Aug 10, 2010

Trade - Short Cairn India (CAIRN), Long CRUDE (CL1 or CRUDEOIL)


Cairn India is a crude producer in India with stakes in oil fields in Rajasthan. 95% of Cairn's valuations are attributed to the PDV of the future value of its crude oil inventories. Therefore, Cairn's valuation can be attributed to three main factors:
  1. Price of Crude
  2. Quantity of crude in the oil fields
  3. Cairn's ability to successfully extract and sell the crude
I got into a Long Crude Oil (3816 Sept 10 MCX) , Short Cairn India (343 Aug 10 NSE)...with an anticipation of 6% yield based on my model. The first factor is hedged. The second factor is known.. and the third factor can only have downside risk. Finally, crude faces upside risk due to compelling geopolitical factors based on Israel-Iran interactions and this may lead to an exceptional pay off beyond the expected 6%.

Hope this works well..

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