INDIAN RUPEE

Introduction

Rupee is the name given to the official currency that is used in several countries including India, Bhutan, Pakistan, Sri Lanka, Nepal, Mauritius, Maldives and Indonesia. The name rupee comes from the Sanskrit language word ‘rupyakam’ meaning silver coin. Rupee in different regions is denoted with different symbols most commonly Rs, ₨ and Rp. One unit of the currency is equivalent to one hundred equal paise.

Among all the countries mentioned above that have rupee as their national currency; the Indian rupee is the most important with respect to value, preference and popularity. India stands among those countries that discovered the need for a currency and the first rupee coins were issued as early as in the 16th century. The currency code and numeric code for Indian rupee according to the ISO 4217 standard are INR and 356 respectively. The currency in India is denoted with the sign Rs.

Overview

India retains the reputation of issuing the some of the earliest coins in the history of mankind. The currency of India i.e. the Indian rupee is also one of the well-established currencies in the world. The importance of the Indian rupee in the world market is characterized by the fact that Bhutan and Nepal peg their currencies to the Indian rupee. Moreover, the Indian rupee is considered a legal tender in Bhutan that has dollorized the currency. Indian rupee does not use the western number system and has a number system of its own. As in the western number system, the large values of money are counted in terms of hundred, thousand, million and billion respectively, in the Indian number system the large values are counted as hundred, thousand, lakh and crore. The Indian number system is also popular among the countries like Pakistan, Nepal, Myanmar, Bhutan and Bangladesh.

Earlier the rupee coins were made up of silver and that is where this name ‘rupee’ is derived from as the word ‘rupyakam’ means silver coin in the Sanskrit language. But when the large silver mines were discovered in the United States of America and parts of European continent, the value of silver declined drastically as compared to gold on which all the other strong economies were based. As a result, the value of Indian rupee also declined as compared to other currencies in the world and this incident is called the ‘fall of rupee’.

 Structure

 Indian rupee did not use the decimal system and rather was subdivided into 16 annas till 1957. In 1957, the decimal monetary system was adopted and one unit of rupee was restructured equivalent to 100 equal paise. The currency in the country is issued in the form of banknotes and coinage, the Reserve Bank of India and the Government of India possessing the issuing authority for banknotes and coins respectively. The central bank i.e. the reserve bank of India is entitled to change the banknote series and the Mahatma Gandhi series, which is in circulation currently, was launched in 1996. The notes are issued in 7 denominations i.e. Rs 5, Rs 10, Rs 20, Rs 50, Rs 100, Rs 500, Rs 1000. Two more denominations for banknotes i.e. Rs 1 and Rs 2 are still in circulation but no new notes are being printed as coins for both these denominations are being minted now. Each note depicts the face value of the note in 17 languages. The notes also have some unique features quite often called the security features that help in avoiding the duplicity and illegal circulation of the notes. These features include 

• Mahatma Gandhi watermark


• Silver security


• Latent image


• Micro-lettering


• Fluorescence


• Optically variable ink


• Back to back registration

Coins for the Indian currency are minted in 7 denominations namely 10 paisa, 20 paisa, 25 paisa, 50 paisa, Rs 1, Rs 2 and Rs 5 under the Coinage act 1906. The country has four coin mints one each at Mumbai (Maharashtra), Hyderabad (Andhra Pradesh), Kolkata (West Bengal), Noida (Uttar Pradesh). Like in the case of banknotes, the management of circulation of coins is in the hands of the Reserve Bank of India.

 History

India is the place where the concept of coinage developed at its earliest in around 6th century BC which later on built the base for other currencies of the world. according to the historians, the Indian currency i.e. rupee was brought into existence by Sher Shah Suri in the 16th century and it was evaluated as equal to 40 copper coins per rupee. The dominance of Mughals over India started diminishing when the British arrived in the country. The paper money was introduced under their reign in the latter part of the 18th century. Bank of Hindostan made the earliest rupee notes issues in the year 1770.

It was followed  by some more issues of the currency notes by private and presidency banks. For 100 odd years, the issue of bank notes by the private and presidency banks continued but with the formation of The Paper Currency Act  in 1861, the issue of notes was monopolized by the Government of India. The government of India (British India) initially appointed the presidency banks as their agents to help it with the circulation of bank notes as it was a tough job to promote the use of common note over a wide stretch of area. The notes had to be made a legal tender due to the problem arising from the redemption of these notes.

In 1867, the presidency banks were dismantled from the positions as the  agents to the Government of India and the responsibility of the management of the currency was given to the mint masters, account generals and the controller of the currency. The first series of notes that was issued by the government of India was the Victoria portrait series. The notes in the series were uni-faced and were issued in 5 denominations. This series was replaced by the underprint series of notes in 1867 which was kept in use for than 50 years. This long duration of time observed many positive changes in the bank note quality and introduction of a few security features as well. The need to issue small denominations note arose with the beginning of the world war I and Rs 1 note was issued for the first time.

In 1923, the underprint series was replaced by the king’s portrait series and they were continued to be used till 1935. The reserve bank of India took over the authority to print and circulate banknotes from the government of India. The notes bearing the portrait of George V was replaced by the notes bearing the portrait of George VI in 1938. In 1940, the one rupee note was re-launched due to the emergence of second world war. The notes with the portrait of George VI were in circulation till 1947 and were taken off the money market with the independence of India. The Indian rupee was adopted as a sole currency of the country and the use of all other domestic coinage was put to an end. The country adopted the decimalization standards in the year 1957. The current Mahatma Gandhi's portrait series was introduced in the year 1996.

 Factors affecting the exchange rates between two countries

The volatility in the foreign exchange rates depends upon a numerous macro economic factors that have different degrees of importance to different economies of the world. Some special and exceptional factors affecting the rates may also exist in the case of different countries. Following are shown the common factors on which the foreign exchange rate depends

• Flow of imports and exports between the countries


• Flow of capital between the countries


• Relative inflation rates


• Fluctuation limits on exchange rate imposed by the governments of the countries


• Merchandise trade balance


• Rate of inflation in the country


• Flow of funds between the countries for the payment of stock and bond purchases


• Relative growth


• Short term and long term interest rate differentials


• Cost of borrowings

Limited Liability Partnership (LLP)

A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India recently. (Limited Liability Partnership (LLP) Act of 2008).

LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.

This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises.

As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.

Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

The salient features of the LLP Act of 2008 are as follows:-

(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.

(ii) The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.

(iii) While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

(iv) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners can not exceed 20.

(iv) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.

(v) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.

(vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.

Benjamin Graham 's Formula

I - WHAT IS GRAHAM'S FORMULA ?

Benjamin Graham describes a formula he used to value stocks in the 11th chapter of the “Intelligent Investor”:

"Most of the writing of security analysts on formal appraisals relates to the valuation of growth stocks. Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the valuation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations.

Our formula is :

Intrinsic Value = Current Earnings x (8.5 + 2 x Expected Annual Growth Rate)

The growth figure should be that expected over the next seven to ten years."

Example n°1 : A stock is trading at 120$. Its current earnings are 8$ per share. The annual growth rate over the next 7 to 10 years should be around 7%. The Intrinsic Value is = 8 *( 8.5 + 2 * 7) = 180 $. The Margin of Safety is : (180 - 120) / 180 = 33%.

Example n°2 : the same stock is still trading at 120$, but its earnings are revised to 9$ per share and the annual long term growth rate should now be around 8%. The Intrinsic Value becomes = 9 *( 8.5 + 2 * 8) = 220.5. The Margin of Safety is : (220.5 - 120) / 220.5 = 56%.

Example n°3 : the same stock is trading at 120$, its earnings are 5.5$ per share, the annual growth rate around 6.5%.
The Intrinsic Value is = 5.5 *( 8.5 + 2 * 6.5) = 118. The Margin of Safety is : (118 - 120) / 118 = -1%.

A - A FEW IMPLICATIONS OF GRAHAM'S FORMULA
If we assume that Intrinsic Value = Price, then Graham's Formula is equivalent to : Price / Earnings = 8.5 + 2 x G.

1 - Price Earning Ratio (P/E) as a function of future growth (G)

In other words, the P/E for a no-growth company (G = 0) should be around 8.5.

2 - Implicit Growth derived from price and earnings.

From the fomula above, a P/E can be linked to G this way : G = (P/E - 8.5) / 2. 

Position Sizing Strategy

Now that the market is in a short term downtrend and stock tip threads have mostly disappeared I think it is a good time to discuss what is really important in trading - Position Sizing / Money Management Strategies. I Would like to hear/discuss the different sorts of position sizing strategies experienced traders here use for stock trading.

For new traders:

"Position Sizing" is the way you determine the number of shares of a stock you would buy when you decide to initiate a trade (and also how many shares you would continue to hold throughout the duration of the trade). It also decides how much equity will be allocated to a single position. Position Sizing is used by everyone even though they might not think about it (usually traders just buy 100 or 50 shares or any number that they are comfortable with or can afford). But good position sizing is what makes or breaks a trader, it is the strategy that keeps a trader in the business longer. It turns a mediocre trading system into an excellent one (but won't help a losing system).

The most popular/recommended position sizing strategy is to risk not more than 2% on any single position.

New traders - make sure you go thru' previous threads in "Risk & Money Management" section of this forum, there are good posts on risk & money mgmt by Traderji & CreditViolet.

Books on position sizing:

Trade Your Way To Financial Freedom by Dr. Van Tharp
Portfolio Management Formulas by Ralph Vince
The Mathematics of Money Management by Ralph Vince
The Trading Game by Ryan Jones

My Strategy:

I use a combination of percent risk & percent volatility strategy. Here are the rules I use:

- My main aim is to ensure that I stay in the business longer so my trading system gets a fair chance to realise its potential.
- No position should be greater than 10% of my total trading equity
- I don't risk more than 1% of my total trading equity on any single position
- I make sure my positions are "volatility balanced". In other words I make sure that all my positions fluctuate approximately the same each day in the market. I do this using Average True Range of the stock.

Example:

Say I am planning to buy HINDLEVER, here is what I would do to determine the number of shares I would buy:

Total Equity : 100,000.00
Max Equity for each trade : 10,000.00 (10% of total equity)
Risk Amount : 1,000.00 (1% of total equity)
Volatility Amount : 500.00 (0.5% of total equity. This is the fluctuation level per day per position)

Average True Range (10 Day Avg) : 5.63
Last Market Closing Price : 173.20 (For simplicity assume this is the entry price)
Stop Loss at : 163.40 (Will get out just below previous reaction low)

Number of shares to buy (percent risk model) = Risk Amount / (Entry Price - Stop Loss Price)
Number of shares to buy (percent risk model) = 1000 / (173.20 - 163.40)
Number of shares to buy (percent risk model) = 102 Shares

Number of shares to buy (percent volatility model) = Volatility Amount / Average True Range (10 Day)
Number of shares to buy (percent volatility model) = 500 / 5.63
Number of shares to buy (percent volatility model) = 88 shares

Number of shares to buy (based on Max Equity for each trade) = Max Equity for each trade / Last Market Closing Price
Number of shares to buy (based on Max Equity for each trade) = 10000 / 173.20
Number of shares to buy (based on Max Equity for each trade) = 57 shares

I will buy minimum number of shares determined from the above three models. So in the above case I would buy 57 shares.

So here is what I basically do. I am still trying to fine tune these things. The above parameters used are what I am currently using but I am in the process of doing trial & error to come up with parameters that fit me well. I would now like to hear what the experienced traders here do.

What is money management?

Money management is the process of analyzing trades for risk and potential profits, determining how much risk, if any, is acceptable and managing a trade position (if taken) to control risk and maximize profitability.
Many traders pay lip service to money management while spending the bulk of their time and energy trying to find the perfect (read: imaginary) trading system or entry method. But traders ignore money management at their own peril.

The importance of money management can best be shown through drawdown analysis.
Drawdown
Drawdown is simply the amount of money you lose trading, expressed as a percentage of your total trading equity. If all your trades were profitable, you would never experience a drawdown. Drawdown does not measure overall performance, only the money lost while achieving that performance. Its calculation begins only with a losing trade and continues as long as the account hits new equity lows.


Suppose you begin with an account of 10,000 and lose 2,000. Your drawdown would be 20%. On the 8,000 that remains, if you subsequently make 1,000, then lose 2,000, you now have a drawdown of 30% (8,000 + 1,000 - 2,000 =7,000, a 30% loss on the original equity stake of 10,000). But, if you made 4,000 after the initial 2,000 loss (increasing your account equity to 12,000), then lost another 3,000, your drawdown would be 25% (12,000 - 3,000 = 9,000, a 25% drop from the new equity high of 12,000).

Maximum drawdown is the largest percentage drop in your account between equity peaks. In other words, it's how much money you lose until you get back to breakeven. If you began with 10,000 and lost 4,000 before getting back to breakeven, your maximum drawdown would be 40%. Keep in mind that no matter how much you are up in your account at any given time--100%, 200%, 300%--a 100% drawdown will wipe out your trading account. This leads us to our next topic: the difficulty of recovering from drawdowns.

Even worse is that as the drawdowns deepen, the recovery percentage begins to grow geometrically. For example, a 50% loss requires a 100% return just to get back to break even (see Table 1 and Figure 1 for details).

Professional traders and money mangers are well aware of how difficult it is to recover from drawdowns. Those who succeed long term have the utmost respect for risk. They get on top and stay on top, not by being gunslingers and taking huge risks, but by controlling risk through proper money management. Sure, we all like to read about famous traders who parlay small sums into fortunes, but what these stories fail to mention is that many such traders, through lack of respect for risk, are eventually wiped out.


Guidelines that should help your long-term trading success.
1. Risk only a small percentage of total equity on each trade, preferably no more than 2% of your portfolio value. I know of two traders who have been actively trading for over 15 years, both of whom have amassed small fortunes during this time. In fact, both have paid for their dream homes with cash out of their trading accounts. I was amazed to find out that one rarely trades over 1,000 shares of stock and the other rarely trades more than two or three futures contracts at a time. Both use extremely tight stops and risk less than 1% per trade.

2. Limit your total portfolio risk to 20%. In other words, if you were stopped out on every open position in your account at the same time, you would still retain 80% of your original trading capital.

3. Keep your reward-to-risk ratio at a minimum of 2:1, and preferably 3:1 or higher. In other words, if you are risking 1 point on each trade, you should be making, on average, at least 2 points. An S&P futures system I recently saw did just the opposite: It risked 3 points to make only 1. That is, for every losing trade, it took 3 winners make up for it. The first drawdown (string of losses) would wipe out all of the trader's money.

4. Be realistic about the amount of risk required to properly trade a given market. For instance, don't kid yourself by thinking you are only risking a small amount if you are position trading (holding overnight) in a high-flying technology stock or a highly leveraged and volatile market like the S&P futures.

5. Understand the volatility of the market you are trading and adjust position size accordingly. That is, take smaller positions in more volatile stocks and futures. Also, be aware that volatility is constantly changing as markets heat up and cool off.

6. Understand position correlation. If you are long heating oil, crude oil and unleaded gas, in reality you do not have three positions. Because these markets are so highly correlated (meaning their price moves are very similar), you really have one position in energy with three times the risk of a single position. It would essentially be the same as trading three crude, three heating oil, or three unleaded gas contracts.

7. Lock in at least a portion of windfall profits. If you are fortunate enough to catch a substantial move in a short amount of time, liquidate at least part of your position. This is especially true for short-term trading, for which large gains are few and far between.

8. The more active a trader you are, the less you should risk per trade. Obviously, if you are making dozens of trades a day you can't afford to risk even 2% per trade--one really bad day could virtually wipe you out. Longer-term traders who may make three to four trades per year could risk more, say 3-5% per trade. Regardless of how active you are, just limit total portfolio risk to 20% (rule #2).

9. Make sure you are adequately capitalized. There is no "Holy Grail" in trading. However, if there was one, I think it would be having enough money to trade and taking small risks. These principles help you survive long enough to prosper. I know of many successful traders who wiped out small accounts early in their careers. It was only until they became adequately capitalized and took reasonable risks that they survived as long term traders.

10. Never add to or "average down" a losing position. If you are wrong, admit it and get out. Two wrongs do not make a right.

11. Avoid pyramiding altogether or only pyramid properly. By "properly," I mean only adding to profitable positions and establishing the largest position first. In other words the position should look like an actual pyramid. For example, if your typical total position size in a stock is 1000 shares then you might initially buy 600 shares, add 300 (if the initial position is profitable), then 100 more as the position moves in your direction. In addition, if you do pyramid, make sure the total position risk is within the guidelines outlined earlier (i.e., 2% on the entire position, total portfolio risk no more that 20%, etc.).

12. Always have an actual stop in the market. "Mental stops" do not work.

13. Be willing to take money off the table as a position moves in your favor; "2-for-1 money management1" is a good start. Essentially, once your profits exceed your initial risk, exit half of your position and move your stop to breakeven on the remainder of your position. This way, barring overnight gaps, you are ensured, at worst, a breakeven trade, and you still have the potential for gains on the remainder of the position.

14. Understand the market you are trading. This is especially true in derivative trading (i.e. options, futures).

15. Strive to keep maximum drawdowns between 20 and 25%. Once drawdowns exceed this amount it becomes increasingly difficult, if not impossible, to completely recover. The importance of keeping drawdowns within reason was illustrated in the first installment of this series.

16. Be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: "When you make one to three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the market."

17. Consider the psychological impact of losing money. Unlike most of the other techniques discussed here, this one can't be quantified. Obviously, no one likes to lose money. However, each individual reacts differently. You must honestly ask yourself, What would happen if I lose X%? Would it have a material effect on my lifestyle, my family or my mental well being? You should be willing to accept the consequences of being stopped out on any or all of your trades. Emotionally, you should be completely comfortable with the risks you are taking.

The main point is that money management doesn't have to be rocket science. It all boils down to understanding the risk of the investment, risking only a small percentage on any one trade (or trading approach) and keeping total exposure within reason. While the list above is not exhaustive, I believe it will help keep you out of the majority of trouble spots. Those who survive to become successful traders not only study methodologies for trading, but they also study the risks associated with them. I strongly urge you to do the same.