Wednesday, May 12, 2010

Futuristic Assumptions and Finance

First of all welcome back all my readers and followers. Sorry for being in hibernation for so long, at least a year. To start with I would come up with a very different set of approaches to how financiers forecast the assumptions.
See if you can answer these questions:
  1. In 1950, a computer cost $1mn. In 1990, it came down to 5000$. Now its just a pack of some hundreds of dollars. Can you forecast the cost 50 years down the line?

  2. With growing concentration of Democratic alliances globally, can you predict the total concentration of countries 50 years down the line who would shift to the democracy setup?

Using extrapolation and deriving the values using the past data forming a trend analysis function may help the least. The reason may be explained though an example:

Consider yourself in 100 AD and if you are said to forecast the development and sustainance of Roman Civilization, using past data every person may have opted for a rapid spread of roman culture. But taking into consideration the present scenario it is now just a part of 3 small nations.

It appears easy for most people to use extrapolation, as people default to physics when predicting social trends. Its a common understanding that momentum will remain static unless acted upon by an external force. Like when a person threw a rock on another person in his compartment, second person ducked. He ducked because his mind had inherited and learned the consequences of the law of Conservation of Momentum. The rock would not veer off course because there was nothing between the two persons to act upon it, nor a rock has mind to do it.

Its always been said that gold is a good inflation hedge. So as to find the impact of inflation and its correct development the money supply present helps considerably. With more money supply more will be the purchasing power in hands of people leading to high lift fir inflation. As Gold is considered to be a stable currency and a good inflation hedge people often resort to Gold in times of Inflation of Stagflation.

Values of M1

Values of Gold

The figure above shows that the money supply tripled while the value of gold steadily decreased. In other words, gold failed to keep the promise of being an inflation hedge as its value or demand may have decreased or in other matter, inflation and gold acted to work in opposite direction. Hence we can see the physics paradigm in science is not that applicable in finance.
Let us see the various factors:
  1. Momentum- it determines the basic rule of movement.
  2. Correlation- sometimes helps in development of the trends

There are many more which will be covered in detail afterwards.

Thursday, May 7, 2009

ADRs and GDRs

Indian companies are permitted to raise foreign currency resources through issue of ordinary equity shares through depository receipts, namely, Global Depository Receipt(GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. institutional investors or individuals (including NRIs) residing abroad.
A depository receipt (DR) is any negotiable instrument in the form of a certificate denominated in US dollars. The certificates are issued by an overseas depository bank against certain underlying stock/shares. It is non-voting equity holding. One of the basic advantage of DRs is facilitation of cross border trading and settlement, minimized transactions costs and broadened potential base, especially among institutional investors.
An American Depository Receipt (ADR) is a negotiable U.S. certificate representing ownership of shares in a non-U.S. corporation. ADRs are quoted and traded in U.S. dollars in the U.S. securities market.
I found out some of the important advantages of ADR:

1. ADRs allow you to diversify your portfolio with foreign securities easily.
2. ADRs trade, clear and settle in accordance with U.S. market regulations and permit prompt dividend payments and corporate action notification.
3. If an ADR is exchange-listed, investor also benefits from readily available price and trading information.
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering. GDRs may be used in either the public or private markets inside or outside the US. GDR, a negotiable certificate usually represents a company’s publicly traded equity or debt. ADRs and GDRs are identical from a legal, operational, technical and administrative standpoint. The word ‘global’ denotes receipts issued are on a global basis that is to investors not restricted to US.

There are many more technicalities relates to ADR and GDR relating them to Arbitrage and other instruments. These all will be discussed in upcoming posts.

Wednesday, April 29, 2009

Intermediate Time Period - In Vicinity

In my previous post I have emphasized primarily on the development methodology and working of a the XYZ Company. I am highly satisfied with your response and hence would continue analyzing the Company further. I would appreciate further assistance from the readers.

Coming on the topic, having a stream-lined batch flow is a very good approach looking at the straight way of producing with a predefined and processes to follow. This kind of approach gives a very well structured and organized way for production of goods. This leads to optimization of production capability and experience of workers.

Above saying is truly seen from Macro point of view, going on a micro sense we can analyze the way the production take place. This kind of Streamlined development leads to a very high level of production optimization.

Also this approach has an important advantage of knowing the stages of production process, this helps in analyzing the prototype produced. This can be used in optimizing the the prototype which will be then used as input in the next process.

Going on the Research phase, at micro level having a very inflexible and rigid process flow it is very difficult to change the process flow and hence optimization takes place compromising the effectiveness it may have produced when a process slot may have been replaced. The system at macro level looks very structure and organized, but in micro sense this leads to a very huge amount of cost as the byproducts produced are discarded. This is due to the fact that utilizing them may require process deformation, which is highly discarded as well as discouraged.

But changing the production methodology is also not done in this scenario. This would require a huge training and development of manpower to understand and implement the new methodology.

hence the companies tend to use the same methodology, but try to optimize the other resources so as to cut the cost. This started by using the technique of Bulk-buying. Here a company used to buy raw materials in bulk. This used to decrease the total cost of purchase. This lead to a very high, fast and sophisticated process development where a large capacity was input and output was in huge masses. This process yielded good results but the main problem of By-products was still prevailing.

Would emphasize on the other important properties in my next blog.

Do comment if u like the approach and do keep reviewing and helping me in this work.

Tuesday, April 28, 2009

Older Scenario Part I - Production Strategy

We always have come across the same kinda rules when forced to follow.

The same is the situation with the Corporate World. The scenario can be well explained with our resistive nature to change the path we are following even if the new path may provide a cost-cutting way. That is why Change Management has always been given epitome importance while restructuring(once in a century or even scarce) the company.

Changing the methodology of working involves one of the most daunting task to educate the internal customers(employees) about the new system and its methodology.

Having a several hundred years of existence,the Technique was known as the Mass Production, which was then highly simplified and implemented by Mr. Henry Ford the technique is also know as division by labor. Manufacturing companies started using a fresh new technique to provide a strong impetus to production and processing.

In this technique, always there was a streamlined-batch flow of data(goods as inputs) to produce outputs. The scheme got immediate recognition, as before this the production took place using some Ape-Intellectual Methods. These were random methods with less to do with certainty, usefulness and predictability.

After advent of Mass Production the total input cost decreased by a huge ratio, taking in consideration the historic method used. The most important advantage was the advent of Machine Age replacing the long practiced Manual Production. Also the output at a certain stage was highly known due to the rigidity and inflexibility of the process.

Having a clean and precise flow, the input went through several stages of and several workers, each assigned their own task with one depending on the output provided by his immediate predecessor. The method used to be rather irrelevant where one used to depend on other for input leading to rather most vague BATCH feeling. This is because this production process is highly inflexible and hence it is difficult to alter the design or production process. Also the yield is highly finished in nature, making it hard to make changes the output. Also this lead to wastage of some goods in form of by-products to say.

Companies have been wasting their resources and benefits which could have been used in some other work.

Would like to have reviews about the post and any improvements as well as corrections from your side will be taken care of!!!

XYZ Company

Here is a company which has undergone rigorous changes in due course of recession or any other phenomena.

We will analyze the various changes it came through during period of recession.

Changes may be Forced or Adapted and Regular-to-do fixed time changes.

How a company restructures itself to adapt to new technology after recession and all other mechanism.

I would like my visitors to help me access this company profile and add their valuable inputs to the post if I am not able to touch those points!!

Happy Reading and stay INTERCEPTED!!!

Monday, April 27, 2009


Acquisition means buying of one company by another called as the target company. An Acquisition may be friendly or hostile. In former case, the companies cooperate in negotiations leading to both side willing to merge. But in later case, the acquisition of target is somewhat unwilling to be bought or the target's board has no prior knowledge of the offer.

Acquisition in most cases refers to the purchase of a smaller firm by a larger one. Sometimes however a larger firm may be acquired by a smaller firm. This is known as Reverse Takeover.

Acquisition may be by purchasing of shares, and therefore control of the target company. Ownership control of the company in turn conveys effective control over the assets of the company. This form of transaction carries with it all the liabilities accrued by the business in the past.

Another form may be by buying the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. A disadvantage of this structure is the tax that many jurisdictions impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.

These acquisitions may lead to changes in Earning per Share(EPS), changes may be positive or negative. In one case the EPS may increase this is a case when a company with higher P/E ratio acquires one with low P/E ratio. In other case EPS decreases, when a higher P/E ratio company is acquired by a lower P/E ratio marked comapny.

Sunday, April 26, 2009

Asia - modest recovery in 2010: IMF

According to International Monetary Fund(IMF), Asian economies will witness a modest growth in 2010 due to the stronger export demand and stimulus spending by IMF.

I my previous post, IMF has increased the Power Quota Shares of some Developing Asian Economies to catalyze the development process both in Macro and Micro ways. Since The Great Depression in 1930, Trade in Asia have got its worst setback with a exponential decrease in the trade market.


The report exposes a risk of fall in global demand to more lower levels. This can be due to Economic Imbalance in stronger nations and its continuation. But the most important factor is to restore an economic balance in these economies with increase in exports ratio as a source of growth. Protcetionism has also been given due consideration so as to boost trade ratio in economies like India and China, in particular.