Cricket (off topic)

Rambling thoughts

The recent loss to Aus by 333 runs at home 

is a big blow. We were deceived by the current team’s performance, largely at home.

Weaker or not is not  the issue. 
Australia is not the strong team they were, 

lost to SA at home recently

Pakistan fought well there but lost to Australia.

NZ beat them too. 
Overseas – we have had some bad bad losses
We have had some horrendous performances over the last 30-40 years.

42 all out – India vs England 1974 (Wadekar led)

England thrashing us 3-0 in that series

We lost badly to Pakistan (2006), Australia (2007), South Africa 

at home
We did not have strong teams always.

It took a long time to build one – a lot changed after Kapil came into the scene
Kapil won in England 2-0

Dravid won in England 1-0

Dravid won in Pakistan and West Indies.
No other captain has won in England – not even Dhoni !

We got thrashed in England and Australia (Dhoni led!!)
The team of Sachin, Dravid, VVS, Sehwag, Ganguly have seen lots of defeats and showed great mental strength to fight – Kumble, Harby, Srinath, Prasad did their part
2001 Calcutta was the turnaround – Amazing performance by VVS and Dravid. And Harby

This was like 1983 world cup win.

Steve Waugh’s team had 16 wins in a row !!
Sadly there is a lot adulation around Sachin not enough appreciation of Dravid, Laxman
Virat is a great batsman yet as a captain he needs to show the transformation

Secondly why not make Ashwin vice-captain? 
We may come back in the series but the team is still brittle. This is where captaincy matters.

Virat is not a Brearly or a Waugh. 

His own performance will come under pressure. 
This is also a mental game. 

Our opponents are traditionally stronger in that department, at least as things stand.


Introduction to Financial Derivatives

A derivative is a financial instrument whose value is derived from another underlying asset. The underlying asset could be

  • Stock
  • Interest rate or foreign exchange rate
  • Index value such as a stock index value
  • Commodity price or index

Value of a derivative is ‘derived’ from another variable

The four basic derivatives types are

  • Forwards
  • Futures
  • Options
  • Swaps

A. Forwards

A forward contract gives the owner the right and obligation to buy a specified asset on a specified date at a specified price. On the specified date, the underlying asset will be received or delivered at this price.

  • The seller of the forward contract has the right and obligation to sell the asset on the date for the price
  • At the end of the forward contract, at “delivery,” ownership of the good is transferred and payment is made from the purchaser to the seller
  • Generally, no money changes hands on the origination date of the forward contract
  • However, collateral may be demanded

Delivery options may exist concerning the

  • quality of the asset
  • quantity of the asset
  • delivery date
  • delivery location

If your position has value, you face the risk that your counterparty will default.

B. Futures

This is a financial contract

  • obligating the buyer
  • to purchase an asset (or the seller to sell an asset),
  • such as a physical commodity (crude oil, wheat, corn) or a financial instrument (debt instruments, stock index, currencies)
  • at a predetermined future date
  • at a predetermined future price

Futures contracts are standardised and are be traded on exchanges. Default risk is lower as they are cleared on exchanges.

Futures and Forwards are identical in structure. The key difference is

  • Futures are exchange traded and hence have no counterparty risk, Forwards are OTC (Over the Counter) products
  • Futures are standardized contracts (done by the Exchange), Forwards are customized by the parties.

C. Options

These are derivatives with the following features

The buyer of an option

  • Has the right
  • but not the obligation
  • to buy (or sell) a particular product
  • on a particular date (Exercise Date)
  • at a particular price (Strike or Exercise Price)

The seller of the option

  • Receives a premium for selling the right
  • Has the obligation to deliver the product when the buyer exercises the option
  • An option seller is also called a ‘WRITER’

Listed Options are standardised and are traded on exchanges

OTC Options are customized and not traded on exchanges

Call Options

  • A call option is a contract that gives the owner of the call option the right, but not the obligation, to buy an underlying asset, at a fixed price, on (or sometimes before) a pre-specified day, which is known as the expiration day
  • The seller of a call option, the call writer, is obligated to deliver, or sell, the underlying asset at a fixed price, on (or sometimes before) expiration day
  • The fixed price is called the strike price, or the exercise price.


Put Options

  • A put option is a contract that gives the owner of the put option the right, but not the obligation, to sell an underlying asset, at a fixed price, on (or sometimes before) a pre-specified day, which is known as the expiration day
  • The seller of a put option, the put writer, is obligated to take delivery, or buy, the underlying asset at a fixed price, on (or sometimes before) expiration day.
  • The fixed price is called the strike price, or the exercise price.

Options that can only be exercised at expiration are called “European” options.

Options that can be exercised any time until expiration are called “American” options

D. Swaps

  • A swap is an agreement between counter-parties to exchange cash flows at specified future times according to pre-specified conditions
  • Involves the exchange of cash flows arising from specific
  • Assets
  • Liabilities
  • To exchange one set of cash flows for another without involving the transfer of the asset or liability itself
  • A swap is like a portfolio of forwards. Each forward in a swap has a different delivery date, and the same forward price







TCS share buy-back

TCS has announced a share buy back at its board meeting on 20th Feb.

The board has approved a proposal to buyback up to ~5.61 crore shares for an amount not exceeding Rs 16,000 crores. The buyback price will be at Rs 2.850. The number of shares bought back will be 2.85% of the total paid-up capital.

Why do companies buy back their shares? Why TCS?

Companies can use their profits
1. Use for new capex / investments to grow the  business
This is done if the project returns gives an ROE that is near current levels

2. Pay out dividend
If no more cash is required after the capex/investments

3. Keep the cash and invest in money market instruments
Keep excess cash

As the cash pile increases, companies can pay out more dividend. Dividend is taxable before the payout (in India).

A share buyback is a market operation and signals to the market that the value of the company is more than the current market price and this is a way to pay out cash to the shareholders in a tax efficient way.

Shareholders can tender their shares through a broker. Only a proportion of shares will be accepted by TCS. This will be in proportion to their holding and the number of shares tendered to TCS.

For every 100 shared one holds, assuming all tender their shares, 2.85 shares will be purchased by TCS @ Rs 2850/-

For the shareholder, if Securities Transaction Tax is paid, there is no Long Term Capital Gains applicable if they have held the shares for more than one year.


Bond Basics #2

A basic coupon bond has the following features

  • On issue date, initial bond face value is paid to issuer (investor buys a bond)
  • Regular coupon payments received by investor (represents the interest)
  • At maturity, bond face value is redeemed (returns the loan)


An illustration

  • Consider a coupon bond with a face value of $100,000;
  • Bond maturity: 5 years
  • Coupon Rate: 4%;
  • Coupon Payment: Semi-annual
  • image.png

Why is it called a bond coupon? Read more at Coupon

Most governments raise a lot of debt (short, medium and long term) to finance investment and expenditure.

Some basic government bonds

Gilts (UK)

  • A gilt is a UK Government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange
  • The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security
  • This is a reflection of the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due
  • These have a maturity of 5, 10, 30 and 50 years

US Treasury – Bills, Notes and Bonds

The US treasury issues a number of securities to raise money required for various government program

These are three key types of securities

  • Treasury Bills (T-Bills) have a maturity of < 1 year
  • Treasury Notes (T-Notes) have a maturity of 2, 3, 5, 7 and 10 years
  • Treasury Bonds (T-Bond) have a maturity of 30 years

Japanese Government Bonds (JGB)

JGB’s are issued by the Japanese government, which is responsible for interest and principal payments

Payment is guaranteed by the Government

  • JGB’s are a financial product traded in the market. So, you don’t need to wait for maturity.
  • The principal amount will be paid at maturity
  • Maturities can vary from 2 to 40 years

Government Securities and Types

Selected Countries

FI Country Bonds


The next topic will be on Fixed Income Security types and features.

Bonds Basics

A bond is a borrowing (or lending) and is a loan in structure.

Let us look at a loan transaction.
Lender: Gives Money. For a period of time. At a rate of interest.

Borrower: Borrows for this period of time. Has to pay regular interest and finally the principal amount at maturity.

fincome 1

What are the challenges?

Lender does not get his money till maturity – Liquidity Risk
This is the chief problem in a loan transaction which is one to one (OTC).
Borrower may default – Credit Risk. We will look at this later.

What is a Bond?

A bond also called a Fixed Income Security .

  • A bond is a financial security that promises to pay a fixed income stream at fixed dates in the future
  • Issued by governments, state agencies municipalities and corporations
  • When a corporation or government wants to borrow money, it often sells a bond


So we have the issuer of a bond (borrower) and the investor of the bond (lender)

Key Features

The borrower promises to give the investor:

  • Regular interest or coupon payments every period until the bond matures.
  • The face value of the bond when it matures

Bonds are characterized by

  • Maturity date
  • Face, par or principal value
  • Interest Rate (or Coupon Rate)
  • Number of interest payments per year (typically 2; also called coupon payments)

Loans are classified by the initial maturity or tenor of the borrowing

Fincome Loan types

Loans are also classified by the Issuer of the loan

Fincome Issuer

Combining the two we see a loan has two key principal characteristics – issuer and duration of borrowing

Fincome IssuerMaturity

What are the benefits of bonds to investors?

  • Investors receive ‘coupon’ also known as the interest payment.
  • On maturity, investors receive back the principal which they had originally invested
  • Depending on the quality of the borrower, the investor derives a measure of comfort regarding the safety of his investment.