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Uttar Pradesh
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ASSIGNMENTS
PROGRAM: BFIA
SEMESTER-II
Subject Name:
Study COUNTRY:
Roll Number (Reg. No.):
Student Name:
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C
DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions
MARKS
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10
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Assignment B
Assignment C
instruments?
Answer:
Money market: is a market for short-term, high liquid debt securities with
maturities of less than one year. It is a highly liquid market wherein
securities are bought and sold in large denominations to reduce
transaction costs. Call money market, certificates of deposit, commercial
paper, and treasury bills are the major instruments of the money market.
Money market is a very important segment of the financial system of a
country. It is the market dealing in monetary assets of short term nature.
Short term funds up to one year and financial assets that are close
substitutes for money are dealt in the money market.
The money market functions include:
a) Money markets serve as an equilibrating force that redistributes
cash balances in accordance with the liquidity needs of the
participants.
b) Money markets form a basis for the management of liquidity and
money in the economy by monetary authorities.
c) Money markets provide a reasonable access to the users of shortterm money for meeting their requirements at realistic prices.
d) As it facilitates the conduct of monetary policy, money markets
constitute a very important segment of the financial system.
Money market Instruments are short-term, low risk, high liquid financial
instruments such as treasury bills, call money, notice money, certificates
of deposit, commercial paper etc.
1) Call Money: is money borrowed or lent on demand for a very short
period. It is borrowed or lent for a day, and sometimes called as
Overnight Money. Intervening holidays or weekends are excluded for this
purpose. Thus money, borrowed on a day and repaid on the next working
day is Call Money.
2) Notice Money: is money borrowed or lent for up to 14 days. No
collateral security is required to cover these transactions.
3
Answer:
Depositories are organizations which hold securities of investors in
electronic form at the request of the investors through a registered
Depository Participant. It also provides services related to transactions in
securities.
In the Depository System, the securities of a shareholder are held in the
electronic form by conversion of physical securities to electronic form
through a process called 'dematerialization' (demat) of share certificates
and facilitates transactions electronically without involving any share
certificate or transfer deed.
Depository system is playing a significant role in stock markets around the
world and hence has become popular and prevalent in many advanced
countries.
objectives.
Answer:
Financial markets are the mechanism enabling participants to deal in
financial claims. The markets also provide a facility in which their
demands and requirements interact to set a price for such claims.
Financial markets are classified as primary market and secondary market.
Primary Market: It is the market where new issues of securities are
offered to the investors. It deals in new issues. Primary market is a part of
capital market meant for new issues. In other words, the primary market
creates long-term instruments for borrowings. It is a market where
securities are issued for the first time. For example, when StarTek, Inc.
sold 4,370,000 new shares of its common stock in June 2004, it did so in
the primary markets. In 2004, U.S. corporations issued bonds worth $5.5
trillion, and more than 240 companies came to market for the first time
with initial public offerings worth $34 billion.
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Price Stability.
Exchange Stability.
Increase in Capital Accumulation.
Higher Employment Level.
Increase in Rate of Economic Growth
All have the effect of contracting the money supply; and, if reversed,
expand the money supply. During inflation, the measures are taken to
decrease the supply of money in circulation and during deflation; the
supply of money is increased by adopting the above methods.
The monetary policy has the following effects on the economy;
1) It brings the desirable changes in the price level.
2) It helps to maintain foreign exchange reserves at a desirable level.
3) It creates more employment opportunities because the central bank
can encourage the commercial banks to provide more loans to the
sectors where more persons can be employed.
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4) It can affect the rate of economic growth. This policy can facilitate
more effective use of the resources of the country.
Limitations of Monetary Policy
Objectives of monetary policy cannot be achieved successfully due to the
following limitations:
1) Commercial banks do not cooperate fully with the central bank.
2) Money market is not properly organized.
3) Some of the financial institutions are not under the control of the
central bank.
Some of Monetary policy tools are as follow:
1) Monetary base: Monetary policy can be implemented by changing
the size of the monetary base. This directly changes the total amount of
money circulating in the economy. A central bank can use open market
operations to change the monetary base. The central bank would buy/sell
bonds in exchange for hard currency. When the central bank
disburses/collects this hard currency payment, it alters the amount of
currency in the economy, thus altering the monetary base.
2) Reserve requirements: The monetary authority exerts regulatory
control over banks. Monetary policy can be implemented by changing the
proportion of total assets that banks must hold in reserve with the
central bank. Banks only maintain a small portion of their assets as cash
available for immediate withdrawal; the rest is invested in illiquid assets
like mortgages and loans. By changing the proportion of total assets to be
held as liquid cash, the Federal Reserve changes the availability of
loanable funds. This acts as a change in the money supply. Central
banks typically do not change the reserve requirements often because it
creates very volatile changes in the money supply due to the lending
multiplier.
3) Discount window lending: Many central banks or finance
ministries have the authority to lend funds to financial institutions within
their country. By calling in existing loans or extending new loans, the
monetary authority can directly change the size of the money supply.
4) Interest rates: The contraction of the monetary supply can be
achieved indirectly by increasing the nominal interest rates. This rate has
significant effect on other market interest rates, but there is no perfect
relationship. By raising the interest rates under its control, a monetary
authority can contract the money supply, because higher interest rates
encourage savings and discourage borrowing. Both of these effects reduce
the size of the money supply.
5) Currency board: A currency board is a monetary arrangement that
pegs the monetary base of one country to another, the anchor nation. As
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vice versa. But even in the case of a pure floating exchange rate, central
banks and monetary authorities can at best "lean against the wind" in a
world where capital is mobile.
Monetary policy targets include:
1) Inflation targeting: Monetary policy targets to keep inflation under
a particular definition such as Consumer Price Index, within a desired
range. This is achieved through periodic adjustments to the Central
Bank interest rate target. The interest rate used is generally the
interbank rate at which banks lend to each other overnight for cash flow
purposes.
2) Price level targeting: Price level targeting is similar to inflation
targeting except that CPI growth in one year is offset in subsequent
years such that over time the price level on aggregate does not move.
3) Monetary aggregates: This is based on a constant growth in the
money supply. It focuses on monetary quantities. This approach was
refined to include different classes of money and credit (M0, M1 etc).
This approach is also called monetarism.
4) Fixed exchange rate: This policy is based on maintaining a fixed
exchange rate with a foreign currency. There are varying degrees of fixed
exchange rates, which can be ranked in relation to how rigid the fixed
exchange rate is with the anchor nation.
5) Gold standard: The gold standard is a system in which the price of
the national currency is measured in units of gold bars and is kept
constant by the daily buying and selling of base currency to other
countries and nationals. The selling of gold is very important for
economic growth and stability. This might be regarded as a special case
of the "Fixed Exchange Rate" policy. And the gold price might be
regarded as a special type of "Commodity Price Index".
Q: 5).
any economy.
Answer:
Interest is the price paid for borrowing money. It is expressed as a
percentage rate over a period of time. It is the price the borrowers must
pay to lenders to obtain the use of money for a period of time.
There are many interest rates, and all are affected by certain underlying
economic conditions including supply of and demand for money. When
those conditions change, all rates change together. The equilibrium rate of
Interest is also determined by the forces of demand and supply in the
market.
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13
Assignment B
Q: 1).
Answer:
Financial System is a popularly known term consisting of two sub terms,
namely; Finance and System.
In order to understand better the term Financial System we have to
define each of these sub terms.
Firstly, the term "finance" in its simplest meaning is equivalent to 'Money'.
In other words most people perceive finance and money interchangeable.
But finance exactly is not money; it is the source of providing funds for a
particular activity. Thus public finance does not mean the money with the
Government, but it refers to sources of raising revenue for the activities
and functions of a Government.
Finance is the study and practice of how money is raised and used by
organizations. It is a discipline concerned with determining value and
making decisions. The finance function allocates resources, which includes
acquiring, investing, and managing resources.
Secondly, the word "system", in the term "financial system", implies a set
of complex and closely connected or interlined institutions, agents,
practices, markets, transactions, claims, and liabilities in the economy.
Financial system is a group of interrelated and interacting institutions in
the economy that help to match one persons saving with another persons
investment.
The term financial system is a set of inter-related activities/services
working together to achieve some predetermined purposes or goals. It
includes different markets, institutions, instruments, services and
mechanisms which influence the generation of savings, investment, capital
formation and economic growth.
Van Horne defined the financial system as the purpose of financial
markets to allocate savings efficiently in an economy to ultimate users
either for investment in real assets or for consumption.
Christy has opined that the objective of the financial system is to "supply
funds to various sectors and activities of the economy in ways that promote
the fullest possible utilization of resources without the destabilizing
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16
Q: 2).
Stock Exchange.
Investment Trusts.
Insurance Companies.
Hire Purchase Companies.
Building Societies.
Pension Funds.
Commercial Banks.
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Q: 3).
Answer:
A stock market which is also known as equity market is a public body in
which a free network of economic transactions occurs. It is not a physical
facility or secret body. It is the place for the trading of stock or shares of
company and its derivatives at an agreeable price. These shares and
derivatives are securities that are listed on a stock exchange.
Participants in the stock markets
The participants in a stock market process are: Investors, Intermediaries
and Companies.
1) Investors
Investors come to the stock exchange to buy and sell securities.
SEBIs regulations permit Resident investors, Non-resident Indians,
Corporate bodies, Trusts, FIIs who are registered with SEBI, among others,
to invest in stock markets in India. Foreign citizens and overseas corporate
bodies are prohibited from investing in Indian securities markets.
Investors cannot directly trade on the stock market. They have to go
through intermediaries called brokers. Brokers are members of the stock
exchange. The investors have to open a trading account with the broker.
They are required to comply with the Know your Customer (KYC) norms.
This seeks to establish the identity and bona-fides of the investor.
Investors will also need to open a beneficiary account with a depository
participant (DP) to be able to trade in dematerialized securities. This
account will hold the shares which the investor will buy and sell.
Once the formality of account opening is done, investors can put through
their transactions through their brokers terminal. The trades have to be
settled, i.e. securities delivered/received and funds paid out/received,
according to the settlement schedule (currently T+2) decided by the
exchange. Investors have to give instructions to the DP to transfer
securities from their account to that of the broker who is also a clearing
member. Or give standing instructions to receive securities if they have
bought shares. Similarly, they have to ensure that funds are available in
their bank account to settle for shares they have bought.
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2) Brokers
Intermediaries in the secondary market process include brokers and
depository participants. Brokers are members of a stock exchange who are
alone authorized to put through trades on the stock exchange. Brokers
may be individuals or institutions who are registered with SEBI and meet
the respective stock exchanges eligibility criteria for becoming a member of
the exchange.
The stock exchange will specify minimum eligibility requirements such as
base capital to be collected from the member brokers which are in line
with SEBIs regulations on the same. The exposure that a broker can take
in the market will be a multiple of the base capital that is deposited with
the exchange.
3) DPs
Depository participants are associates of a depository through whom the
investor will hold the beneficiary account of the investors to enable them to
trade in dematerialized shares.
The SEBI (Depository and Participants) regulations specify the eligibility
requirements for a DP. Banks, financial institutions, brokers, custodians,
R&T agents, NBFCs among others are eligible to become DPs. Apart from
this, the DPs are required to have minimum net worth as specified by the
regulations. This could range from Rs 10 Crore for R&T agents who are
DPs to Rs 50 Crore for NBFCs.
The DPs are responsible for executing the investors directions on delivery
and receipt of shares from their beneficiary account to settle the trades
done on the secondary markets.
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CASE STUDY
Security Scam in India-1991
In April 1992, press reports indicated that there was a shortfall in the
Government Securities held by the State Bank of India. Investigations
uncovered the tip of an iceberg, later called the securities scam, involving
misappropriation of funds to the tune of over Rs. 3500 Crores8. The scam
engulfed top executives of large nationalized banks, foreign banks and
financial institutions, brokers, bureaucrats and politicians: The
functioning of the money market and the stock market was thrown in
disarray. The tainted shares were worthless as they could not be sold. This
created a panic among investors and brokers and led to a prolonged
closure of the stock exchanges along with a precipitous drop in the price of
shares. Soon after the discovery of the scam, the stock prices dropped by
over 40%, wiping out market value to the tune of Rs. 100,000 crores. TIle
normal settlement process in government securities was that the
transacting banks made payments and delivered the securities directly to
each other. The broker's only function was to bring the buyer and seller
together. During the scam, however, the banks or at least some banks
adopted an alternative settlement process similar to settlement of stock
market transactions. The deliveries of securities and payments were made
through the broker. That is, the seller handed' over the securities to the
broker who passed them on to the buyer, while the buyer gave the cheque
to the broker who then made the payment to the seller. There were two
important reasons why the broker intermediated settlement began to be
used in the government securities markets: The brokers instead of merely
bringing buyers and sellers together stfu1ed taking positions in the
market. They in a sense imparted greater liquidity to the markets.
When a bank wanted to conceal the fact. That it was doing a Ready
Forward deal, the broker came in handy. The broker provided contract
notes for this purpose with fictitious counterparties, but arranged for the
actual settlement to take place with the correct counterparty. This allowed
the broker to lay his hands on the cheque as it went from one bank to
another through him. The hurdle now was to find a way of crediting the
cheque to his account though it was drawn in favour of a bank and was
crossed account payee. It is purely a matter of banking custom that an
account payee cheque is paid only to the payee mentioned on the cheque.
In fact, privileged (Corporate) customers were routinely allowed to credit
account payee cheques in favour of a bank into their own accounts to
avoid clearing delays; thereby reducing the interest lost on the amount.
The brokers thus found a way of getting hold of the cheques as they went
from one bank to another and crediting the amounts to their accounts.
This effectively transformed an RF into a loan to a broker rather than to a
bank. But this, by itself, would not have led to the scam because the RF
after all is a secured. Loan and a secured loan to a broker is still secured.
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What was necessary now was to find a way of eliminating the security
itself.
Three routes adopted for this purpose were:
Some banks (or rather their officials) were persuaded to part with
cheques without actually receiving securities in return. A simple
explanation of this is that the officials concerned were bribed and/or
negligent. Alternatively, as long as the scam lasted, the banks benefited
from such an arrangement. The management of banks might have been
sorely tempted to adopt this route to higher profitability.
The second route was to replace the actual securities by a worthless
piece of paper - a fake Bank Receipt (BR). A BR like an IOU has only the
borrower's assurance that the borrower has the securities which can/will
be delivered if/when the need arises.
The third method was simply to forge the securities themselves. In many
cases, PSU bonds were represented only by allotment letters rather than
certificates on security paper. However, it accounted for only a very small
part of the total funds misappropriated. During the scam, the brokers
perfected the art of using fake BRs to obtain unsecured loans from the
banking system. They persuaded some small and little known banks - the
Bank of Karad (BOK) and the Metropolitan Cooperative Bank (MCB) - to
issue BRs as and when required. These BRs could then be used to do RF
deals with other banks. The cheques in favour of BOK were, of course,
credited into the brokers' accounts. In effect, several large banks made
huge unsecured loans to the BOK/MCB which in turn made the money
available to the brokers.
Questions:
Q: 1).
was being violated in that scam and what actions should be taken by
regulatory bodies to avoid these kinds of frauds.
Answer:
Brokers are intermediaries in the secondary market process. They are
members of the stock exchange who are authorized to put through trades
on the stock exchange. Brokers may be individuals or institutions who are
registered with SEBI and meet the respective stock exchanges eligibility
criteria for becoming a member of the exchange.
The stock exchange will specify minimum eligibility requirements such as
base capital to be collected from the member brokers which are in line
with SEBIs regulations on the same. The exposure that a broker can take
in the market will be a multiple of the base capital that is deposited with
the exchange.
All brokers are regulated by the Securities and Exchange Commission
[SEC] and are required to meet certain standards when dealing with
customers. Specifically, the Securities and Exchange Act of 1934 puts
forth certain provisions that all brokers must adhere to. These provisions
are provided below:
Duty of Fair Dealing: This includes the duty to execute orders promptly,
disclosing material information (information that a brokers client would
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consider relevant as an investor), and charge prices that are in line with
competitors.
Duty of Best Execution: The broker has a responsibility to complete
customer orders at the most favorable market prices possible.
Customer Confirmation Rule: The broker must provide the investor with
certain information, at or before the execution of the order (i.e. date, time,
price, and number of shares, commission and other information).
Disclosure of Credit Terms: At the time an account is opened, a broker
must provide the customer with the credit terms and, in addition, provide
credit customers with account statements quarterly.
Restriction of Short Sales: This rule bars an investor from selling an
exchange-listed security that they do not own (in other words, sell a stock
short) unless the sale is above the price of the last trade.
Trading During Offerings: the Rule 101 prohibits the broker from buying
a stock that is being offered during the "quiet period" one to five days
before and up to the offering.
Restrictions on Insider Trading: Brokers have to establish written
policies and procedures to ensure that employees do not misuse material
nonpublic (or inside) information.
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Assignment C
Q: 1).
The organized financial system comprises the following subsystems:
I.
II.
III.
IV.
V.
Banking system
Cooperative system
Development Banking system
Money markets
Financial companies/institutions.
a)
b)
c)
d)
Q: 2).
a)
b)
c)
d)
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Q: 6).
The Reserve Bank of India regulates the _______ and Securities
and Exchange Board of India (SEBI) regulates _________.
a)
b)
c)
d)
Q: 7).
Secondary securities are also referred to as indirect securities,
as they are issued by financial intermediaries to the ultimate savers.
_______________ are secondary securities.
a)
b)
c)
d)
Q: 8).
Interest rates are typically determined by the supply of and
demand for ___________ in the economy.
a)
b)
c)
d)
Commodities
Money ()
Manpower
Technology
Q: 9).
If the economic growth of an economy picks up momentum,
then the demand for money tends to________, putting upward
pressure on interest rates.
a)
b)
c)
d)
Go down
Stabilize
Go up ()
None of the above
Rise ()
Fall
Stabilization
None of the above
a)
b)
c)
d)
Q: 13).
Paid up capital
Issued capital
Subscribed Capital
Called Up Capital ().
Three theories about the determination of rate of Interest are:
The
The
The
The
a)
b)
c)
d)
classical theory
loanable funds theory
Keynesian theory
Vogels theory
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Q: 17).
a)
b)
c)
d)
Fixed, floating
Short term , Long term
Simple, compound ().
Long term, short term, medium term
Three theories about the determination of rate of Interest are:-
I, II, III, IV
II, III, IV, V
I to V ()
I, II, III, V
Co-operative ()
Scheduled commercial
Foreign
Private
Liberal, strict
Expansionary, contractionary ()
Inflationary, deflationary
Classical. Modern
Supply of money ()
Demand of money
Inflation
Deflation
c) Inflationary
d) Deflationary
Q: 28). The ____________ is a system in which the price of the national
currency is measured in units of gold bars and is kept constant by
the daily buying and selling of base currency to other countries and
nationals.
a)
b)
c)
d)
Stock trading
Gold standard ()
Discount window lending
Monetarism
Inflation targeting ()
Stock trading
Discount window lending
Monetarism
Share
Share & bond
Futures & options
Bond ()
Q: 32). Bonds that allow the issuer to alter the tenor of a bond, by
redeeming it prior to the original maturity date, are called ________
bonds.
a)
b)
c)
d)
Callable ()
Puttable
Amortising
Step up
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I, II, III, IV
II, III, IV, V
I to V ()
I, II, III, V
The credit risk of a borrower is evaluated by ____________.
SEBI (Securities and exchange board of India)
Stock Exchange
RBI( Reserve Bank of India)
Credit rating agencies ()
Currency ()
Country
Hedging
Speculation
Stock exchange ()
Depository
Company
Credit rating agency
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Interest rates
Inflation figures
Balance of payment figures
GDP( Gross domestic product)
a)
b)
c)
d)
Q: 39).
I, II, III
I, II, III, IV ()
II, III, IV
I, III, IV
Benefits of trading through a stock exchange:
I. Best price
II. lack of any counter-party risk
III. Access to investor grievance and redressal mechanism
a)
b)
c)
d)
I, II
I, III
II, III
I, II, III ()
Mutual ()
Demutualised
Neither a nor b
Both a & b
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