Parliamentary Election Impact on Indian Capital Markets Harvard Case Solution & Analysis

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ParliamentaryElection Impact on Indian Capital Markets Harvard Case Solution &ampAnalysis

Beforethe evaluation and declaration of 2009 elections results withinIndia, one of the senior most research analysts was doing anevaluation of the forecast of the impacts that then elections wasgoing to have on the activities of the stock market. With one of theleading investments and Brokerage Company within India, he wassupposed to find an example of the most efficient ways that theclients within the most volatile environment which developed due tothe elections and this would lead to very high risks to theinvestors.

Caseanalysis

Manyof the government will have to take the seats within the Parliamentand, therefore, this might be quite helpful for the markets if theresults of the elections become the opposite then it is possible thatthis could create the opposite impacts on the market too. For thiscase study, it is clear that the markets analyst was confused whileputting the priorities whether they are defensive or aggressive. Theanalyst wanted to figure out the most lucrative strategy that hisclients will not be facing so many potential risks given the strategythat he implements within that given short period. The predictabilityof the market for the analyst is an important aspect of the businessand, therefore, it was his responsibility to make sure that all goeswell even during the worst of time. After doing much analysis thatcould help him avoid the tragic situation he was able to giverecommendations, in attempts to go completely defensive, herecommended two major bull strategies to his clients who were thelong call and the bull spread. He also recommended that his clientsuse the volatile strategies such as the long straddle and the longstrangle. This was according to his expectations on how the marketswould turn out to be after the turnout of the elections.

Dueto the instability of the markets he was worried about losing hismoney in case his predictions on the markets went wrong. He did notexecute any position before the closing on Friday.

Theopinion polls had developed mixed feelings for Sharma had the restbut during the Election Day. The India National Congress emerged tobe the biggest party in the country by winning 206 parliamentaryseats, but this was not sufficient for the party to form a governmentas 272 to form the government on its own. This was a very relievingevent for Sharma and on Monday the values skyrocketed as the tradingopened. Surprisingly the market hit two upper circuits within theday, and this makes the profits exponential this was tremendous, andSharma was perplexed when he wrote reports for his superiors.

Sharmais blaming himself for not taking a position in his account, couldnot sleep for two days. All the traders who had been very cautiousmissed out in making the exponential profits from the situation.

Shortstraddle

Ashort straddle refers to a neutral strategy that is meant to help inachieving the maximum profit within the market that moves sideways.It is a combination of writing uncovered calls and the writing of theuncovered puts. Together the two can produce a position that helps inpredicting a narrow trading range for the underlying stock. Themaximum profit in a given straddle is achieved when the underlyingstock price within the expiration date is trading at the strike. Atthis particular price, both of the options expire worthlessly and thegiven options keep the entire initial profit. The formula forcalculating the profits is given by

MaxProfit = Net Received Premium – Paid commission

Maximumachieved profit=strike price of either short call or put

Verylarge losses can be incurred for the short straddle if the price ofthe underlying stock makes a strong move either upwards or downwards.This can cause the short call or the short put to expire deep withinthe market. The maximum loss is unlimited, the loss that occurs whenthe underlying price is greater than the strike price of the shortcall added to the net premium. The underlying price is less than theprice of the short put with reduced net premium. There are two majorbreaks even points in a short straddle position. The break-even pointis calculated as follows.

Theupper break-even point is equal to the sum strike price of the givenshort call and the net premium, the received lower break-even pointis equal to the subtraction of the net premium received from shortput strike price

Strike price

LPT

Possible profit

Call options

3300

437

3737

3400

360

3760

3500

273.55

273.55

3600

210

210

3700

150

3850

3800

108

3908

3900

70

3970

4000

42.6

4042.6

4100

27.9

4127.9

4200

16.5

4216.5

4300

9.45

4309.45

Put Options

Possible loss

3300

46

3254

3400

63

3337

3500

89

3411

3600

119.65

3480.35

3700

165

3535

3800

218.25

3581.75

3900

279.2

279.2

4000

347

3653

4100

467.85

3632.15

4200

605.2

605.2

4300

625

3675

Payofftable

Index price

at maturity

Payoff from

call position

Payoff from

put position

Total

profit/loss

3200

3737

3254

-483

3300

3760

3337

423

3400

273.55

3411

-3137.45

3500

210

3480.35

3480.35

3600

3850

3535

-6805.35385

3700

3908

3581.75

327

3800

3970

279.2

3690.8

3900

4042.6

3653

389.6

4000

4127.9

3632.15

495.75

Shortstraddle graph

REFERENCES

Options Xpress. (2015, November 07). Neutral Optio Strategies: Short Straddle. Retrieved from Options Xpress: http://www.optionsxpress.com/free_education/strategies/short_straddle.aspx

sigh, V. K. (2014). Paliamentary Ellection Impact On Indian Capital Markets . New York : Richard Ivey School of Business Foundations .

The Options Guide. (2015, December 07). Short Straddle (Sell Straddle). Retrieved from The Options Guide: http://www.theoptionsguide.com/short-straddle.aspx

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