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Working Papers | 1991

Indian Convertible Bonds with Unspecified Terms: A Valuation Model

Samir K. Barua and Jayanth R. Varma

Indian convertible bonds have two peculiar features that make them possibly unique in the world: a) the bonds are compulsorily converted into equity without any option, and b) the conversion terms are not specified at the time of issue but are left to be determined subsequently by the Controller of Capital Issues (CCI) who is the government functionary regulating capital issues in India. An naïve model would say that the market simply forms and estimate of the likely conversion terms and then values the bond as if these terms were prespecified. However, the empirical investigation reported in a companion paper, Barua, Madhavan and Varma (1991) convincingly rejects the naïve model and makes a more sophisticated model necessary. In this paper, we use the general theory of derivative securities (Cox, Ingersoll and Ross, 1985) to obtain a closed form expression for the value of the Indian convertible bond. The testable implications derived from our model are in sharp contrast to those of the naïve model and are consistent with the empirical results in Barua, Madhavan and Varma (1991). Though the valuation formula contains an unobservable state variable, the crucial functional parameters of the pricing relationship can be estimated, allowing the investor to measure and manage his risk. We derive the hedge ratios which an investor needs to control his risk exposure. An investor in Indian convertibles cannot, however, protect himself from both sources of risk (firm value risk and conversion ratio risk) with a single hedge ratio. This is an important difference between the Indian convertible and the ordinary convertible bond.

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Working Papers | 1991

Is the BSE Sensitive Index Better than the National Index?

Jayanth R. Varma

Stock price indices are used extensively by investors, brokers and portfolio managers as a general indicator of the stock market conditions. They are also used extensively in finance theory notably in operationalizing the popular Capital Asset Pricing Model (CAPM). In recent years, the indices published by the Bombay Stock Exchange (BSE) - the Sensitive Index (Sensex) of 30 scrips in Bombay and the 100 share National Index (Natex) - have become extremely popular with academics and practitioners alike. Anecdotal evidence suggests that the Sensex is by far the more popular index among brokers and lay investors while the Natex is the index of choice among mutual funds, professional investors, foreign investment agencies and academics. This paper studies the two BSE indices and their inter-relationship. The analysis in this paper indicates: 1. The Natex is a sluggish index which responds too slowly to market conditions. Changes which are reflected in the Sensex on any day are completely reflected in the Natex only by the next day. 2 Sensex is more volatile than Natex, but this difference is accounted for by two factors - (a) the autocorrelation of the Natex which conceals the true volatility of Natex, and (b) a higher beta of Sensex relative to Sensex. Therefore, the excess volatility of Sensex is not a matter of serious concern. In many applications, however, the higher beta of Sensex is worrisome, but it is easy to correct for it. The conclusion, therefore, is that those who follow the Natex because of its greater comprehensiveness and theoretical appeal may be mistaken. The Sensex needs to be taken more seriously as a sound market index. The observed deficiencies of the Natex raise several disturbing questions for finance theorists and researchers. Is the market for the less well traded securities in the market inefficient? Do the scrips constituting the Sensex lead the other scrips? If so, can this relationship be used to make extra normal returns? Does the Bombay market lead other exchanges which are also represented in the Natex? These issues call for further research.

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Working Papers | 1991

Solar Energy Technology: Research and Development in India

Mehta Swati and Moulik T K

Solar Energy is a direct and perrenial energy source. It is non polluting and is available freely. The technology of converting solar energy into heat and utilizing it for various applications can now be commercially exploited. Solar Energy is received in the form of light and heat radiation. The radiant energy of the Sun can be converted into thermal, electrical, mechanical energy etc. but of all these types of energy in solar radiant energy the thermal conversion mode is the easiest and most convenient. The sun energy can be used to meet the thermal requirements in almost all the temperature ranges in every sector of national economy. The objective of the Solar Thermal Programme of The Department of Non Conventional Energy Sources is to develop and promote use of technologies for conversion of solar energy into thermal energy for supplementing the ever increasing demand for thermal and electrical energy in the developing economy.

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Working Papers | 1991

Valid Inequalities and Facets for the Capacitated Lot-Sizing Problem with Changeover Costs

Sastry Trilochan

We study a scheduling problem with costs and capacity constraints. The problem is NP-complete and combinatorial algorithms have not been very successful. We identify a general class of facets which subsumes as a special case all facets described earlier. We also develop a cutting plane based procedure for the dynamic version of the problem, and solve problem instances with up to 1200 integer variables to optimality without resorting to branch and bound procedures.

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Working Papers | 1991

Indian Technology Policy: Use of New & Traditional Technologies

Moulik T K

The debate on Technology Policy in India is not a recent phenomenon. The Indian Technology Policy has tried to maintain a balance between the anti-modern technological view of Gandhian philosophy and new modern technologies. The net result is pluralization of society in terms of benefits gained by different parts of society from different levels of technologies.

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Working Papers | 1991

Reshaping State Governments Role in Industrial Development

Satia J K and Chhabra H S

The state government will have an important role to play in the new industrial policy framework. But they would have to rethink their role reflecting the changed scenario. Rather than distort market prices through subsidies and tax concessions, they would have to assist the firms in heir states to secure competitive advantages over time. This paper argues that such competitive advantages can through actions to increase productivity overall for the whole range of industries and through careful targeting of strategically selected industries. Fundamental issues such as labour relations, careful appraisal of projects, functioning infrastructure and continually improving quality of labour force require attention. Innovations need to be encouraged through coordinated efforts among industries and between educational institutions and the industry. Politically more visible actions of securing megaprojects and promoting non-resident Indian (NRI) investments might have had their attractions in the past. In the changed context, state governments will have to pay far greater attention to the fundamental issues for promoting industries. Sustained industrial development calls for a long-term view, it may take more than a decade for a state to build competitive advantages.

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Working Papers | 1991

Negotiating Strategies and Skills - 1 A Sociological Study of the Paradigms in the Management of Industrial Relations in the Indian Context - Current Scenario and Future Directions

Joseph Jerome

This paper on the sociological analysis of paradigms in the management of industrial relations lays the foundation for a series of papers on Negotiating strategies and skills. The underlying paradigms in industrial relations choice making determine the choice of methods for decision-making, problem solving or conflict resolution in this sphere of management activity. Subsequent papers in this series will argue that the modalities of negotiations as a method for conflict resolution are also determined by the paradigms identified in this paper.

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Working Papers | 1991

Price Elasticity of Fertilizer Demand in India: A Review

Srivastava Uma Kant

The government of India has tried to assure a reasonable return to fertilizer industry so that indigenous production can keep pace with the projected increase in demand of fertilizers. At the same time the farmers have also been assured of a reasonable price so that fertilizer use can be encouraged. The Government efforts to meet the twin policy objectives have resulted in a substantial increase in domestic production as well as consumption of fertilizer but at the same time they have also resulted in an increase in subsidy on fertilizers from Rs.604 crores in 1979-80 to Rs.4388 crores in 1990-91. In the context of reducing budgetary deficit, this increasing level of subsidy on fertilizers has been a matter of concern. In 1991-92 budget, a proposal was made to increase the price of fertilizer by 40 per cent, and this was subsequently reduced to 30 per cent, except in the case of small and marginal farmers where no increase has been envisaged. The impact on the over all cost of cultivation ranging between 0.1 per cent in case of paddy in Assam to highest of 5.25 in case of Wheat in West Bengal, depending on the cropping pattern and level of use of fertilizers. The concern now is (i) whether the price increase will reduce the absolute level of consumption of fertilizers and / or, (ii) whether it will cut down the rate of growth of fertilizer consumption, which is necessary for achieving the food and fiber production? This paper is designed to review various estimates of fertilizer price elasticities and their suitability for assessing the impact of price rise of fertilizers on their consumption. Before various estimates are reviewed, the fertilizers use scenario in India is briefly reviewed to provide the backdrop for examining the suitability and acceptability of the estimates of fertilizer price elasticity. At the end of the paper, the areas for further research have been delineated.

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Working Papers | 1991

A Negotiation Procedure Converging to the Egalitarian Solution

Lahiri Somdeb

In this paper we propose a negotiation procedure, solutions of which coverage to the egalitarian solution, in two person bargaining problems.

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Working Papers | 1991

A Negotiation Procedure Converging to the Nash Bargaining Solution

Lahiri Somdeb

In this paper we propose a negotiation procedure for the bilateral monopoly problem, solutions of which converge to the Nash bargaining solution.

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