FINANCE CONCEPTS

Finance studies and addresses the ways in which individuals, businesses and organizations
raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects.

Arbitrage is the practice of taking advantage of a price difference between two or

more markets: The activity of buying at the lower price and reselling at the higher price is known as arbitrage.

Spot Rates Spot market is a market in which goods or securities are traded for immediate
delivery. Spot in this context means immediately effective, so that spot price is the price for immediate delivery.

Forward Rates the forward exchange market is a market in which contracts are made to
supply currencies at fixed dates in the future at fixed prices

Indian Money Market Money market is the market in which short-term funds are borrowed
and lent. The money market does not deal in cash or money, but in trade bills, promissory notes and government papers which are drawn for short periods. These short-term bills are known as near-money.

Instruments in the Indian Money Market comprise money at call (overnight) and short
notice (up to 14 days), term money, commercial paper (CP), certificate of deposits (CDs), commercial bills, treasury bills and inter-corporate deposits. Of these, the call money and notice and Treasury bills.

Indian Money Market the Indian money market is a less developed market and cannot be
compared with such advanced money markets as the New York and London money markets.

Factoring is a device by which book debts are quickly realized through outright sale of
accounts receivable to a financial intermediary called factor. The factor will purchase accounts receivables from all parties and take over the responsibility of collecting trade dues.

IMF (International monetary fund) IMF is an agency concerned with macro-management and
demand-side management of the World economy.

IBRD (International Bank for Reconstruction and Development) is an agency concerned with
micro-management of projects that it finances in various countries. It mainly deals with the supply-side issues of economies.

RTA (Regional Trade Arrangement) RTA is a grouping of member countries who trade freely
only amongst themselves and confront outsiders with common tariff walls.

Options An option is a contract between two parties a buyer and a seller that gives buyer
The right, but not the obligation, to purchase or sell the underlying asset at a later date at a price agreed upon today.

{Call Right but not the obligation to buy a given quantity of underlying asset.
Put Right but not the obligation to sell a given quantity of underlying asset.

Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. Interest rate swaps These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a difference currency than those in the opposite direction.

Derivatives

The derivatives

market is

the financial

market for derivatives, financial

instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-thecounter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

Hedging is making an investment to reduce the risk of adverse price movements in an asset. This is done by taking a position in the futures market that is opposite to the one in the
physical market with the objective of reducing or limiting risks associated with price changes.

Speculation The process of selecting investments with higher risk in order to profit from an
anticipated price movement.

Money Market is a center in which financial institutions congregate for the purpose of dealing impersonally in monetary assets. It is a market where short term funds are lent and
borrowed.

a) Treasury bills it represents short term borrowings of the government TBM refers to market
where TBS are bought and sold. They may be 14 day TB 91-day TB 182-day TB (they can be discounted by Discount & Finance House of India] 364- day TB (they are popular due to high Yield) they are sold through auction once in a fortnight.

b) Commercial bill Banks advance money to customers against C.Bills. They are
rediscounted in money market for 90 days.

C) Inter- bank calls money this is done to overcome the problem of CRR. d) Commercial paper it is a short-term unsecured instrument issued by a company in the
form of promissory note with fixed maturity ( 15 days to less than one year) they are issued at a discount and the maturity value is equal to face value.

Capital Market It provides long term funds for fixed capital requirements of trade etc. Capital
market can be regional national and international.

WTO provides long term funds for fixed capital requirements of trade etc. Capital market can be
regional national and international.

Repo Rate is the rate at which the RBI lends shot-term money to the banks. When the repo
rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate is he rate at which banks park their short-term excess liquidity with the
RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.

SLR (Statutory Liquidity Ratio) Every bank is required to maintain at the close of business
every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as SLR. CRR (Cash Reserve Ratio) The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, can prescribe CRR for scheduled banks without any floor rate or ceiling rate.

CRR: 5.50% SLR: 24.0% Bank Rate: 6.0% Repo Rate: 7.50% Reverse Repo Rate: 6.00%

IRR (Internal Rate of return) The IRR is a discount rate where the present value of future
cash flows of an investment is equal to the cost of the investment. Its value, compared to the cost of the capital involved, is used to determine the project's viability. IRR is sometimes referred to as "economic rate of return (ERR)".

Annuity A financial product sold by financial institutions that is designed to accept and grow
funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.