Indian banks have started experiencing the ripples of the US subprime crisis. While ICICI Bank is provisioning an additional $70 million (around Rs 280 crore) to cover its losses on exposure to credit derivatives, Bank of Baroda today said it will provision an additional $2.50 million (around Rs 10 crore) for its investments in Credit Linked Notes (CLNs).
CLN is a form of credit derivative issued overseas for bonds floated by Indian companies. The total investment of the bank in CLNs was $330 million (around Rs 1,300 crore) at the end of December 2007.
The full provisioning has been made in accordance with prescribed norms of mark-to-market. The bank has already made provision of $2.8 million (around Rs 11 crore).
If these investments are marked to market as of February 29, 2008, there would be an additional provision of $2.50 million, as credit spreads have widened.
A credit spread is the difference in yield between two debt issues of similar maturity and duration. It may be quoted as a spread to a benchmark floating-rate index such as Libor, or as a spread to a highly-rated reference security such as a government security.
The credit spread is often used as a measure of relative creditworthiness, with reduction in the credit spread reflecting an improvement in the borrower’s perceived creditworthiness.
The public sector bank has, meanwhile, clarified that it does not have any exposure on Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDS) in overseas territories as in the case of ICICI Bank.
Earlier, ICICI Bank had said it would have to make an additional provisioning of $70 million in the current quarter for MTM losses on exposure to credit derivatives of its overseas branches and subsidiaries, with spreads widening further on continuing impact of the sub-prime crisis.
The total depreciation losses as on January 31, 2008, on CDOs and CLNs held in its overseas operations amount to $264 million.
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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