dont think there can be a 100% hedge,not wanting to sound pompous or philosophical in case of your question in such cases it is better that you track the BCX price rather than the soyabean price.

BCX is synthetic in nature meaning Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices.
The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.
Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices. The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.

The Synthetic Soybean crush is based on CBOT Soybean, Soybean Oil, and Soybean Meal futures prices; in order to calculate the crush, prices of Soybean Oil and Soybean Meal need to be converted into dollars and cents per bushel.

To convert prices:
Soybeans: No conversion required
Soybean Meal: 44 lbs. (48% protein meal) / 2,000 lbs (per ton) = 0.022 x price of meal
Soybean Oil: 11 lbs. (oil per bushel) x price of oil

To calculate the Crush:
[(Price of Soybean Meal ($/short ton) x .022) + Price of Soybean Oil (¢/lb) x 11] – Price of Soybeans ($/bu.)
For example, if August Soybean Meal, Soybean Oil and Soybean futures prices were at $297.20/ton, $.3340/pound and $9.565/bushel, respectively, the Crush would be calculated as (297.20 x .022) + (.3340 x 11) - 9.565 = $.6474/bushel.
The Synthetic Soybean crush values are rounded to the nearest $0.0025/bu and displayed in eighths, the same way as soybean futures quotes. Therefore, the sample crush value of $.6474 would be displayed as 64'6 (64 3/4).

Cheers

The Invisible Hand is a Falsifiable Proposition

2008-07-20T07:57:00.000-07:00

Statistical equilibrium of commodity derivative markets is impossible, empirically-seen. Commodity Derivatives markets cannot be correctly described as stationary processes.

Adam Smith’s Invisible Hand, which is assumed by economists to be of general validity, is an assumption that markets are in or near stable equilibrium, requiring the implicit assumption of a stationary process. Consider any market anywhere in the world. With unfilled limit orders the excess demand

ε(p,t), defined by dp/dt= ε(p,t), cannot vanish.

Market stability would be represented by the state of statistical
equilibrium, or at least a stable steady state, where the price p(t)
would satisfy the condition for a stationary stochastic process.

Standard economic theory has it wrong: apparently, one cannot
have both unregulated/deregulated markets and stability
simultaneously.

One might at best have either stable equilibrium or total lack of regulations/constraints, but not both. In between lies a whole spectrum of other possibilities based on the regulation of otherwise free markets, from less to more unstable.

Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via corporate-owned facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

An Over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled . It is usually from an sophisticated broker to its clients directly. Forwards and Swaps are prime examples of such contracts. It is mostly done via the computer or the telephone.

For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement.

This segment of the OTC market is occasionally referred to as the "Fourth Market."
OTC contracts world wide are unregulated or rather self regulated.

The NYMEX which has realised the importance of this instrument and acknowledged its overvehlming dominance over standard exchange contracts has created a clearing mechanism for a slate of commonly traded OTC derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort, the exchange's clearing house, thus eliminating credit and performance risk of the initial OTC transaction counterparts.

This is what the Alan greenspan had to say about OTC Derivatives

Testimony of Chairman Alan Greenspan
The regulation of OTC derivatives
Before the Committee on Banking and Financial Services, U.S. House of Representatives

"I am pleased to be here today to present the Federal Reserve Board's views on the regulation of over-the-counter (OTC) derivatives. Under Secretary Hawke has already addressed the specific questions raised in your letter of invitation. The Board generally agrees with the Treasury Department's views on these issues. In particular, the Board supports a standstill of attempts by the Commodity Futures Trading Commission (CFTC) to impose new regulations on OTC derivatives as a minimalist approach to our longstanding concerns about CFTC assertions of authority in this area.

In my testimony I shall step back from these issues of immediate concern and address the fundamental underlying issue, that is, whether it is appropriate to apply the Commodity Exchange Act (CEA) to over-the-counter derivatives (and, indeed, to financial derivatives generally) in order to achieve the CEA's objectives--deterring market manipulation and protecting investors.

The CEA and Its Objectives
The Commodity Exchange Act of 1936 and its predecessor the Grain Futures Act of 1922 were a response to the perceived problems of manipulation of grain markets that were particularly evident in the latter part of the nineteenth and early part of the twentieth centuries.
For example, endeavors to corner markets in wheat, while rarely successful, often led to temporary, but sharp, increases in prices that engendered very large losses to those short sellers of futures contracts who had no alternative but to buy and deliver grain under their contractual obligations. Because quantities of grain following a harvest are generally known and limited, it is possible, at least in principle, to corner a market.

It is not possible to corner a market for financial futures where the underlying asset or its equivalent is in essentially unlimited supply. Financial derivative contracts are fundamentally different from agricultural futures owing to the nature of the underlying asset from which the derivative contract is "derived." Supplies of foreign exchange, government securities, and certain other financial instruments are being continuously replenished, and large inventories held throughout the world are immediately available to be offered in markets if traders endeavor to create an artificial shortage.

Thus, unlike commodities whose supply is limited to a particular growing season and finite carryover, the markets for financial instruments and their derivatives are deep and, as a consequence, are extremely difficult to manipulate. The type of regulation that is applied to crop futures appears wholly out of place and inappropriate for financial futures, whether traded on organized exchanges or over-the-counter, and accordingly, the Federal Reserve Board sees no need for it.

The early legislation on the trading of commodity futures was primarily designed to discourage forms of speculation that were seen as exacerbating price volatility and hurting farmers. In addition, it included provisions designed primarily to protect small investors in commodity futures, whose participation had been increasing and was viewed as beneficial.

The Commodity Futures Trading Commission Act of 1974 did not make any fundamental changes in the objectives of derivatives regulation. However, it expanded the scope of the CEA quite significantly. In addition to creating the CFTC as an independent agency and giving the CFTC exclusive jurisdiction over commodity futures and options, the 1974 Act expanded the CEA's definition of a "commodity" beyond a specific list of agricultural commodities to include "all other goods and articles, except onions,...and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in."

Given this broadened definition of a commodity and an equally broad interpretation of what constitutes a futures contract, a wide range of off-exchange transactions would have been brought potentially within the scope of the CEA.
The Treasury Department was particularly concerned about the prospect that the foreign exchange markets might be found to fall within the Act's scope. Aside from the difficulty of manipulating these markets, Treasury argued that participants in OTC markets, primarily banks and other financial institutions, and large corporations, did not need the consumer protections of the Commodity Exchange Act.
Consequently, Treasury proposed and Congress included a provision in the 1974 Act, the
"Treasury Amendment," which excluded off-exchange derivative transactions in foreign currency (as well as government securities, and certain other financial instruments) from the newly expanded CEA. What the Treasury did not envision, and the Treasury Amendment did not protect, was the subsequent development and spectacular growth of a much wider range of OTC derivative contracts--swaps on interest rates, exchange rates, and prices of commodities and securities.

Potential Application of the CEA to OTC Derivatives and the message for global watch dogs

The vast majority of privately negotiated OTC contracts are settled in cash rather than through delivery. Cash settlement typically is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply, for example, Crude oilt or the palladium price (where no price dissemeniation is availible in India as of date, however India is one of the largest importers thanks to its use in catalytic convertors in car etc, so what would chennai(the largest automotive manufacturing base in south asia do) based ancilliary units who want to hedge their price risk without losing out on valuable foreign exchange do ?.

To be sure, there are a limited number of OTC derivative contracts that apply to nonfinancial underlying assets.
There is a significant business in oil-based derivatives or precious metals, for example.

But unlike farm crops, especially near the end of a crop season, private counterparties in oil or precious metals contracts have virtually no ability to restrict the worldwide supply of this commodity. (Even OPEC has been less than successful over the years.)

Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.

To be sure, a few, albeit growing, types of OTC contracts such as equity swaps and some credit derivatives have a limited deliverable supply. However, unlike crop futures, where failure to deliver has additional significant penalties, costs of failure to deliver in OTC derivatives are almost always limited to actual damages. There is no reason to believe either equity swaps or credit derivatives can influence the price of the underlying assets any more than conventional securities trading does. Thus, manipulators attempting to corner a market, even if successful, would have great difficulty in inducing sellers in privately negotiated transactions to pay significantly higher prices to offset their contracts or to purchase the underlying assets.

Finally, the prices established in privately negotiated transactions are not widely disseminated or used directly or indiscriminately as the basis for pricing other transactions. Counterparties in the OTC markets can easily recognize the risks to which they would be exposed by failing to make their own independent valuations of their transactions, whose economic and credit terms may differ in significant respects. Moreover, they usually have access to other, often more reliable or more relevant sources of information. Hence, any price distortions in particular transactions could not affect other buyers or sellers of the underlying asset.

Professional counterparties to privately negotiated contracts also have demonstrated their ability to protect themselves from losses from fraud and counterparty insolvencies. They have managed credit risks quite effectively through careful evaluation of counterparties, the setting of internal credit limits, and judicious use of netting and collateral agreements. In particular, they have insisted that dealers have financial strength sufficient to warrant a credit rating of A or higher. This, in turn, provides substantial protection against losses from fraud.

Dealers are established institutions with substantial assets and significant investments in their reputations. When they have been seen to engage in deceptive practices, the professional counterparties that have been victimized have been able to obtain redress under laws applicable to contracts generally. Moreover, the threat of legal damage awards provides dealers with strong incentives to avoid misconduct.

A far more powerful incentive, however, is the fear of loss of the dealer's good reputation, without which it cannot compete effectively, regardless of its financial strength or financial engineering capabilities. In these respects, derivatives dealers bear no resemblance to the "bucket shops" whose activities apparently motivate the exchange trading requirement.

I do not mean to suggest that counterparties will not in the future suffer significant losses on their OTC derivatives transactions. Since 1994 the effectiveness of their risk management skills has not been tested by widespread major declines in underlying asset prices. I have no doubt derivatives losses will mushroom at the next significant downturn as will losses on holdings of other risk assets, both on and off exchange. Nonetheless, I see no reason to question the underlying stability of the OTC markets, or the overall effectiveness of private market discipline, or the prudential supervision of the derivatives activities of banks and other regulated participants. The huge increase in the volume of OTC transactions reflects the judgments of counterparties that these instruments provide extensive protection against undue asset concentration risk. They are clearly perceived to add significant value to our financial structure, both here in the United States and internationally.

Accordingly the Federal Reserve Board sees no reason why these markets should be encumbered with a regulatory structure devised for a wholly different type of market process, where supplies of underlying assets are driven by the vagaries of weather and seasons. Inappropriate regulation distorts the efficiency of our market system and as a consequence impedes growth and improvement in standards of living.

Application of the CEA to Centralized Markets for Derivatives
Recently, some participants in the OTC markets have shown interest in utilizing centralized mechanisms for clearing or executing OTC derivatives transactions. For example, the London Clearing House plans to introduce clearing of interest rate swaps and forward rate agreements in the second half of 1999, and the Electronic Broking Service, a brokerage system for foreign exchange contracts, reportedly is planning to begin brokering forward rate agreements. The latter service may not be offered in the U.S., however, because of the threat of application of the CEA.

Even some who argue that privately negotiated and bilaterally settled derivatives transactions should be excluded from the CEA, nonetheless believe that such transactions should be subject to the CEA if they are centrally executed or cleared, for fear that such facilities can foster price manipulation. Leaving aside our concern about the regulatory regime of financial futures generally, the Federal Reserve Board is particularly concerned that the vast majority of the instruments currently traded in the OTC markets not be subject to the CEA, even if they become sufficiently standardized to be centrally executed or cleared. To be sure, OTC contracts between counterparties would then have many similarities to exchange-traded contracts. But, they would still retain distinct characteristics that would leave them economically far short of standardization. For example, participants in trade execution systems may seek to retain counterparty credit limits, and participants in clearing systems likely will resist constraints on their ability to customize the economic terms of contracts. To force full standardization would reduce the economic value of a bilateral contract to both parties, and to the marketplace as a whole. The 1992 Act as we read it authorized exemption of all OTC derivatives transactions between professional counterparties from the CEA, whether or not they are centrally executed or cleared. Even with centralized execution or clearing, the most relevant attributes of these markets would not resemble those of the agricultural futures markets and hence would not be susceptible to manipulation.

Harmonizing Regulation of the OTC Markets and Futures Exchanges

Beyond question, the centralized execution and clearing of what to date have been privately negotiated and bilaterally cleared transactions would narrow the existing differences between exchange-traded and OTC derivatives transactions. However, that is not a reason to extend the CEA to cover OTC transactions. As we have argued, doing so is unnecessary to achieve the public policy objectives of the CEA. Moreover, as the economic differences between OTC and exchange-traded contracts are narrowing, it is becoming more apparent that OTC market participants share this conclusion; their decision to trade outside the regulated environment implies they do not see the benefits of the CEA as outweighing its costs.

Instead, the Federal Reserve believes that the fact that OTC markets function so effectively without the benefits of the CEA provides a strong argument for development of a less burdensome regulatory regime for financial derivatives traded on futures exchanges. To reiterate, the existing regulatory framework for futures trading was designed in the 1920s and 1930s for the trading of grain futures by the general public. Like OTC derivatives, exchange-traded financial derivatives generally are not as susceptible to manipulation and are traded predominantly by professional counterparties.

Indeed, Congress has rejected the notion of a "one-size-fits-all" approach to regulation of exchange trading. The exemptive authority that Congress gave the CFTC in 1992 permitted it to create a less restrictive regulatory regime for professional trading of financial futures. However, the pilot program proposed by the CFTC evidently has not met the competitive and business requirements of the futures exchanges--no contracts are currently trading under the program. Last year, the Agriculture Committees of the House and the Senate both attempted to craft legislation that would spur development of such a new regulatory framework but were unable to achieve consensus on the best approach. In any event, if progress toward a more appropriate regime is not forthcoming soon, Congress should seriously consider passage of legislation that would mandate progress.

Conclusion

In conclusion, the Board continues to believe that, aside from safety and soundness regulation of derivatives dealers under the banking or securities laws, regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. Moreover, the Board questions whether the CEA as currently implemented is an appropriate framework for professional trading of financial futures on exchanges. The key elements of the CEA were put in place in the 1920s and 1930s to regulate the trading of agricultural futures by the general public.

The vast majority of financial futures traded simply are not as susceptible to manipulation as agricultural and other commodity futures where supplies are more limited.

And participants in futures markets are predominantly professionals that simply do not require the customer protections that may be needed by the general public. Regulation that serves no useful purpose hinders the efficiency of markets to enlarge standards of living. In choosing a particular regulatory regime it is important to remember that no system will fully eliminate inappropriate or illegal activities.

Banking examiners, for example, find it difficult to unearth fraud and embezzlement in their early stages. Securities regulators have difficulty ferreting out malfeasance. Even trading on exchanges does not in itself eliminate all endeavors at manipulation, as the Hunt brothers' 1979-80 fiasco in silver demonstrated. The primary source of regulatory effectiveness has always been private traders being knowledgeable of their counterparties. Government regulation can only act as a backup. It should be careful to create net benefits to markets.

We assumed in the paragraph above that examples of stable
markets are not likely to be found. It is necessary to pose this
assertion as a scientific challenge: Is it possible to find examples of
stability in nonfinancial markets especially commodity derivatives?

One could search for market stability by using the following method: choose any nonfinancial market with data adequate for determining the time development of the empircal price distribution (we can study the timedevelopment of the finance distribution accurately because we have accurate data over the last twelve or so years).
If the distribution is stationary or approaches stationarity asymptotically, then The Invisible Hand stabilizes the market.
With a stationary process the variance approaches a constant as initial correlations die out, equilibrium markets are not volatile.
For diffusive markets like commodity derivatives ones, in contrast, the variance is always increasing with time Δt.
The question of the existence of Adam Smith’s Invisible Hand can be removed from politics and ideology, it can be decided scientifically.

We expect that empirical evidence for stationary markets cannot be found anywhere on the globe. This provides a direct challenge to economists, who advise and direct national and international agencies on the basis of the neo-classical model of equilibria, and where stability is assumed without having been demonstrated.

P.S: as of date there is no formal definition of the word commodity derivatives as per any act of the Government of India.

ADI

2008-07-14T16:48:00.000-07:00

Altos derivatives Institute (ADI, http://altosadi.com ) has launched two courses to cover commodity and currency derivatives markets.
One is a 8 week weekend course and the other one is an intensive 2 month weekday course.The aim of the course is to create top class commodity analysts.

This being our pet project we are all excited about this.

Meanwhile, What is the difference between asif the Pakistani Pace bowlers and the
commodity regulators FMC ?

One has consumed banned substances and the other has banned the substances we consume!

Cheers

Commodity Limericks

2008-07-11T13:42:00.000-07:00

A limerick is a five-line poem with a strict form, originally popularized in English by Edward Lear. Limericks are frequently witty or humorous, and sometimes obscene with humorous intent.

The following example of a limerick is of anonymous origin.

The limerick packs laughs anatomical
In space that is quite economical,
But the good ones I've seen
So seldom are clean,
And the clean ones so seldom are comical.

Here are some commodity limericks ,I did it in a hurry when i get the time will compile and write more.possibly better ones than this
Meanwhile if you do get creative and can think of some commodity limericks feel free to write to me will publish it here.

-------------------------

After engineering got to become a commodity trader,
started well, made money and in just a month became a team leader,
Met with a lot of women who liked young guns,
Wild time all weekend nights not with nuns,
Got up one day to find out that markets have made me badder,

Those days with em chicks went to china to see the great wall,
tried impressing em by dancing on it and avoiding the fall,
at hangzhou for breakfast and shanghai for lunch,
at Guangzhou for supper and Hong Kong for Brunch,
Till the broker said "buddy pay up" , you got a variation margin call.

Exotic OTC options and a new pitch , make a million with just a cent,
Wow lot of business and now without the regulators scent,
so ran the model on commodities like guar gum, soya and cereal,
Had clients and agrements signed in continous seriels,
Screamed the regulator"inducement try it once more to tihar you will be sent"

Decide to bet bear on Sydney wollen futures,heard that this time real horny ewes,
Running around the meadows and fields like bollywood heroines behind Yews,
Waited for bloombergs aussie consensus estimate census,
The number came out and blew me out of my senses,
Unlike bollywood heroines, if not mated during "season" for ewes it is of no use!

Went for a holiday to the beautiful south american country of Chile,
Let me bet that up it will go the price of Guntur Chili,
Prayed that with me will be the Roman Goddess Ceres,
on lower freeze on NCDEX and as usual for me a losing series,
Oh the thought of not having put a stop loss yet again makes me feel silly!

This time on the Sheiks oil I bet waiting for the EIA to give me a cue,
I get it right this time near Richmond i will build my house facing the lovely Kew,
A golf course and a beautiful lake with a natural dam,
Listened to the data and cursed yet again "Damn",
This time with my lawyer I got to face a bigger queue.

So with no more clients left met uncle and asked him to cite,
he thought deeply and then said with a bit of foresight,
I know you are now broke and have to pay your credit card dues,
with my reference for your client you have some donts and dos,
Be honest with him and dont lie because he is the owner of the krishnampettai site,

Looked at the account statement and almost got a flu,
Took out the marlboro lights and smoked it like a flue,
Oh god as a commodity trader my career is done.
When the mafia client sees he is going to dun.
Oh god like that eagle i wish I Flew.

Once at 253 analysed and said I will buy coffee,
El nino is coming ,winning trade so pass me the toffee.
The technical analyst checked the chart called me on phone and said,
Looks to be over bought, rsi 85 so get off the bed,
At 1845 when new york opened the margin account that was a 100k gone in a jiffy.

Nothing to worry just a few more days afterall there is a santa claus,
and what else can the mafiose do the agreement has all the safety clause,
said his aide, take enough food so that you will not be weak,
and definetly be safe away from him atleast for a week,
The long ones in his hands are not nails but claws.

Front seats at the Cricket match thanks to that reuters relationship Belle,
Thought will go back to trading just before the opening bell.
After seeing sachins knock thought will get in some beer,
Forgot that mafia client who sends his clients to the bier,
Called him and said coffee sorry,for which he said "SOB going to hang uou down that Indian Thorn Bel".

Cheers

The unnoticed booming oil economy !

2008-06-25T04:51:00.000-07:00

Can you guess which is the country with the worlds second largest reserve of Oil ?

If you had said a Gulf country or Russia or Venezuella you got it wrong!

It Is CANADA!

Saudi Arabia with 260 billion barrels as reserves produces about 8.8 million barrels a day having a total reserve life of about 81 years compared to Canada which has a reserve of 179 billion barrels a day and produces 2.7 million barrels of Oil a day with a reserve life of about 182 years.

Including the portion of oil sands reserves considered by government regulators to be producible at current prices using current technology, Canada's proven oil reserves were estimated at 179 billion barrels (28×109 m3) as of 2007, placing it second only to Saudi Arabia. Over 95% of these reserves are in the oil sands deposits in the province of Alberta. Although Alberta contains nearly all of Canada's oil sands and about 75% of its conventional oil reserves, several other provinces and territories, especially Saskatchewan and offshore Newfoundland, have substantial oil production and reserves. Total Canadian oil production was about 1.2 billion barrels (190×106 m3) in 2006, giving Canada about 182 years of reserves at current production rates.

Over 99% of Canadian oil exports are sent to the United States, making Canada, not Saudi Arabia, the United States' largest supplier of oil.The picture is complicated somewhat by the fact that Canada has a highly sophisticated energy industry and is both an importer and exporter of oil and refined products. In 2006, in addition to producing 1.2 billion barrels (190×106 m3), Canada imported 440 million barrels (70×106 m3), consumed 800 million barrels (130×106 m3) itself, and exported 840 million barrels (134×106 m3) to the U.S. The excess of exports over imports was 400 million barrels (64×106 m3).

The addition of 174 billion barrels (28×109 m3) of the vast Alberta oil sands deposits, mostly in the Athabasca Oil Sands, to proven reserves by the Alberta Energy and Utilities Board (AEUB), was controversial at the time because oil sands contain a semisolid form of oil referred to as bitumen by Canadian government authorities, rather than conventional crude oil.
The existence of the deposits (historically referred to as "tar sands") has been known for centuries since major rivers cut through the sands to reveal the bitumen in the river banks, but their development had to wait for high prices and the invention of new technology. In recent years technological breakthroughs have overcome the challenges of producing it and most Alberta oil is now non-conventional production from oil sands rather than conventional oil fields. The AEUB estimates that by 2016 Alberta oil sands production will triple to amount to 86% of the province's total oil production, and Alberta will by then be one of the largest oil producers in the world.

The difference between crude bitumen and crude oil is somewhat arbitrary since bitumen is really just an unusually thick and viscous grade of crude oil, and many U.S. oil refineries have been modified to handle it in recent years as domestic U.S. oil production declines. The main problem is that it must be heated or diluted with solvents before it will flow through pipelines.

A problem for companies trading on U.S. stock markets is that U.S. Securities and Exchange Commission (SEC) rules do not allow them to report oil sands production as an oil and gas activity, so they cannot report their oil sands reserves as oil reserves. Companies such as Petro-Canada with large oil-sands operations claim this can seriously underestimate the value of their assets. As of 2008 the SEC was reported to be looking at putting oil sands reserves on the same footing as conventional crude oil.

The West(and our very own Finance Minister PC) has been pressurising OPEC to raise its production , Why is it that the US or other western countries not pressurize canada to increase its production? Is it because Canada has the worlds largest undefended border with the United States or is this typical western hypocrisy?

A market maker friend of mine who trades the fx markets , believes that there is a very high degree of correlation between Crude Oil Contract and the Canadian Dollar contract (CAD).And by tracking the crude oil contract one can do good intraday(especially on wednesdays/EIA data release days) as well as long term trades on the CAD, for the long term play on structural crude oil bull market,Buy the Canadian Dollar he says!

Due to the price boom in crude oil, the Canadian economy is a direct benefactor and would be witnessing a huge boom and an exponential expansion of its own economy, thus indirectly benefiting the U.S,experts go on to say that , the energy crisis induced soft landing in the US might end up being rescued by the Kind Act of Canada afterall!

Cartoon thanks to the Sheer Brilliance of John Trever,Albuquerque, E-mail John ©John Trever and the Albuquerque Journal. .

P.chidambaram at the OPEC

2008-06-23T04:55:00.000-07:00

India has said it will follow up its suggestion on having a price band for crude oil once the producing nations reflect on the idea, even as it asked them to step up oil output.
"It (price band) is an idea that I have mooted in the earlier IMF meetings and it is the first time I am addressing an oil ministerial meeting. So let them reflect on that, we will follow it up," Finance Minister Chidambaram told news channel NDTV before leaving for India.

Explaining his proposal mooted at the Energy Ministers' meeting here, the finance minister said the suggestion is that producing countries will assure the world that prices will not rise above a level and consuming countries will assure the world that prices will not fall below a level, between which prices can be determined by the market forces.

Crude oil prices are not under India's control, the Finance Minister said, adding that the prices will cool down only if producing countries increase supply and the countries concerned regulate over-the-counter trade or futures trading in oil.

"In August, 2007, it (crude prices) was 70 dollars a barrel and a few days ago it has touched 140 dollars a barrel... Those are not under India's control... So we have urged producing countries to increase supply. We have urged countries where these financial transactions are taking place to step in and regulate these transactions," he said.

MCX Platinum,Kuselan Commodity Markets and Rajnikanth!

2008-06-20T08:41:00.000-07:00

" You must be mad" manju said, "totally gone case, just because you had written one blog connecting commodity markets and kamal and just because your schoolday sweetheart called and said choo chweet to the blog, what are you trying to do ? , dont you realise what your institutional clients will think about you" , she continued and as usual with the left indicator on and hand showing right from the window continued to zip straight towards adyar signal.

"Wont they find out that invariably all friday afternoons that your phone is switched off not because you are sick as you claim but because you are just crazy about all this stupid bollywood kollywood molly wood pictures, you either need medical help or a detox", she continued.....

Kuselan the Rajnikanth starrer movie is complete, directed by P.Vasu, it is a remake of the Malayalam Film Katha Parayambol(produced by srinivasan and mukesh) is an adaption of the hindu mythology the story of Lord Krishna and his poor friend Kusela.

Kusela, a childhood friend of Lord Krishna went to see the Almighty with a pouch of puffed rice and he was in a dilemma whether to offer it or not.After all puffed rice was a food meant for the poor not a king or a king of kingss, But the Lord snatched the pouch from him and gulped some pieces and said `Akshayam'.This magic word transformed Kusela's simple house to a magnificent palace and the Lord's poor friend became as rich as Kubera. To this date this important event is signified by what people refer to as Akshay Trithi.

Akshaya Tritiya, variously spelt as Akshya Thiritiya,Akshaya Trutheeya, Akshaya Tritiiya and also called Akshaya Trithi, falling on the third day of the bright half of the lunar month of Vaisakha of the traditional Hindu calendar, is one of the four most auspicious days of the year for Hindus. The word Akshaya, a Sanskrit word, literally means one that never diminishes, and the day is believed to bring good luck and success. It is widely celebrated in all parts of India by different sections of the society irrespective of their religious faith and social grouping. The day is particularly considered auspicious for buying long term assets like gold,platinum and silver, including ornaments made of the same; diamond and other precious stones; and the real estate.

The legend states that any venture initiated on the auspicious day of Akshaya Tritiya shall continue to grow and bring prosperity. Hence, it is normal to see many of the new ventures, like starting a business, ground breaking for construction etc on the Akshaya Tritiya Day.

With the mass media and marketing, this day has been taken over by marketeers to promote sales and bookings for precious metal jewellery, houses, consumer electronics(btw consumer electronics is one of the largest users of precious metals, take any pcb or what is reffered to as printed circuit boards,turn it around, the yellow and white lines that you see there are alloys of gold,silver and platinum chosen for their high conductivity low resistance properties).

Today is coincidentally the day when the Platinum contract is being launched on MCX(along with the tamil movies Kuselans publicity stills),

"We will be launching the July and October contracts in platinum for trading," my good friend,mentor,south india mcx's all in all azhgu raja and asst vice president MCX,T.G.SenthilVelan confirmed.

"The contract will have market lot size of 500 gm and the price quote will be in rupees per 10 gm ex-Mumbai," he added.

Although there is no developed platinum spot market in India, consumption in industrial purposes as well as the jewellery industry is rising.

Platinum is also used by pharmaceutical industries for making anti-cancer drugs(Nano Medicane) and by auto industry to create catalysts.

At these high prices of crude oil and the world betting on alternative energy such as fuel cells, platinum finds great application in the form of electro catalysis as well as in emission control catalysis.

Well coming back to my topic, Guess Rajni says for Kuselan I dont need Chaos and any time 1=10 (or should we say 1 =100, Na oru dirva sonna nooru dirva sonna madhiri meaning ,if I tell once it is the same as telling a hundred times)??

Ok so US regulators CFTC shocked me ! Limits on overseas trading

2008-06-18T14:28:00.000-07:00

Fundamentally any exchange or market place or ecn' business model is designed to be such that it is a monopoly or atleast never loses a dime doing its business, since all the cost (impact cost) is passed on to the end participants.
And thanks to the network effect at economy of scales it is a win win to all.
Good business to be in , cause by default you become quasi regulatory since you have the power to make rules.

So when I read this bbc report which Said that US Regulators believe that Speculators(whom they call as manipulators) are the reason for the high price of Oil my eyes popped out and prayed that prakash karat never ever reads this, This contract accounts for almost a quarter to a third of my firms volumes and even by mistake if any of these cpi/cpi m read this then as far as the Crude Oil Contracts are concerned in India it is curtains or QED or worse still differential margining for hedgers and speculators (like Bursa Malayasia).

This is the news for sake of some

US regulators have announced plans to impose limits on oil trades overseas.
The US Commodity Futures Trading Commission said the London-based electronic exchange would have to comply with US rules.

The move comes as oil prices notch up record highs, amid fears that speculators are distorting the market.

As a result, fuel costs have shot up hitting the global economy. Airlines have been hit badly, with near record losses expected for 2008 in the US.

US airlines were forecast to report $10bn (£5bn) of losses this financial year as sky-high fuel costs erode profits, according to the industry group Air Transport Association (ATA).

Oil prices slipped from their record highs near $140 a barrel reached during Monday trade as investors were cautious ahead of plans by Saudi Arabia to increase production in July.

US sweet, light crude finished down 60 cents at $134.01, while London Brent settled 99 cents lower at $133.72.

Speculators to blame?

But, oil prices are still almost 40% higher than they were at the beginning of the year and, increasingly, this surge is being blamed on speculation by large investors, including hedge funds and banking giants.

They are being accused of pushing commodity prices way above the level they would trade at to satisfy supply and demand trends.

Representing US airlines, the ATA is one group pressing for tighter regulation and increased transparency in the energy markets.

Its head James May told a joint US Senate hearing on speculative oil trading that up to 200 US communities could lose airline service as a result of capacity cuts to save money.

"This nation's economy is inextricably linked to the viability of its air transportation system. If the airlines continue to spiral downward, so will the economy," he said.

Earlier, Air Canada announced that it would have to shed 2,000 jobs - a 7% reduction in its workforce - and ground 7% of its services to survive the rising fuel charges.

More disclosure

Under the plan announced by the US Commodity Futures Trading Commission (CFTC), trading of the West Texas Intermediate oil contract on the ICE Futures Europe - which hosts up to 30% of total trades - will by October be subject to stricter limits on individual positions.

It is hoped this will prevent the ability of a single entity to move oil prices.

Under the measures, European authorities will also share trading data with their US counterparts to improve transparency and crack down on market manipulation.

The ICE exchange said it would comply with US regulatory requirements subject to approval by the Financial Services Authority.

The acting head of the CFTC Walter Lukken said in testimony at a Senate hearing committee: "During these turbulent market conditions for crude oil, the environment is ripe for those wanting to illegally manipulate the markets," he said.

about ICE
IntercontinentalExchange (NYSE: ICE) is an American financial company that operates Internet-based marketplaces which trade futures and over-the-counter (OTC) energy and commodity contracts as well as derivative financial products. While the company's original focus was energy products (crude and refined oil, natural gas, power, and emissions), recent acquisitions have expanded its activity into the "soft" commodities (e.g. sugar, cotton and coffee), foreign exchange and equity index futures.

Currently ICE is organized into three business lines:
ICE Markets - futures, options, and OTC markets. Energy futures are traded via ICE Futures Europe; soft commodity futures/options are handled by ICE Futures U.S.
ICE Services - electronic trade confirmations and education.
ICE Data - electronic delivery of market data, including real-time trades, historical prices and daily indices. Contracts sold through ICE Futures U.S. are processed through a subsidiary, ICE Clear U.S. Energy futures and OTC contracts are currently cleared externally, through LCH.Clearnet, Ltd., but ICE has announced plans to transition these operations to a new subsidiary, ICE Clear Europe, by mid-2008.

Headquartered in Atlanta, ICE also has offices in Calgary, Chicago, Houston, London, New York and Singapore, with regional telecommunications hubs in Chicago, New York, London and Singapore.

In the late 1990s, Jeffrey Sprecher, ICE’s founder, chairman, and Chief Executive Officer, acquired Continental Power Exchange, Inc. with the objective of developing an Internet-based platform to provide a more transparent and efficient market structure for OTC energy commodity trading. In May 2000, IntercontinentalExchange (ICE) was established, with its founding shareholders representing some of the world’s largest energy traders. The company’s stated mission was to transform OTC trading by providing an open, accessible, multi-dealer, around-the-clock electronic energy exchange. The new exchange offered the trading community better price transparency, more efficiency, greater liquidity and lower costs than manual trading.

In June of 2001, ICE expanded its business into futures trading by acquiring the International Petroleum Exchange (IPE), now ICE Futures Europe, which operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE portfolio of energy futures became fully electronic.

ICE became a publicly traded company on November 16, 2005, and was added to the Russell 1000 Index on June 30, 2006. The company expanded rapidly in 2007, acquiring the New York Board of Trade (NYBOT), ChemConnect (a chemical commodity market), and the Winnipeg Commodity Exchange. In March of 2007 ICE made an unsuccessful $9.9 billion bid for the Chicago Board of Trade, which was instead acquired by the Chicago Mercantile Exchange.
In January 2008 ICE partnered with TSX Group's Natural Gas Exchange, expanding their offering to clearing and settlement services for physical OTC natural gas contracts

Dasavataram,Chaos Theory and Commodity markets

2008-06-12T03:59:00.001-07:00

God does not play with the dice ,Dasavataram this movie is due for release tommorow June 13th and the basic concept behind the movie is Chaos Theory and application of chaos theory (I had to hold this information which i knew quite long time back till the release :) )

In mathematics, chaos theory describes the behavior of certain dynamical systems – that is, systems whose state evolves with time – that may exhibit dynamics that are highly sensitive to initial conditions (popularly referred to as the butterfly effect). As a result of this sensitivity, which manifests itself as an exponential growth of perturbations in the initial conditions, the behavior of chaotic systems appears to be random. This happens even though these systems are deterministic, meaning that their future dynamics are fully defined by their initial conditions, with no random elements involved. This behavior is known as deterministic chaos, or simply chaos.

Chaotic behaviour is also observed in natural systems, such as the weather. This may be explained by a chaos-theoretical analysis of a mathematical model of such a system, embodying the laws of physics that are relevant for the natural system.

Chaotic behavior has been observed in the laboratory in a variety of systems including electrical circuits, lasers, oscillating chemical reactions, fluid dynamics, and mechanical and magneto-mechanical devices. Observations of chaotic behaviour in nature include the dynamics of satellites in the solar system, the time evolution of the magnetic field of celestial bodies, population growth in ecology, the dynamics of the action potentials in neurons, and molecular vibrations. Everyday examples of chaotic systems include weather and climate. There is some controversy over the existence of chaotic dynamics in the plate tectonics and in economics.

Systems that exhibit mathematical chaos are deterministic and thus orderly in some sense; this technical use of the word chaos is at odds with common parlance, which suggests complete disorder. A related field of physics called quantum chaos theory studies systems that follow the laws of quantum mechanics. Recently, another field, called relativistic chaos,has emerged to describe systems that follow the laws of general relativity.

As well as being orderly in the sense of being deterministic, chaotic systems usually have well defined statistics.For example, the Lorenz system pictured is chaotic, but has a clearly defined structure. Bounded chaos is a useful term for describing models of disorder

Applications
Chaos theory is applied in many scientific disciplines: mathematics, biology, computer science, economics, engineering, finance, philosophy, physics, politics, population dynamics, psychology, and robotics.

One of the most successful applications of chaos theory has been in ecology, where dynamical systems such as the Ricker model have been used to show how population growth under density dependence can lead to chaotic dynamics.

Chaos theory is also currently being applied to medical studies of epilepsy, specifically to the prediction of seemingly random seizures by observing initial conditions.

Coming to Derivatives markets and more specifically our commodity futures markets,

Network effect Network Externalities and the two sided Network : The macro economic purpose and existence of derivatives markets.

Network effect is a term used narrowly to describe business phenomena, or more broadly to describe non-business phenomena.

In the narrow usage, a network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.

One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good — for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities. The resulting bandwagon effect is an example of a positive feedback loop.

Stock exchanges and derivatives exchanges feature a network effect. Market liquidity is a major determinant of transaction cost in the sale or purchase of a security, as a bid-ask spread exists between the price at which a purchase can be done versus the price at which the sale of the same security can be done. As the number of buyers and sellers on an exchange increases, liquidity increases, and transaction costs decrease. This then attracts a larger number of buyers and sellers to the exchange.

The network advantage of financial exchanges is apparent in the difficulty that startup exchanges have in dislodging a dominant exchange. For example, the Chicago Board of Trade has retained overwhelming dominance of trading in US Treasury Bond futures despite the startup of Eurex US trading of identical futures contracts. Similarly, the Chicago Mercantile Exchange has maintained a dominance in trading of Eurobond interest rate futures despite a challenge from Euronext.Liffe.

Types of network effects
There are two kinds of economic value to be concerned about when thinking of network effects:

Inherent — my value from me using the product
Network — my value from you using the product

Network value itself can be direct or indirect.

Direct network value is an immediate result of other users adopting the same system. Some examples of this are fax machines and email.

Indirect is a secondary result of many people using the same system. For example, complementary goods are cheaper or more available when many people adopt a standard. Toner may be cheaper for widely used printers.

Negative and positive network effectsPositive network effects are obvious. More people means more interaction.Negative network effects beyond lock-in also exist.

Negative network effects result from resource limits. Consider the connection that overloads the freeway or trading portals — or the competition for bandwidth. In fact, the automobile and ethernet congestion examples illustrate that there can be threshold limits. In this case, the n+1 person begins to decrease the value of a network if additional resources are not provided.

The result is that in some networks there is an exclusion value. This is clear to anyone who has considered problems of authentication or trust on the modern internet.

Another negative network effect is provider complacency. The absence of viable competitors in a successful network can cause a provider to restrict resources, consider fee increases, monopolistic tantrums or otherwise create an environment contrary to the end as well as intermediary users' benefit.

These situations are typically accompanied by vocal complaints from the users. (In a competitive environment the users would simply change vendors rather than complain.)
Classic examples are the United States Postal Service or telephone companies during the 1960s and 1970s. More recent examples include the National Stock Exchange of India, Microsoft's operating system and Ebay's auction site.

Two-sided markets, also called two-sided networks, are economic networks having two distinct user groups that provide each other with network benefits.

Example markets include our commodity Derivatives markets comprised of commercials(hedgers,producers,supply lines or people who have an inherent commercial implication of the markets) and non commercials(investors,speculators,traders and arbitrageurs , who are there only for a profit motive),credit cards, comprised of cardholders and merchants; HMOs (patients and doctors); operating systems (end-users and developers), travel reservation services (travelers and airlines); video games (gamers and game developers); and communication networks, such as the Internet. Benefits to each group exhibit demand economies of scale. Consumers, for example, prefer credit cards honored by more merchants, while merchants prefer cards carried by more consumers.

Structural characteristics
In some networks, users are homogeneous, that is, they all perform similar functions. For example, although participants in a telephone network originate and receive calls, these roles are transient. Almost all phone users play both roles at different times. Likewise, almost all instant messaging, FAX, and email users both. Networks with homogenous users are called one-sided to distinguish them from two-sided networks, which have two distinct user groups whose respective members consistently play the same role in transactions.

In a two-sided network, members of each group exhibit a preference regarding the number of users in the other group; these are called cross-side network effects. Each group’s members may also have preferences regarding the number of users in their own group; these are called same-side network effects. Cross-side network effects are usually positive, but can be negative (as with consumer reactions to advertising or with non commercial in derivatives markets losing money on zero sum transactions).

Same-side network effects may be either positive (e.g., the benefit from swapping video games with more peers) or negative (e.g., the desire to exclude direct rivals from an online business-to-business marketplace). Figure 1 depicts these relationships.

In two-sided networks, users on each side typically require very different functionality from their common platform. In derivatives markets for example the commercial user are participating in order to reduce is inherent risk in his actual business whereas the non commercial has only the motive to profit out of the same. Other Examples include credit card networks, for example, consumers require a unique account, a plastic card, access to phone-based customer service, a monthly bill, etc.
Merchants require terminals for authorizing transactions, procedures for submitting charges and receiving payment, “signage” (decals that show the card is accepted), etc. Given these different requirements, platform providers may specialize in serving users on just one side of a two-sided network.

uyarvaRa uyarnNalam udaiyavan evan? avan
mayarvaRa madhinNalam aruLinan evan? avan
ayarvaRum amarargaL athipathi evan? avan
thuyaraRu sudaradi thozhuthezhen mananE!

happy birthday dindi

2008-06-10T02:29:00.000-07:00

ranagarajan chittpas (aka)Writer Sujatha write up on his 71st birthday and his definition of progressive compromise has redefined birthdays as a matter of fact i think one must read it on ones birthday every year! I did it the first thing today , and then told myself Dindi Happy birthday to you,

One of the biggest influences of my life was my patti Soundaravalli aka manni patti aka pattu.She was my moms uncle's wife,but was for all practical purpose my patti! she was really a great lady.

I shared a very personal rapport with her,also got to do with the fact that she was the first one to see me and carry me as a new born 34 years back same day, I sure was lucky.

She had never been to a school! (Thank god for that!, if she was formally educated she would have become the prime minister).But she could quote as much with ease the hamlet and discuss nano technology.

There were just three important things that i now remember she taught me ( Progressive Compromise you see)

1. Planning (or what we in our jargon refer to as strategic planning)
Ensuring thatha book tickets to pune 90 day in advance the lower berth/window seat in the same direction as that of the journey.
2. Saving for a Rainy day (Reserve build up).
This is the one that i really thank her for,she made me realise the importance of this.
3. Accounting and Documentation (Total Quality Management).
She had a what one refers to as Kanaku pillai note book and documented everything .

She passed away last November at the age of 85,and this is the first birthday of mine when i did not get to hear the three things mentioned above from her, and I really miss that.

Anyways Happy Birthday Dindi, you just got a bit more wiser this year.

CPO Contracts and CER contracts on the MCX

2008-06-09T02:17:00.000-07:00

Perfectly timed contract launches by MCX, it cannot get better than this,post the soya oil ban and hedgers wanted an alternative.I am now sure that the MCX IPO is on schedule, i also wanted to add that my guess is that they would have been dissappointed that the new rbi guidelines for setting up of the FX exchange does not include commodity exchanges and includes only existing stock exchanges recognised by sebi(or new stock exchanges although to my knowledge there has been no new stock exchange recognised by sebi for more than a decade)

Personally my view on the prices of these commodities/instruments is that it can go only one way up but first let me tell you what a CER is I had blogged about this in the past when i had asked an honest question are we ready for carbon trading ?

Certified Emission Reductions (CERs) are climate credits (or carbon credits) issued by the Clean Development Mechanism (CDM) Executive Board for emission reductions achieved by CDM projects and verified by a DOE under the rules of the Kyoto Protocol. CERs can be used by Annex 1 countries in order to comply with their emission limitation targets or by operators of installations covered by the European Union Emission Trading Scheme (EU ETS) in order to comply with their obligations to surrender EU Allowances, CERs or Emission Reduction Units (ERUs) for the CO2 emissions of their installations. CERs can be held by governmental and private entities on electronic accounts.

CERs are split into long-term (lCER) or temporary (tCER), depending on the likely duration of their benefit.

Presently, most of the approved CERs are recorded in CDM Registry accounts only. It is only when the CER is actually sitting in an operator's trading account that its value can be monetized through being traded. The UNFCCC's International Transaction Log has already validated and transferred CERs into the accounts of some national climate registries , although European operators are waiting for the European Commission to facilitate the transfer of their units into the registries of their Member States.

Coming To CPO I personally want the price of cpo to go so high that there is a disruptive demand shift on this commodity. We dumb arrogant humans fail to realise that we are guests/visitors to this planet and think that we own the whole dam place.

This summer My family and I had an opportunity to visit the equatorial rain forests of south east asia, The feeling was scary, huge tracts of rain forests are being destroyed to grow palm (not for food but as a bio diesel). Huge amounts of beautiful wild animals are going extinct,including the bornean orangutan.

And that the next time if and when we come here again there would be no forests but only malls.When I told tejas this he just cried.

The irony is so apparent in the photo where my kid is seeing outside our hotel room, outside one window there is a concrete jungle and through the other one there is a jungle.

God save our arrogance.

MY Price view for both these commodities CPO is always a buy,and i pray that prices go so high that people cannot afford to consume it and hence stop using that, coz atleast that will save the Malaysian Orangutan

After suspension of soyoil futures in early May, Indian edible oil importers were planning to shift abroad for their hedging needs, analysts said.
The contract is Kandla delivery-based as most of the imports come through this port, the official said. The pricing will be high sea-base, which is delivery prices exclusive of local taxes.
The trading unit is 10 tonnes, while the daily initial fluctuation limit is 2 percent and final fluctuation allowed is 4 percent.
The bourse will offer July, August and September as the initial contracts of trade.
The rival National Commodity and Derivatives Exchange has an illiquid crude palm oil contract.

am trying to locate the snaps of palm oil plantations that i took, will post the one with forest which we could infact view from our resort.

What is driving the commodities super cycle ?

2008-06-07T03:48:00.000-07:00

1.Population The 21st Century is going to experience the largest population growth in history of human kind.The united nations estimates that world wioll add a little fewer than 1 billion people during each of the first five decades of the 21st century. This means that the global population will grow to about 10 billion people by 2050. Ok why is it that suddenly we have adopted a tone of a demography scientist ????? Elemantary my dear watson! Siginificant growth in population growth translates into greater global demand for commoditoes, could Add QED and close this booklet here.....

Humans are the most voracious consumers of raw materials on the planet( Americans are also nowadays considered to be humans though) and is the only one who pays for it either by cash,kind, government contracts or credit cards. As the number of humans in the world increases, so will demand for natural resources. After all,people need food to eat,houses to live,vehicles to travel-and all this requires raw materials.(Ratan tata and his one lakh car team i am sure will agree , although only to an extent).THIS LARGE POPULATION GROWTH IS THE KEY DRIVER FOR INCREASING DEMAND FOR COMMODITIES,which will continue to put upward pressures on commodity prices and hence inflation and hence the seats of harvard educated finance ministers who fail to understand this and tell people who dont have bread to eat cakes.

2. The new exodus: Urbanization

In the begining of the 20th according to the united nations,less than 10% of the Global population lived in cities by 2005 that number shifted to 50% and by the year 2030 nearly 66.66 % of the population would live in urban areas.

The number of large metropolitan areas with 5 million or more popeluation is sky rocketing and will continue for the rest of the century.

Urbanization is highly significant for commodities becayse people who live in urban centers consume a lot more natural resources than those who loive in rural areas.Significantly additional amount of natural resources are required to expand the size of the citires as more people migrate to urban areas from rural areas.More natural resources are required for roads,cars and personal appliance that are the staple of city life.

3. Industrialization and the Modern BRIC economy china & India

And finally Jobs for commodity market bloggers!

2008-06-05T06:08:00.000-07:00

An interesting and totaly surprising job description got this info from a good friend of mine, basically this means that if you are running a commodity specific yahoogroups or a blog you might get hired by MCX!!!

thought must share this with you all! No not because i am going to get a refferal fee for this, but for the fact that such an advertisement is going to encourage a lot of writers and niche analysts to start their own blog or yahoogroups and write about commodities or atleast post on existing yahoogroups articles on commodities.

Social networking /web communities as they say is turning out to be the next big internet revolution after all.

Position Internet Media & Web Communities
(Manager's & AVP)
(Code: MCX/MGR/INTMW)

Role
Create, manage and grow and grow online communities for various baskets of commodities and technology products and services. Create and edit online content for Domestic and International coverage..

Experience
Online writer, with favourite or own e-zones, portals, blogs, news-feed and proven experience in building online communication and communities.

Believe you need to go to the careers link on MCX and apply online , and you got mention the code else your application gets rejected i believe.

Cheers

P.S: No wonder Amitab bachan is blogging these days! Post retirement job guaranteed.

Food Security global Food Crisis and the US

2008-06-05T05:47:00.000-07:00

Food Security Et All. And this is the Kill this is from the Mouth of the US food secretary on the Global Food Crisis in which he presented a three-pronged strategy to combat food prices.

U.S. Secretary of Agriculture Ed Schafer rolled out his three-pronged plan to fight rising global food costs at a press conference Monday in Rome at the United Nation's Food and Agriculture Organization Food Security Summit. The summit is designed to establish a global conversation on how to best address both the immediate and long-term effects of the current food crisis.

Schafer's plan emphasizes expanded humanitarian aid, addressing underlying causes of food prices such as energy and global cooperation for the free flow of food and safe technologies.

"Now is the time to lift trade-restrictive policy measures such as export restrictions," says Schafer. "While they are designed to increase short-term food security in the countries imposing the restrictions, these policies often have the opposite effect and only make the situation worse. They take food off the global market, drive up prices, and discourage farmers to respond to market signals."

Schafer also spoke about work to complete the Doha Round of global trade talks and addressed the concerns many have expressed about the role biofuels have in the world food situation.

"I look forward to hearing other perspectives on these important issues, so that together we can determine how best to work through the United Nations structure to increase the availability of food for all," Schafer says. The summit began Monday and runs through Wednesday.

I mean this guy is going to get himself invited on the David Lettermans Tonight Show! thats for sure !

Petrol and Diesel hiked

2008-06-04T07:12:00.000-07:00

The government today hiked petrol and diesel prices by Rs 5 and 3 a litre and that of LPG by Rs 50 a cylinder, while sparing poor man's cooking medium kerosene from any increase.
The Union Cabinet chaired by Prime Minister Manmohan Singh took a slew of measures to offset the surging global oil prices that had put the national oil companies under acute pressure. The increase in prices would be effective from midnight tonight, Petroleum Minister Murli Deora said.

The price hike would help oil companies to earn Rs 21,123 crore more.

As part of measures, the government decided to take a burden of Rs 94,601 crore for which it will issue oil bonds to state-run BPCL, HPCL and IOC which were reporting a daily loss of over Rs 720 crore.

In addition, the oil producing PSUs like ONGC would shell out Rs 60,000 crore through discounts to state-owned oil refiners and marketing companies.

Despite all the measures, there would still be a gap of Rs 29,000 crore, Revenue Secretary P V Bhide told reporters briefing about the decisions taken at the Cabinet.

CTT and The Indian Commodity Futures broker

2008-05-27T07:56:00.000-07:00

this was a joke forwarded to me by my colleague, Suresh Kumar
___________________________________________

Two women were walking through the woods when a frog called out to them and said: "Help me, ladies!! I am a commodity futures broker in the Indian commodity futuers market,who, through the prayer of an evil finance ministers curse(witch), has been transformed into a frog. If one of you will kiss me, I'll be returned to my former state!!"

One of the women took out her purse, grabbed the frog, and stuffed it inside her handbag. The other woman, aghast, screamed," Did'nt you here him? If you kiss him he will turn back into a futures commodity broker!!"

The first woman replied, "Sure, but these days a talking frog is worth more than a futures commodity broker!!"
__________________________________

The Great Indian Stagflation ?

2008-05-24T02:50:00.000-07:00

The Great Indian Stagflation!

Scenario: A country on an island with ten inhabitants each holding 100 units of the localcurrency. The country imports ten bottles of beer from the neighboring island. The island produces ten bottles of its own beer. The price in local currency for both kind of bottles is five units of local currency. To increase the buying power of the country, the central bank increases the amount of local money by donating each inhabitant an additional five units.
The question is now, what happens to price of the two different beer.
For the island beer the price of production decreased, because the real salaries on the island shrunk. So one can expect the price for the local beer to remain at least constant or even decrease slightly.
For the foreign beer it's a different story.

Questions to ask might be: What happens to the import price for the bottle in foreign currency?

What happens to the exchange rate between the own and the foreign currency?

In a stagflation scenario the questions might be answered as follows: The import price in foreign currency remains constant (or increases). For one unit of the local currency, one receives now less than before compensating for the increase of the amount of money. Therefore the island price of the bottle has to increase in local currency for compensation.

One can learn that the root causes for the price of the imported beer remain outside the influence of the local monetary policy. Shifts in the amount of local money are just reflected in the price of the foreign good, not changing its effective price in the local currency.
The conclusion follows, the only way to decrease the price is on one hand that the other island increases the supply (external) of the beer or on the other hand that the inhabitants reducedrinking it (internal)

P.S: Now "find" and "replace" Beer with Crude oil ? and "currency" with the "US $" you will understand clearly todays scenario.

P.P.S: Of course our finance minister has an easy solution BAN DRINKING OF BEER,his counterpart in the ministry of health has been recently asking actors to stop drinking alcohol on screen(he wants them to drink cough syrup instead!!)

SO What am i Trying to Say : Hey Wake up, Inflation is not bad, and This is a Stag flation scenario Stupid!!!!

Stagflation is a macroeconomics term used to describe a period of inflation combined with stagnation (that is, slow economic growth and rising unemployment), generally including recession. The portmanteau term "stagflation" is generally attributed to United Kingdom Conservative MP and later Chancellor of the Exchequer Iain Macleod, who coined the term in a speech to Parliament in 1965.

Stagflation came to be recognized as a very serious macroeconomic problem in the 1970s, when it afflicted many countries in the developed and developing world. Prior to the 1970s, the prevailing Keynesian school of macroeconomics assumed that inflation and stagnation were unlikely to occur together. Until that time macroeconomists believed that stagnation could be cured by expansionary monetary or fiscal policies, while inflation could be cured by contractionary monetary or fiscal policies. When both stagnation and inflation occurred at the same time and persisted, this called into question existing macroeconomic theories and also posed a dilemma for the standard policy remedies that had been used to stabilize the economy in the past, since their coexistence resulted in a downward spiral.

Economists today offer twin simplistic explanations of stagflation, which follow, with the Caveat that if (or when) stagflation reappears within the 21st Century, the true explanation will be that the mix of these two elements went out of control.
First, stagflation can occur when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.
Second, both stagnation (recession) and inflation can be caused by inappropriate macroeconomic policies.
For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets (Including present day scenario of the Ban on Futures Trading of commodities).

The global stagflation of the 1970s is often blamed on both causes: it was largely started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession (stagnation), causing a runaway wage-price spiral.

In contrast to central bank responses to the oil price spike of the 1970s where similar policies were pursued on both sides of the Atlantic, the 21st Century begins with America going one way to fight recession and Europe going the other way to fight inflation.

When stagflation holds an economy fully within its grip, the tertiary consequence of rising unit costs because fixed costs(sunk cost?) are spread over fewer units sets in. From the makers of auto to the manufacturers of the marketed consumer brands, operating margins must begin to increase (inorder to maintain a fixed margin of profit or tolerable loss) to the extent that declining unit sales load greater costs per unit. This is the most basic of economic truths if even if it is from the mouth of not an economist but a chemical engineer.

Monetary Policy during times of Stagflation

Stagflation becomes a dilemma for monetary policy when policies usually used to increase economic growth will further increase runaway inflation while policies used to fight inflation will further the decline of an already-declining economy.

An important monetary mechanism to increase economic growth is by lowering interest rates, which reduces the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can increase economic activity, it can also result in increased inflation.
The monetary mechanism to reduce inflation is by raising interest rates, which
increases the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can reduce inflation, it can also result in decreased economic activity.

Stagflation becomes a problem only when the impact of the further use of the principal monetary policy tool available to assist central bank direction of the domestic economy does more marginal harm than marginal good, if used. Ultimately, the central bank can either stimulate the economy or attempt to rein it in through the mechanism of adjusting the domestic interest rate, its primary tool.

A choice can be implemented that tends to improve growth, but does it ignite systemic inflation?

A choice can be implemented that tends to fight inflation, but how badly does it impinge growth?
During periods properly described as stagflation both problems co-exist. In modern times, it will be only after the central bank has used all possible tools to meet both goals, using the best quantitative measures it has at its disposal, for stagflation to occur. Major economic conditions of unusual proportion will have already created near-crises on both fronts before stagflation can set in again. Stagflation is the name of the dilemma that exists when the central bank has rendered itself powerless to fix either inflation or stagnation.

The problem for fiscal policy is far less clear.
Both revenues and expenditures tend to rise with inflation, and with balanced budget politics, they fall as growth slows. Unless there is a differential impact on either revenues or spending due to stagflation, the impact of stagflation on the budget balance is not altogether clear. One school of thought is that the best policy mix
is one in which government stimulates growth through increased spending or reduced taxes, while the central bank fights inflation through higher interest rates. Whatever theory is employed, coordinating fiscal and monetary policy is not an easy task.

Common man sense to solving stag flation:

" The First step in curing alcholism is for the alcoholic to accept that he has a problem"

Stagflation undermined the dominant Keynesian consensus, and placed renewed emphasis on microeconomic behavior, particularly neo-classical economics with its attempt to root macroeconomics in microeconomic formalisms. The rise of conservative theories of economics, including monetarism, can be traced to the perceived failure of Keynesian policies to combat stagflation or even properly explain it.

Stagflation in the USA was defeated by then Federal Reserve chairman, Paul Volcker(yes the same Volcker report Volcker), who sharply increased interest rates to reduce money supply from 1979-1983 in what was called a"disinflationary scenario." This was the time when Gold Peaked to $851 (adjusted to inflation about $2100 in todays terms) Starting in 1983, fiscal stimulus and money supply growth combined to create a sharp economic recovery which is in line with standard macro-economic models; however, there was a five-to-six-year jump in unemployment during the Volcker disinflation. It appears that Volcker trusted unemployment to self-correct and return to its natural rate within a reasonable period, which it did.(Volcker Did not know about Maharashtras MREG's of the late 70's now in new avtar as The National Rural Employment Guarantee program!!!! ).

Supply-side economics emerged as a response to US stagflation in the 1970s. It largely attributed inflation to the ending of the Bretton Woods system in 1971 and the lack of a specific price reference in the subsequent monetary policies. Supply-side economics asserts that the contraction component of stagflation resulted from an inflation-induced rise in real tax rates. In addition certain states in the USA had laws limiting nominal interest rates, which under high inflation resulted in negative real interest rates. In some places this caused a collapse in lending to business. The reality, as described throughout this article, is that there was a major confluence of economic events in the 1970s that occurred as the US adjusted to a post-Vietnam War economy that contributed to stagflation.

Now can i say that History repeats itself?

Arrows Impossiblity Theorem And Indian Commodity

2008-03-21T07:30:00.000-07:00

Arrow's theorem says that if the decision-making body has at least two members and at least three options to decide among, then it is impossible to design a social welfare function that satisfies all these conditions at once.

In social choice theory, Arrow’s impossibility theorem, or Arrow’s paradox, demonstrates that no voting system can convert the ranked preferences of individuals into a community-wide ranking while also meeting a certain set of reasonable criteria with three or more discrete options to choose from. These criteria are called unrestricted domain, non-imposition, non-dictatorship, Pareto efficiency, and independence of irrelevant alternatives. The theorem is often cited in discussions of election theory as it is further interpreted by the Gibbard–Satterthwaite theorem.

The theorem is named after economist Kenneth Arrow, who demonstrated the theorem in his Ph.D. thesis and popularized it in his 1951 book Social Choice and Individual Values. The original paper was entitled "A Difficulty in the Concept of Social Welfare". [1] Arrow was a co-recipient of the 1972 Nobel Prize in Economics.

Statement of the theorem
The need to aggregate preferences occurs in many different disciplines: in welfare economics, where one attempts to find an economic outcome which would be acceptable and stable; in decision making, where a person has to make a rational choice based on several criteria; and most naturally in voting systems, which are mechanisms for extracting a decision from a multitude of voters' preferences.

The framework for Arrow's theorem assumes that we need to extract a preference order on a given set of options (outcomes). Each individual in the society (or equivalently, each decision criterion) gives a particular order of preferences on the set of outcomes. We are searching for a preferential voting system, called a social welfare function, which transforms the set of preferences into a single global societal preference order. The theorem considers the following properties, assumed to be reasonable requirements of a fair voting method:

non-dictatorship: the social welfare function should account for the wishes of multiple voters. It cannot simply mimic the preferences of a single voter.
unrestricted domain or universality: the social welfare function should account for all preferences among all voters to yield a unique and complete ranking of societal choices. Thus, the voting mechanism must account for all individual preferences, it must do so in a manner that results in a complete ranking of preferences for society, and it must deterministically provide the same ranking each time voters' preferences are presented the same way.
independence of irrelevant alternatives (IIA): the social welfare function should provide the same ranking of preferences among a subset of options as it would for a complete set of options. Changes in individuals' rankings of irrelevant alternatives (ones outside the subset) should have no impact on the societal ranking of the relevant subset.
positive association of social and individual values or monotonicity: if any individual modifies his or her preference order by promoting a certain option, then the societal preference order should respond only by promoting that same option or not changing, never by placing it lower than before. An individual should not be able to hurt an option by ranking it higher.
non-imposition or citizen sovereignty: every possible societal preference order should be achievable by some set of individual preference orders. This means that the social welfare function is surjective: It has an unrestricted target space.
Arrow's theorem says that if the decision-making body has at least two members and at least three options to decide among, then it is impossible to design a social welfare function that satisfies all these conditions at once.

A later (1963) version of Arrow's theorem can be obtained by replacing the monotonicity and non-imposition criteria with:

Pareto efficiency: if every individual prefers a certain option to another, then so must the resulting societal preference order. This, again, is a demand that the social welfare function will be minimally sensitive to the preference profile.
The later version of this theorem is stronger—has weaker conditions—since monotonicity, non-imposition, and independence of irrelevant alternatives together imply Pareto efficiency, whereas Pareto efficiency, non-imposition, and independence of irrelevant alternatives together do not imply monotonicity.

Formal statement of the theorem

Let A be a set of outcomes, N a number of voters or decision criteria. We shall denote the set of all full linear orderings of A by L(A) (this set is equivalent to the set S | A | of permutations on the elements of A).

A (strict) social welfare function is a function which aggregates voters' preferences into a single preference order on A. The N-tuple of voter's preferences is called a preference profile. In its strongest and most simple form, Arrow's impossibility theorem states that whenever the set A of possible alternatives has more than 2 elements, then the following three conditions become incompatible:

unanimity, or Pareto efficiency
If alternative a is ranked above b for all orderings , then a is ranked higher than b by . (Note that unanimity implies non-imposition).
non-dictatorship
There is no individual i whose preferences always prevail. That is, there is no such that .
independence of irrelevant alternatives
For two preference profiles and such that for all individuals i, alternatives a and b have the same order in Ri as in Si, alternatives a and b have the same order in as in .

Proof
Based on the proof by John Geanakoplos of Cowles Foundation, Yale University.[2]

We wish to prove that any social choice system respecting unrestricted domain (U), the Weak Pareto Principle (WP), and independence of irrelevant alternatives (IIA) is a dictatorship.

Say there are three choices for society, call them A, B, and C. Suppose first that everyone prefers option B the least. That is, everyone prefers every other option to B. By the Weak Pareto Principle, society must prefer every option to B, since if everyone prefers something to B, it must have a higher social ranking by WP. Specifically, society prefers A and C to B. Call this situation Profile I.

On the other hand, if everyone preferred B to everything else, then society would have to prefer B to everything else by WP. So it is clear that, if we take Profile 1 and, running through the members in the society in some arbitrary but specific order, move B from the bottom of each person's preference list to the top, there must be some point at which B moves off the bottom of society's preferences as well, since we know it eventually ends up at the top.

We now want to show that, during this process, at the point when the pivotal voter n moves B off the bottom of his preferences to the top, and society's B also moves off the bottom of its preferences, that society's B moves to the top of its preferences, not some intermediate point.

To prove this, consider what would happen if it were not true. Then society would have some option it prefers to B, say A, and one less preferable than B, say C. (If otherwise, just change C's name to A and vice versa).

Now if each person moves his preference for C above A, then society would prefer C to A by WP. By the fact that A is already preferred to B, C would now be preferred to B as well in the social preference ranking. But moving C above A shouldn't change anything about how B and C compare, by independence of irrelevant alternatives. That is, since B is either at the very top or bottom of each person's preferences, moving C or A around doesn't change how either compares with B. We have reached an absurd conclusion.

Therefore, when all the voters through voter n have moved B from the bottom of their preferences to the top, society moves B from the bottom all the way to the top, not some intermediate point.

In the second part of the proof, we show how voter n can be a dictator over society's decision between A and C. Call the case with all voters up to n having B on the bottom of their preferences and the rest with B at the top Profile II. Call the case with all voters up through n having B on the bottom and the rest having B on the top Profile III.

Now suppose everyone up to n ranks B at the bottom, n ranks B below A but above C, and everyone else ranks B at the top. As far as A is concerned, this organization is just as in Profile II, which we proved puts B below A (in Profile II, B is actually at the bottom of the social ordering). C's new position is irrelevant to the B-A ordering for society because of IIA. Likewise, n's new ordering has a relationship between B and C that is just as in profile III, which we proved has B above C (B is actually at the top). Hence we know society puts A above B above C. And if person n flipped A and C, society would have to flip its preferences by the same argument. Hence person n gets to be a dictator over society's decision between A and C.

Since B is irrelevant (IIA) to the decision between A and C, the fact that we assumed particular profiles that put B in particular places doesn't matter. This was just a way of finding out, by example, who the dictator over A and C was. But all we need to know is that he exists.

Finally, we want to show that the dictator can also dictate over the A-B pair and over the C-B pair. Consider that we have proven that there are dictators over the A-B, B-C, and A-C pairs, but they are not necessarily the same dictator. However, if you take the two dictators who can dictate over A-B and B-C, for example, they together can determine the A-C outcome, contradicting the idea that there is some third dictator who can dictate over the A-C pair. Hence the existence of these dictators is enough to prove that they are the same person, otherwise they would be able to overrule one another, a contradiction.

Interpretations of the theorem

Arrow's theorem is a mathematical result, but it is often expressed in a non-mathematical way with a statement such as "No voting method is fair", "Every ranked voting method is flawed", or "The only voting method that isn't flawed is a dictatorship". These statements are simplifications of Arrow's result which are not universally considered to be true. What Arrow's theorem does state is that a voting mechanism cannot comply with all of the conditions given above simultaneously for all possible preference orders.

Arrow did use the term "fair" to refer to his criteria. Indeed, Pareto efficiency, as well as the demand for non-imposition, seems trivial. Various theorists have suggested weakening the IIA criterion as a way out of the paradox. Proponents of ranked voting methods contend that the IIA is an unreasonably strong criterion, which actually does not hold in most real-life situations. Indeed, the IIA criterion is the one breached in most useful voting systems.

Advocates of this position point out that failure of the standard IIA criterion is trivially implied by the possibility of cyclic preferences. If voters cast ballots as follows:

7 votes for A > B > C
6 votes for B > C > A
5 votes for C > A > B
then the net preference of the group is that A wins over B, B wins over C, and C wins over A. In this circumstance, any system that picks a unique winner, and satisfies the very basic majoritarian rule that a candidate who receives a majority of all first-choice votes must win the election, will fail the IIA criterion. Without loss of generality, consider that if a system currently picks A, and B drops out of the race (as e.g. in a two-round system), the remaining votes will be:

7 votes for A > C
11 votes for C > A
Thus, C will win, even though the change (B dropping out) concerned an "irrelevant" alternative candidate who did not win in the original circumstance.

So, what Arrow's theorem really shows is that voting is a non-trivial game, and that game theory should be used to predict the outcome of most voting mechanisms. This could be seen as a discouraging result, because a game need not have efficient equilibria, e.g., a ballot could result in an alternative nobody really wanted in the first place, yet everybody voted for.

Note, however, that not all voting systems require (or even allow), as input, a strict ordering of all candidates. These systems may then trivially fail the universality criterion. Some systems may satisfy a version of Arrow's theorem with some reformulation of universality and independence of irrelevant alternatives; Warren Smith claims that Range voting is such a system.

Other possibilities
The preceding discussion assumes that the "correct" way to deal with Arrow's paradox is to eliminate (or weaken) one of the criteria. The IIA criterion is the most natural candidate. Yet there are other "ways out".

Duncan Black has shown that if there is only one agenda by which the preferences are judged, then all of Arrow's axioms are met by the majority rule. Formally, this means that if we properly restrict the domain of the social welfare function, then all is well. Black's restriction, the "single-peaked preference" principle, states that there is some predetermined linear ordering P of the alternative set. Every voter has some special place he likes best along that line, and his dislike for an alternative grows larger as the alternative goes further away from that spot.

Indeed, many different social welfare functions can meet Arrow's conditions under such restrictions of the domain. It has been proved, however, that under any such restriction, if there exists any social welfare function that adheres to Arrow's criteria, then the majority rule will adhere to Arrow's criteria.[3] Under single-peaked preferences, then, the majority rule is in some respects the most natural voting mechanism.

Another common way "around" the paradox is limiting the alternative set to two alternatives. Thus, whenever more than two alternatives should be put to the test, it seems very tempting to use a mechanism that pairs them and votes by pairs. As tempting as this mechanism seems at first glance, it is generally far from meeting even the Pareto principle, not to mention IIA. The specific order by which the pairs are decided strongly influences the outcome. This is not necessarily a bad feature of the mechanism. Many sports use the tournament mechanism—essentially a pairing mechanism—to choose a winner. This gives considerable opportunity for weaker teams to win, thus adding interest and tension throughout the tournament. In effect, the mechanism by which the choices are limited to two candidates is best considered as a part of the balloting system, and hence Arrow's theorem applies.

There has developed an entire literature following from Arrow's original work which finds other impossibilities as well as some possibility results. For example, if we weaken the requirement that the social choice rule must create a social preference ordering which satisfies transitivity and instead only require acyclicity (if a is preferred to b, and b is preferred to c, then it is not the case that c is preferred to a) there do exist social choice rules which satisfy Arrow's requirements.

Economist and Nobel prize winner Amartya Sen has suggested at least two other alternatives. He has offered both relaxation of transitivity and removal of the Pareto principle. He has shown the existence of voting mechanisms which comply with all of Arrow's criteria, but supply only semi-transitive results.

Also, he has demonstrated another interesting impossibility result, known as the "impossibility of the Paretian Liberal". (See Liberal paradox for details). Sen went on to argue that this demonstrates the futility of demanding Pareto optimality in relation to voting mechanisms.

Advocates of Approval voting consider unrestricted domain to be the best criteria to weaken. In approval voting, voters can only vote 'for' or 'against' each candidate, preventing them from making distinctions between their favored candidates and merely acceptable ones.

Advocates of Range voting also consider unrestricted domain to be the best criteria to violate- but instead of limiting voter options like approval voting, range voting increases the number of voter options beyond what Arrow's Theorem allows.

Scalar rankings from a vector of attributes and the IIA property

The IIA property might not be satisfied in human decision-making of realistic complexity because the scalar preference ranking is effectively derived from the weighting—not usually explicit—of a vector of attributes (one book dealing with the Arrow theorem invites the reader to consider the related problem of creating a scalar measure for the track and field decathlon event—e.g. how does one make scoring 600 points in the discus event "commensurable" with scoring 600 points in the 1500 m race) and this scalar ranking can depend sensitively on the weighting of different attributes, with the tacit weighting itself affected by the context and contrast created by apparently "irrelevant" choices. Edward MacNeal discusses this sensitivity problem with respect to the ranking of "most livable city" in the chapter "Surveys" of his book MathSemantics: making numbers talk sense (1994).

Exchange for Physicals will ensure that Agricultural futures markets succeed in India!

2007-10-31T06:38:00.000-07:00

The Indian futures markets has had a reasonable 'success story' however this success has been restricted to only precious metals,some base metals and crude oil contracts which has been due to significant retail and investor participation.

However it is to be noted that Agricultural futures has not succeeded and as a matter of fact the recent drop in volumes on major agricultural futures exchange in India has got many a stake holders worried.

Although it is very easy for us to say that it was the fault of policy makers and recent bans etc however that is not the real truth.

We at Altos Research believe that the real reason for failure of agro contracts in the India context is the absence of an offset method which is extremely popular in many global exchanges namely the EFP or the Exchange for Physicals(not to be confused with the SPOT exchange, and an electronic spot exchange is not the panacea of all ills of the commodity market).

What is an EFP ?

There are four ways to close out a futures contract:

1] Offset is the transaction of a reversing trade on the exchange. If you are short 20 March soybean futures traded on the Chicago Board of Trade, you can close the position by taking an offsetting long position in 20 March soybean contracts on the same exchange. There will be a final margining at the end of the day, and then the position will be closed.

2] Cash settlement is simply the holding of a cash settled future until expiration. At that time, there is a final margin payment, and the contract expires.

3] Delivery is the holding of a physically settled future until it physically settles according to exchange rules.

4] Exchange for physicals (EFP) is a form of privately negotiated physical settlement of long and short futures positions held by two parties.This aspect has been completely ignored in the Indian context and this is what we believe is required for the success of Agricultural Contracts in the Indian derivatives exchanges.

Every futures contract has a last trade date and a delivery period specified by the exchange. In the case of a cash settled future, the delivery period is the last trade date. On that date, the settlement price is set equal to the cash price of the underlier. There is a final margining based on that settlement price, and then the contract expires.

For physically settled futures, exchange rules depend upon the specific underlier. Usually, there is an entire month—called the delivery month—during which delivery may occur. The last trading day for the future falls towards the end of that month. A party that is short a future may elect to deliver the underlier on any business day in the delivery month. Typically, notice of delivery must be made to the exchange say two-five business days prior to delivery. The date on which notice is given is called the notice date. The first possible date for notice comes towards the end of the month preceding the delivery month. It is called the first notice date. Upon receiving notice of delivery, the exchange selects a party that is long the future to take the delivery. This may be the party with the largest long position in the future. Alternatively, the party to take delivery may be selected by lot.

The vast majority of futures contracts are traded by hedgers or speculators with no interest in taking or delivering the underlier. Such parties holding long futures will offset them prior to the first notice date. Those with short positions will offset them by the last trade date. Most futures are closed out by offset.

Exchanges specify conditions of delivery. These include acceptable locations for delivery, in the case of commodities or energies. It includes specifics about the quality, grade or nature of the underlier to be delivered. For example, only certain Treasury bonds may be delivered under the Chicago Board of Trade's Treasury bond future. Only certain growths of coffee may be delivered under the Coffee, Sugar and Cocoa Exchange's coffee future.

In many agricultral commodity or energy markets, parties want to settle futures by delivery, but exchange rules are too restrictive for their needs. For example, the New York Mercantile Exchange requires that natural gas be delivered at the Henry Hub in Louisiana. Suppose two parties need to buy/sell gas at some other hub and have transacted futures to hedge against price movements prior to the transaction.
What should they do?

One answer is that they could privately negotiate the trade(OTC) and then reverse their futures positions by offset. This requires that they take price risk during the period between closing the physical trade and offsetting their respective futures positions. Many exchanges offer an alternative called exchange for physicals (EFP).
The mechanics of EFP vary by exchange. Generally, the parties privately negotiate their physical trade. Then, instead of offsetting their futures hedges with trades on the exchange, they inform the exchange that they want to transfer the futures from one party to the other, closing out their respective positions.
Essentially, EFP is customizable physical delivery.

An Exchange of Futures for Physical (EFP) is a transaction negotiated off-market in which one party buys physical assets and sells futures contracts while the opposite party sells the physical market products and buys futures contracts.

EFPs provide a mechanism to:

1]swap from a futures to a physical position or vice versa
2] off market price certainty for large physical vs futures transactions
3] fulfilll delivery commitments

The physical and futures components must be 'substantially similar' and equal in terms of either:

--> value (ie the value of the physical being similar to the value of the futures); or by
--> quantity (the quantity of the physical being similar to the quantity of the futures)

An Example of an EFP contract is the one on the Australian Futures exchange at Sydeny.

Commodity contracts (wool, electricity) can provide a hedge either for the quantity or amount (value) of a physical transaction.

If a trader is holding 20 tonnes (20,000 kilograms) of greasy wool and wished to exchange it for SFE Greasy Wool Futures contracts, the exchange could be made either:

1)at any reasonable price for 8 contracts (each of 2,500 kilograms), or
2) for an equivalent value of futures. If the physical is trading at 600 cents/kilogram and the futures contract is priced at 670, the hedge could be made against the ($6.00 x 20,000 =) $120,000 worth of wool by using ($120,000/($6.70 x 2,500 kg) = approx.) 7 futures contracts.

Either trade would be deemed by SFE to be a valid EFP.

Note that the physical wool should have a micron measurement within that allowed for in the futures. For example SFE Fine Wool Futures includes 19.6 – 22.5 microns and therefore the physical component of an EFP involving SFE Fine Wool Futures should include a physical of a similar size. If the wool traded is in a greasy state, the yield of the physical wool should also be submitted.

For commodities with variable quality, some allowance can be made for variation from SFE contract-specified quality, but this must be justified to SFE on enquiry.(EFB Exchange for Basis)

My 2 cents on this and Sincerely hope that Agro contracts suceed in our country because honestly that is going to determine the future of futures in our country for time to come.

(Note: This is an abstract of Research on "Success formula for Agricultural Futures in India" You can order the complete copy of this research paper from http://www.research.altostrade.com)
also check out for our daily research http://altosdailyresearch.blogspot.com

The World of Non-conventional commodities ?

2007-08-23T00:52:00.000-07:00

The World of Non-conventional commodities ?

Having been in the business of commodity trading ever since I passed out of engineering in the year 1996 has made me look at this business through different cycles and also through different perspectives.
The world of Non conventional commodities,i.e commodities that are truly not commodities but people at large are considering them to be commodities.
Nature's commodity outputs

Commodity thinking is undergoing a more direct revival thanks to the theorists of "natural capital" Natural capital, as described in the book Natural Capitalism, is a metaphor for the mineral, plant, and animal formations of the Earth's biosphere when viewed as a means of production of oxygen, water filter, erosion preventer, or provider of other ecosystem services. It is one approach to ecosystem valuation, an alternative to the traditional view of all non-human life as passive natural resources, and to the idea of ecological health. However, human knowledge and understanding of the natural environment is never complete, and therefore the boundaries of natural capital expand or contract as knowledge is gained or lost Natural Cpital whose products, some economists argue, are the only genuine commodities - air, water, and calories we consume being mostly interchangeable when they are free of pollution or disease. Whether we wish to think of these things as tradeable commodities rather than birthrights has been a major source of controversy in many nations.

Most types of environmental economics consider the shift to measuring them inevitable, arguing that reframing political economy to consider the flow of these basic commodities first and foremost, helps avoids use of any military fiat except to protect "natural capital" itself, and basing credit-worthiness more strictly on commitment to preserving biodiversity aligns the long-term interests of ecoregions, societies, and individuals. They seek relatively conservative sustainable development schemes that would be amenable to measuring well-being over long periods of time, typically "seven generations", in line with Native American as well as the Hindu 'Saptha kula' thought.

Weather trading

However, this is not the only way in which commodity thinking interacts with ecologists' thinking. Hedging began as a way to escape the consequences of damage done by natural conditions. It has matured not only into a system of interlocking guarantees, but also into a system of indirectly trading on the actual damage done by weather, using "weather derivatives". For a price, this relieves the purchaser of the following types of concerns:
"Will a freeze hurt the Brazilian coffee crop? Will there be a drought in the U.S. Corn Belt? What are the chances that we will have a cold winter, driving natural gas prices higher and creating havoc in Florida orange areas? What is the status of El Niño? How is Hurricane Dean going to affect Crude oilt prices ?"
Emissions trading

Weather trading is just one example of "negative commodities", units of which represent harm rather than good.
"Economy is three fifths of ecology" argues Mike Nickerson, one of many economic theorists who holds that nature's productive services and waste disposal services are poorly accounted for. One way to fairly allocate the waste disposal capacity of nature is "cap and trade" market structure that is used to trade toxic emissions rights in the United States, e.g. SO2. This is in effect a "negative commodity", a right to throw something away.
In this market, the atmosphere's capacity to absorb certain amounts of pollutants is measured, divided into units, and traded amongst various market players. Those who emit more SO2 must pay those who emit less. Critics of such schemes argue that unauthorized or unregulated emissions still happen, and that "grandfathering" schemes often permit major polluters, such as the state governments' own agencies, or poorer countries, to expand emissions and take jobs, while the SO2 output still floats over the border and causes death.

In practice, political pressure has overcome most such concerns and it is questionable whether this is a capacity that depends on U.S. clout: The Kyoto Protocol established a similar market in global greenhouse gas emissions without U.S. support.

The Community we live as commodity?

This highlights one of the major issues with global commodity markets of either the positive or negative kind. A community must somehow believe that the commodity instrument is real, enforceable, and well worth paying for.
A very substantial part of the anti-globalization movement opposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current global credit money regime anchored by the Bank for International Settlements, does not in their view correspond to measurable benefits to human well-being worldwide. They seek a fairer way for societies to compete in the global markets that will not require conversion of natural capital to natural resources, nor human capital to move to developed nations in order to find work.
Some economic systems by green economists would replace the "gold standard" with a "biodiversity standard". It remains to be seen if such plans have any merit other than as political ways to draw attention to the way capitalism itself interacts with life.
Is human life a commodity? Cloning et all
While classical, neoclassical, and Marxist approaches to economics tend to treat labor differently, they are united in treating nature as a resource.
The green economists and the more conservative environmental economics argue that not only natural ecologies, but also the life of the individual human being is treated as a commodity by the global markets. A good example is the IPCC calculations cited by the Global Commons Institute as placing a value on a human life in the developed world "15x higher" than in the developing world, based solely on the ability to pay to prevent climate change.

Is free time a commodity? Time is money right ?

Accepting this result, some argue that to put a price on both is the most reasonable way to proceed to optimize and increase that value relative to other goods or services. This has led to efforts in measuring well-being, to assign a commercial "value of life", and to the theory of Natural Capitalism - fusions of green and neoclassical approaches - which focus predictably on energy and material efficiency, i.e. using far less of any given commodity input to achieve the same service outputs as a result.
Indian economist Amartya Sen, applying this thinking to human freedom itself, argued in his 1999 book "Development as Freedom" that human free time was the only real service, and that sustainable development was best defined as freeing human time. Sen won The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1999 and based his book on invited lectures he gave at the World Bank

Commodity derivative markets newest and boldest contract

2007-07-19T08:11:00.001-07:00

Commodity derivative markets newest and boldest contract " HEDGE STREET BINARY OPTIONS CONTRACTS" will it be the most sucessfull every ?

HedgeStreet is an Internet-based government regulated (CFTC) derivatives exchange where traders can hedge against or speculate on economic events and price movements.
HedgeStreet targets retail speculators and hedgers by offering $100 contracts. The CBOE owns a minority interest in HedgeStreet.
HedgeStreet offers a variety of contracts designed to give private individuals the ability to manage the particular risks they face.

HedgeStreet's contracts span a range of markets, from commodities and currencies to economic indicators, employment, fuel, housing prices, inflation, hurricane insurance estimates, and interest and mortgage rates. HedgeStreet members can use the site to put in order entries, find out about market depth, historical data, and position reporting.

Although the liquidity on HedgeStreet contracts is low as of this submission, as a regulated exchange that offers binary option contracts--a contract format which they pioneered--they do add value in the derivatives marketplace.

Liquidity for the exchange has recently risen due to the $10 million investment by market makers Susquehanna International Group (SIG) and DRW Trading Group in March of 2007.

Based in San Mateo, California, the company is subject to regulatory oversight by the Commodity Futures Trading Commission. Membership is only open to people residing in the United States. Member funds are held at the Union Bank of California.

What is a binary Option ?

A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. Thus, the options are binary in nature because there are only two possible outcomes. They are also called all-or-nothing options or digital options.

For example, suppose I buy a binary cash-or-nothing call option on XYZ Corp's stock struck at $100 with a binary payoff of $1000. Then if at the future maturity date, the stock is trading at or above $100, I receive $1000. If its stock is trading below $100, I receive nothing.
In the popular Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function.

can there be a derivative exchange for Intellectual proprieatry rights ?

2007-07-19T05:19:00.000-07:00

Derivatives Exchange for IP rights ?

Current methods of intellectual property exchange are inefficient and often hinder companies from easily realizing value from existing IP assets. In addition, intellectual property enforcement is costly and uncertain and entails lengthy negotiations or legal actions.
As a result, necessary IP rights are not effectively transferred, the “best price” for IP is rarely achieved, and the process itself inhibits the market adoption of new technology based products and hence their companies’ economic growth.
What is Intellectual capital ?
Intellectual capital is a term with various definitions in different theories of economics. Accordingly its only truly neutral definition is as a debate over economic "intangibles". Ambiguous combinations of instructional capital and individual capital employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a capital asset whose yield is intellectual rights.Such use is rare, however, and the term rarely or never appears in accounting proper - it refers to a debate, and to the assumed capital base that creates intellectual property, rather than an auditable style of capital.
Perhaps due to their industry focus, the term "intellectual capital" is employed mostly by theorists in information technology, innovation research, technology transfer and other fields concerned primarily with technology, standards, and venture capital.
It was particularly prevalent in 1995-2000 as theories proliferated to explain the "dotcom boom" and high valuations. During this period it was often observed that computer code and programmers were bearing a substantial premium when combined in new unproven companies.
It is hard to see how this differs from the tulip boom, however, when it would have been just as likely to assign a high value to the seemingly-magical combinations of tulip bulbs and, say, the pots they grew in.Brand as an AssetWhether flags, brands, labels or simple fear dominate economic decisions, it seems that the underlying theories of intellectual capital and of human capital don't explain them.

When attached to "capital" as prefixes, the terms "intellectual", "knowledge" and "human" often conceal more than their use can reveal. Thus the terms intellectual capital, knowledge capital and human capital more properly describe debates, not assets, as internally generated assets do not appear on a balance sheet, however International Financial Reporting Standard 3 on Business Combinations requires acquired intangible assets to be accounted for during the purchase price allocation exercise.
They produce neat abstractions but so far poorly explain what actually occurs in the biologically real world: individuals buying in a social setting based on instructions.So far, the more specific terms "individual", "instructional" and "social" from human development theory, have been preferred in Wikipedia as adjectives describing classes of capital. In part this is because these terms have definitions that arise from academic categories and practices rather than faddish marketing or management theories.
There are standards for assigning value to these, e.g. the UN Human Development Index which literally ranks flags (of countries) for quality of life.Extending such standards to labels (via mandatory labelling) and applying them positively in brand management, e.g. positioning a brand for appeal to an ethical minority, is increasingly common.

Projects by Consumerium and AdBusters seek to make comprehensive outcomes more important in buying decisions. This in turn is part of a trend towards more moral purchasing.When viewed as an asset, then, a brand is simple social capital that may have an increasing amount of instructional capital attached to satisfy an ever-rising demand for more information about product origin, production and distribution.

Why should any asset be intangeible ?
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort.
There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how,knowledge), collaboration activities, leverage activities, and structural activities.
Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price.
Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed.

The development of new IP exchange practices ultimately may lead to the creation of an operating Intellectual Property Rights Exchange in the future, providing for the efficient open market trading of various direct(spot/cash) and derivative IP-based license, debt equity and hybrid investments.
Such an exchange could bring together IP owners, consumers and investors with a solution for current market inefficiency and provide companies with a mechanism for funding additional innovation, reducing their exposure to legal actions, and increasing their access to underutilized patents and technologies. The objective that as a result, faster commercialization of technology will accelerate long-term economic growth.
Different types of trading activities may be developed, bound by the common principles of consistent transaction termsand market pricing. Transactions might be for license rights (e.g., for a specific quantity of production), for ownership rights (e.g., via an open auction), or for various kinds of derivative rights based on specific conditions affecting the underlying asset value.

The derivatives exchange will direct the manner in which the intellectual property rights, either owned by these companies or acquired on their behalf, will be transferred to third parties in accordance with the owners’ objectives. This will relieve the company of the burden of establishing andadministering a licensing program to maximize the value of their IP and will provide investors in IP an avenue for marketing those rights instead of engaging in inefficient, costly and unfamiliar licensing negotiations.

Where all could the applications be ?
1. Under the most recent context global sporting events like the current (2007) world cup, an exchange for derivatives comprising of notional cash value of say runs scored by a batsman, a basket of such values could be securitized and be traded on an exchange, in lay man terms an Exchange which will have an instrument SachinAPRIL 30, i.e a derivatives instrument whose pay off would be linked to the runs scored by sachin as of april 30th or AUSTRALIAWC07APRIL30 this market could then attract participants like advertisers,media channels,branders,consumers investors and speculators.
2. Film and Movie Industry : an active and liquid market comprising of actors,technicians,financiers,producers,investors,distrubutors,advertisers media channels and end consumners(the guy who pays money and buys ticket/dvds)
3. Software and Products company.
4. Architectural firms,building, construction and realt companies,REITS. Eg RELIANCESEZNEAR MUMBAI 2011 futures.
5. Art and artwork.

Crusader of Rights to Information is no more

2007-07-17T05:57:00.000-07:00

Transparency in Public Life15 Jul, 2007
Transparency in public life
By Prakash Kardaley
(Prakash Kardaley, a crusader for the Right to Information passed away of 15 July 2007. This article was written a three days before his demise and reflects his views on transparency)
The greatest adversary of the law on of transparency is not really the bureaucracy. Not every bureaucrat is opposed to transparency; in any case, the bureaucracy can always be tamed or disciplined. The worst opposition to the spirit of transparency is our own hypocrisy.
We want every piece of paper in government offices to be made accessible to the people and yet we fiercely resist any suggestion to open up our own income tax returns – which in fact is our declaration of our liability to the government and thereby to the people at large. There are many organizations that make ear-splitting noise to force the government to enforce every word and comma of the transparency law but are significantly silent when it comes to opening up their own transactions.
What is wrong with transparency unless one desperately wants to cover up one’s own misdeeds? Transparency in public life either in spirit or as a piece of legislation, when codified into a law knows its legitimate laxman rekha. It does not cause any unwarranted invasion of individual privacy. It does not expect disclosure of information that would be detrimental to the society at large. On the other hand, it attacks excessive secrecy, which is in fact is injurious to the well being of society. Any opposition to the spirit of transparency, therefore, must be seen as profound disrespect to society.
Many of us tend to take a myopic view of the law on transparency. We identify it as a weapon bestowed upon people to root out corruption in government. Of course, that is one of its objectives. But the purpose of creating such legislation goes much beyond. The Transparency law - rightly called `sunshine law’ in USA - is a potent instrument that ushers in good governance. It ensures that all bodies or institutions in the public domain function under the watchful eyes of stakeholders. This will curb malpractices and corruption.
Stakeholders of every public venture therefore, have an inherent right to demand transparency from those who function in public interest. Students and parents have a right to demand a reasonable level of transparency from educational institutions. Depositors, investors have a right to expect the same from financial institutions.
Justice P B Sawant, former judge of the Supreme Court, as the Chairman of the Press Council of India, presented the first draft of the RTI Act in India and is an ardent advocate bringing the private sector under the purview of the transparency law. The private sector gets its funds from shareholders and depositors money as well as from financial institutions, he says, which shows that they too use public resources to run their companies. All major scams, he points out, have been in the private sector, especially in banks and financial institutions and yet, secrecy is greater in the private sector, whereas truth comes out sooner in the public sector.
Justice Sawant says it is imperative to extend the RTI Act to the private sector lock and stock and barrel especially at a time when many public services and public sector undertakings are being privatized. He emphasizes that all institutions that carry out activities that are of public interest, must come under the purview of the RTI law.
The draft of the Right to Information Bill, 1996, as suggested by Press Council of India, therefore, defined “public authority” as:
(i) The Government and Parliament of India and the Government and Legislature of each of the States and a local or other authorities within the territory of India or under the control of the Government of India; and
(ii) A company, corporation, trust, firm, society or a cooperative society, whether owned or controlled by private individuals and institutions whose activities affect the public interest; [The expressions company, corporation, trust, firm, society and cooperative society shall have the same meaning as assigned to them in the respective Acts under which they are registered.]
The Right to Information Act, 2005, did not incorporate Justice Sawant’s radical definition of a public authority, but it came fairly close to his concept when it included bodies ``owned, controlled or substantially financed’’ by the government as well as ``non-Government organization substantially financed, directly or indirectly by funds’’ provided by the government.
These ``non-government organizations’’ do not merely mean the jholawala NGOs but all ``authorities, bodies or institution of self government established or constituted by or under the Constitution; by any other law made by Parliament; by any other law made by State Legislature or by notification issued or order made by the appropriate government’’, thus bringing under the purview of the RTI Act, therefore, companies, corporations, trusts, firms, societies or cooperative societies, as envisaged by Justice Sawant, irrespective of the nature of their ownership, except for the condition that these be either ``controlled or substantially financed’’ by the government.
Going by the letter and spirit of the Act, information commissions have begun giving their rulings on the interpretation of ``controlled’’ with respect to various types of these private bodies. The Gujarat Information Commission on May 15 decided that all co-operative societies, including cooperative banks, are bodies ``controlled’’ by the government and therefore are required to abide by the provisions of the RTI Act.
The Central Information Commission (CIC) on June 7 declared in unambiguous terms that functioning all recognized stock exchanges are under the ``deep and all pervasive close control’’ Central Government and hence are public authorities, being obliged to give information to any requisitioner under the Act.
In support of its observations that stock exchanges, undoubtedly are controlled by the government, the CIC cited, apart from pronouncements of the apex court, a whole array of provisions in the SEBI Act including its preamble which declares that it is "An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto".
Any right thinking person would have expected stock exchanges not to have opposed a requisition under the RTI Act in the first place or at least have decided to honour the decision of the Central Information Commission. After all, what is there to hide? What is there in any disclosure of information that would go against the public interest?
Yet, the National Stock Exchange (NSE) in its wisdom has approached the higher judiciary challenging the interpretation pronounced by the CIC. All one can do at the moment is to wait and watch, but at the same time wonder how the NSE that claims to be totally autonomous is being represented in the court by an additional solicitor general!

This article was ctrlc ctrlveed from suchetas website www.suchetadalal.com, and is copyrighted to her site, my sincere apologies are to sucheta who had to remind me of copy right violation my apologies mam i respect you and wanted people in my yahoogroups to know about RTI crusader

Buy Uranium ?

2007-07-17T02:12:00.000-07:00

1. SupplyBetween the late 1980s and early this decade secondary supplies hung over the market, resulting in very low prices and inducing little to no investment in uranium exploration and output capacity. Since the late 1980s primary mine supply has not been sufficient to meet demand and so large quantities of non-recyclable secondary supplies were 'used up' in filling this gap over this period.

2. DemandThe drying up of secondary supply sources and tight uranium market has driven the massive increase in demand for future primary mine supply over the past three years, evidenced by a massive increase in long-term contracting in recent years. Current supply shortage is being exacerbated by speculators/hedge funds entering the market and holding large quantities of uranium (roughly 8-10,000tU is estimated be held of the market).Unlike other metals, the initial boom in the uranium price was not directly tied to China (actual demand from China to date is reportedly negligible), it is more of a traditional underinvestment / tight market related cyclical price boom.

3. Speculative activityHas been playing a big role in the boom in spot prices. On and off-market uranium futures began trading on NYME on 7 May (no physical delivery) - the June 2007 contract is trading at $134.9/lb and the February 2008 contract last traded at $150.0/lb.

Reasons to Buy into the Uranium Story…

Concerns over future supply fuelled by the delays at Cameco's massive 18mlbpa capacity Cigar Lake project, will keep reactor demand for future mine supply at very high levels in the coming year.
Recent flooding at ERA's Ranger mine - the world's second highest producing mine – will reduce supply from the mine significantly in 2008, taking much-needed supply off a market already in deficit.
High levels of reactor procurement of future mine supply is likely to continue to spill over to the spot market
The Real need for clean fuels ,corelation with carbon credits Global warming.
Uranium held by speculators/hedge funds appears to be in tight hands (at current prices).
Producer, consumer and (strategic) government inventory building (China in particular), is likely to keep the market tight in the coming years.
Uranium futures (no physical delivery) are giving bullish guidance as to uranium prices going forward – with the June 2007 contract trading around $135/lb and the early 2008 contracts at $150.0/lb.

Carbon trading ,Carbon credits ,Bushs initiative finally!

2007-06-01T02:31:00.000-07:00

Carbon credits are a tradable permit scheme. They provide a way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the owner the right to emit one tonne of carbon dioxide.
International treaties such as the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. By allowing credits to be bought and sold, a business for which reducing its emissions would be expensive or prohibitive can pay another business to make the reduction for it. This minimizes the quota's impact on the business, while still reaching the quota.
Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. There are currently two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.
BackgroundIn addition to the burning of fossil fuels, major industry sources of greenhouse gas emissions are cement, steel, textile, and fertilizer manufacturers. The main gases emitted by these industries are methane, nitrous oxide, hydroflurocarbons, etc, which increase the atmosphere's ability to trap infrared energy.
The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control. It was formalized in the Kyoto Protocol, an international agreement between 169 countries. Carbon credits are certificates awarded to countries that are successful in reducing emissions of greenhouse gases.
For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions. Such a credit can be sold in the international market at the prevailing market price. There are two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.
How buying carbon credits attempts to reduce emissionsCarbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.
By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
A business would buy the carbon credits on an open market from organisations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.
As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as 'carbon credits.' The possibilities are endless hence making it an open market.
The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
Under JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost. Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Under IET, countries can trade in the international carbon credit market. Countries with surplus credits can sell them to countries with quantified emission limitation and reduction commitments under the Kyoto ProtocolIt is also important for any carbon credit (offset) to prove a concept called additionality. Additionality is a term used by Kyoto's Clean Development Mechanism to describe the fact that a carbon dioxide reduction project (carbon project) would not have occurred had it not been for concern for the mitigation of climate change. More succinctly, a project that has proven additionality is a beyond business as usual project.
It is generally agreed that voluntary carbon offset projects must also prove additionality in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). According the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD) : "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions, undermining the emissions target of the GHG program. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."
Emissions trading (or cap and trade) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.[1] The development of a carbon project that provides a reduction in Greenhouse Gas emissions is a way by which participating entities may generate tradeable carbon credits. Kyoto Protocol provides for this facet of its cap and trade program with the Clean Development Mechanism (CDM).
In such a plan, a central authority (usually a government agency) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given credits or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduces greenhouse gasses at the lowest possible cost to society.
There are currently several trading systems in place with the largest being the European Union's. The carbon market makes up the bulk of these and is growing in popularity. Many businesses have welcomed emissions trading as the best way to mitigate climate change. Enforcement of the caps is a problem, but unlike traditional regulation, emissions trading markets can be easier to enforce because the government overseeing the market does not need to regulate specific practices of each pollution source. However, monitoring (or estimating) and verifing of actual emissions is still required, which can be costly. Critics doubt whether these trading schemes can work as there may be too many credits given by the government, such as in the first phase of the European Union's scheme. Once a large surplus was discovered the price for credits bottomed out and effectively collapsed, with no noticeable reduction of emissions.
OverviewThe overall goal of an emissions trading plan is to reduce emissions of the greenhouse gases that cause climate change. The cap is usually lowered over time - aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap and trade systems, organizations which do not pollute may also buy credits. Environmental groups that purchase and retire pollution credits reduce emissions and raise the price of the remaining credits according to the law of demand. Corporations can also retire pollution credits by donating them to a nonprofit and then be eligible for a tax deduction. Allowances are accounted for in the balance sheet of the company as intangible assets, as recommended by the IAS 37 issued by IASB.
Because emissions trading uses markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. In theory, firms will choose the least-cost way to comply with the pollution regulation, creating incentives that reduce the cost of achieving a pollution reduction goal.
Cap & trade vs. baseline & creditThe textbook emissions trading program can be called a "cap & trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline & credit program [3] In a baseline and credit program a set of polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions. These credits can be purchased by polluters that are under a regulatory limit. Many of the criticisms of trading in general is targeted at baseline & credit programs rather than cap & trade type programs.
Major trading systems
United StatesPerhaps the most successful emission trading system to date is the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the USA. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are expected to be reduced by 50% from 1980 to 2010.[4]
Some experts argue that the "cap and trade" system of SO2 emissions reduction reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.
In 1997, the State of Illinois adopted a trading program for volatile organic compounds in most of the Chicago area, called the Emissions Reduction Market System.[5] Beginning in 2000, over 100 major sources of pollution in 8 Illinois counties began trading pollution credits.
In 2003, New York State proposed and attained commitments from 9 Northeast states to cap and trade carbon dioxide emissions. Also in 2003, corporations began voluntarily trading greenhouse gas emission allowances on the Chicago Climate Exchange.
In 2007, the California Legislature passed AB32, which was signed into law by Governor, Arnold Schwarzenegger. This bill is aimed at curbing Carbon emissions.
European UnionThe European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It commenced operation in January 2005 with all 25 (now 27) member states of the European Union participating in it.[6] It contains the world's only mandatory carbon trading program. The program caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU's Carbon Dioxide emissions.[7]
Whilst the first phase (2005 - 2007) has received much criticism due to oversupply of allowances and the distribution method of allowances (via grandfathering rather than auctioning), the European Commission have been tough on Member States' Plans for Phase II, dismissing many of them as being too loose again.[8] In addition, the first phase has established a strong carbon market. Compliance has also been high in 2006, increasing confidence in the scheme.
Kyoto ProtocolThe Kyoto Protocol is a 1997 international treaty that took effect in 2005 which currently bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations.
Green tagsGreen tags are a kind of reverse carbon trading scheme, available in the U.S. A renewable energy provider is issued one green tag for each 1000KWh of energy it produces. The energy is sold into the electrical grid, and the green tag can be sold on the open market as additional profit.
The carbon marketThis section deals with carbon emissions trading between nations. For carbon trading schemes for individuals, see Personal carbon trading. Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
Market trendCarbon emissions trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was itself a 41% increase relative to 2003 (78 mtCO2e)
Business reactionWith the creation of a market for trading carbon dioxide emissions within the Kyoto Protocol, the London financial markets has established itself as the centre of the carbon market: a potentially highly lucrative business; the New York and Chicago stock markets would like a share (which is unlikely as long as the current US administration rejects Kyoto).[11] The European Union Greenhouse Gas Emission Trading Scheme (EU ETS) began operations on 1 January 2005.
23 multinational corporations have come together in the G8 Climate Change Roundtable, a business group formed at the January 2005 World Economic Forum. The group includes Ford, Toyota, British Airways and BP. On 9 June 2005 the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases.
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.
EnforcementAnother critical part of the bargain is enforcement. Without effective enforcement, the licenses have no value. Two basic schemes exist:
In one, the regulators measure facilities, and fine or sanction those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on emission licenses, and greater pollution.
In another, a third party agency certified or licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the Internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing the cost of most regulation on the private sector. The transparency of this process helps act as a safeguard against corruption.
CriticismThere are critics of the schemes, mainly environmental justice NGOs and movements who see carbon trading as a proliferation of the free market into public spaces and environmental policy-making.[15] They point to failures in accounting, dubious science and destructive impacts of projects upon local peoples and environments as reasons why trading pollution rights should be avoided.[16] Instead they advocate making reductions at the source of pollution and energy policies that are justice-based and community-driven.[17] Most of the criticisms have been focused on the carbon market created through investment in Kyoto Mechanisms. Criticism of 'cap and trade' emissions trading has generally been more limited to lack of credibility in the first phase of the EU ETS.
Critics argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder. Overall reductions would need to come from a sufficient and challenging reduction of allowances available in the system. Likely this would occur over time through central regulation, though some environmental groups acted more immediately by buying credits and refusing to use or sell them. The National Allocation Plans by member governments of the European Union Emission Trading Scheme came under fire for this recently when some governments issued more carbon allowances than emissions during Phase I of the scheme. They have also been criticised for the widespread practice of grandfathering, where polluters are given carbon credits by governments, instead of being made to pay for them.[18] Nevertheless, the transfer of wealth from polluters to non-polluters provides incentives for polluting firms to change, especially if the market price for pollution credits is very high. Tight controls are necessary in order to establish a reverse commodity market like Green Tags as well. Regulatory agencies run the risk of issuing too many emission credits, diluting the effectiveness of regulation, and practically removing the cap. In this case instead of any net reduction in carbon dioxide emissions, beneficiaries of emissions trading simply do more of the polluting activity.
Many environmental activists and foundations consider Al Gore's strong advocation of carbon trading to be a denial of the imminence of climate change and a formalized failure of international policy to address the gravity of the carbon increase. Critics of carbon trading, such as Carbon Trade Watch argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change.[19]
A mistake may also be made by giving away emission credits rather than auctioning them. Emission credits are, in effect, money and therefore should be treated as such. The giving away of emission credits may also have the negative result of turning down investment dollars that might have been spent on sustainable technologies, if the government chooses to.
The authoritative British Newspaper the Financial Times argued on April 26th 2007 that "Carbon markets create a muddle". In the opinion of the FT these markets "...leave much room for unverifiable manipulation"

Navin's 30 seconds with Warren buffet

2007-05-27T07:19:00.000-07:00

Navin was my class mate in school and my good friend of last 24 years,
here was his 30 seconds with warren buffet and the day long with BH shareholders,his advise to me only "fake people do a put on with costly suits",it shows their insecurity and the camflouge value, urchins... will be urchins .... but its true class and honesty that stands apart.
Here are the details
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I had one of the most amazing and exhilarating experiences of my life in Omaha, Nebraska, USA. I attended the Berkshire Hathaway (BH) Annual shareholders meeting. Warren Buffet (WB) hosts a day long open house session with 27,000 people at the Qwest downtown center. This had the feeling of a U2 concert or Nelson Mandela addressing a rally in Pretoria!

WB has a cult following with people from all over the world attending this ‘Mecca of finance’ event to listen to the sage of Omaha impart his wisdom. Amongst others, I got to see Bill Gates (who sits on the board of BH) and the legendary and the outspoken billionaire Charlie Monger (CM) (WBs long time best friend, vice chairman of BH and considered the right hand/brains behind many of WBs investments).

Omaha is a simple, laid back friendly town, one would never imagine this would be home to the second richest person in the world! WB, the oracle of Omaha, is a simple, down to earth guy. He has no personal body guard and happily mingles amongst people. I drove past his house on a Sunday. It is a simple and beautiful house which he had bought some 35 years ago and is the smallest house in his neighborhood. He has no gates or physical security outside his house and an old Cadillac is parked outside his front porch. He is often seeing mowing the lawns on his own! He is revered in Omaha and the local people admire his value system. He is often seen in the local restaurants, or takes the local taxi and is often seeing walking down the road like any regular guy! BH offices in Omaha (The Kiewit center) is a simple 10 storey building, not one of these fancy buildings that you would see on Wall Street. My personal takeaway on observing all this - never try to be ’flash’ or a fake fool – just be yourself and know your strengths and weaknesses.

I will first give you a recap of my 30 seconds with WB and then give you a summary of Q&A from the day.

WB and Charlie Monger meet all the International shareholders end of the day (on Saturday) for about 2 hours. I had a dollar bill which (CM) first signed and then I moved onto WB to get his signature. I actually wish I had an Indian rupee at hand!

Navin: Mr. Buffet, I am Navin from Chennai, India
WB: Hello
Navin: Can I shake your hand
WB: Sure (shakes my hand and then starts to sign the dollar note)
Navin: Mr. Buffet, have you visited India?
WB: No, but Ajit is my most valuable person (Ajit Jain runs BH’s insurance business) but Ajit is from New Delhi
Navin: Mr. Buffet, you must come and visit us
WB: Sure, find me a deal!
Navin: smiles, as the next person replaces him

Those of you visiting Chennai can see the dollar note with WB and CMs signature neatly framed on my wall!

Other interesting snippets from the weekend.
Those attending the weekend get to check out private jets (as they are part of Net Jets) owned by BH. During the day weekend you get 25% off any BH products (there are too many companies and products for me to list them here). There is a big bbq on Sunday where you get to shop at Borsheims (jewellery and watches 25% off) and you get to enjoy a picnic in the tent. WB visits and hangs out with the crowd. Apparently, the sales from this weekend are close to 100 million dollars.
You get to buy amazing books, and if lucky signed by WB and CM. I managed to picked up some good books – ‘Biography of Einstein’, ‘How the Scots invented the Modern World’, ‘The Dhandho Investor’, ‘Seeking Wisdom’, ‘The Essays of Warren Buffet: Lessons for Corporate America’ …etc.

For an investor what is my single key takeaway?
Buy very few stocks, know them well and invest in large sums for very long term.
Not very complicated right?! That is the essence of WB!

Q&A from the day: I have taken out any technical terms/questions/comments out of all my notes for ease of reading to all. I have bolded questions to my favorite answers

Q: View on Private Equity money vs. BH
BH is buying companies for the very long term, basic math needs to make sense. Private Equity managers are compelled to invest as they make their management fee and need to start a new fund once an existing fund has completed investing. Private equity money is not necessarily a bubble though as the lock up period is long and their companies are not valued everyday. If yields on junk bonds become higher that will slow down private equity.

Q: Why less participation by BH in overseas investments?
No bias against International. Just been a lot easier to get to know companies that have been closer to us. Also there are some ownership thresholds that make it harder, e.g. in some parts of Europe, when you own 3%, you have to report. So harder to take bigger stakes without disturbing price.

Q: View on executive compensation
Executives are overpaid! Envy is a big problem i.e. they are happy if they are making x$ but the minute they hear that the next person is making more money, they get envious and want more money. Envy is the worst of the seven deadly sins. No upside to envy. Not good!! Envy is silly. CEOs appoint their director of compensation that are generally cocker spaniels not Dobermans i.e. they are going to recommend higher compensation while wagging their tail.

Q: View on Executive power?
Too much power not good. Infact too much power is counter productive. All things can be over abused. E.g. fall of Roman Empire!

Q: Effect of credit contraction on BH?
BH benefits. But no real credit crunch, that’s why Fed established. Quoting Mark Twain ‘History Doesn’t Repeat itself but Rhymes’

Q: View on Corporate profits going up?
Historically corporate profits have been 4 to 6% of GDP. Now going higher, that means someone else’s share is coming down.

Q: View on naked shorting?
No problem with it but shorts generally have a tougher time!

Q: View on gambling companies?
People like to gamble; it is essentially a tax on people’s ignorance. It is socially revolting that a Government preys on people’s weakness. It is a dirty business and not for BH!

Q: How does one become a better investor?
Read every book! Reading is good. Will fill you with competing thoughts! Then jump into water if you like it and it turns you on!

Q: What are your criteria/standards for owning a business?
It has to be a business that we understand. Reasonable valuation.

Q: View on healthcare
Too complex, We don’t try tough things. We do very little in healthcare insurance.

Q: View on private equity investors in companies vs. BH
Private Equity companies are too short term oriented. From us, you hear only once a year.

Q: Best way to value company?
Not easy. There are multiple techniques. You need a lot of experience. Can’t become a good investor rapidly. Competitive position, dynamics of industry impt. We’ve never had any system. Just do basic math.e.g if you are buying farming land in Nebraska, just do the math on what the total costs are to do farming and if the returns from that add up and justifies your purchase of the land go for it, otherwise don’t! Not too fancy or complicated.

Q: What is BH looking for to replace WB?
1 or a group of people. People that can see risks haven’t occurred. Many smart people have gone broke. Similar to 1969 when he identified 3 very smart people except that WB is at a different age cohort now and has to understand the current generation.

Q: View on Global warming?
It is a problem! Has to be taken seriously. Don’t know enough.

Q: China vs. Japan?
Great question. Don’t understand.

Q: View on silver?
Bought too early, sold too early otherwise perfect trade!

Q: Regarding returns?
Easier to earn large returns on smaller sums of money. Hard to earn on larger sums. Big ocean liner had disadvantages.

Q: Good management vs. Good Business?
Good business more important first!

Q: Expectations for equities?
Not very high expectations but expectations greater that yields on bonds.

Q: View on NYSE/Euronext merger?
Don’t understand.

Q: How do you trust somebody?
Body language important, need luck. We’ve had over 90% luck. When something is too good, be wary!

Q: Will you look at Hedge fund managers for BH?
Unlikely, people come from a certain bent of fee structure that is different from BHs view of thinking. Unsure about quality of people as long term investors.

Q: How do you handle issues of hurdle rates/discount rates?
It is very fuzzy. So much nonsense is printed. Most presentations do what listeners desire i.e they are bullshit. They are meant to please the boards of companies. Someone says 20% return, why? Because people won’t choose you otherwise. Pension funds are gullible and believe this nonsense.

Q: View on Railroad industry?
Not that exciting but competitive position has moved up.

Q: What is the best way for a 10 year old to earn money?
Deliver papers. WB tired 20 different jobs. Higher the chances of success in business the earlier you have had experience in your life. Be reliable, hard to fail!

Q: $ decline?
Expects to decline

Q: Interactions with board of directors (BOD)?
Historically BOD were potted plants. Many companies don’t really want board to interfere. Main job of BOD is appoint the right CEO, to make sure that the CEO doesn’t over leach! BOD needs to bring independent judgements to the CEO. Big deals in America are often contrary to shareholders. Nowadays bankers and lawyers have so much momentum that they determine the fate of companies and deals. BOD should own stock on their own and it should be an owners board!

Q: View on partners?
Don’t like to do deals with partners. Like to do investments on own.

Q: L/T view on commodities?
No view, invest in it coz it offers a lot of value at certain moments. Like business that have low capex. E.g. Sees Candy.

Q: Newspaper business?
Gotten a lot tougher! Imagine if there was cable and internet only and no newspapers and someone were to start a newspaper business from scratch, most people would not be up for it as it would be too complicated and simply not worth it.

Q: There was a question about BHs investment in Petrochina due to their links in Sudan and (indirect?) links to Genocide?
It was a very passionate topic. I got two takeaways from the 30 minutes this topic was discussed. ‘’Elie Wiesel (Nobel Laureate): We must take sides otherwise it helps the oppressor’’; Martin Luther King ‘’We will not be silent’’

(C) Navin Ram
www.originwave.com

Navin Ram is an entreprenuer and the Founder CEO of Origin Wave ,He was a successful investment banker with Gold Man Sachs before the entreprenurial bug bit him

David Bowie Bonds & IP Securitization

2007-05-01T15:30:00.000-07:00

Bowie Bonds are asset-backed securities of current and future revenues of the first 25 albums (287 songs) of David Bowie's collection recorded before 1990. Issued by David Bowie in 1997, they were bought for $55 million by the Prudential Insurance Company. The 287 included songs also acted as collateral to insure the bond. The Bonds were a ten-year issue, after which the royalties of the songs would return to David Bowie. By forfeiting ten years worth of royalties, Bowie was able to receive $55 million up front, which allowed him to buy out the rights to the David Bowie songs owned by a former manager. David Bowie now owns the rights to every one of his songs.The Bowie Bond issuance was perhaps the first instance of intellectual property rights securitization. The securitization of the collections of other artists, such James Brown, Ashford & Simpson and the Isley Brothers, later followed. These Bonds are named Pullman Bonds after David Pullman, the banker who pushed the original Bowie deal.Bowie Bonds offer a rich 7.9% yield; however, this is not without risk. In March 2004, Moody's Investors Service lowered the bonds from an A3 rating (the seventh highest rating) to Baa3, one notch above junk status. This downgrade was prompted by lower-than-expected revenue "due to weakness in sales for recorded music." A downgrade to an unnamed company that guarantees the issue was also cited as a reason for the downgrade. The success of Apple's iTunes and other legal online music retailers has led to a renewed interest in Bowie and Pullman Bonds. At this time, Bowie Bonds are not available to individual investors.

California electricity crisis caused due to electricity derivatives trading ?

2007-04-12T00:41:00.000-07:00

The California electricity crisis (also known as the Western Energy Crisis) of 2000 and 2001 resulted from the gaming of a partially deregulated California energy system by energy companies such as Enron and Reliant Energy. The energy crisis was characterized by a combination of extremely high prices and rolling blackouts. Price instability and spikes lasted from May 2000 to September 2001. Rolling blackouts began in June 2000 and recurred several times in the following 12 months.

Controversy

While initially the cause of the crisis was defined as being caused either by poorly structured deregulation or by market manipulation, after extensive investigation The Federal Energy Regulatory Commission (FERC) concluded in 2003:[2]

"...supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful."

"...many trading strategies employed by Enron and other companies violated the anti-gaming provisions..."

"Electricity prices in California’s spot markets were affected by economic withholding and inflated price bidding, in violation of tariff anti-gaming provisions."

In summary, poorly structured deregulation which relied on active policing by the FERC led to situations where energy companies could manipulate the California energy market with near impunity and reap substantial profits at the expense of California energy consumers and the State.

Most proponents of deregulation suggest that the major flaw of the deregulation scheme was that it was an incomplete deregulation -- that is, "middleman" utility distributors continued to be regulated and forced to charge fixed prices, and continued to have limited choice in terms of electricity providers. Other, less catastrophic energy deregulation schemes have generally deregulated utilities but kept the providers regulated, or deregulated both.

California's utilities came to depend in part on the import of excess hydroelectricity from the Pacific Northwest states of Oregon and Washington. California's groundbreaking clean air standards favored in-state electricity generation which burned natural gas because of its lower emissions, as opposed to coal whose emissions are more toxic and release more pollutants. In the summer of 2000 a drought in the North West states reduced the amount of hydroelectric power that was available to California, though at no point during the crisis was California's sum of [actual electric-generating capacity]+[out of state supply] less than demand. Rather, California's energy reserves were low enough that during peak hours the private industry which owned power-generating plants could effectively hold the State hostage by shutting down their plants for "maintenance" in order to manipulate supply and demand. These critical shutdowns often occurred for no other reason than to force California's electricity grid managers into a position where they would be forced to purchase electricity from other suppliers who could charge astronomical rates. Even though these rates were semi-regulated, the companies (which included Enron and Reliant Energy) controlled the supply of natural gas as well. Under regulation the price of natural gas dictated the price of electricity, so manipulation by the industry of natural gas prices resulted in higher electricity rates that could be charged under the semi-regulations.

In addition, the energy companies took advantage of California's electrical infrastructure weakness. The main line which allowed electricity to travel from the north to the south, Path 15, had not been improved for many years and became a major bottleneck (congestion) point which limited the amount of power that could be sent south to 3,900 MW. Without the manipulation by energy companies, this bottleneck was not problematic, but the effects of the bottleneck compounded the price manipulation by hamstringing energy grid managers in their ability to transport electricity from one area to another. With a smaller pool of generators available to draw from in each area, managers were forced to work in two markets to buy energy, both of which were being manipulated by the energy companies.

It is estimated[3] that a 5% lowering of demand would result in a 50% price reduction during the peak hours of the California electricity crisis in 2000/2001. With better demand response the market also becomes more resilient to intentional withdrawal of offers from the supply side.

Regulation and deregulation
The deregulation of the California energy market was supported by a unanimous vote from both parties in the California legislature and signed into law by then-Governor Pete Wilson in 1996. Then-state senator Steve Peace was the chair of the energy committee and the author of the bill that caused deregulation, and is often credited as "the father of deregulation". Wilson admitted publicly that defects in the deregulation system would need fixing by "the next governor".

Part of California's deregulation process, which was promoted as a means of increasing competition, involved the partial divestiture in March 1998 of electricity generation stations by the incumbent utilities, who were still responsible for electricity distribution and were competing with independents in the retail market. A total of 40% of installed capacity - 20,164 megawatts - was sold to what were called "independent power producers." These included Mirant, Reliant, Williams, Dynegy, and AES.

Then, in 2000, wholesale prices were deregulated, but retail prices were regulated for the incumbents as part of a deal with the regulator, allowing the incumbent utilities to recover the cost of assets that would be stranded as a result of greater competition, based on the expectation that "frozen" would remain higher than wholesale prices. This assumption remained true from April 1998 through May 2000.

When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the incumbent utility companies still had to purchase power, albeit at a loss. This allowed independent producers to manipulate prices in the electricity market by withholding electricity generation, arbitraging the price between internal generation and imported (interstate) power, and causing artificial transmission constraints. This was a procedure referred to as "gaming the market." In economic terms, the incumbents who were still subject to retail price caps were faced with inelastic demand (see also: Demand response). They were unable to pass the higher prices on to consumers without approval from the public utilities commission. The affected incumbents were Southern California Edison (SCE) and Pacific Gas & Electric (PG&E). Pro-privatization advocates insist the cause of the problem was that the regulator still held too much control over the market, and true market processes were stymied — whereas opponents of deregulation simply assert that the fully regulated system had worked perfectly well for 40 years, and that deregulation created an opportunity for unscrupulous speculators to wreck a viable system.

Prior to deregulation, the electricity market in California was largely in private hands, though subject to intense regulation. The main players were PG&E, SCE, and San Diego Gas and Electric (SDG&E). Those utility companies were forced to sell their generators to non-regulated private companies such as Enron and Reliant. Ownership of certain power stations was transferred in order to increase competition in the wholesale market. In return for divesting some of their power stations the major utilities negotiated a deal to protect them from their assets being stranded. Part of this deal involved price caps for retail customers.

While the selling of power plants to private companies was labeled "deregulation", in fact Steve Peace and the California legislature expected that there would be regulation from the FERC which would prevent manipulation. The FERC's job, in theory, is to regulate and enforce Federal law which would prevent market manipulation and price manipulation of energy markets. When called upon to regulate the out-of-state privateers which were clearly manipulating the California energy market, the FERC, whose chairman was appointed by President Bush, hardly reacted at all and in fact did not take serious action against Enron, Reliant, or any other privateers. FERC's resources are in fact quite spare in comparison to their entrusted task of policing the energy market.

Market manipulation

As the FERC report concluded, market manipulation was only possible as a result of the complex market design produced by the process of partial deregulation. Manipulation strategies were known to energy traders under names such as "Fat Boy", "Death Star", "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow", "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty".[4] Some of these have been extensively investigated and described in reports.

Megawatt laundering is the term, analogous to money laundering, coined to describe the process of obscuring the true origins of specific quantities of electricity being sold on the energy market. The California energy market allowed for energy companies to charge higher prices for electricity produced out-of-state. It was therefore advantageous to make it appear that electricity was being generated somewhere other than California.

Overscheduling is a term used in describing the manipulation of capacity available for the transportation of electricity along power lines. Power lines have a defined maximum load. Lines must be booked (or scheduled) in advance for transporting bought-and-sold quantities of electricity. "Overscheduling" means a deliberate reservation of more line usage than is actually required and can create the appearance that the power lines are congested. Overscheduling was one of the building blocks of a number of scams. For example, the Death Star group of scams played on the market rules which required the state to pay "congestion fees" to alleviate congestion on major power lines. "Congestion fees" were a variety of financial incentives aimed at ensuring power providers solved the congestion problem. But in the Death Star scenario, the congestion was entirely illusory and the congestion fees would therefore simply increase profits.

In a letter sent from David Fabian to Senator Boxer in 2002, it was alleged that:

"There is a single connection between northern and southern California's power grids. I heard that Enron traders purposely overbooked that line, then caused others to need it. Next, by California's free-market rules, Enron was allowed to price-gouge at will."
As a result of the actions of electricity wholesalers, Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) were buying from a spot market at very high prices but were unable to raise retail rates. PG&E and SoCalEd had racked up $20 Billion in debt by Spring of 2001 (PG&E declared bankruptcy in April of that year), and their credit ratings were reduced to junk status. The financial crisis meant that PG&E and SoCalEd were unable to purchase power on behalf of their customers. The state stepped in on January 17, 2001, having the California Department of Water Resources buy power. By February 1, 2001 this stop-gap measure had been extended and would also include SDG&E. It would not be until January 1, 2003 that the utilities would resume procuring power for their customers.

Between 2000 and 2001, the combined California utilities laid off 1,300 workers, from 56,000 to 54,700, in an effort to remain solvent. San Diego had worked through the stranded asset provision and was in a position to increase prices to reflect the spot market. Small businesses were badly affected.

The involvement of Enron
One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was Enron Corporation. Enron CEO Ken Lay mocked the efforts by the California State government to thwart the practices of the energy wholesalers, saying, "In the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys who can always figure out how to make money."

Enron eventually went bankrupt, and signed a $1.52 billion settlement with a group of California agencies and private utilities on July 16, 2005. However, due to its other bankruptcy obligations, only $202 million of this was expected to be paid. Ken Lay was convicted of multiple criminal charges unrelated to the California energy crisis on May 25, 2006, but he died due to a massive heart attack on July 5 of that year before he could be sentenced.

Enron traded in energy derivatives specifically exempted from regulation by the Commodity Futures Trading Commission. At a Senate hearing in January 2002, Vincent Viola, chairman of the New York Mercantile Exchange -- the largest forum for energy contract trading and clearing -- urged that Enron-like companies, which don't operate in trading "pits" and don't have the same government regulations, be given the same requirements for "compliance, disclosure, and oversight." He asked the committee to enforce "greater transparency" for the records of companies like Enron. In any case, the U.S. Supreme Court had ruled "that FERC has had the authority to negate bilateral contracts if it finds that the prices, terms or conditions of those contracts are unjust or unreasonable." Nevada was the first state to attempt recovery of such contract losses.
Consequences of wholesale price rises on the retail market

Are We ready for electricity futures ?

2007-04-10T02:59:00.000-07:00

Electricity ,Futures Trading! – Its Shocking…..

Electricity lends itself to futures trading. It meets the three broad criteria needed for successful futures markets:

prices are volatile;
there is a large, diverse universe of buyers and sellers;
and the physical product is fungible.

The Exchange clearinghouse provides a system of guarantees that mitigates counterparty credit risk.

Indian Scenario

In India with the imminent opening of the power sector including re doing of archaically laws and powers employed with the constitutional authorities such as the regulatory authorities(Varies ERC's) The competitive market in India would develop through structural changes in the power industry that have evolved in recent years, resulting in opportunities, price volatility, and market risk.

Barriers to the development of the Indian electricity derivatives market

The physical supply system is still encumbered by the british legacy of vertical integration.
Electricity markets are subject to Central and State regulations that are still evolving.
As a commodity, electricity has many unique aspects, including instantaneous delivery, non-storability, an interactive delivery system, and extreme price volatility.
The complexity of electricity spot markets is not conducive to common futures transactions.
There are also substantial problems with price transparency, modeling of derivative instruments, effective arbitrage, credit risk, and default risk.

How should the contract be ?

Greater market participation is a key issue for the emerging rather "under supplied" Indian power market.
In an effort to address this, the Indian exchanges in consultation with regulators has to create a contract that reduces the barriers to market entry by removing the requirement for underlying physical OTC contracts and signatory status.

The Unique Nature of Electricity as a Commodity

Storage and Real-Time Balance
The two most significant characteristics of electricity are that it cannot be easily stored and it flows at the speed of light. As a result, electricity must be produced at virtually the same instant that it is consumed, and electricity transactions must be balanced in real time on an instantaneous spot market. Electricity's real-time market contrasts sharply with the markets for other energy commodities, such as natural gas, oil, and coal, in which the underlying commodity can be stocked and dispensed over time to deal with peaks and troughs in supply and demand.

Real-time balancing requirements also complicate the market settlement process. Some electricity market transactions occur before the system constraints are fully known or the price is calculated. In extreme cases, the settlement price may be readjusted up to several months later

Electricity is typically "stored" in the form of spare generating capacity and fuel inventories at power stations. For existing plants, the "storage costs" are usually less than or equivalent to the costs of storing other energy fuels; however, the addition of new storage capacity ( i.e., power stations) can be very capital intensive. The high cost of new capacity also means that there are disincentives to building spare power capacity. Instead, existing plants must be available to respond to the strong local, weather-related, and seasonal patterns of electricity demand. Over the course of a year or even a day, electricity demand cycles through peaks and valleys corresponding to changes in heating or air conditioning loads. Two distinct diurnal electricity markets also exist, corresponding to the on-peak and off-peak load periods. Each of these markets has its own volatility characteristics and associated price risks.

Regulatory Challenges Ahead for Electricity Derivatives – Watch out No more Enron "Death Stars" The Jurisdictional Interplay Between the FMC and CERC

Financial Risk to Ratepayers. The financial risks resulting from the use of derivatives are illustrated by the number of companies that have suffered significant losses in derivative markets. Large losses can be the result of well-intentioned hedging activities or of wanton speculation. In either case, regulators must be concerned with the impact that such losses could have on ratepayers who, absent protections, might be placed at financial risk for large losses

Market Power.

The preceding paragraphs has illustrated the complexity and non-homogeneity of the electricity markets.
Amid this dynamic environment, opportunities abound for market power and gaming strategies to develop.
Controlling this potential threat to competitive markets will require substantial regulatory review, as well as physical changes in the marketplace itself. In many areas of the country, only a small number of suppliers are capable of delivering power to consumers on a particular bus bar, and each of the suppliers can easily anticipate the bids of the others. In such "thin" markets, the price of electricity can be driven by market power rather than by the marginal costs of production.
The need for overall market transparency will be critical to traders and to the market monitors.

Conservation and Demand.

One of the key tools available to regulators for reducing the volatility of electricity prices is demand-side management programs. Electricity prices are likely to be most volatile during the on-peak hours of the day and substantially more stable (and lower) during the off-peak periods.

This fact, coupled with the hockey stick shaped supply cost curve suggests that substantial reductions in volatility could be achieved through the use of market mechanisms and demand-side management programs to shift consumption to off-peak hours. State and Federal authorities have been examining a variety of possible methods for shifting consumer demand for electricity; however, one of the most direct methods—real-time pricing for large electricity consumers—remains largely untapped.

Ideal features of the contract

Baseload and Peakload contracts shoul;d be listed based on the power supply calendar and settlement cycle favoured by the industry with 12 months, 6 quarters and 4 seasons;
No requirement to be a power supplier party;
Margin offset between Electricity Futures and Natural Gas Futures/Coal Futures/Crude Oil Futures;
Each contract will be physically deliverable and will be cleared by one central counterparty,
Minimum trading size will be 10 lots;
Months, Quarters and Seasons will be listed in parallel – no cascading;
All positions will be held as months for maximum flexibility for participants;

There should ideally be 50% margin offsets between Peak and Base Load contracts;
Inter-month spreads should be made available and there will be price implication down the curve;
Outright margin rates are envisaged to be about Rs. 136 per MWh for baseload contracts and Rs. 248 per MWh for peakload contracts.
Inter-month spread rates are envisaged to be Rs. 180/- per MWh for baseload contracts and Rs. 300 per MWh for peakload contracts;
The Contracts will initially be available for trading through existing commodity exchanges and will then be rolled out to ISV solutions

The Exchanges should provide financially settled monthly futures contracts for on-peak and off-peak electricity transactions based on the daily floating price for each peak day of the month at the respective regional hub. For eg The western hub could consist of delivery points, primarily on the BSES /TATA Power transmission systems.
Additional risk management and trading opportunities should be offered through options on the monthly futures contract

The peak daily floating prices should be the weighted exponential average of say the western hub real-time locational marginal pricing for the 16 peak hours of each peak day, provided by the Utility service providers in the western hub.
Peak hours should be designated from 7:00 AM to 11:00 PM (the hour ending 0800 to the hour ending 2300) prevailing local time.
Peak days are Mondays through Fridays, excluding the Railways consumption.

Off-peak hours are from midnight to 7:00 AM (the hour ending 0100 to the hour ending 0700) and 11:00 PM to midnight (the hour ending 2400) Mondays through Fridays; also, all day Saturdays and Sundays (the hour ending 0100 to the hour ending 2400). All times are prevailing local time Locational marginal pricing is the marginal cost of supplying the next increment of power demand at a specific location on the network, taking into account the marginal cost of generation and the physical aspects of the transmission system

Quality Specification

Electric energy delivered under this contract shall be in the form of three phase current alternating at a nominal frequency as prescribed by the Central Electricity regulatory authority, and be in conformance with the specifications of the CERC.

TRANSMISSION

Except as set forth in , seller shall be required to make all transmission arrangements to deliver electric energy to central buyers, and buyer shall be required to make all transmission arrangements to receive electric energy at Central sellers

Alternative Delivery Procedure

seller or buyer may agree with the buyer or seller with which it has been matched by the Exchange Rules to make and take delivery under terms or conditions which differ from the terms and conditions prescribed by the exchange. In such a case, Clearing Members shall execute an Alternative Delivery Notice on the form prescribed by the Exchange and shall deliver a completed executed copy of such Notice to the Exchange. The delivery of an executed Alternative Delivery Notice to the Exchange shall release the Clearing Members and the Exchange from their respective obligations under the Exchange contracts.

In executing such Notice, Clearing Members shall indemnify the Exchange against any liability, cost or expense it may incur for any reason as a result of the execution, delivery or performance of such contracts or such agreement, or any breach thereof or default thereunder. Upon receipt of an executed Alternative Delivery Notice, the Exchange will return to the Clearing Members all margin monies held for the account of each with respect to the contracts involved.

Conclusion

There is an urgent impending need for a market driven ,vibrant instrument for electricity futures which would attract huge market participation automatically.
The electricity futures/options markets may provide useful information about forward prices. Futures prices represent the market participants' forecasts of what future spot prices will be. An essential feature of electricity futures contracts (for delivery at a specific location) is that as the delivery date of the futures contract approaches, the futures contract price and the spot price will converge. While the futures contract prices provide forecasts of forward spot prices, there is no assurance that the forecast will be correct, although the forecast error can be expected to diminish, the shorter the time remaining to futures contract maturity.

To start with futures price data may provide imperfect information for estimating forward contracts prices because of locational and product differences. As mentioned above, locational differences in spot price may make the spot price at one location in south India a poor proxy for the market clearing price for another location say Mumbai. Similarly, the price for a futures contract for delivery at one location may not be a good proxy for the price of a futures contract at another location. Product differences could also occur because the product specification for a tradeable futures contract may not adequately reflect the product (primarily in terms of delivery schedule) specifications for a forward contract.
The power and natural gas markets are interesting examples of the spectrum of wholesale commodity transactions. Historically, the regulation of those transactions was largely separated between CERC, which primarily regulates physical transactions, and the FMC which primarily regulates commodity derivatives transactions

Policy makers need to consider carefully whether the current regulatory structure should be modified. If they conclude that the answer is yes, they should be careful to ensure that any change in the regulatory scheme does not stifle innovation and increased efficiency in these emerging commodity derivatives markets

Altos derivatives exchange for IP rights(ADEXIP)

2007-03-28T06:51:00.000-07:00

Current methods of intellectual property exchange are inefficient and often hinder companies from easily realizing value from existing IP assets. In addition, intellectual property enforcement is costly and uncertain and entails lengthy negotiations or legal actions.
As a result, necessary IP rights are not effectively transferred, the “best price” for IP is rarely achieved, and the process itself inhibits the market adoption of new technology based products and hence their companies’ economic growth.

What is Intellectual capital ?

Intellectual capital is a term with various definitions in different theories of economics. Accordingly its only truly neutral definition is as a debate over economic "intangibles". Ambiguous combinations of instructional capital and individual capital employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a capital asset whose yield is intellectual rights.

Such use is rare, however, and the term rarely or never appears in accounting proper - it refers to a debate, and to the assumed capital base that creates intellectual property, rather than an auditable style of capital.

Perhaps due to their industry focus, the term "intellectual capital" is employed mostly by theorists in information technology, innovation research, technology transfer and other fields concerned primarily with technology, standards, and venture capital. It was particularly prevalent in 1995-2000 as theories proliferated to explain the "dotcom boom" and high valuations. During this period it was often observed that computer code and programmers were bearing a substantial premium when combined in new unproven companies. It is hard to see how this differs from the tulip boom, however, when it would have been just as likely to assign a high value to the seemingly-magical combinations of tulip bulbs and, say, the pots they grew in.

Brand as an Asset

Whether flags, brands, labels or simple fear dominate economic decisions, it seems that the underlying theories of intellectual capital and of human capital don't explain them. When attached to "capital" as prefixes, the terms "intellectual", "knowledge" and "human" often conceal more than their use can reveal. Thus the terms intellectual capital, knowledge capital and human capital more properly describe debates, not assets, as internally generated assets do not appear on a balance sheet, however International Financial Reporting Standard 3 on Business Combinations requires acquired intangible assets to be accounted for during the purchase price allocation exercise. They produce neat abstractions but so far poorly explain what actually occurs in the biologically real world: individuals buying in a social setting based on instructions.

So far, the more specific terms "individual", "instructional" and "social" from human development theory, have been preferred in Wikipedia as adjectives describing classes of capital. In part this is because these terms have definitions that arise from academic categories and practices rather than faddish marketing or management theories. There are standards for assigning value to these, e.g. the UN Human Development Index which literally ranks flags (of countries) for quality of life.

Extending such standards to labels (via mandatory labelling) and applying them positively in brand management, e.g. positioning a brand for appeal to an ethical minority, is increasingly common. Projects by Consumerium and AdBusters seek to make comprehensive outcomes more important in buying decisions. This in turn is part of a trend towards more moral purchasing.

When viewed as an asset, then, a brand is simple social capital that may have an increasing amount of instructional capital attached to satisfy an ever-rising demand for more information about product origin, production and distribution.

why should any asset be intangeible ?
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort.[1] There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how,knowledge), collaboration activities, leverage activities, and structural activities. Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price. Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed.

To achieve the objectives of the Intellectual Property Enhancement Program, Altos will explore and develop ways to consolidate IP rights more efficiently for its IPEP participants. The development of new IP exchange practices ultimately may lead to the creation of an operating Intellectual Property Rights Exchange in the future, providing for the efficient open market trading of various direct(spot/cash) and derivative IP-based license, debt equity and hybrid investments.

Such an exchange could bring together IP owners, consumers and investors with a solution for current market inefficiency and provide companies with a mechanism for funding additional innovation, reducing their exposure to legal actions, and increasing their access to underutilized patents and technologies. It is our objective that as a result, faster commercialization of technology will accelerate long-term economic growth.

Different types of trading activities may be developed, bound by the common principles of consistent transaction termsand market pricing. Transactions might be for license rights (e.g., for a specific quantity of production), for ownership rights (e.g., via an open auction), or for various kinds of derivative rights based on specific conditions affecting the underlying asset value.
We anticipate that through our practical experience with the acquisition and out-licensing of IP
rights for IPEP participants, viable long-term mechanisms for open trading will be developed.
Companies that would be admitted into AltosIPexchange agree to participate in this development program, as may financial firm members that have investment interests in IP or IP-owning companies, thus providing a test bed for the creation of practical exchange practices. The program will direct the manner in which the intellectual property rights, either owned by these companies or acquired on their behalf, will be transferred to third parties in accordance with the owners’ objectives. This will relieve the company of the burden of establishing and
administering a licensing program to maximize the value of their IP and will provide investors in IP an avenue for marketing those rights instead of engaging in inefficient, costly and unfamiliar licensing negotiations.

Where all could the applications be ?

1. Under the most recent context global sporting events like the current (2007) world cup, an exchange for derivatives comprising of notional cash value of say runs scored by a batsman, a basket of such values could be securitized and be traded on an exchange, in lay man terms an Exchange which will have an instrument SachinAPRIL 30, i.e a derivatives instrument whose pay off would be linked to the runs scored by sachin as of april 30th or AUSTRALIAWC07APRIL30 this market could then attract participants like advertisers,media channels,branders,consumers investors and speculators.

2. Film and Movie Industry : an active and liquid market comprising of actors,technicians,financiers,producers,investors,distrubutors,advertisers media channels and end consumners(the guy who pays money and buys ticket/dvds)

3. Software and Products company.

4. Architectural firms,building, construction and real estate companies. Eg RELIANCESEZNEAR MUMBAI 2011 futures.

5. Art and artwork.

2007-03-15T07:08:00.000-07:00

The case for the First India BEAR FUND : FIB Fund.

The Methodology
The FIB Fund takes short positions in individual stocks and market proxies, and purchases put options, to benefit from a anticipated decline in particular stocks or stock market indices. The fund also holds some “long” positions, primarily stocks of gold and silver asset classes. Investors should realize that the fund is not a “market neutral” fund, but will typically have far more "short" than "long" exposure. And because most long positions are gold stocks, the long portion of the portfolio is unlikely to closely track the general stock market. The fund manager believes this portfolio of short positions and gold stocks will benefit if the long bear market continues to unfold as we expect.
The fund regularly makes short sales of securities, which involves unlimited risk including the possibility that losses may exceed the original amount invested. The fund may also use options and future contracts, which have risks associated with unlimited losses of the underlying holdings due to unanticipated market movements and failure to correctly predict the direction of securities prices, interest rates and currency exchange rates. However, a mutual fund investor's risk is limited to one's amount of investment in a mutual fund. The fund may also hold restricted securities purchased through private placements. Such securities may be difficult to sell without experiencing delays or additional costs.
How does the fund potentially benefit investors in stock market declines?
Like most mutual funds, the Fund is a broadly diversified investment vehicle. But the FIBFund is primarily engaged in "short sales." The fund may also purchase put options. An investor who sells a stock short or buys a put option profits when the stock goes down. The fund also holds short positions on indexes which act as proxies for the stock market or a segment of the market. This portfolio of "short" positions (in addition to put options) allows the fund to potentially benefit from a steep market decline. The fund does have some long positions, but these are primarily stocks of gold mining companies. We expect gold stocks to benefit during the secular bear market that we believe is ongoing. What is short selling?Typically an investor buys a stock in hopes it will appreciate. He tries to "buy low and sell high." But if you believe the price of a stock will decline you can sell a stock short. Here, the goal is to sell "high" and buy the stock back "low."An investor may short a stock because he believes it is overvalued or because there is fundamental problem with the company. Or an investor may want to protect against a broad market decline by shorting a number of stocks or an index. How do you sell a stock short?When you short a stock you borrow the stock from you broker and sell it in the market hoping to buy at back later at a lower price.
Here's how it works:
Assume you think XYZ stock will decline in price. You short 100 shares trading at Rs.100 a share. You borrow those shares from your broker who then sells them at the going price and deposits the Rs.10,000 from the sale in your account. Now you owe the broker 100 shares of XYZ regardless of the price of the stock. Now assume the price of XYZ falls to Rs.50. You buy the 100 shares in the market for Rs.5,000 and return the shares to your broker. That leaves you with a profit of Rs.5,000 excluding commissions. If you bought back the stock at a higher price, say Rs.150, you would return the shares to your broker, but you would have lost Rs.5,000:

Who sells stocks short?
Sophisticated investors including hedge funds have long used short sales as an important strategy. Especially during "bear" markets, the flexible strategies of hedge funds allow investors to prosper. A common misconception is that selling short is an ugly or unethical practice, even unpatriotic because the techniques make money when a company fails or disappoints investors.

In reality, short selling has an important role in financial and commodity markets, the most important of which is to help keep the markets efficient. Some academics have suggested that informed investors who execute short sales help set the upper limit and keep equity markets efficient. Additionally, short selling reduces the risk of manipulation, and provides liquidity. Some sophisticated investors do not invest in markets that do not have short sellers, because they consider them to be less efficient markets. Their absence tends to let the markets become too highly valued and therefore too prone to crash. The absence of short selling increases the market’s volatility.What is a put option?A put option is the right to sell a stock at a certain price sometime in the future. An investor who buys a put option pays a price (or premium) for that right with the expectation the stock price will decline. How does a put option work?
Say an investor thinks XYZ Corp., now trading at Rs.50, will fall in price. Let's assume the investor buys a put option in the open market for Rs.2 that lets the investor sell the stock at Rs.50 anytime over the next 90 days. If the stock falls to Rs.40 within that 90 day period, the option would be worth at least Rs.10.* So why buy puts instead of shorting stock?
In the above example, the investor would have made Rs.10, or a 20% return, by shorting the stock (Sell at Rs.50, buy back at Rs.40.). The option investor would have made at least Rs.8 (buy at Rs.2, sell at Rs.10), a return of four times the investment.What happens if the stock price goes up?
The value of the option will decline, and will eventually be worthless if not sold before expiration. *If the option was selling for only Rs.4, for example, an investor could buy the stock for Rs.40, then buy the put option, and immediately "exercise" the option by selling the stock for Rs.50, making a risk free Rs.6.

Asset

Market position

Gold
Spot

Derivatives
Silver
Spot

Derivatives
Nifty
Cash

Derivatives
Sensex
Cash

Derivatives

2007-03-15T04:08:00.000-07:00

Why Indian Banking industry must be allowed to participate in the emerging Indian Commodity derivatives industry.

Question : What does the Farmer want[1] ?
Answer : The Farmer requires Credit ,Water and Market[2]

CREDIT
MARKET
WATER
Whereas the lenders approach has always been from the credit risk point of view , if the lender has an over all view of the business risk process and adopts suitable hedging strategies using structured derivative products, the approach would not only benefit the Lender but also the Farmer, the governments and the society at large.
So incase of the Agricultural lender in order to minimize his npa, more in particular of the “SOCIAL OBLIGATIONS” of government which may suddenly decide to waive of recoverable, This research paper tries to have an holistic approach on this area and proposes to the agricultural lender a risk hedge matrix based mathematical model on which he can offset his risk .

How to improve access of farmers to agricultural lending?

As per the author, some of the characteristics of price risk management instruments that can enhance access to agricultural credit:

Have a market-based approach.
Assess agricultural portfolio by linking it with exposure and market price of proceeds on exposure.
Create a cushion to protect against price falls.
Short positions including using derivatives like futures and options (Options is currently not available but the talk is of this instrument being made available by the financial year end.)
Provide short term insurance coverage.By cross selling insurance products through strategic alliances with Insurance firms.
Encourage intermediaries for aggregating farmers and meeting contract size.

The author state that traditional crop insurance has suffered from high administrative costs, moral hazard and adverse selection. As a result there is a need for index-based weather insurance, which the author is confident, is just a question of time before which it becomes a reality.

What does the Weather index do?
It compares a measurable, objective, correlated risk to yield.
It has a rainfall index that is designed with historical weather data. If, rainfall levels drop below threshold, then insurance pays out.
It is designed like a put option; farmers select trigger level and scope of coverage.

Innovative ways for improving access to agricultural lending:
Liquid collaterals to improve creditworthiness of agricultural producers.
Warehouse receipts to access financial support.

The reality though is that a few small farmers know in advance what price they will receive for their produce when they sell it and as a result small farmers around the world watch pensively as the prices moves throughout the season. These farmers may not know the daily movements of the international prices but they do know that the price they are being offered by local traders is constantly changing. They also know that if the price drops when they are ready to sell their produce they will not be able to cover their costs of production, send their children to school/pay for household expenditures, or pay back their creditors.

Low market prices limit the income farmers receive from their products, but it is the unpredictability or volatility of these prices that makes it difficult for farmers to optimize production technology, time sales, use assets, and, in most cases, access credit.

Financial services providers are often not willing to lend to small farmers because of farmers’ lack of traditional collateral and the possibility of default on loans in the face of a fall in commodity prices.

Attempts have been made in the past - minimum price guarantees by state owned marketing boards, international commodity agreements, and state subsidized lending institutions - to help farmers deal with volatility and access credit, but these schemes have proven difficult to sustain, costly, and inefficient.

An alternative approach - market based price risk management instruments

The use of market based price risk management instruments, derivatives, can help farmers deal with the price volatility by effectively reducing the uncertainty caused by movements in international commodity prices that affect their business. In this way, the use of price risk management instruments - called hedging - can improve the quality of the lender’s portfolio and help eliminate one of the primary reasons that farmers do not repay loans: unrealized assumptions about levels of projected income and return because of sharply or suddenly falling international commodity prices at the time of selling. These instruments could substantially reduce the risk that many lenders see in lending for commodities.

Price risk management instruments and lending institutions

The small production volumes of most individual farmers make it necessary to involve an intermediary institution that can aggregate the demands of many individual farmers for a risk management instrument into the minimum size traded on international markets. The interest for banks and other financial institutions in playing this role would be to link loans to price risk management tools in order to protect their own risk profile and provide a valuable financial service to its credit facilities.

Financial institutions could combine hedging with lending in three main ways:

1. Hedging for themselves the exposure of their overall portfolio to seasonal falls in commodity prices.
This could allow financial institutions to restructure their portfolio, extend repayments, or even forgive part of the interest and/or principal repayments when a severe price shock occurs;

2. Hedging on behalf of their borrowers, thus attaching a hedge to each loan;

3. Requiring that borrowers provide evidence of price protection measures taken when they come to negotiate a loan (in this final case, farmers would have already accessed risk management instruments through their producer organisation or exporter).
This would allow banks to expand or restart their agricultural loan portfolios, while giving farmers better access to credit and/or opportunity to borrow at better terms.

Who can access these instruments?

Tools to insulate producers and businesses from the negative effects of short- term price volatility are very widely used in high-income countries, but the vast majority of agricultural producers in developing countries have been, in general, unable to access these markets to date.

Some traditional barriers to entry have prevented small holders from accessing these tools including:

Contract size
Lack of knowledge of such market-based price insurance instruments
Limited knowledge about how to utilize them
An unwillingness of sellers of such instruments, generally international banks and brokerage houses, to engage with a new and unfamiliar customer base
Some regulatory barriers

The adoption of several basic financial management practices is examined. The study provides estimates of the extent to which various business analysis and control, investment analysis and decision-making, and capital acquisition practices have been adopted. Many practices, such as net present value analysis, are not widely adopted by farmers. The relationship between the adoption of financial management practices and farm profitability is also examined. Results suggest that the adoption of financial management practices, such as using investment analysis techniques, significantly impacts farm financial performance.

The real question though is, are we using the lessons that we’ve learned? In today’s environment it is critical that we use all of the “lessons” on how to make sound loans and minimize risk while still serving the credit needs of agriculture. Increasing pressure to build business may have allowed lenders to become complacent, and rising farm incomes may have helped them avoid paying the price. There is nothing new or startling in the “lessons” chronicled here. They all call for attention to the basics, doing your homework on all aspects of the borrower’s operation. As competition intensifies among agricultural lenders, and borrowers are more susceptible to market pressures, agricultural lenders that follow these “lessons” will be the ones to survive and prosper.

Simple Road Maps and Blocks ahead.

1. Educate farmers on the use of commodity derivatives, and price knowledge.
The author would like to state an example of ‘Khargone’ a village in the border of Madhyapradesh where farmer’s where educated and based on future prices of cotton their cropping intention was re examined.

2. Taxation issue to be re –examined since hedging transaction is still treated as ‘speculation’, actually it is to be realized that “NOT” hedging is actually speculation.

3. Experts and policy makers to reach out to farmers as well as agro lenders and make them aware of the benefits of the commodity derivative industry.

4. Amendment to the FMC Act, which enable banks and financial institutions to participate directly in these markets.

--------------------------------------------------------------------------------

[1] What Does the Farmer really want ? Case for Agriculture revolution –3 Commodity Derivatives – Internal Publication Zone Equity Pte Ltd Singapore . Shravan Kumar,S.Venkataraghavan ,Nelson Lee 1997.

[2] Walk the Talk NDTV 2004 M.S.Swaminathan, Swaminathan et al , MS S Research Foundation

Review of the Risk Arbitrage opportunities under the context of the current Indian Banking and Financial Sector

2007-03-15T04:04:00.000-07:00

The Banking Sector with consolidation imminent thanks to proposed reforms on Basel-II and need for enhanced capital requirements to meet regulatory needs in India.

In particular, generic research questions are pursued-

(1) What is the present landscape for Merger and Acquisition Trend on risk arbitrage activities in the Indian Financial markets specific to Banks & FI’s..

(2) What is the current trend and effect of the Indian financial regulatory mechanism on risk arbitrage(M&A Arbitrage) ?

Returns associated with risk arbitrage are more pronouncedly decreased in down/severely depreciating stock market and business conditions especially when there is possibility of deal failure but remain rather uncorrelated with market returns when the market is flat and appreciating.

There has also been a growing trend in Indian financial market regulatory mechanism toreduce systemic risk, eliminate legal uncertainty and control regulatory and to have a
closer look on derivatives trading, over the counter derivatives including P-Notes which could be potentially used for fraud or manipulation. The current focus of the financial regulatory mechanism is to curb illegal trading in risk arbitrage activities through limits on trading volume and control of regulatory arbitrage opportunities which should continue into the future.

Acknowledgements

I would like to thank my team of analysts at Altos who have been patient enough with my tantrums,mood swings and have contributed considerably.
My sincere thanks are due to Raj Venkatraman New York a M& A arbitrageur, guru for his guidance and valuable suggestions.

Disclosures:

Investments & Exposure to Banks and Financial Institution

Proprietary Position : No
Family and Friends : Yes
Clients : No
Other Conflicts : Maybe

Introduction

With the global financial services scenario having changed in the recent past, there is a growing trend of mergers and acquisitions which has taken place recently in numerous financial institutions specifically in India .

INDIAN BANKING stands at the threshold of a mega change in the next five years. Many new situations as compared to the present scenario are predicted to emerge. However, participants and analysts in the industry too see the opportunities and failures in distinctively different ways. While the core area of discussion in the recent reports published on the industry relates to consolidation and foreign direct investment, "Social Banking,'' an area of concern, has got short shrift.

Standard & Poor's, which compares Indian and Chinese banking, prescribes risk management as a thrust area for the former. McKinsey, however, suggests different goals (and ways of achieving them) to different sets of bankers — public sector, old private, new private and foreign — while visualizing different scenarios of Indian banking five years from now. The Independent Commission of Bank Officers analyses, in detail, the issues that had hampered the Indian banking system in the past and argues how the Government's recent proposals — foreign direct investment (FDI) and consolidation of public sector banks — will not ensure systemic transparency and efficiency as projected.

One has to see these reports in the light of the United Progressive Alliance (UPA) Government's priorities in the rural and agrarian sector, and the future growth of the economy as well as employment generation. These reports also focus on the emerging scenario in April 2009, when the second phase of the "Road Map for Foreign Banks' Presence in India" begins. In the second phase, the removal of limitations on the operations of the wholly owned subsidiaries and the treating of foreign banks on a par with domestic banks to the extent appropriate will be implemented after reviewing the experience with phase one (March 2005 to March 2009), and after due consultations with all stakeholders in the banking sector. While rating the country's top 20 banks (most of them are public sector banks), Standard & Poor's narrates the key challenges in the system, with priority given to "the need for banking sector consolidation.'' It expects that "rationalisation will ultimately occur among the Indian public sector banks, albeit at a moderate pace.'' At the same time, consolidation could occur between foreign banks and private sector banks, "although any sharp increase in such activity is only expected after March 2009,'' as per the guidelines for the Road Map for the presence of foreign banks.

The banking sector reforms undertaken in India from 1992 onwards were basically aimed at ensuring the safety and soundness of financial institutions and at the same time at making the banking system strong, efficient, functionally diverse and competitive. The reforms included measures for arresting the decline in productivity, efficiency and profitability of the banking sector. Furthermore, it was recognized that the Indian banking system should be in tune with international standards of capital adequacy,
prudential regulations, and accounting and disclosure standards. Financial soundness and consistent supervisory practices, as evident in our level of compliance with the Basel Committees Core Principles for Effective Banking Supervision, have made our banking system resilient to global shocks.

Potential scenarios

In an interesting futuristic study, McKinsey uncovers "three potential scenarios'' that could emerge in the banking sector by 2010 (after the entry of a large number of foreign players), based on the interplay between policy and regulatory interventions and management strategies. The first is a "high performing'' scenario, where policy makers intervene only to the extent required to ensure system stability and protection of consumers' interest, and bank managements step up the drive for far-reaching change.

In the second, "evolving'' scenario, policy makers adopt a pro-market stance but are cautious on pushing reform. The share of the banking sector value added would be 4.7 per cent of GDP. And in the third scenario — stagnating — policy makers intervene to set restrictive conditions and management is unable to execute changes to deliver value to shareholders or customers. Here, the share of the banking sector value added would be only 3.3 per cent of GDP.

The evidence from many emerging market economies, particularly Latin America, shows that a greater reliance on banking FDI has given rise to conditions of: stalled overall growth in credit with domestic banks also reducing loan exposure; far greater financial instability during episodes of shock to the domestic economy; and uncertainty and slow economic growth due to foreign banks acting as conduits for transmission of contagion and strategic decisions from parent banks onto developing markets. "It is to be noted that these consequences are but an expression of the loss of economic sovereignty. We can choose to ignore these lessons only at our own peril,'' states the Independent Commission of Bank Officers.

Consolidation of banks

On consolidation of banks, especially public sector banks, the Commission says that "while the gains from consolidation are expected along greater economies of scale and scope available to bigger banks, the evidence does not support an automatic association between large size and profitability.

On the other hand, bigger banks tend to rely much more on arm's length transactions and standardised balance sheets and loan accounts, on fee based income that seek to avert credit and interest risk, and on trading risk at the securities market. These tendencies give rise to the phenomenon of financial exclusion (whereby a large segment of the population remains unbanked) at the same time that it engenders financial fragility via a greater exposure to financial markets.''

Today, the overall level of non-performing loans (NPLs) in the entire financial system is around Rs. 1,20,000 crore. Of this, around Rs. 50,000 crore are NPLs on account of the corporate sector, the rest accounted for by the rural and cooperative sector. The cooperative sector is not ruined by the rural poor, but by politicians and other manipulators. What India needs is a proper banking structure to ensure that these funds reach the end user.

The Author believes that at current juncture due to the above stated factors the opportunities in the area of Risk Arbitrage or what is commonly reffered to as M&A Arbitrage in the Indian Banking & FI sector are phenomenal.

In Risk Arbitrage, large excess returns have been documented in literature i.e. in previous studies(in the US in 1990’s) .
Two reasons can be attributed to this-
a) Transaction Costs and other practical limitations prevent investors from realizing these
extraordinary returns.
b) Risk arbitrageurs receive a risk premium to compensate for the risk of deal failure. The
risk arbitrage premium is defined as the spread between the current market price and the price to be paid for the shares in the deal at the time of the tender offer announcement. Another possible explanation for the extraordinary returns to risk as documented in previous studies is that they simply reflect the compensation for bearing
extraordinary risk. The paper by Mitchell, Mark and Todd Pulvino (2001) attempts to understand the effect of stock market and business conditions as well as the M&A trend on risk arbitrage in US financial markets confirms that returns associated with risk arbitrage are said to expect more of a downturn in down stock market and business conditions especially when there is possibility of deal failure.

However under the Present Indian Context it is totally different.

Domestic mergers The Narrow RBI Approach.

Under the Banking Regulation Act, banking companies cannot merge without the approval of the Reserve Bank of India. The government and the Reserve Bank do not play a proactive role in either encouraging or discouraging mergers. It is our endeavour that the government and the RBI should only provide the enabling environment through an appropriate fiscal, regulatory and supervisory framework for the consolidation and convergence of financial institutions, at the same time ensuring that a few large institutions do not create an oligopolistic structure in the market. Mergers should be
based on the need to attain a meaningful balance sheet size and market share in the face of heightened competition and driven by synergies and locational and business-specific complementarities.

While there is no regulatory deterrence to bank mergers, their incidence has not been significant and hence no problems have occurred in India. Mergers of banks help to reduce the gestation period for launching/promoting new places of business,
strengthen product portfolios, minimise duplication, gain competitive advantage, etc. They are also recognized as a good strategy for enhancing efficiency.

Ideally, mergers under the present context according to the RBI ought to be aimed at
exploiting synergies, reducing overlap in operations, right-sizing and redeploying surplus staff either by retraining, alternate employment or voluntary retirement, etc.

As banks are leveraged and the credibility of the top management has tremendous supervisory implications, we prefer consensual mergers to hostile takeovers. The takeover codes should, therefore, reflect the supervisory concerns.

Issues in banks mergers with non-banks (NBFC’S)

The RBI endeavor’s to preserve the integrity and identity of banks. The activities that the banks and their subsidiaries can undertake are restrictive, to ensure that the interests of existing and future depositors are fully protected. Banks are also not allowed to undertake trading in commodities(and since yours truly began his career as a Comodity broker I am consistent on my role as a RBI basher) .
In pursuit of these objectives, the merger of a bank with a non-bank is generally not favored.
However, the merger of a non-bank financial company with a bank is allowed subject to the prior approval of the Reserve Bank of India and compliance with all the regulatory and supervisory standards applicable to banks. The issues that may arise in such mergers would be the bank’s ability to comply with statutory and regulatory requirements in respect of liabilities and assets taken over by it from the non-bank.

Mechanism for preserving competition
There is no separate agency/mechanism for preserving competition in the banking sector. Promoting competition is, however, one of the key objectives of the new proposed financial sector reforms.
The entry of new private sector and foreign banks and introduction of new products and technology and operational freedom to banks have ensured a competitive environment in the financial market.

Impact of consolidation
Since the consolidation process has not gone very far in India, its impact has not been significant.Mergers of certain foreign banks at the global level have also not affected the Indian market, as their market share is currently very low. However, the deregulation process has brought in more competition in the banking sector, resulting in delivery of innovative financial products at competitiverates. The consolidation of banks may not significantly affect the functioning of various segments of the financial markets. In a liberalised environment, the mere size of the bank may not be an enabling condition for distorting the pricing mechanisms or liquidity in the market. The presence of large banks
would result in more competition and narrowing spreads.

Role of banks and development finance institutions (DFIs)

India being a geographically vast country with its rural population constituting almost 70% of the total, the role of regional rural banks remains important. The banking sector, characterised by the presence of internationally active banks, national-level banks and regional rural banks, is likely to be preserved to cater to the needs of a varied customer base. Consequent to liberalisation and financial sector reforms, there has been some blurring of distinction between the activities of banks and DFIs. In
particular, the traditional distinction between commercial banking and investment banking has tended to narrow somewhat. Banks have been moving into certain areas which were the exclusive domain of the DFIs, eg project finance and investment banking. DFIs have recently been given the option to convert themselves into universal banks with the RBI’s approval.
To this end, a DFI would need to prepare a transition path in order to comply fully with the statutory and regulatory requirements applicable to banks

Research Purpose and Contribution

This paper analyses risk arbitrage in Indian financial markets specific to the Banking and Financial services sector. An attempt has been made to the paper by studying the Indian financial regulatory mechanism and its related impact on risk arbitrage in terms of controlling trading limits as well as illegal trading.
Questions that are pursued include,
(1) What are the effects of financial market and business conditions as well as the Merger and Acquisition Trend on risk arbitrage activities in the Indian Banking and financial services space ?
(2) What is the effect of the Indian financial regulatory mechanism on risk arbitrage?
(3) The Dichotomy that exists in the current regulatory structure where by “slaves” who have two masters become free – Especially in the Indian context where Banks are regulated by the Reserve bank of India and as listed entities regulated by the SEBI and its prescribed take over code of conduct.

The first signigicant M& A arbitrage opportunity was observed in the HDFC Bank, Times Bank Merger in the year 1998.
There have been swings on subsequent deals, like that of The OBC –GTB deal and the lastest Centurion Bank –Bank of Punjab deal.

Definitions

Risk Arbitrage otherwise called as merger arbitrage, refers to an investment strategy whereby an attempt is made to profit from what is known as an arbitrage spread.
A Takeover in the modern day business world refers to one company (the acquirer) purchasing another company (the target).

An Overview

Risk Arbitrage otherwise called as merger arbitrage, refers to an investment strategy whereby an attempt is made to profit from what is known as an arbitrage spread. After the announcement of a merger or acquisition, the stock of the target company is typically traded at a discount to the stock of the acquired company.
In fact the difference in the price of stock between that of the target company and the acquiring company is known as the arbitrage spread.

In the event of the merger being successful the arbitrageur incurs a profit based on the arbitrage spread. However in the event of a merger failure the risk arbitrageur incurs loss , which is usually much more than the profits he would have earned, had the merger been successful.

Institutional Background of mergers in the US
With the global financial services scenario having changed in the recent past, there is a growing trend of mergers and acquisitions which has taken place recently in numerous financial institutions. This has been particularly observed in the U.S.A where takeover activity has been most observed in the 1990s.
There was an encouragement for merger activity, due to the removal of geographical restrictions for banks and thrifts under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Also observed was the removal of preferential tax treatment of bad debt reserves under a special provision of the Small Business Jobs Protection Act of 1996 eliminated previous impediments for thrift to bank conversions and mergers. Another significant change observed during that time was the Gramm-Leach-Bliley Act (Financial Modernization Act) of 1999 that permitted the creation of Financial Holding Companies which could practice all functions ‘financial in nature’ under one umbrella removed further deterrents to bank/thrift mergers.
What we are seeing in the Indian Context is an adaptation of the best practices of the above with a new Jargon of Shri Kamath Chief of ICICI “ The Universal Banking”

Limited Arbitrage in Mergers and Acquisition

Firstly arbitrage is limited to the extent of buying the acquiring firms shares, with a direct
purchase and an indirect purchase. While the direct purchase would involve buying the shares from the acquiring firm, an indirect purchase would involve buying the target firm’s shares and waiting for the deal to come through, during which the target firm’s shares are exchanged for the acquirer’s shares.
Both the above methods of transacting in shares have identical payoffs if the

merger deal comes through. The arbitrageur also faces an inherent fundamental risk, that of deal failure which could lead to exorbitant losses. The phenomenon of deal failure can be described as any risk arbitrage deal where the arbitrageur loses money.

Nature of Risk Arbitrage
While understanding the nature of risk arbitrage, it is important to know that it can be categorized into two –
a) Pre-emptive Arbitrage-In this kind of arbitrage opportunity, the arbitrageur buys the
shares of the acquired company well in advance. This kind of arbitrage is quite speculative and depends on the success of the merger. In the event of the merger being carried out, the arbitrageur does benefit from the price paid and the tender offer of the share. Pre-emptive arbitrage is guided by instinct and predictions made by the arbitrageur who attempts to forecast potential mergers and acquisitions in the coming weeks and months.
b) Post-Tender Arbitrage-As far as post-tender arbitrage is concerned the acquiring
company makes a tender offer about shares and the arbitrage profit is determined by the price differential between the offer price of the share and the selling price of the share on a particular day, post merger. For example say BIHAR BANK(fictious bank) is planning to acquire UTTAR PRADESH BANK in the near future. BIHAR BANK makes a predictable tender offer of the stock of UTTAR PRADES for Rs. 25;
however the common stock of UTTAR PRADESH BANK sells for Rs. 27 in the market. In such a case the arbitrageur seeks to make a profit from the Rs. 2 differential.
The process of post-tender arbitrage is very dynamic wherein the investment is held for a very short time with very high potential for profits.

Risks associated with risk arbitrage

The main risk associated with risk arbitrage is that of deal failure, otherwise called the completionrisk. If at some stage the management of either company decides not to go through with the deal, then the benefits of arbitrage accruing to the transaction of shares may not materialise. Some shareholders may wish to insure this risk by selling of their shares. As a result of this selling pressure, the price of the target firm can fall below its efficient market price and lead to a market inefficiency thereby resulting in abnormal profits. Arbitrage is also limited to the extent of supply of capital which is a prerequisite for its smooth functioning; it has been observed that the lender typically requires 105-110 % of the short position as collateral.

Calculating Annual Return for Risk Arbitrage

The formula for calculating the returns for risk arbitrage, in other words the potential arbitrage
commitment, was invested by Benjamin Graham in the book Security Analysis (1951).

Indicated Annual Return = [GC-L (100%-C)] /YP (Rockwood, Richard M (2001))
G=Expected gain in points in the event of success.
L=Expected loss in points in the event of failure.
C=Expected change of success as a percentage.
Y=Expected time of holding of shares, in years
P=Current Price of the security

Risk Arbitrage in Bank &FI Takeovers

In the modern day business world a takeover refers to one company (the acquirer) purchasing another company (the target). Though takeovers resemble mergers they are different in the sense that while a merger leads to the formation of a new company, a takeover does not. Corporate takeovers are common in USA and the United Kingdom. However they are a rare occurrence in Germany because of the dual board structure, in Japan because of kereitsu or the interlocking sets of ownerships in the corporate structure and in China because a majority of the publicly listed companies are owned by the state.
Under the present Indian context especially in the Banking and financial services sector it is far more complicated and are backed by various legislations of the Parliament.

Takeovers are of the following kinds-

a) Friendly Takeover-A friendly takeover involves the straight buyout of a company and is observed frequently. In such a takeover the shareholders are the recipients of cash or a number of shares which is contractually agreed upon in advance.
b) Hostile Takeover-In a hostile takeover one company agrees to buy out another company regardless of the consent of the company or otherwise. The mode of conducting a hostile takeover is through publicly traded shares. The rationale behind this mode of performing a hostile takeover is that the acquiring company is actually required to bypass the board the directors and purchase shares from other sources. The process of carrying out a hostile takeover through publicly traded shares is rather difficult unless the shares of the company are otherwise widely available and can be easily purchased.
c) Reverse Takeover-A reverse takeover can take place through either a smaller firm taking over a larger firm, a private company taking over a public company by bypassing a majority of security regulations. This cannot be ruled out in the later economic landscape of corporate India.

Rationale behind takeovers

A variety of reasons can be attributed to why one Bank would like to acquire another
Bank .
One reason is profitability, the target company in such a case may be reasonably priced
and so the acquiring company may make a decision that within a certain time period purchasing that company would be a profitable move.
Takeovers can also be strategic in the sense that the acquiring Bank has motives other than profit to purchase another Bank. In such a case the company that is to be acquired could be quite profitable on its own but may harbour other capabilities that could be beneficial to the acquiring firm. For example a target Bank may
have a well developed distribution network,best practices or information technology capabilities which could lead to an acquiring Bank wishing to takeover it. The acquiring Bank as a result of this takeover will be able to benefit strategically from the capabilities of that Bank apart from earning a profit. An acquiring Bank may decide to takeover another bank as it enables the company to enter into a new market. In some cases in order to eliminate competition, one bank may decide to acquire another and also to be able to defend itself against another competitor. It has very often been the case that very large companies enter into takeovers for the purpose of boosting their reported revenues without much care for the profit involved and the company’s profitability does stand a chance of being affected if there are large costs involved.

There is a premium involved if the target company is financially healthy which may not always be the case. Following a takeover the stock price of the target company may rise forcing down the price of the acquiring company Takeovers and the legal system
In the US takeovers are governed by the Williams Act, which was enacted in July 1968. (Gomes, Armando, 2001)Takeovers are also governed by corporate laws and the state jurisdiction. The purpose of the Williams Act is to enable shareholders of a company to have fair and full disclosure to information and sufficient time to be able to act upon information. US Takeover rules are contained in the in Section 14(d)(1) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rules 14D and 14E.
Indian Scenario SEBI’s guide lines on take over.(refer appendix A 4)

Risk Arbitrage in Takeovers: An overview

Arbitrageurs are strategically important in the market for corporate control. Following a tender offer there is often a drastic rise in risk arbitrageur activity. Risk arbitrageurs take long positions in a target stock with the notion that the takeover will go through. Based on the cooperative Nash bargaining game, the idea that blocking of shares may be relevant for pricing of takeovers wasfirst developed by Bergström, Clas, Peter Högfeldt, and Kenneth Högholm (1993).These arbitrageurs are often hedged by taking short positions in the acquirers stock. Factors contributing to a rise in risk arbitrage activity include the emergence of Ivan Boesky(a prominent arbitrageur on Wallstreet who had been involved in an Insiders Trading Scandal) and an increase in the number of corporate takeover deals contributing to its visibility. Due to the large volume of new arbitrage capital in recent times there is a rise in the narrowing of spreads and the increase in
share price following a takeover announcement which has on an average reduced profit margins in this activity. Despite the odds that prevail, risk arbitrageurs continue to make profits and are considered as important players in the success of a takeover. Usually in an arbitrage deal the number of risk arbitrageurs contributes to 30-40% of the stock and they are considered an important element in the very many deals that are happening.

Rationale behind Risk Arbitrage in Takeovers

Risk arbitrageurs enjoy an information advantage which arises from their choice to enter the field of risk arbitrage. (Larcker, D. and T. Lys,(1987)) If the presence of risk arbitrageurs increases the likeliness of a takeover occurring, then one risk arbitrageur buying shares is relevant for the entire value of shares. Risk arbitrageurs expend a large effort in understanding how other risk arbitrageurs would behave. The number of arbitrageurs who decide to take positions, the number of shares that they will purchase and the price of shares are often determined in equilibrium of an endogenous kind. The value of shares in a takeover does depend on the probability of a takeover occurring. Share value should be higher in the event of there being a larger number of risk arbitrageurs in the market. The informational advantage that a risk arbitrageur enjoys enables and makes him willing to pay a price high enough to persuade smaller shareholders to sell their shares. In most cases the risk arbitrageurs do not have any initial private information. The private 14 information that they enjoy arises endogenously when they start buying shares. However arbitrageurs have to be controlled to ensure that they don’t compete away their rent.

Conclusion

1. With consolidation in Banking and FI imminent in India , a tremendous opportunity in the area of Risk arbitrage(M&A arbitrage) largely remains untapped.

2. Players who have exposure to sophisticated risk management tools and systems (barra et all) and best practices that are currently being used in the developed financial markets for assessing Risk Arbitrage opportunities have a significant competitive advantage over the local Indian players.
3. Market driven reforms will make Indian regulators to strive to reduce the cost associated with “regulatory arbitrage” opportunities.

Sharia Compliant Islamic Commodity Structures

2007-03-12T09:18:00.000-07:00

Sharia Compliant Islamic Structures-The Commodity world.

Whereas every exchange in the world worth its salt has been trying to come out with Islamic structrures which are compliant as per the sharia, however we believe that this is a domain not for exchanges which have the cash and carry concept of financing deeply ingrained into every single aspect, this is a problem for intermediary who absorb and can counter this problem with out of the box approach.
Essentially this means that SHARIA ISLAMIC products would be essentially OTC in nature since otherwise the uncertainty of counterparty would make the transaction 'ghariar' instead the Exchange could clear these OTC trades.

It is the arab world that thought the world algebra, it also taught the the world, two –ve’s make a positive, this is the basis of the proposed approach to this Islamic Structure- The Venkataraghavan, & Altos trade et all (SM) service based approach to sharia compliant structre.

A Brief history of sharia compliance

The Problem with Interest or ‘Riba’

As Shari’ah considers money to be a measuring tool for value and not an ‘asset’ in itself, it requires that one should not be able to receive income from money (or anything that has the genus of money) alone. This generation of money from money (simplistically interest) is ‘Riba’, and is forbidden. The implications for Islamic financial institutions is that the trading/selling of debts, receivables (for anything other than par), conventional loan lending and credit cards are not permissible.

The Problem of Uncertainty or ‘Gharar’

This principle is widely understood to mean uncertainty in the contractual terms and/or the uncertainty in the existence of an underlying asset in a contract and this causes issues for Islamic scholars when considering the application of derivatives. Shari’ah also incorporates the concept of ‘Maslahah’ or ‘Public benefit’, denoting that, if something is overwhelmingly in the public good, it may yet be transacted – and so hedging or mitigation of avoidable business risks, may fall into this category but there is still much discussion yet to come.

Takaful (Islamic Insurance)
In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The basic idea behind insurance is the sharing of risk. The concept of insurance where resources are pooled to help the needy does not contradict Shariah.

Conventional insurance involves the elements of uncertainty (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes. The concept of takaful is not a new concept; in fact, it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago.

Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.

Another Interesting Arabic Discovery Algebra is a branch of mathematics concerning the study of structure, relation and quantity. The name is derived from the treatise written by the Persian mathematician Muḥammad ibn Mūsā al-Ḵwārizmī titled Al-Kitab al-Jabr wa-l-Muqabala (meaning "The Compendious Book on Calculation by Completion and Balancing"),

So what happens when two Gharars meet ?

Gharar + Gharar = YASIR , YASIR is a permissible financial transaction.

Translated as risky transaction + risky transaction = low risk or zero risk transaction.so what could be that magic transaction which is sharia compliant ? An arbitrage,in the current commodity derivative markets.more specifically in agricultural commodities halal by nature (no transaction will be done on Gold & Silver and other haram transactions.) is a Yasir transaction and hence any product in these lines is perfectly sharia compliant.

At Altos We propose to come out with the Altos Sharia Compliant Arbitrage Sukuk. This structure comprises of combination of sharia compliance product and at no stage is there a possibility of a riba pay out. The combination of the below mentioned sharia compliant transaction leads us to a remarkable elegant and profitable financial structure for all stake holders.

Murabahah (Cost Plus)

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of interest determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e. the bank cannot charge additional interest on late payments); however, the asset remains in the ownership of the bank until the loan is paid in full.

Bai' Bithaman Ajil (Deferred Payment Sale)
This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment, on the maturity date of the contract.

Bai' al-Inah (Sell and Buy Back Agreement)
The financier sells an asset to the customer on a deferred payment basis and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the broker to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency.

Murabahah (Cost Plus)
This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs and the profit MURABAHA
Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and profit. Islamic banks have adopted this as a mode of financing. As a financing technique, it involves a request by the client to the bank to purchase certain goods for him. The bank does that for a definite profit is stipulated in advance.

IJARAH
Ijarah is a contract of a known and proposed usufruct against a specified and lawful return or consideration for the service or return for the benefit proposed to be taken, or for the effort or work proposed to be expended. In other words, Ijarah or leasing is the transfer of usufruct for a consideration which is rent in case of hiring of assets or things and wage in case of hiring of persons.

IJARAH-WAL-IQTINA
A contract under which an Islamic bank provides equipment, building or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum alongwith with profit over the period of lease.

MUSAWAMAH
Musawamah is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell.

ISTISNA A
It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. Istisna’a can be used for providing the facility of financing the manufacture or construction of houses, plants, projects and building of bridges, roads and highways.

BAI MUAJJAL
Literally it means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the bank earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

MUDARABAH
It is a partnership in profit between capital and work where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits accrued are shared between the two parties on a pre-agreed basis, while loss is borne only by the provider of the capital.

MUSHARAKAH
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds, which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions.L

BAI SALAM
Salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver or currencies. Barring this, Bai?Salam covers almost everything, which is capable of being definitely described as to quantity, quality and workmanship.