Cases

C7. Reliance Communications: On the Brink of Bankruptcy (with Jayanth R. Varma): Case no. F&A0560

This case describes the change in fortune of Reliance Communications (RCom) from being a pioneer in offering low-cost mobile telephony to the brink of bankruptcy. After giving a brief background on the family history of Reliance Industries, its break-up and the launch of RCom, it describes the changing dynamics of the Indian telecommunications industry after the launch of Reliance Jio and the difficulties faced by RCom. As RCom’s debt troubles increased, while its stock price and its credit rating plunged, yields on its Indian Rupee bonds barely moved. The case allows for discussing ways of implementing capital structure arbitrage in such situations and analyze issues that arise in doing so. The case provides data on yields on RCom’s Indian Rupee and US dollar bonds over time and provides additional relevant financial information about RCom, including its market share, stock price, credit rating and balance sheet variables. The case would be appropriate for use in an advanced corporate finance or a strategic risk management or a trading strategies course.

C6. Swap Curve Steepener (with Jayanth R. Varma): Case no. F&A0539

The case is about a decision problem facing James on whether or not to invest in a structured product called the “CMS Steepener” issued by a large US investment bank. The payoff from the product is linked to two constant maturity swap (CMS) rates, and the investor profits if the difference between the two CMS rates increases, or alternatively if the CMS curve steepens. The case describes the risks that investing in such a product poses, and presents relevant data on the CMS rates, term structure and recent financial history of the issuer to help resolve James’s decision problem.

C5. Hundred Million Dollar Beta (with Jayanth R. Varma): Case no. F&A0534

This case is about the practical and conceptual issues involved in estimating the beta of a company for the purpose of computing the cost of capital using the CAPM (Capital Asset Pricing Model). In many applications of the CAPM in the classroom, the beta is assumed to be known or is exogenously specified. This case is an opportunity to confront the fact that, in the real world the beta has to be estimated and there is often a wide range of uncertainity (confidence interval)around any point estimate of the beta. The issue that Delaware Chencery Court Vice Chancellor Judge Travis Laster needed to resolve in October 2014 was that the beta estimated by te plaintiff and the defendant varied so substantially that they implied a difference of over $100 million in the valuation of Rural-Metro. The case provides alive context to discuss conceptual and statistical issues that are often glossed over as minor details of the estimation process. In the real world, these apparantely minor details make a big difference to the results and can no longer be ignored. In an advanced course, the case also provides an opportunity to expose the participants to the large academic literature on beta estimation.

C4. Swiss Roll (B) (with Jayanth R. Varma): Case no. F&A0532(B)

In the aftermath of global financial crisis of 2008 and the ensuing capital flows into Switzerland, the Swiss National Bank (SNB) decided to peg Swiss Franc (CHF) to the Euro (EUR), and announced that it would not let CHF go beyond 1.20 starting 6 September, 20 11. With ever-increasing capital flows, maintaining the peg required the SNB to purchase foreign currency assets almost endlessly, and by the end-of 2014 its foreign exchange reserves stood at almost 80% of its Gross Domestic Product. With the European Central Bank announcing its “quantitative easing” program from 2015, and faced with the prospect of a massive balance sheet, SNB finally decided to discontinue the peg starting January 15,2015. lmmediately after the peg was removed, the CHF surged by almost 30% to EUR and this left many market participants stranded with losses worth hundreds of millions of dollars. This case describes the market turmoil and the main casualties after the peg was discontinued, with a focus on one particular retail foreign exchange (FX) brokerage firm, FXCM Inc., which was left with a negative equity of almost $300 million after removal of the peg.

C3. Swiss Roll (A) (with Jayanth R. Varma): Case no. F&A0532(A)

In September, 2011, to prevent its currency from appreciating after the Global Financial Crisis, the Swiss National Bank (SNB) decided to peg its currency to EUR and announced that it would not let CHF go beyond 1/1.20 EUR. Maintaining the peg required the SNB to purchase foreign currency assets virtually endlessly in response to the worsening Eurozone crisis. By end of 2014, its foreign currency exchange reserves amounted to almost 80% of its GDP. In an attempt to deter capital flows and reduce its balance sheet size, in December, 2014, the SNB first bought the interest rate on commercial bank deposits to negative levels and then, facing impending quantitative easing by the European Central Bank, announced the removal of the peg on January 15, 2015. The case describes the backdrop and the circumstances leading up to removal of the peg.

C2. Industrial Financing Corporation of India Ltd. (IFCI) – B (with G. Raghuram and Chitra Singla): Case no. BP0363(B)

IFCI Limited-a non-banking financial corporation in India was struggling with issues of negative Capital Adequacy Ratio and high non-performing assets till 2007. The company had not done any business for a decade until 2007. July, 2007 was the time when Atul Rai joined the company as the CEO. This case revolves around the various strategic initiatives taken by Rai and his team to help the firm turnaround. The main focus of the case is on the implementation of some of the key strategic decisions. The case gives opportunity to review IFCI’s strategy and make recommendations for future expansion.

C1. Industrial Financing Corporation of India Ltd. (IFCI) – A (with G. Raghuram and Chitra Singla): Case no. BP0363(A)

This case mainly talks about the journey of IFCI since its inception amidst the institutional changes that had taken place in India; how the changing institutional context of an emerging economy like India could affect the growth path of a firm in a regulated industry; and how a leadership style attempted to turn around and build the firm’s position in the industry. Atul Rai had taken a number of initiatives in light of the above. Next on his agenda was to turn IFCI into a leading financial institution and come up with a road map to achieve this.

Technical notes

T6. Probability in Finance-IV: The Vanna-Volga Method: TN no. F&A0531TEC

This note describes the intuition and the mathematics behind the Vanna-Volga method for pricing derivatives in the foreign-exchange markets. After building the intuition through the lens of risk neutral density and movement in volatility smile, the note explains the mathematics of the necessary adjustment to the Black-Scholes valuation formula in terms of its Greeks (Vega,Vanna and Volga).

T5. New-Keynesian Macro Models-I: Workings of a Baseline DSGE Model with Monopolistic Competition and Nominal Rigidities: TN no. ECO355TEC

This note lays out the necessary workings for solving a baseline New-Keyneisan Dynamic Stochastic General Equilibrium model with monopolistic competition and nominal rigidities (via the Calvo staggered-price setting model).

T4. Probability in Finance – III: Mathematics of the Dupire Local Volatility Model: TN no. F&A0524TEC

This note lays out the necessary background and essential mathematics for understanding the Dupire Local Volatility model in derivatives pricing.

T3. Probability in Finance – II: Numeraire Change in Option Pricing – Select Applications: TN no. F&A0523TEC

This technical note lays out the necessary background with examples for numeraire change applications in stochastic calculus. The note presents four examples with full workings, including :a) pricing of a call option, b) pricing of an exchange/Margrabe option, c) relationship between forward rates and expected spot rates and d) use of change of numeraire in foreign markets.

T2. Probability in Finance – I: Mathematics of the Martingale and the Numeraire Change Approach to the Black-Scholes Option Pricing Formula: TN no. F&A0514TEC

This technical note lays out the necessary mathematics for understanding the martingale and change of numeraire approaches to the Black-Scholes option pricing formula.

T1. PDEs in Finance – I: Mathematics of the Black-Scholes-Merton PDE: TN no. F&A0492TEC

This technical note lays out the necessary mathematics for understanding the Black-Scholes-Merton Partial Differential Equation.