TRM - Trading and Risk Management

Energy Hedging, Trading & Risk Management Glossary

2011-02-02T02:22:00.003+05:30

HAPPY NEW YEAR 2011!!!!!!!!!!!

2011-01-01T01:11:00.004+05:30

HAPPY NEW YEAR 2011!!!!!!!!!!!

A complaint received by the Pontiac Division of General Motors

2010-04-30T23:32:00.001+05:30

"This is the second time I have written you, and I don't blame you for not answering me, because I kind of sounded crazy, but it is a fact that we have a tradition in our family of ice cream for dessert after dinner each night. But the kind of ice cream varies so, every night, after we've eaten, the whole family votes on which kind of ice cream we should have and I drive down to the store to get it.

"It's also a fact that I recently purchased a new Pontiac and since then my trips to the store have created a problem. You see, every time I buy vanilla ice cream, when I start back from the store my car won't start. If I get any other kind of ice cream, the car starts just fine.

"I want you to know I'm serious about this question, no matter how silly it sounds: 'What is there about a Pontiac that makes it not start when I get vanilla ice cream, and easy to start whenever I get any other kind?'"

The Pontiac President was understandably skeptical about the letter, but sent an engineer to check it out anyway. The latter was surprised to be greeted by a successful, obviously well-educated man in a fine neighborhood. He had arranged to meet the man just after dinner time so the two hopped into the car and drove to the ice cream store. It was vanilla ice cream that night and, sure enough, after they came back to the car, it wouldn't start.

The engineer returned for three more nights. The first night, the man got chocolate. The car started. The second night, he got strawberry. The car started. The third night he ordered vanilla.

The car failed to start.

Now the engineer, being a logical man, refused to believe that this man's car was allergic to vanilla ice cream. He arranged, therefore, to continue his visits for as long as it took to solve the problem. And toward this end he began to take notes: he jotted down all sorts of data, time of day, type of gas used, time to drive back and forth, etc.

In a short time, he had a clue: the man took less time to buy vanilla than any other flavor. Why? The answer was in the layout of the store. Vanilla, being the most popular flavor, was in a separate case at the front of the store for quick pickup. All the other flavors were kept in the back of the store at a different counter where it took considerably longer to find the flavor and get checked out.

Now the question for the engineer was why the car wouldn't start when it took less time. Once time became the problem -- not the vanilla ice cream -- the engineer quickly came up with the answer: vapor lock. It was happening every night, but the extra time taken to get the other flavors allowed the engine to cool down sufficiently to start. When the man got vanilla, the engine was still too hot for the vapor lock to dissipate.

Moral of the story: Even insane-looking problems are sometimes real.

HAPPY NEW YEAR 2010!!!!!!!!!!

2010-01-01T00:30:00.004+05:30

Visit my latest blog about some poetry & prose written by me or what I like: FALANA-DHIMKANA
& visit my personal blog: IAMBETTERTHANTHEBEST

Fun at Call Centre!!!

2009-07-01T13:17:00.002+05:30

View more presentations from Rahul Tiwari.

Bill Gates, My Celebrity Morph

2009-06-15T17:26:00.010+05:30

click here to see me morph into Johnny Depp & Anthony Hopkins

US President Obama's Speech in Cairo, on 'Islam & Muslims'

2009-06-05T13:04:00.005+05:30

Airline Security Staff on Strike

2009-05-31T23:59:00.001+05:30

Alleging no revision had taken place in their pay for the last five years, no provident fund, no medical facilities, no identity cards and a ‘step-sisterly’ behavior by the Indian Airlines, over 500 contractual employees, across the country, of Indian Airlines Air Transport Services Ltd, a subsidiary company responsible for the security of at least 60 international airlines, have threatened to go on strike from June 1. There are 300 staff on contract in Delhi. Protesting employees are demanding permanent employee status. They're just demanding for usual employee benefits like provident fund, medical facilities and the renewal of identity cards. With the kind of hard work and effort they put in providing the best possible services, doesn't seems they are asking for too much. They definitely deserve decent treatment & proper compensation.

As a mark of protest, the employees have been wearing black ribbons since May 20 at the Indira Gandhi International Airport. On June 1, employees will protest at the international terminal, then at the domestic terminal on June 2, and later at the Indian Airlines office. The strike is likely to affect air services as the contractual employees hired by the Indian Airlines Air Transport Services Ltd are responsible for X-ray and baggage clearing facilities at the passenger, cargo and courier terminals for several international airlines. The move can bring international flights to a complete standstill at Delhi and other international airports across the country. Hopefully the authorities and the government will be able to understand the grimness situation. They should be sensible enough to take corrective decision and make the conditions better for these employees so that they can continue providing the best services satisfactorily.

Fight Against Max Hospital

2009-05-24T23:05:00.005+05:30

(Click here to read more about this)

View more OpenOffice presentations from Rahul Tiwari.

Stock Market is not a Zero Sum Game

2009-05-10T09:40:00.000+05:30

What Does Zero-Sum Game Mean? A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another. Options and future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling is also an example of a zero-sum game.

A stock market, however, is not a zero-sum game because wealth can be created in a stock market.

Most people think the stock market is a zero sum game because there is a buyer for each seller and seller for each buyer so each cancels the other and everything is equal. Not quite. The question is not "Is there a buyer for every seller?" but "Is there a short position for every long position?" to determine if it is a zero-sum game. As long as there is a short position for every long position, every time one person makes a dollar someone else loses a dollar. That makes the total average return (before expenses) zero. With a stock, there can never be as many short positions as long positions. When a company first issues shares there are no short positions. After that, every time someone shorts a share one new long share is essentially created, so there will always be more long shares than short shares. That, in turn, means when the price of the stock goes up more money is made than lost, so it is not a zero-sum game. As the overall market tends to rise in value over time, therefore most investors are statistically predestined to be winners should they hold their positions over the long haul. Don't miss the fact that dividend payments add to the return on investment with a stream of income in such a way that the "pot" is constantly sweetened, thereby increasing the overall return all investors beyond the simple capital gain of a purchase and later sale.

For example, I buy RIL for 375. I sell it a week latter for 385 to Stock Buyer-2. Stock Buyer-2 sells the same stock a week latter for 395. I made money and Stock Buyer-2 made money. No one lost money. This same process can yield losses when for everyone when stock prices declines. If I buy RIL at 395 and sell it to Stock Buyer-2 for 385 and Stock Buyer-2 sells RIL for 375, then we both have a loss. Everyone lost money. Here is another simple example (using actual share prices and dates) that shows why the stock market is not a zero-sum game but rather a positive-sum game (where the whole pie grows rather than where the pie stays fixed): An investor buys 1,000 shares of Johnson & Johnson stock at $10 per share in 1994. A year later, the shares are sold to another investor at a price of $15 a share. This investor sells the same 1,000 shares to another at the end of 1996 for $20 per share who, in turn, sells the same shares to another investor at the end of 1997 for $30 per share. Each investor has made a nice capital gain on the purchase and sale and collected dividends for a year as well. Clearly not all transactions show a gain, as it is all too easy to buy high and sell low. But the key point is that a gain by one investor is not an automatic and equal loss for another investor.

In the stock market when you go long you are simply buying something, just as if you were buying some gold, or oil, or anything else where you are just acquiring something out of an inventory of supply. No one has to go short in order for you to go long. While it is true that stock is a liability on the books of the company that issues them, that liability does not rise or fall with stock price, and the company is not required to ever buy the stock back, so it’s not the same as being short the stock. Shorting stock means that you actually have to borrow the stock from someone who is long in order to sell them. You can’t just sell something you have no possession of as you can in other markets. That’s why stock trading is not considered zero sum. If you buy Google at $10 and it runs to $10,000 then it represents a growth in your assets, but not a growth in someone else’s liability. Stocks are not simply investments traded from one party to another. Rather, they're representative of the underlying business. So if the business creates value, the stock will do so for the investor as well.

Here are some links with details on the same discussion, which I have referred too: 1, 2, 3, 4, 5

Vodafone Zoozoo

2009-04-30T09:56:00.006+05:30

You guys must have watched those Vodafone Zoozoo ads & I think they are quite awesome, cool concept & great ads I would say. I thought they are animated characters but turns out they are not, they are humans (mostly thin women & kids) in those amazing costumes. Looks pretty animated & cool though.

View more presentations from Rahul Tiwari.

If they come up with a movie or serial on these, i think it should click well with kids & others too. A very niche way of marketing & advertising (click here to get zoozoo wallpapers). Great job!!!

Ant - Management Lesson

2009-04-14T23:43:00.001+05:30

View more presentations from Rahul Tiwari.

Market Types and OTC vs Exchange

2009-04-04T08:57:00.005+05:30

Trades are done in Markets. So, what are the types of Market?

Primary Market: Financial instruments are listed for the first time here (like IPO). Does not involve share trading. Investors here earn money either through future dividends (if any) or if company wants to repurchase its shares. On an average these markets generate reliable long-term returns. Also called Money Raising Market.
Secondary Market: The market where the financial instruments are traded for their lifetime, once they are created in primary markets. This is what we commonly know as ‘Stock Markets’. They provide liquidity to investors and help in Price Discovery (Current Price is defined by stream of future dividends expected).

Some financial or commodities instruments are traded on established exchanges. Examples include most highly-capitalized stocks, which trade on exchanges such as the New York Stock Exchange or Bombay Stock Exchange, and futures, which trade on futures exchanges such as the Chicago Board of Trade. These instruments are called exchange traded. The products at Exchange are standardized and the Exchange acts as a mediator for the trade. Also, The Exchange covers the Credit Risk by maintaining Margin Accounts for its members. Exchange may also provide clearing and settlement services. There could be types of exchanges like Stock Exchange, Futures & Options Exchange, Commodities Exchange, Foreign Exchange and so on.

An instrument is traded over-the-counter (OTC) if it trades in some context other than a formal exchange. Constitutes a network of brokers and dealers that trade stocks and bonds that are not listed on an Exchange and involves buying and selling securities outside the organized stock exchange. Brokers/Dealers negotiate most transactions by telephone, private leased lines and computer networks. Most debt instruments are traded OTC with investment banks making markets in specific issues. If someone wants to buy or sell a bond, they call the bank that makes a market in that bond and ask for quotes. Many derivative instruments, including forwards, swaps and most exotic derivatives are also traded OTC. In these markets, large financial institutions serve as derivatives dealers, customizing derivatives for the needs of clients. When traders want to trade non-standard or customized products or if they want to trade special or illiquid products then they need to trade OTC. Sometimes traders want to get into slightly less strict contracts than what an exchange allows them to with counter parties.

(To read more go to wikipedia or investopedia. You may also read & enjoy my personal-blog here)

Management & Corporate Lessons...

2009-03-26T02:10:00.001+05:30

View more presentations from Rahul Tiwari.

Why people TRADE?

2009-03-18T22:45:00.005+05:30

Why do people trade? To make money and just to make more money, or you could also say to try that they don't lose money. It can be classified in just three simple reasons:

Hedging: Hedging means attempt to mitigate/minimize/offset your risk. When someone tries to get in to a future agreement/contract or do a trade so as he can try to possibly reduce his risk (of losing money due to change in market value). The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations. Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the most common of which are Forwards, Futures, Options & Swaps. An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Speculation: Speculation is like inverse of hedging, the process of selecting investments with higher risk in order to profit from an anticipated price movement. A speculator generally tries to take advantage of another speculator or a hedger by getting into a deal/trade contract with him for future, as he is hoping that the other party would probably be wrong about future so the contract will turn in his favor. Financial speculation involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.

Arbitrage: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. Arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, and buy the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge. Arbitrageurs also play an important role in the operation of capital markets, as their efforts in exploiting price inefficiencies keep prices more accurate than they otherwise would be.

(To read more go to wikipedia or investopedia. You may also read & enjoy my personal-blog here)

What people do for Marketing & Business... Israeli Rafael's Indian promo

2009-03-15T03:18:00.003+05:30

The Crisis of Credit Visualized

2009-03-05T23:51:00.008+05:30

The Crisis of Credit Visualized (see part-2 in related videos at end or here)

Forex Review

2009-03-04T09:06:00.003+05:30

What is Forex? Forex is an abbreviation of Foreign Exchange (also referred to as FX) and it is the largest financial market in the world. The Forex market is the place where currencies are traded (currencies are money that is used as an exchange medium). In other words, it is the place where currencies are being sold and bought. In the Forex market all currencies are traded in real time. Trading with currencies always means that there are two simultaneous transactions taking place. If a currency is being bought, it is also being sold. To better understand this notion, think of currencies as both the goods you are buying AND the method with which you're paying for the goods.

Since the Forex market is the place where currencies are traded in real time, people may trade one currency for another and make a profit off of this transaction. Profits are made when one is able to determine which currency's value will increase by the end of a pre-determined time period (such time periods may be short or long). The Forex market is open 24 hours a day, five days a week and it is based in four major cities: New York, London, Sydney, and Tokyo. The Forex market is open to individuals over the age of eighteen. While Forex trading may sound daunting, it really isn’t. It can be easily comprehended and understood without prior experience in finance or economy. It is challenging and exciting, thought provoking and manageable, stimulating and filled with opportunities.

Some Forex Basics:
• The first currency listed in a currency pair is called the "base currency".
• The “base currency” is usually the U.S. Dollar. Traders will generally trade the U.S. Dollar against another currency, which is called the “counter currency”.
• Currencies are quoted in pairs. For example: The pair U.S. Dollar and JPY will be quoted in the following way: USD/JPY equals to 2.5 (This means that 1 U.S. Dollar can buy 2.5 JPY).
• When a quote increases, it means that the “base currency” has risen in value and the “counter currency” has weakened in value. For example: If the USD/JPY quote used to be equal to 2.5 but is now equal to 2.6, then this means that the dollar has strengthened (because 1 U.S. Dollar can now buy 2.6 JPY as opposed to the mere 2.5 JPY it could buy beforehand.)

(To read more click here. You may also read & enjoy my personal-blog here)

Forex Glossory... FX Terms You Wouldn’t Want to Live Without

2009-02-25T01:10:00.000+05:30

Ask Price: The ask price (right quote display) is the price at which traders can buy the base currency. If you think that the EUR value will increase then you can choose to buy it for USD at the price displayed in the ask quote (also called as Buy Price).
Aussie: Dealer slang for the AUD/USD currency pair.
Base Currency: The base currency is the first currency listed in any currency pair. Its value is determined against the counter currency’s value. For example, if the rate of the EUR/USD pair is 1.3525, then the EUR is the base currency and it is worth 1.3525 USD.
Bear: A Bear market is a pessimistic market with declining prices.
Bid Price: The bid price (left quote display) is the price at which traders can sell the base currency. If you think that the EUR value will decrease then you can choose to sell it for USD at the price displayed in the bid quote (also called as Offer Price).
Bull: A Bull market is an optimistic market with rising prices.
Cable: Also known as Sterling. Dealer slang for the GPB/USD currency pair.
Counter Currency: The counter currency is the second currency in any currency pair. Its value is determined against the base currency’s value. For example, in the following currency pair EUR/USD, the counter currency is USD. (also called as Pip Currency)
Cross Rate: A price quote consisting of any currency quoted against a currency that is not the USD. The quote is made up of the individual exchange rates of the two currencies against the USD.
Currency Pair: The two currencies that the exchange rate is comprised of. One of the currencies is bought, and the other is sold at the same time.
Day Trading: The practice of opening and closing positions within the same trading day, so that at the end of the day the trader has no open positions.
Fed: The Fed is short for Federal Reserve, which is the central banking system of the United States. The Fed issues announcements regarding U.S. monetary policy which can have significant effect on the Forex market.
Forex: Forex, or FX, stands for Foreign Exchange. Forex is the simultaneous buying of one currency and selling of another. Since you purchase money with money, there are two transactions (buying and selling) happening at the same time.
Fundamental Analysis: This type of analysis focuses on the macroeconomic factors that influence the value of a country’s currency. Traders open positions based on how they think changes in these factors are bound to affect different economies.
Hedging: The practice of opening several positions at once where one position minimizes the risk of another position. Click here to learn more about hedging.
Kiwi: Dealer slang for the NZD/USD currency pair.
Leverage: Leverage is a loan from your broker, which enables you to trade with a small amount of capital. It can increase your potential profit, but it can also increase your risk. Click here to learn more about leverage.
Long Position: Going long means opening a position in which the trader buys currency in hopes that this currency’s value will increase (buy low, sell high).
Loonie: Dealer slang for the USD/CAD currency pair.
Lot: The standard unit of trading. One standard lot equals 100,000 units of the base currency, a mini lot equals 10,000 units, and a micro lot equals 1,000 units. eToro’s standard trade volume is the mini lot.
Margin: The minimal cash deposit that you have to put up for the transaction. Trading forex on margin increases your buying power, but it can also increase your losses. Click here to learn more about margin.
Pip/Point: Pip is the smallest price increment in the last digit in the rate – usually the fourth digit after the decimal point (apart from the USD/JPY).
Price Trend: A consistent movement of currency prices in a certain direction. Traders try to spot trends in order to capitalize on their potential. Click here to learn more about trends.
Rate: Rate or quote, is the price of one currency in terms of another.
Risk Capital: The amount of money that a trader can afford to risk, the potential loss of which would not affect their lifestyle.
Short Position: Going short means opening a position in which the trader sells currency in hopes that this currency’s value will decrease (sell high, buy low).
Spread: The spread is the difference between the bid price and the ask price.
Stop Loss: A trade order which automatically closes an open position at a specific price in order to prevent losses in case the market moves against your position. Click here to learn more about Stop Loss orders.
Swissy: Dealer slang for the USD/CHF currency pair.
Take Profit: A trade order which automatically closes an open position at a specific price realizing a specific amount of profit. Use this order to realize your gains. Click here to learn more about Take Profit orders.
Technical Analysis: This type of analysis focuses on chart patterns of currency movements. It assumes that a currency’s future movements can be predicted by looking at past behavior. Click here to learn more about technical analysis.

(All information courtesy ETORO. You may also read & enjoy my personal-blog and a funny entry on Management CRAP)

Trading & Risk Management

2009-02-07T23:48:00.000+05:30

At first I want to define TRM but I do not have a one line definition. So I'll try to do a dissection of the term TRM and see what we come up with...

Trade: A basic economic concept that involves multiple parties participating in the voluntary negotiation and then the exchange of one's goods and services for desired goods and services that someone else possesses. The advent of money as a medium of exchange has allowed trade to be conducted in a manner that is much simpler and effective compared to earlier forms of trade, such as bartering. In financial markets, trading also can mean performing a transaction that involves the selling and purchasing of a security. So, trading can also refer to the action performed by traders and other market agents in the financial markets.

Risk: The quantifiable likelihood of loss or less-than-expected returns is Risk. The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Risk has two components:
1. uncertainty
2. exposure
If either is not present, there is no risk. In engineering, the definition risk often simply is:
Risk = (probability of an accident) X (losses per accident)
Or in more general terms:
Risk = (probability of event occurring) X (impact of event occurring)

Management: 'The group of individuals who make decisions about how a business is run' or 'The initiation and maintenance of an investment portfolio'. Management in business and human organization activity is simply the act of getting people together to accomplish desired goals. Management comprises planning, organizing, staffing, leading or directing, and controlling an organization (a group of one or more people or entities) or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources. Risk management is activity directed towards the assessing, mitigating (to an acceptable level) and monitoring of risks.

Financial Risk Management: The practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly Credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them. Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.

Trading (Financial or Commodities) always involves some risk and that risk needs to be managed (minimized and still attain maximum profit), that's TRM in a nutshell. The nutshell will break and I'll try to spread the TRM knowledge much more soon!!!