DRM Group Assignment Submission:Group Number: 10

REPORT
Name: RAHUL GUPTA

ID NO.: 2016A4PS0366H

Serial Number: 113

Company Name:Indiabulls Housing Finance Ltd(IBULHSGFIN)

Instrument Name-: IBULHSGFIN

Page 1 of 19
DRM Group Assignment Submission:Group Number: 10

Page 2 of 19
DRM Group Assignment Submission:Group Number: 10

Contents

Section 1(Underlying Assets-Equity)

1.1 Introduction

1.2 Sample Returns

1.3 Sharpe Ratio

1.4 Risk Adjusted Returns

1.5 Economic Interpretation

Section-2(Equity Futures Instruments)

2.1 Introduction

2.2Sample Returns

2.3 Risk Adjusted Returns

2.4Sharpe Ratio

2.5 Economic Interpretation

Section-3(Comparison of Risk Adjusted and Unadjusted Returns)

Section-4 (Backwardation or Contango)

Section-5 (Options)

Page 3 of 19
DRM Group Assignment Submission:Group Number: 10

Section-1 (Underlying Assets-Equity)

1.1 INTRODUCTION

Nature of the business (Banking, software, manufacturing etc.)

Housing Finance Company

Public or private ownership

Private Ownership

When it is started and under what circumstances

It Started on 2005.Circumstances are-
 The affordable housing need in India is vast.
 It started to ensure utmost consumer convenience in the home buying experience
making housing finance more viable by contributing towards the easy financing and
charging affordable interest to the population aiming for capital required for purchasing
home. organizationhave followed their principle of working towards greater ‘customer
convenience’.
 The company founders saw the immense potential in the housing finance needs of the
middle class Indian population.

Industry it belongs. And its importance in the industry

It belongs to housing finance sector.
It’s importance in industry lies in the fact that itcreatedSocial Affordable Housing Bond
which is being used towards financing the Housing sector for less privileged class of
population.

Page 4 of 19
DRM Group Assignment Submission:Group Number: 10

Overall greatness of the company

Overall greatness of the companies are-
 It is India's second largest housing finance company and it’s regulator is the National
Housing Bank.
 It Collaborated under the Pradhan MantriAwasYojana for providing affordable loans.
 The revenues have increased 36.7 per cent, on a year on year basis, from Rs 21.98
billion in Q2 FY2015 to Rs 41.05 billion during Q1 FY2018.
 the rating agency CRISILhas upgraded the long-term rating of the company to AAA/
Stable, from its earlier rating of AA+/Positive

1.2Sample Returns on Daily, Weekly & Monthly Frequency

DAILY WEEKLY MONTHLY

Mean 0.001264011 0.005938334 0.025042713
Max 0.080610842 0.150993144 0.170551484
Min -0.085751602 -0.126458605 -0.205981449
StdDev 0.020575588 0.046746174 0.091232809

The returns are positive and hence suggesting that an investor can good get return on
investment.

1.2 Sharpe Ratio on Daily, Weekly & Monthly Frequency

DAILY WEEKLY MONTHLY

Mean 0.05187901 0.097494727 0.210938665
Max 3.907614822 3.198045967 1.797615195
Min -4.17604001 -2.7370761 -2.32884732
StdDev 1.000008578 1.000103792 0.99954369

Page 5 of 19
DRM Group Assignment Submission:Group Number: 10

The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility
or total risk. Subtracting the return with the risk-free rate, the performance associated with
risk-taking activities can be isolated.
The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance

1.4 Adjusted returns on Daily, Weekly & Monthly Frequency

DAILY WEEKLY MONTHLY

Mean 0.001068966 0.05187901 0.001068966
Max 0.080401472 3.90761482 0.080401472
Min 0.085924478 4.17604001 0.085924478
StdDev 0.020590438 1.00000857 0.020590438

The positive adjusted return indicates that the investor can get a better return compared to T-
bills. The investor can also borrow money at the T-bills rate and invest in the underlying asset to
earn a profit, creating an arbitrage opportunity.

1.5 Economic Interpretation

Risk-unadjusted returns are for normal return calculations whereas risk adjusted returns are
better parameters to assess return potential of an asset. Sharpe Ratio is an indication of return
(reward) per unit risk, higher the ratio, the better is the investment potential of the company.
In addition the frequency of trading is also an important parameter to consider. The standard
deviation of monthly frequency is greater than daily frequency and weekly frequency lies
between these two indicating that as the time interval increases fluctuations increases.

Page 6 of 19
DRM Group Assignment Submission:Group Number: 10

Page 7 of 19
DRM Group Assignment Submission:Group Number: 10

Section-2 (Equity Futures Instruments)

2.1Futures Instrument Introduction

When it is started
January 5, 2004

Lot size and contract specifications.

Lot size:400
FUTSTK (futures stock);
Trading cycle: 3 months trading cycle;
Expiry date: last Thursday of expiry month;

Overall greatness of equity futures instruments.

Future contracts are traded in huge numbers every day and hence futures have quite
high liquidity.The prices do not fluctuate drastically especially for contracts that are
quite near to maturity.hence, a large position may also be cleared out quite easily
without any adverse impact on stock price.

2.2 Sample Returns on Daily, Weekly & Monthly Frequency

Near month

DAILY WEEKLY MONTHLY

Mean 0.001247928 0.051798344 0.02491557
Max 0.07738299 2.881578656 0.17526709
Min -0.086314049 -2.77365151 -0.192428003
StdDev 0.02040132 0.04630568 0.090233231

Page 8 of 19
DRM Group Assignment Submission:Group Number: 10

Next Month

DAILY WEEKLY MONTHLY

Mean 0.001267319 0.050621559 0.025351795
Max 0.080200973 3.108611205 0.182321557
Min -0.084361453 -2.866686221 -0.205848067
StdDev 0.0210054 0.047504577 0.093068296

Far month

DAILY WEEKLY MONTHLY

Mean 0.001259069 0.050402865 0.025562096
Max 0.080265496 3.127557389 0.170763025
Min -0.085917509 -2.746970992 -0.205576624
StdDev 0.020904526 0.047144936 0.090996918

The returns are positive suggesting that the investor can earn good returns on the investment.

2.3 Adjusted Return on Daily, Weekly & Monthly Frequency

Near
Daily Weekly Monthly
Mean 0.0010528604 0.0045237018 0.0191173842
Max 0.07717362 0.133433459 0.16871709
Min -0.0864869257 -0.1284358193 -0.1989138363
StdDev 0.020401511 0.04631076 0.090190453

Next
Daily Weekly Monthly
Mean 0.0010722790 0.0045287781 0.0195536090
Max 0.079991603 0.14767326 0.175771557
Min -0.0845343299 -0.1361807163 -0.2123338999
StdDev 0.021005564 0.047509396 0.093022103

Page 9 of 19
DRM Group Assignment Submission:Group Number: 10

Far
Daily Weekly Monthly
Mean 0.0010640172 0.0044763436 0.0197639101
Max 0.080056126 0.147448493 0.164213025
Min -0.0860903861 -0.1295057716 -0.2120624570
StdDev 0.020904699 0.047149786 0.090949935

The positive adjusted return mean indicates that the investor can get a better return compared
to T-bills. The variation in adjusted return on futures and underlying asset was quite less.

2.4. Sharpe Ratio on Daily, Weekly & Monthly Frequency

NEAR
Daily Weekly Monthly
Mean 0.051533843 0.097692157 0.211866338
Max 3.782775835 2.881578656 1.869788862
Min -4.239280875 -2.77365151 -2.204441026
StdDev 1.000009343 1.003798776 0.999525921

Next
Daily Weekly Monthly
Mean 0.050974957 0.095333511 0.21009957
Max 3.808144726 3.108611205 1.888629795
Min -4.024409434 -2.866686221 -2.28148477
StdDev 1.000007823 1.003792185 0.999503669

Far
Daily Weekly Monthly
Mean 0.05082628 0.094948557 0.219295923
Max 3.829607353 3.127557389 1.822570332
Min -4.1182654 -2.74697099 -2.35364242
StdDev 1.000008254 1.00379391 1.009437502

Page 10 of 19
DRM Group Assignment Submission:Group Number: 10

The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility
or total risk. The positive sharpe ratio average indicates that the investor can get a better return
compared to T-bills.

2.5 Economic Interpretation

The risk unadjusted return indicates the returns on the investment while adjusted excess return
indicates the excess return compared to T-bills return. Risk adjusted returns are better
parameters to assess return performance of an asset. The standard deviation of monthly
frequency is greater than daily frequency and weekly frequency lies between these two. Near
month data reveals that returns are relatively better when trading takes place at weekly and
monthly frequency but risk (standard deviation) is also higher for these two. Hence Sharpe ratio
is highest for daily frequency in the near month case. In next month futures weekly trading
gives highest returns on an average and has risk between daily and monthly. Sharpe ratio
indicates that highest return to risk is in daily trading in middle month.

Near month

Page 11 of 19
DRM Group Assignment Submission:Group Number: 10

Next month

Page 12 of 19
DRM Group Assignment Submission:Group Number: 10

Far month

Page 13 of 19
DRM Group Assignment Submission:Group Number: 10

The positive adjusted return mean indicates that the investor can get a better return compared
to T-bills. From the above tables we conclude that the variation in adjusted return on futures
and underlying asset was quite less and also the return on different maturity contracts was
nearly same.

Section-3
(Comparison of Risk Adjusted and Unadjusted Returns)

The underlying risk adjusted and risk unadjusted return values, are in general less when
compared to risk adjusted and risk unadjusted return values on futures. This therefore means that
futures is a better option for investing in IndiaBulls Housing Finance , when compared to trade
in its equity We can have the idea of the liquidity of the company’s stock based on the volume
of stock/futures being traded and open interest of the stock/futures. It can be seen from the data
that liquidity decreases in the order of Near Month , Next Month and Far month respectively.

Page 14 of 19
DRM Group Assignment Submission:Group Number: 10

SECTION 4
Backwardation or Contango

Backwardation

Backwardation is the market condition wherein the price of a futures contract is trading below
the expected spot price.

Contango

Contango is a situation where the futures price (or forward price) of a commodity is higher than
the spot price.

DAILY FREQUENCY

1600
1400
1200
1000
800
600
Close
400
200 near
0
next
far

Page 15 of 19
DRM Group Assignment Submission:Group Number: 10

WEEKLY FREQUENCY
1400
1200
1000
800
600
400 Close
200 near
0
next
far

MONTHLY FREQUENCY
1600
1400
1200
1000
800
600
400 Close
200 near
0
next
far

AS THE FUTURES PRICE IS GREATER THAN THE UNDERLYING STOCK PRICE THUS IT
SHOWS CONTANGO

Page 16 of 19
DRM Group Assignment Submission:Group Number: 10

SECTION 5
Options
Expiry date used for calculation - 25th Jan’18.

Option contract having maximum liquidity was chosen and standard deviation (Volatility) in call
option premium returns was calculated. Thus implied volatility was found which was further
substituted into Black–Scholes formula for predicting the call premium at the end of three
months i.e. on 26th April’18.

BSM Formula used is as follows

So 𝜎^2
ln( )+ (𝑅+ )
𝐾 2
d1 =
𝜎∗√𝑇

d2 = d1 - 𝜎 ∗ √𝑇

c = So*N(d1) – k*e-(r*t)*N(d2).

where,

C= call option premium

S = stock price = Rs. 1421.15
K = strike price = Rs.1260
R = risk free return = .0636
T = 0.25 years (3 months)

Therefore when substituted into the model, call premium for next contract i.e on 29th Jan’18
was Found to be 195.4137 and from historical data this price turns out to be 214.9

Page 17 of 19
DRM Group Assignment Submission:Group Number: 10

Thus the given data varies slighty because of the assumptions involved in calculating Block
Sholes call premium which are
 No dividends are paid out during the life of the option.
 Markets are efficient (i.e., market movements cannot be predicted
 There are no transaction costs in buying the option.
 The risk-free rate and volatility of the underlying are known and constant.

This BSM option pricing model gives a good approximation and thus be used for predicting the
option premium value.

Returns
1
0.8
0.6
0.4
0.2
Returns
0
-0.2
-0.4
-0.6
-0.8

Page 18 of 19
DRM Group Assignment Submission:Group Number: 10

Conclusion
 Despite demonetisation and GST blues, Indiabulls Housing Finance was able to maintain
its high growth momentum.
 Indiabulls Housing has beaten the Market expectations positively by a wide margin. The
company has been able to maintain a high growth because of its focus on the fast-
growing affordable housing segment.
 Government initiatives such as ‘housing for all’, additional tax benefits for the affordable
housing segment are boasting the financing opportunity for companies like Indiabulls
Housing. The government, which is completely backing the housing sector over the last
couple of years hence provides a huge potential growth for the stock

Page 19 of 19