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Friday, March 28, 2008

Amtek another casualty of forex derivative swaps

Says it may make Rs 72 crore loss.

Auto parts-maker Amtek Auto today joined a growing list of Indian companies that are sitting on notional losses on account of their exposure to foreign exchange derivatives.

Amtek today informed the stock exchanges that it could potentially make a loss of up to $18 million (Rs 72.18 crore) in the next two years on its exposure to currency hedges and swaps.

A Rs 72-crore loss is 30 per cent of Amtek’s standalone net profits of Rs 236 crore on sales of Rs 1,196 crore during the year ended at the end of May 2007 (the company follows a June-to-May financial year).

“The company has taken measures to restrict the same and any improvement in the currency market from here will mitigate the above,” the company said.

Interestingly, the company earned Rs 36 crore from forex fluctuations or through forex derivative products during the last financial year, according to its balance-sheet.

A derivative is an instrument whose value is a function of an underlying commodity, bond, stock or currency and which is used as a risk-management tool.

The promoters of the company have undertaken to bring in the matching amount to meet the obligation, should they arise, in the form of a 10-year, interest-free non-convertible debentures or preference shares, the Amtek statement added.

“If there are any losses, the hit will be taken by promoters. What we have disclosed is a worst-case scenario,” said Amtek’s CFO Santosh Singhi.

He, however, refused to divulge the total exposure of the company to forex derivatives, saying he needs to first inform the stock exchange.

The Amtek Auto scrip was up 3.56 per cent to Rs 260.40 on the Bombay Stock Exchange, though the disclosure came after the market closed for the day.

Earlier, software major Hexaware reported a Rs 81-crore loss for the quarter ended December 2007 after the company took a hit of about Rs 103 crore on account of unauthorised forex derivative deals struck by a company official.

The company had posted a net profit of Rs 110.07 crore in 2007 (the company follows a January to December financial year).

About half a dozen other companies have also taken their banks to court alleging that they were sold exotic derivative contracts for speculative purposes.

Stationery maker Sundaram Multi Pap Ltd has sued ICICI Bank for its losses on forex derivatives.

Coimbatore-based Rajshree Sugars and Chemicals has filed a case against Axis Bank in the Madras High Court alleging that the forex derivative product sold to them by the bank did not take care of their needs.

The next hearing is due on Tuesday. Another company, Sundaram Brake Linings, is also involved in a legal dispute with Kotak Mahindra Bank.

Foreign exchange experts said India Inc’s losses on account of their exposure to foreign exchange derivatives are estimated at Rs 12,000 crore to Rs 20,000 crore. The losses may hog the headlines for the next few quarters as many of the currency swaps are likely to mature after March, said foreign exchange experts.

“This is a big thing brewing. The losses in some cases may be equal to a company’s profit for the whole year,” a senior executive with a Mumbai-based foreign exchange consultant said.

In a separate development, engineering major Larsen & Toubro Ltd had reported on March 10 that one of its subsidiaries in West Asia may incur a loss of Rs 200 crore on commodity-hedging bets.

Posted by Srivatsan at 4:29 PM

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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.