Anand Rathi Wealth Limited (ANANDRATHI) Earnings Call Transcript & Summary

[Audio Gap] that is structured product insights. In the first session, last Monday, we discussed about how the product is constructed and design using the equity options. We have seen the performance of the past products. And also we -- Kalpesh gave you all the insights on the current issuer that is Anand Rathi Global Finance Limited. In today's session, Kalpesh will take you all through the ease of Black-Scholes model in designing the structured product. And again, let me introduce our team very briefly. Kalpesh, he is a structured product design head at Anand Rathi Wealth. He has a total experience of more than 14 years. Out of that, he has spent more than 12 years with Anand Rathi group. He is engineer by background and MBA in Finance and is heading the team of 10 members. Thank you, Kalpesh, for joining us. Saumil Pabari, he is our structured product sales and marketing team head at Anand Rathi Wealth. He has a total experience of more than 15 years. And he is driving our structured product design issuance of more than INR 30,000 crores across 11 issuers, till date. And he has been with Anand Rathi Group for more than 12 years. He did graduation in business management from Fox School and MBA from SP Jain. Thank you, Saumil to joining us today. We have Mohit Vajpayee, he is specialized in the derivative trading and he's bringing with him more than 18 years of industry experience, and he holds a B.Tech degree from IIT Bombay. Let's start our second session, and I hand over the floor to Kalpesh. Over to you, Kalpesh. [Operator Instructions].

Thank you, Vishal. Good evening, friends. Good evening, and we will resume our [ session ], understanding of Black-Scholes pricing model. We've done our previous session last week. I'll just quickly share my screen. So we've done the Part 1 last week where we understood the performance of our products, and then we also went through and understood a sample product construct as to how a structured product is constructed at the back end so that you get a final payoff or the client gets a final payoff on the output side. Today, we'll spend some time in understanding the Black-Scholes model in specific, what is the model that is used for, how does it help in pricing options, et cetera. And then we have another round next week where we look at how do we use this model to synthesize long-dated options. So laying across the agenda for today. Today, we are looking at Black-Scholes model in specific. Now going forward, a preface about what is the Black-Scholes pricing model all about. The Black-Scholes pricing model was developed way back in 1973 by 3 gentlemen known as Fischer Black, Myron Scholes, and Robert Merton. This is a model which was developed way back in 1973. The model basically helps us calculate the fair price of any option basis certain assumptions that are feed into the model. This model won a Nobel Prize for the calculation or the things that it has to offer in 1997 for its contribution to the derivatives market and its role in facilitating risk management. So some snippets or facts about the Black-Scholes model. Going forward, we have 6 slides or 6 agenda items where we first look at what is the Black-Scholes model. Then we look at options price in detail, what is an options price made up of. Then we spend some time on understanding moneyness of options, right? It looks more technical, but I'll try to simplify as much as I can. Fourth is what are the inputs that are fed into the model to arrive at the options price. Then we look at the impact of all these input parameters on the options pricing, how does the option pricing react to these input variables and then a small slide or a small explanation on Options Greeks. So we move on to the first slide, which is what is the Black-Scholes model? Like I already mentioned in the preface -- like I was already telling you, the Black-Scholes model is a formula, which is used to calculate the fair value of a European option. Options are of 2 types, call or put based on key market inputs. What is an European option? A European option is an option, which can be exercised completely on its expiry date. So there are 2 types of options, European option and American options. American options can get their full value on any specific date. For a European option to realize its full value, it will have to be held to maturity or held to the expiry. So this formula -- Black-Scholes model formula helps give you price of a European option based on key market inputs. Now what does this formula helps us to? Again, at the cost of repetition, it helps us in identifying what is the fair price that one should pay today, right, for an asset to buy or sell in the future. Call option specifically gives you the right to buy. If I am buying a call option, what I get is the right to buy an asset at a specific price on a future date. Similarly, when I'm dealing with put options, what I get is the right to sell that asset at a specific price on a future date. So what Black-Scholes model does is, it helps us identifying this fair price at which I should either buy or sell at a specific date in future. In case the options are illiquid, if we are dealing with options that are illiquid or where the counterparty to my option is not available, the same model helps in realizing this fair value that it is pricing, right? By which I mean, let's say, for example, a specific option has a price of INR 5, a 100 strike option has a price of INR 5, but there's no counterparty available or that option is illiquid. What the model will do is it will tell me what I should do so that I can realize the same INR 5 on expiry, right? So that's where our Session 3 will put more light into, but the model itself gives you enough and more to realize this fair value, which it is predicting. Third, like I told you, the fair price of an option is coming basis some input parameters. The model also tells you that if your input parameter goes, hey, [ via buy ] a certain margin, how much will the fair price move up or down, right? So 3 things. It gives you the fair price; b, it tells you that if there is no counterparty or the option is illiquid, how or what should you do to realize its fare price? Third, the fair price has come because of certain inputs. If the inputs move up or down, how much this fair price will move up or down. All these 3 things the Black-Scholes model will tell you when you try and work with the Black-Scholes model. So that's the first bit on the Black-Scholes model. Moving ahead, what is that fair price that we are speaking of? In technical terms, it is known as premium. So any option that you see on the exchange will have a price associated to that option. That price is known as options premium. Now any options premium is made up of 2 values, okay? Any option premium is made up of 2 values, one of which is called as intrinsic value, the other one is called as time value. So if I break down an options price, let's take the same example. A 100 strike option was worth INR 5. This INR 5 has some component of intrinsic value, some component of time value, okay? Now what is an intrinsic value? Of course, the next question? An intrinsic value is nothing but the money the options buyer make for an options contract, if he decide to exercise that option on a given day. Again, let's take a same -- let's take one more example. Suppose I'm dealing with call options, call option gives you right to buy. Say the spot, the current market is INR 100, and you are entering in a contract of call option where you are saying that I will buy this asset on a future date at INR 105, INR 105 being your strike. So your spot is INR 100, the asset's current value is INR 100, you are saying that at a future date, you are ready to buy it at INR 105, because what I'm expecting in my head is this asset will run up in the future, for which I am paying a premium of INR 5 today, okay? Now in this case, if I want to exercise, say, for example, all my costs associated with option are INR 0, okay? And the spot goes to INR 110, then the intrinsic value of this INR 105 strike that I have is INR 5 because the asset which is worth INR 110, I will be able to buy it at INR 105 okay? So in essence, what I'm trying to tell you is, if your spot is X and your strike price or the price that you wish to buy is at a lower number than X, when you are dealing with call options, the difference between your strike and spot becomes your intrinsic value. So all option contracts when the strike is lesser than the spot and you are dealing in call options, all of them will have intrinsic value and the difference between the strike and the spot will become your intrinsic value. Intrinsic value is always positive. Now when we are speaking of put option, we are speaking of right to sell, [Foreign Language]. So therefore, all my strikes which are higher than the spot will have an intrinsic value because I'll be able to sell at a higher price. So if I'm speaking of a spot, which is at this level, all the call strikes, which are lower than the spot will have intrinsic value because [Foreign Language], you will have the right to buy at a lower price. Similarly, when I'm looking at put options because it is giving you right to sell, all the strike prices, which are higher than my spot will have an intrinsic value because you will be able to sell at a higher price, [Foreign Language], right? And intrinsic value is nothing but [Foreign Language] difference is your intrinsic value. So for put options, all the strikes, which are greater than the spot will have intrinsic value. For call options, all the strikes, which are lower than the spot will have an intrinsic value. All the other options, [Foreign Language], apart from what we just discussed, will only and only have time value. Time value is nothing but [Foreign Language] whatever is the additional that I'm paying apart from the intrinsic is classified as time value, right? So this gives me a fair idea as to [Foreign Language] at the cost of, again, repeating, right, I got some feedback saying that I need to be a little slow, is why I'm again repeating it for call option [Foreign Language] all strikes will have intrinsic value because you will be able to buy it at a lower price compared to your spot. Similarly, when you're dealing with put options, you get the right to sell. So all your strike prices, which are greater than the spot will have an intrinsic value. Intrinsic value, like I told you, is nothing but the difference between your spot and the strike. Anything else that you are paying higher than the intrinsic value, right, or for options where there is no intrinsic value, what you are paying is, in essence, the time value for the tenure of the contract. Going forward, the third topic, technical topic, again, that we are speaking of is moneyness of an option. Most of you would have come across the terminology. And when you're looking at options, people say that this is an at the money option, this is an in the money option, this is an out of the money option. ATM, ITM, OTM, [Foreign Language] short form, you would have heard people using it when they are speaking of options. Now what is this in the money option, at the money option, out of the money option. [Foreign Language] at the money. So let's first look at what at the money is. On your screen, I have drawn 1 table, where I'm saying that your Spot Nifty is INR 24,000, let's understand it with the help of an example so that it sticks in our head. Say, the Spot Nifty is INR 24,000 for both call and put, if I am entering in a INR 24,000 strike contract, okay? One is a spot, the second thing that is -- that one decides is the strike price, which is nothing but the price with which he will be buying or selling the asset at a future date. So if the spot is INR 24,000 and we are looking at a INR 24,000 strike call or a INR 24,000 strike put, both of them are at the money. So at the money are those strikes, which are very, very closer to the spot. In our case, INR 24,000, so INR 24,000 is equal to the spot, both INR 24,000 call and INR 24,000 put are at the money options, right? [Foreign Language], those are at the money options. Second concept is in the money options. In the money options [Foreign Language] whichever option has intrinsic value in it, options premium has intrinsic value in it, those options are referred to as in the money options. Like I was telling you, if the spot is INR 24,000 and we are on the call side, all the strikes, which are lesser than the spot have intrinsic value, and therefore, they are in the money. Now [Foreign Language] which is nothing but the difference between your strike and my spot is INR 24,000. So INR 23,900 and INR 24,000 difference, which is INR 100 is the intrinsic value for this call option and definitely, it is in the money. Similarly, if I'm looking at a INR 23,500 strike, it is in the money by INR 500 where INR 500 is the intrinsic value, which is nothing but the difference between INR 24,000 and INR 23,500. Similarly, one more example, if I'm looking at a INR 23,000 call option again that is in the money by INR 1,000, which is nothing but INR 24,000 or INR 23,000 difference. That's the intrinsic value. If you look at all the options with higher strikes, okay, INR 24,100; INR 24,500; INR 25,000, they don't have any intrinsic value. So options [Foreign Language] value is 0 [Foreign Language] and are away from the spot, options [Foreign Language] and are away from the spot are referred to as out of the money options. So 3 things that we discussed. First, at the money, call or put [Foreign Language] at the money is nothing but all the options which are closer to your spot, at the money. Second is in the money. In the money are those option contracts where there is intrinsic value present in the premium. So like we saw in our last slide, for all the strikes, which are lower than your spot in the calls will have intrinsic value. For all the strikes, which are higher than the spot in case of put options will have an intrinsic value, and therefore, they will be in the money. [Foreign Language] There is no intrinsic value attached, they are away from the spot, those are out of the money. So for call options, all strikes greater than the spot are out of the money. For put options, all strikes lesser than the spot are out of the money. [Foreign Language], it consists only and only time value. There is no intrinsic value like I already told. The intrinsic value for these options is 0, right? I hope I could simplify this concept of in the money, at the money and out of the money. Again, to summarize all options, which are closer to the spot for both calls and puts are at the money. Whichever options have intrinsic value, which is strikes lower than the spot for calls, strikes higher than the spot for puts, they are in the money. All options, which are away from the spot and don't have any intrinsic value are out of the money, which is all strikes greater than the spot for calls are out of the money, all strikes lower than the spot for puts are out of the money. So that brings end to this discussion of moneyness. Now moving on to the actual Black-Scholes model and its formula. What I have listed down here are the input variables that you will have to feed into a Black-Scholes formula to get you a fair price of an option. So what are the inputs that are required for anybody to determine the fair price of any option that you want to find the price of. The first input variable that is required is spot price. Spot price is nothing but the current price of the underlying asset. [Foreign Language] is nothing but the spot price of that specific asset. So that goes as an input parameter into finding the fair price of an option as to where your current price of the asset is. The second price or second thing that goes in as input is the strike price, which is nothing but the agreed price to transact in a future date, right? So you can have different strike prices. When your spot was INR 24,000, I could have a INR 25,000 option, I could have a INR 23,000 option as well. So that is nothing but your strike price. The agreed price to transact in the future is your second input variable that goes into the Black-Scholes model. The third input variable that goes into the Black-Scholes model is how far is the contract? [Foreign Language]. Is it a 15-day contract, is it a 1-month contract, is it a 2-month contract, is it a 1-year contract? What is the time period of the contract, that is time to expiry. That is the third variable that goes into pricing any option. The fourth variable that goes into pricing an option is the volatility of that underlying. The expected up and downs that the underlying can go through for the tenure of the contract is nothing but your volatility. The expected up and down that your underlying is -- will go through till the tenure of the contract is nothing but your volatility. That's your fourth input variable. The fifth input variable is nothing but the risk-free rate or the interest rate, the risk-free rate that probably will exist for the tenure of the contract. So all these 5 variables, the first 3 variables I would call them as, in layman terms, as known variables. These are something you don't have to give any assumptions. You can just get the exact details of this variable, you will have to choose them, but there is no uncertainty about it once you have chosen them. You know what is the underlying spot. You know which strike price you would want to enter into [Foreign Language]. Again, it's a known variable. Third, time to expiry, again a known variable, whether I want a 15-day contract, whether I want a 1-month contract, whether I'm pricing a 1-year contract, again, this is a known variable. Now volatility is something which is an unknown variable, where a trader looks at how the underlying has behaved in the past. He looks at what is expected in the future. Is there any event that is expected in the future? And therefore, looking at all these historical data plus future expectations, he will price in this volatility, which is nothing, but what is this expectation of the underlying going up and down. [Foreign Language] the tenure of the contract is the assumption that you are putting in the model to price your option. Again, the last but not the least is again an assumption saying that the risk-free rate or the interest rate for the options tenure will be X. That's, again, a guesstimate or estimate of the trader, what is it that he sees as the risk-free rate for the tenure of the options contract. So [Foreign Language] I would say, are known variables. The other 2 are the best effort estimate of the trader who is pricing the options, right? Now this is the actual Black-Scholes formula, which is on your screen. It looks like an intimidating formula, but there are enough and more calculators that are available online on Excel, et cetera, where you feed in these 5 variables, you feed in these 5 numbers and the formula or the model will throw a fair value of the option, right? [Foreign Language], this is the formula. Puts [Foreign Language] this is the formula where you see what you are feeding in is S, which is spot. N(d1) [Foreign Language]. K is nothing, but your strike price, your exponential function where you have time to expire and your risk-free rate. Similarly, put [Foreign Language] it's slightly reverse of the above formula. Now what is D1 and D2? D1 and D2 are nothing, but they are cumulative distribution functions [Foreign Language], they basically tell you the sensitivity of the options price. So N(d1) reflects the options price sensitivity to the change in the underlying volatility and time. So if you look at D1's formula, D1 has volatility and time. So N(d1) function basically tells you how sensitive your option price will be, depending on the move in the volatility and time. And similarly, N(d2) gives you the probability what is the probability that your specific option that you are choosing will turn out to be in the money basis your assumptions. So these are distribution functions, which are cumulative distribution functions which are -- which have their specific formulas, but both of them -- one of them tells you the sensitivity with respect to volatility and time, the other one gives you the probability or sensitivity that what is the probability of your specific option being in the money on your expiry date. So once you feed in these 5 inputs, what the model will throw out is nothing but a fair price of an option, right? Now this input parameters have an effect or impact on the options price. We will look at 1, 1 parameter and then see what or how does it impact the options price on an ongoing basis? So [Foreign Language] when I'm looking at the impact, what I'm assuming is if we are looking at the impact of spot, I'm assuming all the other variables are staying constant. I'm not moving all the variables at one point in time. I'm moving 1, 1 variable, and I'm trying to see [Foreign Language], okay? We are looking at 1, 1 variable at a point in time to see how it will impact the fair price of my option, right? Because it becomes primitive or paramount when I'm understanding that I am pricing these options using a specific volatility, using a specific risk-free rate, using a specific tenure, I will, in my head, get it sorted saying that if I'm pricing a larger tenure contract, then I will get an X price. If I'm pricing a lower tenure contract, I will have to pay an X price. So it just helps me put things into perspective, all these input variables when I look at the impact of each of them on the price of an option. So first things first. First, we are looking at a spot price. Let's take the same example. My spot price, spot nifty today is INR 24,000. If my spot keeps going up, the fair price of all my call options will keep going up, okay? I'll repeat. Spot is INR 24,000. And when I'm looking at a call option, if the spot keeps going up, the price of all the call option will also keep going up, right? Intuitively, [Foreign Language] basically say, I'm -- my spot is INR 24,000, okay, and my strike was INR 24,500. So this was out of the money call option, which did not have any intrinsic value, it only had time value. Now let's say, this INR 24,000 is slowly, slowly, slowly going up, and it goes and becomes INR 25,000 now. So this option, which was out of the money when it was INR 24,000, I was speaking of INR 24,500 strike, suddenly, when spot goes to INR 25,000, this becomes in the money. It now has intrinsic value. Why? Because as my spot moved up, this option price also kept moving up out of the money [Foreign Language] in the money [Foreign Language] it kept getting -- the premium went going higher. Similarly, if I'm looking at a put option, it will move the other way around. So the price will decrease if the spot keeps going up because the options which are in the money will start moving down and they will keep becoming out of the money if the price keeps going up. So that's your first inference. [Foreign Language] the price of a call option will keep going up, the price of a put option will keep going down. Second is the strike price, right? Again, we go back to the same table, [Foreign Language] when you -- in case you are looking at a call option, the [Foreign Language] if you are pricing a higher strike price, the premium will decrease. [Foreign Language] intrinsic value [Foreign Language] the premium will also keep going up because premium is nothing but intrinsic value plus time value. Similarly, for put options, higher the strike, the price will be higher; lower the strike, the price will be lower, right, same concept. So [Foreign Language] price increases with the strike price going low, price decreases with the strike price being low for a put option. So that's the impact of strike price. Third, simplest of all -- one of the simplest of all [Foreign Language] whether it is a call option or put option, this variable has same impact. Larger the option, larger -- higher will be the price, right? Volatility, again, a direct correlation with both the prices, higher the volatility, higher will be the price of a call option; similarly, higher will be the price of a put option because [Foreign Language] movement is expected. I don't know in which direction. So I will -- my fair price of the option will be higher, whether it is call or put, irrespective, because volatility means it can go up, it can go down, it can go in either direction. And higher the volatility means higher is the movement expected. So again, that has a direct relationship with the price of both the call option and the put option. Last, but not the least, risk-free rate. [Foreign Language] you are in a regime where the risk-free rate is expected to go up, right, simplest way of understanding this is suppose your asset is worth INR 24,000 today and your risk-free rate is expected to go up [Foreign Language] the price of this asset by inflation will automatically grow and become as per the risk-free rate. [Foreign Language] and your risk free rate was assumed to be 5% for 1 year, what it will -- this [Foreign Language] by default will be [Foreign Language] plus 5% after 1 year. Similarly, [Foreign Language] risk-free rate is not 5% and 6%, it will be at a much higher value and not INR 24,000. So if I just quickly calculate INR 24,000 and, let's say, 10%. So INR 24,000 [Foreign Language] if my expected risk-free rate is 10%, but instead of 10%, it is 20%, then my nifty will be INR 24,000 plus INR 4,800 and not INR 2,400. Therefore, higher the risk-free rate, higher is the expectation of my asset to go up, and therefore, the price of the call option will also be higher, because market [Foreign Language] in the simplistic fashion, if I can explain it to you. Similarly, the put option, it will be the reverse because if the asset will keep going up because of the risk-free rate, the put options price will keep going low, right? So these are the 5 inputs and their impact on the options price if they either move up or down. Last but not the least, some light on different Greeks that one can measure using the Black-Scholes model only. And these Greeks actually will come to our aid or will come to our help when we are synthesizing these options in our -- or when we are looking at synthesizing options in our next version of this presentation. So Black-Scholes model apart from the fair price that we calculated, it also helps us calculating various option Greeks. So the same formula can be altered to also find out the options Greeks that are associated with any option. These option Greeks helps us measure the sensitivity of various input parameters. [Foreign Language] and we saw how sensitive the option price could be, these Greeks will tell you what is the sensitivity of the options price on specific input variables. Like I already told you, [Foreign Language] and also, they will help in risk management. So some of these Greeks are on your screen, the first one being delta. Delta [Foreign Language] what will be the change in my fair price of the option? It gives you the change in the price of an option with respect to the change in the spot. [Foreign Language]. Now for every unit of up move in the spot, how much will the fair price of the option move is nothing but the delta. Second variable or second Greek is gamma. It will tell you that [Foreign Language]. If my spot changes by 1 unit, how much will my delta change? It is a second-order derivative. First order derivative delta [Foreign Language] itself will change by how much, okay? That's your gamma. Third is vega. Vega is nothing, but it tells you [Foreign Language], okay? [Foreign Language]. So that's vega for you. Rho is your interest rate sensitivity. When you are feeding in the interest rate or risk-free rate in a Black-Scholes model, [Foreign Language], which is nothing but your rho. Theta is nothing but time to expiry. So when I'm pricing option today, say, it's a 15-day option. Next day, [Foreign Language] now it's a 14-day option. Just because [Foreign Language] what will be the change in my price of an option, it's nothing but theta, which is nothing but the time decay. So [Foreign Language] input, spot, strike, time to expiry, volatility, risk-free rate, except for the strike price, spot sensitivity is nothing but delta, time to expiry sensitivity is nothing but theta. Volatility sensitivity is nothing but vega and risk-free rate sensitivity is nothing but rho. One more variable, which was there on your screen was gamma, which is nothing but the second-order derivative, which tells you [Foreign Language] if my spot is moving up or down. Delta tells you price [Foreign Language]. Vega also tells you price [Foreign Language]. Rho also tells you [Foreign Language]. Theta also tells you price [Foreign Language], but with respect to different, different variables. Delta [Foreign Language] with respect to spot. Vega [Foreign Language] with respect to volatility. Rho [Foreign Language] with respect to interest rates. Theta [Foreign Language] with every passing day. Gamma [Foreign Language] with respect to spot, so it's a second-order derivative. So all these derivatives or all these Greeks basically will help you keep or help you manage your risks that you are running when you are pricing an option and also help you synthesize this option in the longer run, if you don't have a counterparty available or if the options are illiquid in whichever expiry or timeframe you are wanting to price these options at. So basically, friends, I don't know whether I was fast or slow this time around. But yes, this brings us to the end of this presentation where we -- again, I'll just quickly give you a snapshot where we first look at the Black-Scholes model per se, what it helps us in doing. Second, we look at the options price, which is made up of -- which is nothing but premium, which is made up of 2 things: intrinsic value and time value, right? [Foreign Language] moneyness [Foreign Language] where we looked at in the money, at the money and out of the money options where we are saying that all those strike prices where you have intrinsic value are in the money, all those strike prices which are closer to the spot are at the money and all those strike prices which are away from the spot and does not have intrinsic value are out of the money. Then we saw at the 5 input variables that are fed into the Black-Scholes model to arrive at the fair price of an option. The 5 input variables being spot, strike, time to expiry, volatility and risk-free rate. We look at how these impact our option prices, if they move up or down, what will happen to the fair price of my option. And then we also looked at the Greek saying that delta [Foreign Language], it is changing price of an option with respect to change in spot. Vega, change in price of an option with respect to change in volatility. Rho, change in price of an option with respect to change in interest rate. Theta, change in the price of an option with respect to change in the time to expiry. And a second order Greek, which is gamma, which is nothing but change in delta with respect to change in spot. Over to you, Vishal, for questions.

Thank you, Kalpesh. [Operator Instructions].

So friends, we just covered the basics of options here and basics of Black-Scholes here. The last one -- the last session that we will have next week is where we'll actually see that how we put these basic assumptions or basic variables to use to actually synthesize any specific option that we are wanting to price. So for some of you, I think it might just be a brush up in case there are any questions, we are happy to take them.

We have question from Prayesh Jain. When you sell a product -- when you sell put options, you only sell for decay?

The purposes could be different. One might hedge some specific position. This is a pure trader. The question that somebody has asked is a pure trader's question. He is saying that when you are selling a put option, are you selling? So in fact, whether it is a call or a put whoever is selling an option is playing for the decay. But it is not very generic in the sense that [Foreign Language] because it might have some other purpose as well. You might be wanting to cover your risk, you might have bought something which is at the money and you want to sell it and reduce your cost. So there are multiple usages to selling an option, one of which is somebody selling an option, he might just wanting to sell it to the decay out of it. Mohit Bhai, is there anything that you want to add because you've...

I think selling a put option, first, we take a long exposure as a hedge. Second is decay, definitely, you're right. And third is, it also has an interest rate component, which helps us in case the interest rates are going up as Kalpesh told that price will decrease. So it has all the 3 components: Delta, volatility as well as the interest rate.

So Prayesh, I hope that this answers your question. [Operator Instructions]

My question was with respect to your structured product strategy, when you sell put options from a return perspective, it was more specific to Anand Rathi's structured product in your last teaching session you had mentioned about writing put options. So that was my specific question. For your strategy, do you only look for a decay or do you also look for some other things there?

Like Mohit-bhai told, it's both, it's not just decay, it's a long exposure as well. So our structured products are saying that if Nifty after 5 years hits a specific level on the upside, then you will make certain returns. So it's a combination of all that Mohit-bhai told, it's not just for pure decay. There is a view as well where we are seeing that Nifty after 3 years or after 5 years, depending on the product you have chosen, it will hit a certain threshold. And therefore, once it hits the threshold, whatever premium that we'd collected plus whatever gains we've had on the premium, all of that will belong to the client. So it's a combination like Mohit-bhai already explained.

And over the -- you're talking about 5-year options, 5-year ahead options, how would the liquidity is? And is there a chance of mispricing in that segment? And how easily it is that you get the buyer of the option on that side?

Mohit-bhai, you want to take this or...

I think, see, liquidity depends on market conditions. Sometimes they are liquid, sometimes they are not. And as Kalpesh told that, Black-Scholes formula is a very generic formula. So if you want to build a long-term position and if the options are not liquid, you can take a position in the short-term options and keep rolling them whenever things are right for you

Got it. And it's true for...

So ultimately...

[indiscernible] back to you, right?

If you take a position in a 1-month option, you roll it 12 times, it will become a 1-year option for you.

Right, but the rolling does have a cost, right?

Yes. So that cost is already considered in the Black-Scholes formula when you've priced a long-term option and when you price a short-term option.

Next question we have from Mr. Raj.

Yes. I just wanted to understand, like, I mean, theoretically, it's fine, but historically, if you could sort of give us the numbers on how the theta and gamma have actually moved with Nifty because I think that will give a better sense of really the kind of underlying sensitivity there is to our [ options ]. I mean it's understandable, you can't do it right now, but if you could just share those as well?

So it is -- like just to give you a quick snapshot. It's -- so every option will have its own Greeks associated with itself and Mohit bhai would agree that we have been doing these issuances for 12 years now. And we have weekly trades where the options keep moving as per the underlying is moving, right? This month, I'm pricing an option which is an April 27 expiry, the next month, I will be pricing probably an option, which is May 27 as an expiry at a specific different spot. So how do we look at the entire book is a cumulation of all my options put together. And then we continuously look at the Greeks cumulatively rather than one specific product or one specific option. So it's a cumulative hedging book that is being run and not like every product will have its own different variables. It's a sum of all products which are hedged together.

Next question we have from Mr. Aditya.

If you can just briefly speak about implied volatility versus historical volatility. And in your scenario, when you observe IVs being materially different than historical volatilities. How do you then rebalance your portfolios?

So basically, Mohit bhai correct me if I'm wrong, I'll just try and answer this. So like I told you, Aditya, the pricing is an ongoing mechanism, right? So probably when I'm pricing my first product, I would have assumed an X amount of wall, and say, 3 months or 4 months have passed, and I have been continuously realizing a higher wall. Then the fourth month product that I'm pricing will have a slight uptick on the wall, not complete uptick because these are 5-year options and the walls will not -- like anything which is happening today will not have a larger impact on a 5-year option, but there will be a small uptick for sure. Similarly, if I have done an option, it's just -- it's been 6 months, and the wall is not being realized, then there will be a small downtick on my future pricings and my future pricing will have that small impact. So because when we are looking at a 3-year or a 5-year options, an event which has happened today might not significantly impact the price, but there will be a small change in our pricing on the products that we are pricing for future. So that's how we'll keep moderating our assumptions over the period of time basis my actuals that I've been realizing. And of course, like I told you, if there are any events that are expected in the upcoming days, that will also have an impact. So we recalibrate our assumptions every month to see that if I was pricing it right last month, is there any change that I need to look at so that my future pricing gets that changes that you are mentioning of both price and wall.

Okay. So if I understood it right, you continuously keep on reevaluating your pricing assumptions. What sort of delta you have observed in your pricing assumptions versus what actually came out. How does -- how big a delta can it impact in our issuance, let's say, done in, let's say, January '25 versus issuance, let's say, 6 months later? What sort of Delta can the products have?

Feroze is our joint-CEO, friends, and he is there on the call. Feroze?

Kalpesh, I just came as a mystery shopper and you put me on the spotlight. I'm just joking. I'm just joking. I was just in the car sitting. Yes, whose question was that?

Mr. Aditya Bagadiya.

Yes. So your question is how much change in parameters do you see? Hardly any because the longer the period of the product more is the even in the assumptions. So for example, from December '23 till March, there was hardly any significant -- March of '25, there's hardly any significant change in pricing. Because what happens is walls can spike for about 2 months, rolls can be higher or lower for a few months, but on a 5-year period, the delta is very low. So because you're predicting 5 years. So to answer your point question, not so volatile because it's 5 years, right? If I was issuing 1-year products, then the volatility in the parameters would be larger.

Next question we have from anonymous name. How long can we run such as strategies before our size becomes a constraint, as we expect our AUM to grow at 25% on a consistent basis?

So I think there are various ways in which one can hedge their products, and these products being cyclical. So you will have some products will be maturing and the new products will keep coming. So definitely a huge scope out there. If you look at the total amount of options that are available, total amount of future that are available. Size, definitely, it does not look as a constraint at this point in time is what I'll tell. So we've been doing this for 12 years now, and the AUMs have constantly gone up over the life of the product, and there is enough and more room to issue more products because some products will keep maturing, some products will -- new products will keep happening. At the same time, there is enough liquidity in both the option and the future space in the long and short dated space where we can continue issuing these products.

Now that I'm there, Kalpesh, let me add. So whose question is that, Vishal Ji?

Sir, name is not disclosed.

Okay, name is not disclosed. Is there a constraint [Technical Difficulty] in next 4 years. If we were fast forward 5 years and the derivative market after the new circulars of derivative also, if you look at lower volumes, it can absorb significantly more than what it is today. And when the markets go up, the deltas of the product come down because of the gamma. I don't know Kalpesh, how deep have you explained it to the group, the Black-Scholes pricing model?

No, synthesizing and Greeks will be covered in the next bid. We just went to the options pricing and the basic input variables today.

I think this answer -- this question will be better answered after you've taken them through the hedging process. So that will automatically tell you what's the kind of supply available to hedge a book of INR 2 lakh crores, for example.

Next, Prayesh, wants to ask the question.

Vishal Ji, I'll have to log off. I was in the car, I've reached the place where I was supposed to. Thank you, friends. Kalpesh, only one input. If you're not able to finish synthesizing, please do fourth session, fifth session, sixth session. Anybody who wishes to understand as much as they wish to understand. And if this exercise produces 5 more issuers in the industry because most of us will be representing financial services firms, we're very happy to assist, right? So don't stop at 3. If there are more questions, if somebody is very keen to be an issuer, like a couple of friends in the industry tell me that can you assist us? So please go as deep as the listener wants to go.

Sure, sir. Thank you.

Bye, Vishal Ji. Bye Kalpesh Ji. Saumil Saab. Bye friends. Everybody, have a great evening.

Prayesh?

I just had this question, whether the single entity, gross limit consultation paper was released some time back about in the end of February. Does that in any form in case that is converted into regulation restrict you in any form?

So we've gone through the consultation paper. We've had our representation, et cetera. Like I told you, it's -- the issue of the structured product is a function of how do you hedge your products. And with the kind of limit that -- so they had earlier mentioned, right, there was a little challenge there, but then we had our representation, and we went through a couple of articles where they have kind of mentioned that they have been kind enough to listen to the issuers because what they were trying to do is limit the exposure on the derivative side for somebody who are taking speculative positions. So they have given generous limits is what we read through some of the articles that got published a couple of days back. And those limits, if put on, then I think it's business as usual, plus the kind of instruments that one has availability of to hedge these products, you can venture into options, you can venture into futures, you can synthesize using options, you can use all -- the entire basket of NIFTY50 stocks to hedge a Nifty product. So there are various avenues available. If you ask me if all of them are put to proper use, I think like Feroze mentioned, a INR 2 lakh crore book will also not have an issue to be hedged. So to answer it, again, a little distinct, the consolidation paper mentioned the limits on one specific instrument, like if you're looking at a NIFTY50 Index, it gives you a limit on just the NIFTY50 Index. It gives you a limit on a specific index. So if I am trying to hedge a NIFTY50 using a basket of 50 stocks, you will be able to easily hedge it because then you have additional limits. Just to clarify things. They were putting limits on individual indexes and not on the overall position.

Also, can you -- in case there is not enough liquidity or there are some limits that are not -- you are reaching the thresholds on Nifty, can you also take -- does the product allow you to take positions on Sensex as well? Because there is a very strong correlation between Nifty and Sensex. Does the product allow you to take positions in Sensex as well?

As of now, we are only heading it like-to-like, and there has been no challenge in hedging the products using the same instrument. So we've not ventured really into correlated instruments for hedging because there is enough and more space currently available to hedge our products.

Got it. And thank you so much for holding these sessions because I think these are definitely helping us understand the structured products much better. Thank you so much.

Thank you so much, sir.

Sunil Shah wants to ask a question.

Just my question is, in terms of the things that we do in this, what kind of subjectivity is involved in this entire situation or would I get this better understanding in the third session? Or is this question too early to understand? What I'm -- the question is, how much leeway you have in this entire session or this option pricing thing? Where do we use our own individual subjectivity call? That's my question. I don't know if it is too early.

To answer it, sir, [Foreign Language] unknown variables, which is wall and interest rate, there is -- those 2 variables are the variables where there is a little amount of subjectivity that is being used, because it's a trader's estimate of what you will realize as volatility against a trader estimate of what he will realize as an interest rate number. So those are the 2 variables. Having said which, there are enough and more aggregators and softwares available, which will help you make that estimate. So to name a few, you have Bloomberg, [ Totum ], et cetera, which help you see that whether whatever you as a trader are pricing as an option, right, you are not aggressively or conservatively pricing it, because there are other players who are also issuing these products in the market, and it will give you an estimate of what is their estimate on both volatility and rho. And like I also said, we keep visiting these pricing on a monthly basis. And if we see that there is some mismatch into the assumptions that we've already built into the product, then in our future pricings we will have that moderated to the extent required and my future pricings will have that specific impact. So -- and like I told you, it's an ongoing journey. Of course, there will be some times where my assumptions will absolutely be bang on, but there will be some days where some moderation will be required and that will be happening in the future pricing that we've been doing. Of course, it will be better understood, like you said, in the last session where you will understand the sensitivity of these.

Okay. Just if you can add here. So Kalpesh, you and your team of 10 people, now within which also do we have some kind of structure wherein the unanimous answer will come across on volatility or on interest rate or there will still be subjectivity involved?

There is a 3-way structure. We work as a part of design team where we look at what product designs and what product input parameters we'll be using in this month's pricing, and we come up with our design. Then the design goes to the NBFC team, where the risk team is sitting where they are looking at all the trades, et cetera, as to what is the realized numbers on these parameters for the past and how have these products [ fared ]. And then there is the hedging team, which again looks at the parameters themselves because they are the ones who are pricing it. So one is the design team, which is looking at these variables and pricing the products, the NBFC team, the risk team, who is looking at what has happened in the past products. So what is it that they have actually realized, et cetera? And one is the actual trading team, hedging team, which is looking at these numbers, day in and day out because they are sitting on the terminal trading these options on a daily basis. So it's a 3-way check that happens before any product goes through and comes to the client in the marketplace.

Thank you, Kalpesh. But just to correct you, that is not going to be the last session. Maybe that would be the third session.

Yes, yes. Feroze just told me, yes. Absolutely.

No, no, on a lighter note, I'm just saying. So friends, so far, we have answered all the questions, which has been put on in the Q&A box. I think Prayesh is asking one more question.

At an AUM of INR 2 lakh crore, what is the kind of premium turnover that you will be doing?

So premium turnover, probably I'll not be able to answer it as straightforward as the question sounds because there will be -- so in terms of notional option pricing, I'll have to compute it and tell it to you the next time, but a portion of it will be delta hedged or synthesized, a portion of it will be hedged through options on the exchange, so what is the kind of premium. So if I understand the question right, your question is on a INR 2 lakh crore book, what is the option pricing or premium pricing that I've been using in the product. Am I right?

So basically, in our way, if you're having a INR 2 lakh crore AUM and you would be writing certain level of options, what would be the kind of premium that you would collect?

Likewise, I was telling you it's a function of how much I will be able to offload it on the exchange and how much I will have to synthesize it through the tenure of the options. So once you are synthesizing, you will realize it over the tenure of the options. If you are offloading it on the exchange trade, you will get the premium payout on the day you offload it on the exchange. So it's a function of both these variables because like I told you, these options over the 3-year, 4-year, 5-year period are not as liquid as they sound. So we keep delta hedging or synthesizing them until we find the liquidity. And once I find the liquidity, we offload them on the exchange.

So Prayesh, it is a dynamic in the nature. It's not a static in the nature. That is what Kalpesh is mentioning. So as soon as you get the required options on the exchange, immediately, the synthesize book will be converted to the option book. Correct Kalpesh, if I'm wrong.

Yes.

So friends, there are no more questioners available and also, I think so if you still want to understand something, please I request you to raise the hand button. And I would also request everyone to please join us for the third session. For that, I will send you the one-to-one invitation again. Once we'll upload that on our exchanges website, then we'll communicate to you on one-to-one basis. And I do request everyone to please attend the third session, that is going to be very, very, very interesting where the Kalpesh and the team will explain us how they actually synthesize these options or the options into the futures and we carry out the trades basically in the issuer book. So if there are no any questions, can we just wrap it up? Kalpesh just wait for a minute or else we'll just wrap it up. Aditya wants to ask the question.

A small request, I missed the first session of these 3 sessions. It will be very helpful if you can share at least the presentation of the first session?

Sure Aditya, I will discuss with you on a one-to-one basis.

Yes, that will be very helpful.

Thank you, Aditya. So Kalpesh, I'd just like to give the closing remarks, and then we'll just close this session. Thank you, friends, for joining us this evening. We truly appreciate your patience and engagement throughout the webinar. A special thanks to Kalpesh, Saumil and Mohit for their inputs and also thank you Feroze Bhai for joining us for the -- though it's for the sometime. We would request you to participate in the third session that will be most probably will be the next Monday. But actual date and time we'll communicate to you in some time. In the meanwhile, if you have any questions with respect to the Session 1 and Session 2, I request you to please feel free to call me and also you can write it down to me at [email protected]. Thank you very much, everyone. Thanks for joining us.