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Open Interest Explained.

WHAT IS OPEN INTEREST?

In derivatives trading, open interest, or OI, is the total number of outstanding futures or options contracts in a market at a given point of time. It is measured throughout trading hours and displayed real time on exchange websites and trading terminals. For example, at the end of market hours on Thursday, Nifty May futures on NSE had an open interest of 2.08 crore, up 3.87 lakh from the previous session. As opposed to trading volumes, which capture total buying and selling activity, open interest counts how many positions were created; that is, how many are still ‘open’.
HOW DOES OPEN INTEREST CHANGE?

Every futures or option trade has a buyer and a seller. The buyer can hold the contract till expiry or sell it to another buyer or liquidate it before expiry. Each action changes open interest differently. For example, if trader A buys 10 futures contracts from trader B, then open interest is 10. If another trader X buys 20 futures from trader Y, then the open interest accordingly adds to 30. But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now.
HOW IS THIS DIFFERENT FROM TRADING VOLUMES?

In the above example, while open interest increased or decreased depending on the type of trade, trading volume only increased. When A bought 10 futures, trading volume was 10 and when X bought 20 contracts, volume rose to 30. But, when A unwound his position, open interest declined by 10, but trading volume increased to 40.
HOW TO INTERPRET OPEN INTEREST?

Analysts and traders commonly track open interest to observe unusual buildup of positions in a contract.However, open interest positions should be cross-checked with other parameters such as price.For instance, a rise in contract price along with increase in OI means long positions are being created, which are inflating the contract’s price. But if OI has reduced, then it means the inflation is caused by traders covering their short positions. Conversely, if price falls along with a rise in OI, then it means more traders are building short positions and pushing the price down. If OI falls along with the price, then it means long positions are being unwound. For futures contracts, savvy traders further look at changes in the discount or premium to the spot price to get a clearer picture of the market. So, if premiums contract, or discounts widen, along with an increase in OI, it means short positions are being added, and if OI is reducing, then it means long positions are being closed. Conversely, an expansion in premium or contraction in discount along with rise in OI means long positions are being added. In the options segment, such a direct relationship between option prices and open interest doesn’t exist. However, open interest is used to calculate an indicator called putcall ratio or PCR-OI. It is the ratio of total open interest in put options to that of call options. Traders use this to determine if a market is oversold, or overbought, thus predicting medium-term trends in the market.

Revive your lapsed policies, the easy way

Policies may get lapsed for a number of reasons. But you can revive them without too much of a hassle.

Lapse Policy

Policy Management

MANY of us are often unable to continue paying premiums towards our life insurance policy, causing the policy to lapse. Policy lapsation can be dangerous as you or your financial dependants/beneficiaries may not get any benefit, which was the reason for buying the insurance cover.

One needs to know the reasons behind the policy lapsation and how one can revive it, if need be, at a later date. An insurance policy may cease to exist due to various reasons. It could be because of carelessness or because one doesn’t see value in continuing with the policy, or because of a financial crisis and can’t afford it any longer. Here are some basics on policy lapsation and revival that all policyholders must know.

How does a life insurance policy lapse?
As long as
you pay your premiums regularly, your policy will remain alive. If something happens to you during this period, the insurance company will honour its commitment and pay you or your beneficiaries, depending upon the type of policy you hold. However, if you stop paying your premium, then the insurance company will no longer be obliged to continue providing an insurance cover on your life. In this situation, your policy is said to have lapsed. The insurer might not provide any monetary benefits (the sum assured under the policy) to you or your beneficiaries if something were to happen to you.

Before your policy lapses, you still have a limited time period during which you can make good on a delayed premium payment. If you are late on your premium payment, the insurer will send you a reminder and give you a grace period within which to pay your premium. This is usually 15 days when you pay your premium monthly and 30 days in all other cases. If you fail to pay the premium even after this grace period, your policy will lapse. The insurer will send you a letter informing you about the same.

Can I revive a lapsed policy? Will the benefits be the same after
revival?
Most traditional policies (like term, whole-life and endowment plans) can be revived, subject to certain criteria that your insurer might impose on you.
Revival can happen at any time, but the conditions for revival might depend upon how long the policy has been lapsed for. Under the insurance laws, if the policy has been in force for at least three years, the insured gets up to two years to revive the policy. Some insurers like LIC have special schemes under which policies can be revived for up to five years from being lapsed.
If you revive the policy within six months from the date of lapsation, the process might be as simple as paying the overdue premium (and interest) to catch up on the delay on your part.

If you revive the policy after six months from the date of lapsation, you might be required to pay the overdue premium, penalty fees, as well as interest payment that could be up to 12-18% of the premium payment, depending upon the type of policy and the date of purchase.

At the time of revival, the insurer might impose a lot of conditions or even decline your request for a policy revival if the company is not convinced about the integrity of your application on grounds of suspected fraud or the like. It can be very likely that the insurer will ask you to appear for a medical test before the policy can be revived to ascertain whether you have developed a new medical condition during policy lapse that might expose the insurance company to a high risk in insuring your life.

At the time of revival, usually, full benefits that you or your beneficiaries are eligible for will be reinstated. However, if after revival, the insured commits suicide within one year, the insurer can deny the claim. Similarly, if the insured passes away within two years of the revival, the insurer has the option of conducting an inquiry before they decide to pay the claims to the beneficiaries.

Can one still file a claim on a lapsed policy?
If a policy is less than three years old but lapses, and if something happens to you after the policy lapses, and a claim is filed, the insurer will not pay you anything. At best, the insurer might be willing to give you or your dependants the premium payments that you have made. But, this is also totally at the insurer’s discretion.

If a policy is more than three years old, but lapses, and if something were to happen to you, under the existing insurance rules, your dependants can still get some benefit. However, the insurer will pay only a reduced sum assured based on a pre-set formula (for those who are technically inclined, it’s the number of premiums paid to the total number of premiums payable).

What if I am facing a cash crunch and can’t pay my premium?
One choice you have is to review your insurance contract and change the terms. For instance, you can reduce your sum assured and your premiums will go down accordingly, perhaps making it more affordable for you to keep the policy in force.

Life insurance is a necessary financial instrument that every person with financial dependants must have. Don’t let your policy lapse, otherwise your financial dependants might end up facing financial hardship when you are not around to provide for them.
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How much insurance should I buy?

Towards the end of every financial year, tax payers look at ways to reduce their income tax liability. Many end up spreading their investments across various tax saving schemes and end up buying some life insurance as well. While buying the focus is more often than not on how much money to allocated towards the premium rather than the sum assured.

But a life insurance policy can be relevant over a long-period of time only if there is a scientific approach in determining the sum insured. Fortunately for buyers, this approach can be distilled into simple to follow thumb rules while deciding on the extent of cover.

INCOME MULTIPLE RULE

You should buy life insurance cover for a sum which is equal to a certain multiple of your annual net income. The multiples are given in the table. Income here refers to net income, which means, the residue of your salary after paying for your personal expenditures. This method is one of the simplest methods of ascertaining your need for life insurance.

For example — Rajan, a 30 year old shopkeeper who earns Rs
25,000 per month and spends Rs 2,500 towards personal expenditure per month, should buy life insurance worth ( (25000-2500)*12) *12 = Rs 32,40,000 on the lower side.

PREMIUM AS % OF INCOME

For those who have to prioritise their spending, another way to budget for insurance is to use the benchmark allocating 6% of gross income towards buying life protection. To this 6% an additional 1% should be added for each dependants. A point to be noted is that life protection here refers to pure term insurance – policies which provide only death cover without any savings element. There are ULIPs and other investment plans with high premium but only the money going toward premium should be taken into account.

In the above example, if we assume that Rajan has two dependants on him, then the premium payable towards life insurance is [ (6% * 25000) + (2 * 1% * 25000)] *12 = Rs 24000. How much insurance cover Rajan gets would depend on the cost of insurance. Companies often buy group insurance cover for employees using this yardstick.
   The above two methods are easy to use as there are no complex computations and they bring forth a decent estimate of your need. Those who want to be precise can use methods such as human life value (HLV), capital retention or capital estimation to ascertain their insurance needs. The biggest flaw with the simpler methods is they do not take into situations specific to individuals and variables such as inflation.

Human life value is a better method than the rules of thumb. An individual’s HLV is equal to a sum which can generate his annual income after subtracting the expenses incurred by him for personal consumption over his working life at an expected rate of interest. One can also include variables such as inflation and increase in income to reach a precise value. Many life insurance companies and financial planning websites offer calculators to that effect. Whatever be the tool, there is a need to clearly understand the need of insurance and ascertain the quantum. Go for an amount that would fetch you peace of mind and more important you can afford it, not just in first year, but for the entire term of the policy.