What are the 30 Stocks of BSE SENSEX

The SENSEX gives an indicative figure of the trading happened in BSE, which is the chief stock market of India. A group of 30 stocks that represent various industries of the economy are used for the calculation of SENSEX.

The base year for SENSEX calculation is 1978-79 and the base value is 100. It is calculated using Free-float Market Capitalization methodology. The SENSEX value is calculated every 15 seconds when the trade is going on.

Here is the list of the 30 stocks that constitutes the BSE SENSEX.

Code	Name	Sector	Adj. Factor
500410	ACC Ltd.	Housing Related	0.60
500103	Bharat Heavy Electricals Ltd.	Capital Goods	0.35
532454	Bharti Airtel Ltd.	Telecom	0.35
532868	DLF Ltd.	Housing Related	0.15
500300	Grasim Industries Ltd.	Diversified	0.75
500010	HDFC	Finance	0.85
500180	HDFC Bank Ltd.	Finance	0.85
500440	Hindalco Industries Ltd.	Metal,Metal Products & Mining	0.70
500696	Hindustan Unilever Ltd.	FMCG	0.50
532174	ICICI Bank Ltd.	Finance	1.00
500209	Infosys Technologies Ltd.	Information Technology	0.85
500875	ITC Ltd.	FMCG	0.70
532532	Jaiprakash Associates Ltd.	Housing Related	0.60
500510	Larsen & Toubro Limited	Capital Goods	0.90
500520	Mahindra & Mahindra Ltd.	Transport Equipments	0.80
532500	Maruti Suzuki India Ltd.	Transport Equipments	0.50
532555	NTPC Ltd.	Power	0.15
500312	ONGC Ltd.	Oil & Gas	0.20
500359	Ranbaxy Laboratories Ltd.	Healthcare	0.70
532712	Reliance Communications Limited	Telecom	0.35
500325	Reliance Industries Ltd.	Oil & Gas	0.50
500390	Reliance Infrastructure Ltd.	Power	0.65
500376	Satyam Computer Services Ltd.	Information Technology	0.95
500112	State Bank of India	Finance	0.45
500900	Sterlite Industries (India) Ltd.	Metal,Metal Products & Mining	0.40
532540	Tata Consultancy Services Limited	Information Technology	0.25
500570	Tata Motors Ltd.	Transport Equipments	0.60
500400	Tata Power Company Ltd.	Power	0.70
500470	Tata Steel Ltd.	Metal,Metal Products & Mining	0.70
507685	Wipro Ltd.	Information Technology	0.20

The BSE Index Committee meets every quarter to revise SENSEX constituents. In case a stock is to be replaced by another one, the announcement is made six weeks in advance of the actual change.

Basics of Finance

What are the Capital Components?

• Common Stock
• Preferred Stock
• Bonds (debt)
• Retained Earnings - (profit the company makes, but does not give to the shareholders in the form of dividends)

Each of these components has a cost. We can determine the cost of each capital component.

Cost of Retained Earnings

This is kind of weird to think about. It takes some time to understand so take it slowly. After a company makes money (earnings), who owns that money? The shareholders, right? But when you retain earnings you are not giving the money to the shareholders. You are keeping it. In a way, you are investing it for them in your company. Well those shareholders want some return on that money you are keeping.. How much return do they expect? They want the same amount as if they had gotten the retained earning in the form of dividends, and bought more stock in your company with them. THAT is the cost of retained earnings. You as a financial genius, have to ensure that if you are retaining earning, that the shareholders will get at least as good a return on the money as if they had re-invested the money back into the company.

If you don't understand this, re-read it and re-think it until you do get it. There is really no "cost" in the cost of retained earnings. I mean, no money is changing hands. You aren't paying anyone anything. But you are keeping the shareholders money. You can't say it is "free" money. Frankly if you did, it would screw up your capital budgeting. So when you are doing your capital budgeting, to ensure that the shareholders are getting a decent rate of return, you "guess" a cost of retained earnings. How?? One way is CAPM. Another way is the bond yield plus risk premium approach, in which you take the interest rate on the company's own long term debt and then add between 5% and 7%. Again, you are kind of guessing here. A third way is the discounted cash flow method, in which you divide the dividend by the price of stock and add the growth rate. Again, a lot of guessing.

Cost of Issuing Common Stock

Flotation Cost of Common Stock

=

Costs of issuing the actual stock (ink, printing, paper, computers, etc.)

+

The cost of retained earnings.

Cost of Preferred Stock

Cost of Preferred Stock	=	What you give.	divided by	What you get.
Cost of Preferred Stock	=	Dividend	divided by	Price - Underwriting Costs

Cost of Bonds (debt)

Cost of Debt

=

Coupon rate on the bonds

minus

The Tax Savings

Interest on bonds is tax deductible. So we can reduce our taxable income by the amount of money we pay to the bondholders.

WACC - The Weighted Average Cost of Capital.

Every company has a capital structure - a general understanding of what percentage of debt comes from retained earnings, common stocks, preferred stocks, and bonds. By taking a weighted average, we can see how much interest the company has to pay for every dollar it borrows. This is the weighted average cost of capital.

Capital Component	Cost	Times	% of capital structure	Total
Retained Earnings	10%	X	25%	2.50%
Common Stocks	11%	X	10%	1.10%
Preferred Stocks	9%	X	15%	1.35%
Bonds	6%	X	50%	3.00%
TOTAL				7.95%

So the WACC of this company is 7.95%.

Kinds of Interest Rates

Let's say I give you a credit card and the interest rate on the card is 3% per month. What is the annual rate that you are actually charged?? 36%?? Well, no. It's actually 42.57%.

Nominal Rate	Nominal means "in name only". This is sometimes called the quoted rate.
Periodic Rate	The amount of interest you are charged each period, like every month.
Effective Annual Rate	The rate that you actually get charged on an annual basis. Remember you are paying interest on interest.

In the example

• The Nominal Rate is 36%.
• The Periodic Rate is 3% (you are charged 3% interest on your balance every month)
• The Effective Annual Rate is 42.57%

Nominal Rate = Periodic Rate X Number of Compounding Periods

Effective Annual Rate = (1+ i / m)m -1

• m = the number of compounding periods
• i = the nominal interest rate

O.K., so let's try the example again.

• Effective Annual Rate = (1+ i / m)^m -1
• Effective Annual Rate = ( 1 + .36 / 12 )¹² -1
• Effective Annual Rate = (1.03)¹² - 1
• Effective Annual Rate = (1.4257) -1
• Effective Annual Rate = .4257
• Effective Annual Rate = 42.57 %

Capital Budgeting

Payback, Discounted Payback, NPV, Profitability Index, IRR and MIRR are all capital budgeting decision methods.

Cash Flow- We are going to assume that the project we are considering approving has the following cash flow. Right now, in year zero we will spend 15,000 dollars on the project. Then for 5 years we will get money back as shown below.

Year	Cash flow
0	-15,000
1	+7,000
2	+6,000
3	+3,000
4	+2,000
5	+1,000

Payback - When exactly do we get our money back, when does our project break even. Figuring this is easy. Take your calculator.

Year	Cash flow	Running Total
0	-15,000	-15,000
1	+7,000	-8,000	(so after the 1st year, the project has not yet broken even)
2	+6,000	-2,000	(so after the 2nd year, the project has not yet broken even)
3	+3,000	+1,000	(so the project breaks even sometime in the 3rd year)

But when, exactly? Well, at the beginning of the year we had still had a -2,000 balance, right? So do this.

Negative Balance / Cash flow from the Break Even Year	=	When in the final year we break even
-2,000 / 3,000	=	.666

So we broke even 2/3 of the way through the 3rd year. So the total time required to payback the money we borrowed was 2.66 years.Discounted Payback - is almost the same as payback, but before you figure it, you first discount your cash flows. You reduce the future payments by your cost of capital. Why? Because it is money you will get in the future, and will be less valuable than money today. (See Time Value of Money if you don't understand). For this example, let's say the cost of capital is 10%.

Year	Cash flow	Discounted Cash flow	Running Total
0	-15,000	-15,000	-15,000
1	7,000	6,363	-8,637
2	6,000	4,959	-3,678
3	3,000	2,254	-1,424
4	2,000	1,366	-58
5	1,000	621	563

So we break even sometime in the 5th year. When?

Negative Balance / Cash flow from the Break Even Year	=	When in the final year we break even
-58 / 621	=	.093

So using the Discounted Payback Method we break even after 4.093 years.

Net Present Value (NPV) - Once you understand discounted payback, NPV is so easy! NPV is the final running total number. That's it. In the example above the NPV is 563. That's all. You're done, baby. Basically NPV and Discounted Payback are the same idea, with slightly different answers. Discounted Payback is a period of time, and NPV is the final dollar amount you get by adding all the discounted cash flows together. If the NPV is positive, then approve the project. It shows that you are making more money on the investment than you are spending on your cost of capital. If NPV is negative, then do not approve the project because you are paying more in interest on the borrowed money than you are making from the project.Profitability Index

Profitability Index	equals	NPV	divided by	Total Investment	plus	1
PI	=	563	/	15,000	+	1

So in our example, the PI = 1.0375. For every dollar borrowed and invested we get back $1.0375, or one dollar and 3 and one third cents. This profit is above and beyond our cost of capital.Internal Rate of Return - IRR is the amount of profit you get by investing in a certain project. It is a percentage. An IRR of 10% means you make 10% profit per year on the money invested in the project. To determine the IRR, you need your good buddy, the financial calculator.

Year	Cash flow
0	-15,000
1	+7,000
2	+6,000
3	+3,000
4	+2,000
5	+1,000

Enter these numbers and press these buttons.

-15000	g	CFo
7000	g	CFj
6000	g	CFj
3000	g	CFj
2000	g	CFj
1000	g	CFj
f	IRR

After you enter these numbers the calculator will entertain you by blinking for a few seconds as it determines the IRR, in this case 12.02%. It's fun, isn't it!
Ah, yes, but there are problems.

• Sometimes it gets confusing putting all the numbers in, especially if you have alternate between a lot of negative and positive numbers.
• IRR assumes that the all cash flows from the project are invested back into the project. Sometimes, that simply isn't possible. Let's say you have a sailboat that you give rides on, and you charge people money for it. Well you have a large initial expense (the cost of the boat) but after that, you have almost no expenses, so there is no way to re-invest the money back into the project. Fortunately for you, there is the MIRR.

Modified Internal Rate of Return - MIRR - Is basically the same as the IRR, except it assumes that the revenue (cash flows) from the project are reinvested back into the company, and are compounded by the company's cost of capital, but are not directly invested back into the project from which they came. WHAT?
OK, MIRR assumes that the revenue is not invested back into the same project, but is put back into the general "money fund" for the company, where it earns interest. We don't know exactly how much interest it will earn, so we use the company's cost of capital as a good guess.
Why use the Cost of Capital?
Because we know the company wouldn't do a project which earned profits below the cost of capital. That would be stupid. The company would lose money. Hopefully the company would do projects which earn much more than the cost of capital, but, to play it safe, we just use the cost of capital instead. (We also use this number because sometimes the cash flows in some years might be negative, and we would need to 'borrow'. That would be done at our cost of capital.)

How to get MIRR - OK, we've got these cash flows coming in, right? The money is going to be invested back into the company, and we assume it will then get at least the company's-cost-of-capital's interest on it. So we have to figure out the future value (not the present value) of the sum of all the cash flows. This, by the way is called the Terminal Value. Assume, again, that the company's cost of capital is 10%. Here goes...

Cash Flow	Times		=	Future Value of that years cash flow.	Note
7000	X	(1+.1) 4	=	10249	compounded for 4 years
6000	X	(1+.1) 3	=	7986	compounded for 3 years
3000	X	(1+.1) 2	=	3630	compounded for 2 years
2000	X	(1+.1) 1	=	2200	compounded for 1 years
1000	X	(1+.1)0	=	1000	not compounded at all because this is the final cash flow
TOTAL			=	25065	this is the Terminal Value

OK, now get our your financial calculator again. Do this.

-15000	g	CFo
0	g	CFj
0	g	CFj
0	g	CFj
0	g	CFj
25065	g	CFj
f	IRR

Why all those zeros? Because the calculator needs to know how many years go by. But you don't enter the money from the sum of the cash flows until the end, until the last year. Is MIRR kind of weird? Yep. You have to understand that the cash flows are received from the project, and then get used by the company, and increase because the company makes profit on them, and then, in the end, all that money gets 'credited' back to the project. Anyhow, the final MIRR is 10.81%.
Decision Time- Do we approve the project? Well, let's review.

Decision Method	Result	Approve?	Why?
Payback	2.66 years	Yes	well, cause we get our money back
Discounted Payback	4.195 years	Yes	because we get our money back, even after discounting our cost of capital.
NPV	$500	Yes	because NPV is positive (reject the project if NPV is negative)
Profitability Index	1.003	Yes	cause we make money
IRR	12.02%	Yes	because the IRR is more than the cost of capital
MIRR	10.81%	Yes	because the MIRR is more than the cost of capital

Forex - Foreign Currency Exchange

Foreign Exchange - FX

Forex or FX for short means foreign exchange. Up until a few years ago, foreign currencies were usually traded by corporations, central banks, hedge funds, large financial institutions, and very wealthy individual traders. But like many things, foreign exchange changed dramatically with the Internet. Now, individual investors are able to buy and sell currencies much more easily than before.

Often, pairs of currencies fluctuate only around 1% or less per day, so foreign exchange is often considered to be a relatively stable market. Speculators sometimes use enormous leverage to try to make money off of these small fluctuations. Leverage in foreign markets can be as high as 250 to 1. With leverage of course comes risk, and high leverage, such as 250 to 1, can be extremely risky.

Foreign currency markets are often open around the clock, 24 hours a day, during most business days. Markets are relatively liquid. Investors are often able to open and close positions within minutes, or hold those positions for months. Because the currency markets are so large, even the largest players, such as central banks, are often unable to move prices it will.

Although the Forex market provides investors with plenty of opportunity, currency traders have to understand the basics of currency trading in order to be successful.

People need foreign currency in order to conduct foreign business and trade with other countries. For example, if you're living in Japan and want to buy wine from California, you would have to change your Japanese yen to US dollars to purchase the wine. The same thing happens when you travel abroad. If you want to buy cheese from a supermarket in France you most likely won't be able to pay with US dollars.

Now imagine all of the international trade that occurs in the world and you'll see why the size of the Forex market is so large. In April of 2007, the Bank for International Settlements reported that daily turnover was over $3.2 trillion.

One thing that is unusual about the currency market is that there is no central marketplace. Transactions occur electronically over computer networks between traders all around the world in places like London, Tokyo, New York, Frankfurt, Paris, Hong Kong, Singapore and Sydney. The market is usually open around the clock, 5 1/2 days a week.

The futures market, the forwards market, and the spot market are three ways that corporations, institutions and individuals trade Forex. The underlying real asset is the spot market. The spot market is also the largest market. The futures markets and forwards markets are based on the spot market. When people talk about the Forex market they are usually talking about the spot market. The forwards and futures markets are usually more often traded by companies in order to hedge foreign exchange risks to a specific time in the future.

The spot market is where supply and demand meet and where currencies are bought and sold. The spot market price is based on many things including economic performance, current interest rates, local and international political situations, and a belief in the future performance of one currency against another. When a currency transaction is finalized it's called a spot deal. In a spot deal, one party agrees to deliver a certain amount of a certain currency to a counterpart and receives a certain amount of another currency at a certain exchange rate. The settlement is made in cash after the position is closed. Trades in the spot market usually take two days for settlement.

Forwards markets and futures markets are different from the spot market in that they do not trade actual currencies. They instead deal contracts. These contracts represent claims to specific currency types, specific future dates for settlement, and specific prices per unit. Contracts in the forwards market are bought and sold over-the-counter at the terms that the buyer and seller agreed to between themselves. Futures contracts are bought and sold in the futures market based on standard sizes and settlement dates. The National Futures Association regulates the futures market in the United States. Specific details in futures contracts include the number of units traded, delivery date and settlement date. The minimum price increments in futures contracts cannot be customized. The exchange provides clearance and settlement by acting as a counterpart into the trader.

Before they expire contract can be bought and sold. However, contracts are typically settled for cash when they expire. Both types of contract are binding. The futures markets and forwards markets can offer a degree of protection against currency trading risks. Large multinational companies often use the forwards and futures markets as a hedge against fluctuations in future exchange rates. Speculators also are known to take part in these markets.

Reading Quotes
Here is a currency quote, also called a currency pair: USD/JPY=95.50. The currency on the left-hand side of the slash is called the base currency. In this case the US dollar is the base currency. The currency on the right-hand side of the slash is called the quote currency or counter currency. In this case the quoted currency is the Japanese yen. The base currency is always equal to one unit so in this case one US dollar. This quote means that one US dollar can buy 95.50 Japanese yen.

The two ways to quote a currency pair are directly and indirectly. In a direct quote, the domestic currency is the base currency. In an indirect quote, the domestic currency is the quoted currency.

Nearly all currency exchange rate quotes are carried out to four digits after the decimal place. An important exception is the Japanese yen, which is carried out to two decimal places. 

Cross Currency
A cross currency is a currency quote that doesn't have the US dollar as one of its components. Common cross currency pairs include EUR/JPY, EUR/GBP and EUR/CHF. Although these currency pairs aren't as actively traded as pairs that include the US dollar, they do expand currency tradersf options in the Forex market.

Trading a Currency
When trading a currency pair there is a bid price and an ask price. When going long or buying a currency pair, the ask price is the amount of the quoted currency to be paid in order to buy one unit of the base currency.

When going short or selling a currency pair the bid price is how much of the quoted currency will be obtained when selling one unit of the base currency.

The bid price is the quote before the slash. The last two digits after the slash are the ask price. Often, only the last two digits of the full price or quoted. Generally, the bid price is smaller than the ask price. Here's an example:


USD/CAD=1.0000/05
Bid=1.0000
Ask=1.0005
Let's say that you wanted to buy this currency pair. In other words, you plan to buy the base currency and are watching the ask price to determine how much in Canadian dollars the market charges for US dollars. According to the example, one US dollar can be bought for 1.0005 Canadian dollars.

Now let's say you wanted to sell this currency pair. In other words, you plan to sell the base currency in exchange for the quoted currency. In this case, you would look at the bid price. According to the bid price, the market will buy one US dollar for 1.0000 Canadian dollars.

Transactions are conducted in whichever currency is quoted first. In other words, transactions are conducted in the base currency. You purchase the base currency or sell the base currency.

Pips and Spreads
A pip can be defined as the smallest amount that a price can move in a currency quote. A spread is the difference between the bid price and the ask price. Here's the previous example again:

USD/CAD=1.0000/05
In this case the spread would be 0.0005 or 5 pips. Pips are also sometimes called points. One pip equals 0.0001 units when talking about US dollars, British Pounds, Swiss Franc, or Euro. One pip equals 0.01 units when talking about the Japanese yen.

Currencies are quoted differently on the forwards and futures markets. Foreign exchange is quoted against the US dollar in the forwards and futures markets. In other words, pricing shows how many US dollars you need to buy one unit of a given foreign currency. This contrasts with the spot market where in some cases currencies are quoted against the US dollar and in other cases the US dollar is quoted against the foreign currency.

Forex versus Equities
The Forex market has very few traded instruments. This is a major difference between the Forex market and the equities markets. The equities market has thousands of stocks for traders to research and choose from, however most Forex trades revolve around seven major currency pairs. The seven major pairs are USD/JPY, GBP/USD, EUR/USD, USD/CHF, USD/CAD, NZD/USD and AUD/USD.

In the equities market it is sometimes difficult for traders to make money when the market declines. There are specific rules and regulations regarding short-selling US equities. However in the Forex market traders have the opportunity to profit in either rising or declining market. In the Forex market, short-selling is inherent in every transaction because traders are buying and selling simultaneously. Also, the Forex market is generally more liquid than the equities market so traders don't have to wait for an uptick before they enter a short position.

Margins are low and leverage is high on the Forex market, a result of its high level of liquidity. Such low margin rates are extremely difficult to find in the equities markets, where margin traders often need to maintain at least 50% of the value of the investment as margin. Forex traders on the other hand sometimes need only 1% equity. Commissions in the Forex market tend to be lower than in the equities market.

History of Currency Exchange
The gold standard monetary system was created in 1875. It was one of the most important events in the history of the Forex market. Previously, countries used to use gold and silver to make international payments. However, the value of gold and silver was affected by external supply and demand, which created problems. For example, if a new gold mine was discovered the price of gold would go down.

With the gold standard governments around the world agreed that they would convert currency into specific amounts of gold. To do this governments were required to have large gold reserves to meet the demand to make exchanges. By the end of the 19th century, most of the countries with large economies had defined a certain amount of currency as being equal to one ounce of gold. As time went on, the amount of each currency that was required to purchase one ounce of gold became exchange rates between two currencies. This was the beginning of currency exchange.

Around the beginning of World War I the gold standard broke down. European powers believed it was necessary to complete large military projects because of political pressure from Germany. The cost of these military projects was so high that there wasn't enough gold to exchange for all the currency that the governments were printing.

The gold standard returned briefly after World War I, however most countries went off the gold standard again before World War II.

Near the end of World War II the Allied nations decided to set up a monetary system to replace the gold standard. Over 700 Allied representatives met in Bretton Woods, New Hampshire, in July of 1944 to discuss the Bretton Woods system of international monetary management. Some of the main ideas that came out of the meeting were that the US dollar would replace the gold standard and become a primary reserve currency, that there would be fixed exchange rates and that there would be three international agencies to oversee economic activity would be created. These agencies were the international monetary fund (IMF), the General Agreement on Tariffs and Trade (GATT), and the International Bank for Reconstruction and Development.

The US dollar replacing gold as the primary standard for world currency conversions was one of the main ideas brought about by Bretton Woods. At the time the US dollar was the only currency that was backed by gold.

Over the next few decades, in order to remain the world's reserve currency, the United States had to have a series of balance of payment deficits. However, in the early 1970s, US gold reserves had become so depleted that the United States treasury lacked enough gold to cover the large number of US dollars that foreign central banks had in reserve. So on August 15, 1971, the United States effectively declared that it would no longer exchange gold for US dollars that were held in foreign reserves when US President Richard Nixon closed the gold window. President Nixon's actions brought the Bretton Woods system to an end.

In 1976, the world decided to use floating foreign exchange rates in what was called the Jamaica agreement. This agreement abolished the gold standard. However, not all governments have adopted a free floating exchange rate system. In fact, most governments still use one of three exchange-rate systems. They are Dollarization, a pegged rate, and managed floating rate.

Dollarization occurs if a country chooses to not issue its own currency and instead uses of foreign currency as its national currency. One advantage of dollarization is that the country may be seen as a relatively stable place for investment. Two disadvantages of dollarization are that the country's central bank can no longer make monetary policy nor print money.

Pegged rates happen if a country chooses to directly fix its exchange rates to a foreign currency. Pegged rates usually allow the country to have more stability than a normal float. The country's currency may be pegged at a fixed rate to a single currency or to a specific basket of foreign currencies. The currency only fluctuates when there are changes in the pegged currencies. An obvious example of a pegged currency is the Chinese yuan. Between 1997 and July 21, 2005 the Chinese Yon was pegged to the US dollar at a rate of 8.28 yuan.

Managed floating rates are created when a country's exchange rate changes freely and the currencyf value is subject to the forces of supply and demand in the market. With managed floating rates the country's central bank or government may intervene when there are extreme fluctuations in exchange rates. If, for example, a country's currency depreciates too much, the government could increase short-term interest rates, which would likely cause the currency to appreciate. Central banks generally have a wide variety of tools that they can use to manage their currency.

Participants in the Forex Market

Market participants in the equities market are often limited to investors who trade with either other investors or institutional investors like mutual funds. On the Forex market, however, there are market participants who are not investors.

Governments and central banks are probably the most influential participants in the currency exchange market. Many countries use their central banks as an extension of the government to conduct monetary policy. Other countries seem to believe their central banks would be more effective in finding a balance between keeping interest rates low and curbing inflation if they were more independent, and free of government control. In both cases, though, representatives from the government usually have regular meetings and discussions with the representatives of the central banks, leading, often, to similar ideas on monetary policy.

Reserve volumes are often manipulated by central banks in attempts to meet economic goals. China, for example, has been purchasing millions of dollars of United States treasury bills to keep the Chinese Yuan at its target exchange rate, a result of China pegging its currency to the US dollar. Central banks adjust their reserve volumes by participating in the foreign exchange market. Because these banks have a great deal of purchasing and selling power, they have a large influence on the direction of the currency markets.

Banks and other financial institutions are some of the largest participants in Forex transactions. The interbank market is where large banks conduct transactions amongst themselves. These transactions determine the currency. The interbank market is huge in volume when compared to the exchange individuals make when they need small-scale foreign currency transactions. Credit is the basis of the electronic brokering systems that allow the banks to transact with each other. The only banks that can engage in transactions are ones that have great relationships with each other. Larger banks generally have a wider array of credit relationships and therefore can access better pricing for their customers. On the other hand, small banks with fewer credit relationships often have lower priority in pricing. We can think of banks as being dealers because they are willing to buy or sell a currency at the ask or bid price. Banks are able to make money by charging a premium to exchange currency on the Forex market. The Forex market is decentralized so frequently different banks have slightly different exchange rates for a given currency.

Economics

L, V and U Recessions

These are the types of recessions according to economists worldwide; i.e. L-shaped, V-shaped and U-shaped ones.

L-shape recession is a recession that goes down and then stays there for a long period of time without a recovery. It could last for 20 years like it happened in Japan. A V-shape recession goes down pretty fast and recovers in very less time. A U-shape recession goes down slowly and then stays there for a few years before recovering slowly. It could last anywhere from 2-10 years, like in the 70s in US where it lasted for 8 years.

Most of the times, it is the economic policy adopted by a government before recession, which determines what type of recession it is; where wrongly calibrated economic policies leading to L-shape recessions, the worst of all.

RBI cuts repo and reverse repo rates

The Reserve Bank of India lowered its Repo Rate and Reverse Repo Rate by 50 basis points to 5% and 3.5% respectively, with immediate effect. The Repo Rate is the rate at which RBI lends money to banks and the Reverse Repo Rate is the rate at which banks park funds with RBI.

This move will help RBI to maintain enough money in the economy as it will allow banks to reduce their interest rates on various loans, thereby making credit available easily to the population, at lower interest rates.

The inflation rate, which is already low, would come down further with the rate cut. Meanwhile, the central bank has asked banks to monitor their loans and assets quality as concerns grow over non-performing assets in the banking system.

India’s new Bimetallic 10 Rupee Coin

I might be a little late on this news, but here’s the picture of the new (and first ever) bimetallic coin of Rupees 10 denomination issued by the government of India. The outer ring of the coin is made up of Aluminum and Bronze alloy while the inner section is made up of Nickel and Copper alloy.

There are two themes for the coin.
1) Unity in Diversity and
2) Connectivity and Information Technology.

The coin in the picture has the first theme, Unity in Diversity.

How is WPI inflation rate calculated in India?

With inflation rate surging to new heights, the term is more in the news than ever in India. While leaving aside the debate on whether India should adopt CPI (Consumer Price Index) based inflation calculation rather than the current WPI (Wholesale Price Index) based one, let’s find in detail how inflation rate is calculated in India; which is the WPI based inflation rate.

What is inflation?
Inflation rate of a country is the rate at which prices of goods and services increase in its economy. It is an indication of the rise in the general level of prices over time. Since it’s practically impossible to find out the average change in prices of all the goods and services traded in an economy (which would give comprehensive inflation rate) due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate.

Mathematically, inflation or inflation rate is calculated as the percentage rate of change of a certain price index. The price indices widely used for this are Consumer Price Index (adopted by countries such as USA, UK, Japan and China) and Wholesale Price Index (adopted by countries such as India). Thus inflation rate, generally, is derived from CPI or WPI. Both methods have advantages and disadvantages. Since India uses WPI method for inflation calculation, let’s go in to the details of WPI based inflation calculation.
How is WPI (Wholesale Price Index) calculated?
In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy.

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, let’s assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered.

Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

The WPI of wheat for the year 1980 is,
(Price of Wheat in 1980 – Price of Wheat in 1970)/ Price of Wheat in 1970 x 100

i.e. (6.10 – 5.75)/5.75 x 100 = 6.09

Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09.

In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.
How is inflation rate calculated?
If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be,

(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100

For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the year 1981 is,

(109.72 – 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is 3.42%.

Since WPI figures are available every week, inflation for a particular week (which usually means inflation for a period of one year ended on the given week) is calculated based on the above method using WPI of the given week and WPI of the week one year before. This is how we get weekly inflation rates in India.
Characteristics of WPI
Following are the few characteristics of Wholesale Price Index

WPI uses a sample set of 435 commodities for inflation calculation

The price from wholesale market is taken for the calculation

WPI is available for every week

It has a time lag of two weeks, which means WPI of the week two weeks back will be available now

There are certain arguments in the open saying that the government shall adopt Consumer Price Index (CPI) method for inflation calculation, which gives a more correct picture. 

As on today, India uses a basket of 435 commodities and a base year of 1993-94 for its Wholesale Price Index (WPI) based inflation rate calculation. The 435 commodities used for finding WPI range from food items like rice, wheat to petroleum products to medicines and are given weightages depending upon their importance and impact on the economy. Discussions are going on to revise the number of commodities to 980 and base year to 2004-05.

The 435 commodities are divided to various groups and subgroups. Individual commodities, and as a result, groups and subgroups have weightages. On a broader level, the 435 commodities are grouped into,

1. Primary Articles
2. Fuel, Power, Light & Lubricants
3. Manufactured Products

Primary Articles consist of food grains, fruits and vegetables, milk, eggs, meats and fishes, condiments and spices, fibers, oil seeds and minerals. Fuel, Power, Light & Lubricants consist of coal and petroleum related products, lubricants, electricity etc. Manufactured Products consist of dairy products, atta, biscuits, edible oils, liquors, cloth, toothpaste, batteries, automobiles etc. The group weightages are 22.02525%, 14.22624% and 63.74851% for Primary Articles, Fuel, Power, Light & Lubricants and Manufactured Products respectively. The total adds up to 100.

There are three more parts to this article. In the first part, we will cover Primary Articles, its sub classifications, individual commodities and their weightages. Second part is for Fuel, Power, Light & Lubricants, its sub classifications, individual commodities and their weightages and third part deals with Manufactured Products, its sub classifications, individual commodities and their weightages.

In case you are reading this post first, this is the second article of a four part series. Please go to the first part and then read on.

From the first part,
India uses 435 commodities for its WPI based inflation calculation. On a broader level, the 435 commodities are grouped into,
1. Primary Articles
2. Fuel, Power, Light & Lubricants
3. Manufactured Products

This post covers the first of the main groups, Primary Articles, which has a group weightage of 22.02525%. Primary Articles are further classified in various sub-groups and sub-sub-groups as shown below.

Primary Articles

1. Food Articles
1. Food Grains (Cereals & Pulses)
1. Cereals
2. Pulses
2. Fruits & Vegetables
1. Vegetables
2. Fruits
3. Milk
4. Eggs, Meat & Fishes
5. Condiments & Spices
6. Other Food Articles
2. Non-Food Articles
1. Fibers
2. Oil Seeds
3. Other Non-Food Articles
3. Minerals
1. Metallic Minerals
2. Other Minerals

Following table shows the sub-group, sub-sub-group and individual commodity weightage of the constituents of Primary Articles.


In the next part, we will cover Fuel, Power, Light & Lubricants, its sub classifications, individual commodities and their weightages

In case you are reading this post first, this is the third article of a four part series. Please go to the first part, second part and then read on.

From the first part,
India uses 435 commodities for its WPI based inflation calculation. On a broader level, the 435 commodities are grouped into,
1. Primary Articles
2. Fuel, Power, Light & Lubricants
3. Manufactured Products

This post covers the second of the main groups, Fuel, Power, Light & Lubricants, which has a group weightage of 14.22624%. Fuel, Power, Light & Lubricants are further classified into various sub-groups as shown below.

Fuel, Power, Light & Lubricants

1. Coal Mining
2. Mineral Oils
3. Electricity

Following table shows the sub-groups and individual commodity weightages of the constituents of Fuel, Power, Light & Lubricants.

Group	Sub-Group	Commodity	Weightage	Sub-Group Weightage	Group Weightage
Fuel, Power, Light& Lubricants	Coal Mining	Coking Coal	0.24148	1.75291	14.22624
		Non-coking Coal	1.39670
		Coke	0.01115
		Lignite	0.10358
	Minerals Oil	LPG	1.83731	6.98963
		Petrol	0.88815
		Kerosene	0.68928
		Aviation Fuel	0.16953
		High Speed Diesel	2.02034
		Light Diesel	0.16015
		Naphtha	0.41885
		Bitumen	0.14900
		Furnace Oil	0.49335
		Lubricants	0.16367
	Electricity	Domestic Use	0.96026	5.4837
		Commercial Use	0.27690
		Agriculture	1.94557
		Industry	2.16918
		Railway	0.13179

In the next part, we will cover Manufactured Products, its sub classifications, individual commodities and their weightages. 

WPI vs CPI

Now as we have seen how inflation is calcualated with WPI , its now time to analyze wthether WPI is a good measure of inflation or not.

Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation. But our country, India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

The main difference between WPI and CPI is that wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at final stage of production.

In last post we discussed about WPI, now let’s have a better understanding of CPI and how it’s better from WPI:

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

In use of WPI there are certain problems which have been encountered.
· Economists say that main problem with WPI is that more than 100 out of 435 commodities included in the index have abstained to be important from consumption point of view. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
· WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. Therefore we see here that WPI does give the true picture of inflation.
· In present day service sector plays a key role in indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI.
· Moreover the inflation figures that we get on Friday hardly makes a differnce to consumers, as the commodites on which inflation is calculated are not part individual consumers budget. Therefore in order to know what exact number of inflation is affecting your budget , it is advisible you should do your own calculation. You can compare your expenditure for previous years and with present scenario required to maitain your lifestyle and you ill come to know that increase in expenditure would be a few times higher than the official inflation figure.

But it is not easy for country like india to adopt to CPI , as in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are:
· CPI Industrial Workers;
· CPI Urban Non-Manual Employees;
· CPI Agricultural labourers; and
· CPI Rural labour.
Apart from this official staements say that there is too much of lag in reporting of CPI numbers, which makes it difficult for india to calcualte inflation based on CPI figures.
India calcualtes inflation on weekly basis , whereas CPI figures are available on monthly basis. So all this give little ground for indian government to adopt CPI in calculating inflation.

Financial Terms

Different types of capital issues

  There  are certain types of capital issues like

1. public issue through prospectus.

2. offer for sale.

3. private placement.

4. offer through book building process

5. public offer through stock exchange online system

what is del credare commission

it is a payment made by principal to sales agent for guaranteeing the payment of goods sold

 it is a payment made by principal to sales agent for

collecting the amount of goods sold by agent on credit basis.

define finance

finance is nothing but money and by the meaning of 

financial management is to manage the financial matters

Finance is the life blood of the business as necessary as 

the blood circulation is required for a human life.

Without finance, a business or a business organisation 

can't run even stand for any purpose in no profit-no loss 

situation.

a branch of economics concerned with resource allocations 

well as resource management, acquisition and investment.

mobilisation of funds and invest them in  profitable sectors with the expectation of positive rate of return.

finance deals with procurement of funds and utilization of

such funds in a fruitful manner.

Finance is the provision of money at the time of requirement.

finance means facility of money which provided by any 

financial institute and finance is a pool of money.

Finance is the science of funds management.[1] The general

areas of finance are business finance, personal finance,

and public finance.[2] Finance includes saving money and

often includes lending money. The field of finance deals

with the concepts of time, money, risk and how they are

interrelated. It also deals with how money is spent and

budgeted

 What is mean by debit, credit 2) what is mean by purchase, sales

*Debt is under assets and Credit is under liabilities.

*when the receiver receives the asset or amount and when

expenses are paid and losses are held these types of

entries comes under debit a/c.

*when the giver gives assets or amount and when incomes are

received and profits are held these types of entries comes

under credit a/c.

How the IPO price is decided considering the face value of an equity share?

ipo price is decided by the process of book building in

india also known as French auction in other

countries.....here once the band of share is decided then the

investors are called upon for betting ....band fixing is

done by cumulative method

IPO can be issued at a fixed price as decided by the issuer 

and the merchant banker or by a process known as ‘Book 

Building’ in which a ‘floor price’ or ‘price band’ is fixed 

and the price of the share is decided by the market forces 

(demand and supply mechanism).

 what is the difference between npv and irr method of capital budgeting and which one is better?

NPV stands for net present value where as I.R.R stands for

internal rate of return. N.P.V is the difference between

present value of cash inflow and present value of cash outflow

or initial investment. I.R.R is the rate that equates present

value of cash inflow with cash outflow. N.P.V is better

because it takes into consideration the time value of money.

Above answer is correct but NPV meaning sum of total 

present values of future cash inflows and total present 

cash outflows

what is the working of GDR?

gdr is global depository receipt

is use full to raise the fund globally other than us company

 what is wacc and how it is use?

As WACC standfor weighted Average cost of capital.As you

know capital structure of the company is mix of long term

debt and equity and company tries to maximize the

shareholders wealth by adopting the proper mix of debt and

equity.So WACC is calculates based  on the cost of the

capital of eaach component multiplied by its weight.It is

the minimum cost of capital to the company which discounted

the future inflow againts the inital outflow to have

maximum value to company.

What is ROI

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

ROI= (gain from investment-cost of investment) / cost of investment

What is ROE

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. 

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

 What is Retained Earnings

When a company or corporation earns a profit or surplus, that money can be put to two uses it can either be re-invested in the business called retained earnings or it can be paid to the shareholders as a dividends.

 Profit Of A Company Is Distributed As Dividend To The Preference Shareholder And Common Equity Holder, it Depends Upon The Discretion Of The Company. the Surplus After Dividend Payment Is Retained By The Company. the Retained Earning Is Added To The Reserve And Surplus Of The Balance Sheet. it Is Consider As The Liability In The Balance Sheet.  this Fund Is Used As Expansion Or Accumulated Fund Is Distributed As Bonus.

What is Interim Dividend

Interim Dividend Is Defined As The Declaration Of The Dividend By The Company Before The Annual General Meeting.

What is meant by OTC

Otc Is Defined As Over The Counter Exchange.as Financial Instrument Is Traded In Secondary Market To Increase The Liquidity Of The Instrument.secondary Market Can Be Regulated Bt Exchange Or It Cold Be Otc.exchange Regulated Market Is Governed By Standard Units Of Instrument And Delivery Of The Delivery Of The Instrument Is Gurented By Intermediary Body ,but In Otc Market ,there Is No Such Defined Market Place And It Is Regulated On Telephone And Internet.there Is No Intermediary Body To Guarantee The Delivery Of The Instrument

What is meant by capital market

Capital market is the market for securities, where companies and governments can raise long-term funds. It inculde both stock market and bond market.

What is Treasury Bills?

Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value.

What are Mutual Funds

Mutual funds are funds operated by an investment company which raises money from the public and invests in a group of assets(shares, debentures etc.), in accordance with a stated set of objectives

What is BRS

'BRS" means Bank Reconciliation Statement.

Who is a lame-duck

A person who has defaulted on his or her debts or has gone bankrupted due to the stock market. The financial use of the term is most commonly used in Europe.

A trader or investor who makes poor trades and ends up with heavy losses over time would be considered a lame duck. Often, if a trader goes bankrupt, it is not the result of one bad trade but a long string of them - such a trader is called a lame duck because he or her is ineffective as a trader. (The term  lame duck also refers to a politician who has chosen not to seek re-election, is ineligible to run for office again or has lost an election but is still in office until the election winner takes control of the office. The politician is considered a lame duck as he or she is not accountable to the constituency he or she represents.)