Financial Market & Instrument

FINANCIAL MARKET & INSTRUMENTS
CHAPTER 1. INTRODUCTION
A financial market is a market in which people and entities

can trade financial securities, commodities, and other fungible items of value at low transaction
costs and at prices that reflect supply and demand. Securities include stocks and bonds, and
commodities include precious metals or agricultural goods.
There are both general markets (where many commodities are traded) and specialized markets
(where only one commodity is traded). Markets work by placing many interested buyers and
sellers, including households, firms, and government agencies, in one "place", thus making it
easier for them to find each other. An economy which relies primarily on interactions between
buyers and sellers to allocate resources is known as a market economy in contrast either to
a command economy or to a non-market economy such as a gift economy.
In finance, financial markets facilitate:
The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
Price discovery
Global transactions with integration of financial markets
The transfer of liquidity (in the money markets)
International trade (in the currency markets)
1.1 FUNCTIONS OF FINANCIAL MARKETS

Intermediary Functions
The intermediary functions of financial markets include the following:
Transfer of Resources: Financial markets facilitate the transfer of real economic

resources from lenders to ultimate borrowers.
Enhancing income: Financial markets allow lenders to earn interest or dividend

on their surplus invisible funds, thus contributing to the enhancement of the individual
and the national income.
Productive usage: Financial markets allow for the productive use of the funds
borrowed. The enhancing the income and the gross national production.
Capital Formation: Financial markets provide a channel through which new

savings flow to aid capital formation of a country.
Price determination: Financial markets allow for the determination of price of the
traded financial assets through the interaction of buyers and sellers. They provide a sign
for the allocation of funds in the economy based on the demand and supply through the
mechanism called price discovery process.
Sale Mechanism: Financial markets provide a mechanism for selling of a financial

asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
Information: The activities of the participants in the financial market result in the
generation and the consequent dissemination of information to the various segments of
the market. So as to reduce the cost of transaction of financial assets.
Financial Functions
Providing the borrower with funds so as to enable them to carry out their
investment plans.
Providing the lenders with earning assets so as to enable them to earn wealth by
deploying the assets in production debentures.
Providing liquidity in the market so as to facilitate trading of funds.
it provides liquidity to commercial bank
it facilitate credit creation
it promotes savings
it promotes investment
it facilitates balance economic growth
it improves trading floors
1.2 ROLE OF FINANCIAL MARKETS

One of the important requisite for the accelerated development of an economy is the existence of
a dynamic financial market. A financial market helps the economy in the following manner.
Saving mobilization: Obtaining funds from the savers or surplus units such as household
individuals, business firms, public sector units, central government, state governments etc. is
an important role played by financial markets.
Investment: Financial markets play a crucial role in arranging to invest funds thus
collected in those units which are in need of the same.
National Growth: An important role played by financial market is that, they contributed
to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of
funds for productive purposes is also made possible.
Entrepreneurship growth: Financial market contributes to the development of the

entrepreneurial claw by making available the necessary financial resources.
Industrial development: The different components of financial markets help an

accelerated growth of industrial and economic development of a country, thus contributing to
raising the standard of living and the society of well-being.
1.3 TYPES OF FINANCIAL MARKETS

Within the financial sector, the term "financial markets" is often used to refer just to the markets
that are used to raise finance: for long term finance, the Capital markets; for short term finance,
the Money markets. Another common use of the term is as a catchall for all the markets in the
financial sector, as per examples in the breakdown below.
Capital markets which consist of:
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Stock markets, which provide financing through the issuance of shares or common stock,
and enable the subsequent trading thereof.

Bond markets, which provide financing through the issuance of bonds, and enable the
subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products at
some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.
The capital markets may also be divided into primary markets and secondary markets. Newly
formed (issued) securities are bought or sold in primary markets, such as during initial public
offerings. Secondary markets allow investors to buy and sell existing securities. The transactions
in primary markets exist between issuers and investors, while in secondary market transactions
exist among investors.
Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to
the ease with which a security can be sold without a loss of value. Securities with an active
secondary market mean that there are many buyers and sellers at a given point in time. Investors
benefit from liquid securities because they can sell their assets whenever they want; an illiquid
security may force the seller to get rid of their asset at a large discount.
CHAPTER 2.CAPITAL MARKETS
Capital markets are financial markets for the buying and selling of long-term debt- or equitybacked securities. These markets channel the wealth of savers to those who can put it to longterm
productive
use,
such
as
companies
or
governments
making
long-term
investments. Financial regulators, such as the UK's Bank of England (BoE) or the U.S. Securities
and Exchange Commission (SEC), oversee the capital markets in their jurisdictions to protect
investors against fraud, among other duties.
Modern capital markets are almost invariably hosted on computer-based electronic
trading systems; most can be accessed only by entities within the financial sector or the treasury
departments of governments and corporations, but some can be accessed directly by the
public. There are many thousands of such systems, most serving only small parts of the overall
capital markets. Entities hosting the systems include stock exchanges, investment banks, and
government departments. Physically the systems are hosted all over the world, though they tend
to be concentrated in financial centers like London, New York, and Hong Kong. Capital markets
are defined as markets in which money is provided for periods longer than a year.
A key division within the capital markets is between the primary markets and secondary
markets. In primary markets, new stock or bond issues are sold to investors, often via a
mechanism known as underwriting. The main entities seeking to raise long-term funds on the
primary capital markets are governments (which may be municipal, local or national) and
business enterprises (companies). Governments tend to issue only bonds, whereas companies
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often issue either equity or bonds. The main entities purchasing the bonds or stock
include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy
individuals and investment banks trading on their own behalf. In the secondary markets, existing
securities are sold and bought among investors or traders, usually on an exchange, over-thecounter, or elsewhere. The existence of secondary markets increases the willingness of investors
in primary markets, as they know they are likely to be able to swiftly cash out their investments
if the need arises.
A second important division falls between the stock markets (for equity securities, also known as
shares, where investors acquire ownership of companies) and the bond markets (where investors
become creditors).
DEFINITION:
A market in which individuals and institutions trade financial securities.
Organizations/institutions in the public and private sectors also often sell securities on the capital
markets in order to raise funds. Thus, this type of market is composed of both the primary and
secondary markets.
2.1 FUNCTIONS OF CAPITAL MARKET

1. Mobilization of Savings: Capital market is an important source for mobilizing idle
savings from the economy. It mobilizes funds from people for further investments in the
productive channels of an economy. In that sense it activates the ideal monetary resources
and puts them in proper investments.
2. Capital Formation: Capital market helps in capital formation. Capital formation is net
addition to the existing stock of capital in the economy. Through mobilization of ideal
resources it generates savings; the mobilized savings are made available to various
segments such as agriculture, industry, etc. This helps in increasing capital formation.
3. Provision of Investment Avenue: Capital market raises resources for longer periods of
time. Thus it provides an investment avenue for people who wish to invest resources for a
long period of time. It provides suitable interest rate returns also to investors. Instruments
such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides
diverse investment avenue for the public.
4. Speed up Economic Growth and Development: Capital market enhances production and
productivity in the national economy. As it makes funds available for long period of time,
the financial requirements of business houses are met by the capital market. It helps in
research and development. This helps in, increasing production and productivity in
economy by generation of employment and development of infrastructure.
5. Proper Regulation of Funds: Capital markets not only helps in fund mobilization, but it
also helps in proper allocation of these resources. It can have regulation over the
resources so that it can direct funds in a qualitative manner.
6. Service Provision: As an important financial set up capital market provides various types
of services. It includes long term and medium term loans to industry, underwriting
services, consultancy services, export finance, etc. These services help the manufacturing
sector in a large spectrum.
7. Continuous Availability of Funds: Capital market is place where the investment avenue is
continuously available for long term investment. This is a liquid market as it makes fund
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available on continues basis. Both buyers and seller can easily buy and sell securities as
they are continuously available. Basically capital market transactions are related to the
stock exchanges. Thus marketability in the capital market becomes easy.
CAPITAL MARKETS CAN BE FURTHER CLASSIFIED INTO:

The
Securities
Market,
however,
refers
to
the
markets
for
those
instruments/claims/obligations that are commonly and readily transferable by sale.

The Securities Market has two interdependent and inseparable segments, the new issues
Primary Market
The stock (secondary) market.
PRIMARY MARKET
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financial
The primary market is that part of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain bonds through
the sale of a new stock or bond issue. This is typically done through a syndicateof securities
dealers. The process of selling new issues to investors is called underwriting. In the case of a
new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is
built into the price of the security offering, though it can be found in the prospectus. Primary
markets create long term instruments through which corporate entities borrow from capital
market.
Features of Primary Markets are:
This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called the new issue
market (NIM).
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the investors.
Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as "going
public."
Methods of issuing securities in the primary market are:
Public issuance, including initial public offering;
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Rights issue (for existing companies);
Preferential issue.
SECONDARY MARKET (AFTER MARKET)

The secondary market, also called aftermarket, is the financial market in which previously
issued financial instruments such as stock, bonds, options, and futures are bought and sold.
With primary issuances of securities or financial instruments, or the primary market, investors
purchase
these
securities
directly
from issuers such
as corporations issuing shares in
an IPO or private placement, or directly from the federal government in the case of treasuries.
After the initial issuance, investors can purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from fragmented to
centralized, and from illiquid to very liquid. The major stock exchanges are the most visible
example of liquid secondary markets - in this case, for stocks of publicly traded companies.
Exchanges
such
as
the New
York
Stock
Exchange, London
Stock
Exchange and NASDAQ provide a centralized, liquid secondary market for the investors who
own stocks that trade on those exchanges. Most bonds and structured products trade over the
counter, or by phoning the bond desk of ones broker-dealer. Loans sometimes trade online
using a Loan Exchange.
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CHAPTER 3. MONEY MARKET

A segment of the financial market in which financial instruments with high liquidity and very
short maturities are traded. The money market is used by participants as a means for borrowing
and lending in the short term, from several days to just under a year. Money market securities
consist of negotiable certificates of deposit (CDs), banker acceptances, U.S. Treasury bills,
commercial paper, municipal notes, federal funds and repurchase agreements (repos).
3.1 FUNCTIONS OF MONEY MARKET

The money market functions are:
Transfer of large sums of money
Transfer from parties with surplus funds to parties with a deficit
Allow governments to raise funds
Help to implement monetary policy
Determine short-term interest rates
3.2 PARTICIPANTS IN MONEY MARKET
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The money market consists of financial institutions and dealers in money or credit who wish to
either borrow or lend. Participants borrow and lend for short periods of time, typically up to
thirteen months. Money market trades in short-term financial instruments commonly called
"paper." This contrasts with the capital market for longer-term funding, which is supplied
by bonds and equity.
The core of the money market consists of interbank lending--banks borrowing and lending to
each other using commercial paper, repurchase agreements and similar instruments. These
instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered
Rate (LIBOR) for the appropriate term and currency.
Finance companies typically fund themselves by issuing large amounts of asset-backed
commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP
conduit. Examples of eligible assets include auto loans, credit card receivables,
residential/commercial mortgage loans, mortgage-backed securities and similar financial assets.
Certain large corporations with strong credit ratings, such as General Electric, issue commercial
paper on their own credit. Other large corporations arrange for banks to issue commercial paper
on their behalf via commercial paper lines.
In the United States, federal, state and local governments all issue paper to meet funding needs.
States and local governments issue municipal paper, while the US Treasury issues Treasury
bills to fund the US public debt:
Trading companies often purchase bankers' acceptances to be tendered for payment to

overseas suppliers.
Retail and institutional money market funds
Banks
Central banks
Cash management programs

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Merchant banks
3.3 MONEY MARKET INSTRUMENTS
Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift

institutions, and credit unions.
Repurchase agreements - Short-term loansnormally for less than two weeks and
frequently for one dayarranged by selling securities to an investor with an agreement to
repurchase them at a fixed price on a fixed date.
Commercial paper - short term promissory notes issued by company at discount to face
value and redeemed at face value
Treasury bills - Short-term debt obligations of a national government that are issued to
mature in three to twelve months.
Money funds - Pooled short maturity, high quality investments which buy money market
securities on behalf of retail or institutional investors.
Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of
the exchange of currencies at a predetermined time in the future.
Call Money Market The call money market is a mechanism whereby temporary surplus
of some banks is made available to others who have temporary deficit. In India, the call
money market is located mainly in Mumbai, Kolkata and Chennai.
Money Market Index- To decide how much and where to invest in money market an investor will
refer to the Money Market Index. It provides information about the prevailing market rates.
There are various methods of identifying Money Market Index like:
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Smart Money Market Index- It is a composite index based on intra-day price pattern of the
money market instruments.
Salomon Smith Barneys World Money Market Index- Money market instruments are evaluated
in various world currencies and a weighted average is calculated. This helps in determining the
index.
Bankers Acceptance Rate- As discussed above, Bankers Acceptance is a money market
instrument. The prevailing market rate of this instrument i.e. the rate at which the bankers
acceptance is traded in secondary market, is also used as a money market index.
LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also
serves as good money market index. This is the interest rate at which banks borrow funds from
other banks.
CHAPTER 4: DIFFERENCE BETWEEN CAPITAL MARKET AND

MONEY MARKET
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4.1 UNORGANISED MARKET

Players in unorganized market are money lenders, indigenous bankers, and traders etc. who lend
money to the public. Indigenous bankers even collect money from public in the form of deposits.
There are also private finance companies, chit funds etc. However, activities of these players are
not controlled by RBI. Directions were issued in 1998 to bring finance companies and chit funds
under strict control of RBI. Steps have also been taken to bring the unorganized sector under
organized fold. But these regulations are inadequate and did not have much success. Therefore,
financial instruments in unorganized markets are not standardized.
2013: Changing Scenario of Indian Equity

2012 finally gave investors a year many wished for. The year brought faith in investors and
traders with higher interest like change in interest rate, constant flow of FII, stability in growth
rate, decline in inflation, decrease in petrol prices and most importantly government reforms in
Indian equities markets. Most importantly, the Indian markets performed better compared to
other emerging markets. Year 2011 came with disappointment for investors and traders but year
2012 came with opportunities and looking ahead, 2013 is expected to be a promising year with
more aggressive reforms from the government and changing scenario of Indian equities.
Nifty Return 27.9% vs. -25% and Sensex Return 25.7% vs. -15.7%
The enormous growth and improvement of Indian equities defended some groundbreaking
developments in the Indian markets. In 2011 nifty gave a 25% negative return but in 2012
reversal effect with 27.9% positive return proved the strength in the Indian markets.
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While sensex gave a negative return of 15.7% in 2011, in 2012 recovery was seen with 25.7%
positive return. The Indian economy will improve in 2013 with lower interest rate, drop in
inflation and aggressive steps by the government on reforms might change the overall scenario.
Year 2012 came with more flow of FII in Indian equities. With changes in policy and attractive
government reforms shower the flow from foreign markets to Indian markets. Last year in 2011
FII sell 26595 cr and DII buy 29206 cr but this year in 2012 scenario changing with FII buy
101167 cr and DII sell 55800 cr which clearly indicate Indian equities more attractive with
highest return compared to other markets. With another round of improvement in Indian equities
come in year 2013 will help further inflows with strong case of investment.
In year 2012 rate cut from RBI, decline in inflation, stability in growth rate, Improvement in IIP
and still in the deficit mood of export-import mixed year indicate recovery in Indian economy.
The way Indian government promoting reforms with taking bold decision might changing the
picture of Indian economy with important player on the stage of world.
With the economic uncertainty, political deadlock in Europe, worry of Greece, quantitative
easing from ECB, reelecting of Obama in US, strength in Asian markets with austerity plans and
stimulus packages overall world market tremble between gains and losses with the volatile
microeconomic scenario. Shanghai top loser with 3.2% while DAX top gainer with 29.1%. in
2013 world market faces many challenges like Fiscal cliff issue in US, decision of Greece and
Spain in Europe markets, new Chinese leadership in the emerging markets.
Rising commodity prices, uncertain exchange rates, fall in demand due to higher interest rates,
overall price hikes and government reforms in different sectors directly or indirectly affected all
the sectors. With the robust growth in consumer durables, banking and reality sectors and on
other hands consumer goods, IT sectors posted disappointing numbers. With interest rate event
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by RBI, FDI policy in retail, Raising FDI cap in broadcasting etc. factors Auto, Banking, FMCG,
Media, Reality, Capital goods likely to remain in lime light in 2013.
2013 is expected to be a year of hope with government magic and domestic business confidence.
Year 2012 passed with scams and government reforms. With also confidence of global investors
in Indian markets, the markets may make long journey towards new highs. The government is
expected to work aggressively in 2013 on the issue of DTC, GST and land reforms which are
still in the queue to clear. On the other side forecast of GDP, interest rates, inflation and fiscal
deficit etc factors will be a signal that the worst may be behind us.
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CHAPTER 5: COMMODITY MARKET
Commodity market refers to physical or virtual transactions of buying and selling involving raw
or primary commodities. A soft commodity generally refers to commodities harvested as
products like coffee,cocoa, sugar, corn, wheat, soybean, and fruit traded in the commodity
market. Hard commodities usually refer to commodities that are extracted such as
(gold, rubber, oil). While commodities may be grouped for regulation purposes etc., in large
classes such as energy, agricultural including livestock, precious metals, industrial metals, other
commodity markets, these are broken down into about a hundred primary commodities (soybean
oil, recycled steel). Investors access about 50 major commodity markets worldwide uses growing
numbers of exchanges with virtual transactions increasingly replacing physical trades.
TYPES OF COMMODITIES
World-over one will find that a market exits for almost all the commodities known to us. These
commodities can be broadly classified into the following:
Precious Metals: Gold, Silver, Platinum etc.
Other Metals: Nickel, Aluminum, Copper etc.
Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar etc.
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Live-Stock: Live Cattle, Pork Bellies etc.
Energy: Crude Oil, Natural Gas, Gasoline etc.
SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the Counter (OTC) market
and the Exchange based market. Also, as in equities, there exists the spot and the derivatives
segment. The spot markets are essentially over the counter markets and the participation is
restricted to people who are involved with that commodity say the farmer, processor, wholesaler
etc. Majority of the derivative trading takes place through exchange-based markets with
standardized contracts, settlements etc.
HISTORY OF COMMODITY MARKETS IN INDIA

India, being an agro-based economy, has markets for most of the agro-based commodities. India
is the largest consumer of Gold in the world, which implies a huge market for the yellow metal.
India has huge spot markets for all these commodities. E.g. Indore has a huge market for soya,
Ahmedabad
for
castor
seeds
and
Surendranagar
for
Cotton
etc.
During the pre-independence era India also had a thriving futures market for commodities such
as gold, silver, cotton, edible oils etc. In mid 1960s, due to wars, natural calamities and the
consequent
shortages,
futures
trading
in
most
commodities
were
banned.
Currently, the futures markets that exist in India are localized for specific commodities. For
example, Kerala has an exchange for pepper; Ahmedabad for castor seeds and Mumbai is the
major center for Gold etc. These exchanges, however, have only a regional presence and are
dominated by people who are involved with the physical trade of that commodity.
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CURRENT DEVELOPMENT IN COMMODITY MARKETS
The government has now allowed national commodity exchanges, similar to the BSE & NSE, to
come up and let them deal in commodity derivatives in an electronic trading environment. These
exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading
system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.
Consequently four commodity exchanges have been approved to commence business in this
regard. They are:
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Multi Commodity Exchange of India Ltd. (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
Need of Commodity Derivatives for India. India is among top 5 producers of most of the
Commodities, in addition to being a major consumer of bullion and energy products.
Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the
labor force on total of 163 million hectors of land Agriculture sector is an important factor in
achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major
centre for trading of commodity derivatives.
Trends in volume contribution on the three National Exchanges:Pattern on Multi Commodity Exchange (MCX)
MCX is currently largest commodity exchange in the country in terms of trade volumes, further
it has even become the third largest in bullion and second largest in silver future trading in the
world.
Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4
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commodities contribute for more than 80 percent of total trade volume. As per recent data the
largely traded commodities are Gold, Silver, Energy and base Metals.
Incidentally the futures trends of these commodities are mainly driven by international futures
prices rather than the changes in domestic demand-supply and hence, the price signals largely
reflect International scenario.
Among Agricultural commodities major volume contributors include Gur, Urad, Mentha Oil etc.
Whose market sizes are considerably small making then vulnerable to manipulations.
Pattern on National Commodity & Derivatives Exchange (NCDEX)
NCDEX is the second largest commodity exchange in the country after MCX. However the
major volume contributors on NCDEX are agricultural commodities.
But, most of them have common inherent problem of small market size, which is making them
vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX
comes from guar seed, china and Urad (narrow commodities as specified by FMC).
Pattern on National Multi Commodity Exchange (NMCE)
NMCE is third national level futures exchange that has been largely trading in Agricultural
Commodities.
Trade on NMCE had considerable proportion of commodities with big market size as jute rubber
etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities
with small market size or narrow commodities.
Analysis of volume contributions on three major national commodity exchanges reveled the
following pattern, Major volume contributors: Majority of trade has been concentrated in few commodities that are
Non Agricultural Commodities (bullion, metals and energy)
Agricultural commodities with small market size (or narrow commodities) like guar, Urad,
Mentha etc.
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CHAPTER 6. Foreign Exchange Market

The markets, in which participants are able to buy, sell exchange and
speculate on currencies. The forex markets is made up of banks, commercial
companies, central banks, investment management firms, hedge funds, and
retail forex brokers and investors. The currency market is considered to be
the largest financial market in the world, processing trillions of dollars worth
of transactions each day.
The exchange rate is just the price of one currency in terms of another currency. Currency
markets are the world's largest financial market - over $1T ($1000B) is traded daily vs. $10-15B
traded daily in the entire US equity market. Foreign exchange market operates daily around the
clock - 24/7. There is not a physical location or exchange (like NYSE) for currency trading, it is
more like NASDAQ, an over-the-counter network of currency traders, most large banks, linked
by telephone and computer. Trading is usually in transactions of $1m or more per trade, at the
wholesale level.
Trading in the foreign exchange market is mainly to facilitate international trade and
international investment - the buying and selling of foreign goods, services and financial assets.
Think of the three functions of money - unit of account, medium of exchange and store of
value. Foreign goods are usually priced in foreign currency - German wine/beer is priced in
Euros for example. The unit of account is the euro; the medium of exchange is the euro.
American liquor distributors need Euros to buy the German wine/beer. Also, American investors
may consider the euro a better store of value than the US dollar. They could buy a CD from a
German bank denominated in Euros, instead of putting money in a U.S. bank. Or American
investors want to buy stock of a company in UK, Brazil or Turkey. They need foreign currency to
buy foreign assets.
Note: Exchange rates can be quoted two ways:
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e = / $, or the Foreign Currency per U.S $. When e gets bigger (100 to 120), dollar gets
stronger, appreciates in value (and the Yen depreciates). $1 will buy more foreign currency, or it
takes more Yen to buy a $1. When e gets smaller (100 to 80), dollar gets weaker, depreciates in
value (and the Yen appreciates). $1 will buy fewer Yen, or it takes fewer Yen to buy a $1. Just
like a price of $2/gallon of gasoline, when the P gets bigger the value (price) of gas increases (it's
in the denominator), when P gets smaller the value (price) of gas decreases.
e = $ / (British pound), or the U.S. $ equivalent, or U.S. Dollars per national currency unit.
When this e gets bigger, the get stronger (appreciates) and the dollar gets weaker (depreciates),
because it takes more dollars to buy a . When e gets smaller, the depreciates and the dollar
gets stronger. It costs less for us, in U.S. $, to buy a pound.
POINT:
1. when e (ex-rate) gets bigger, the currency in the DENOMINATOR gets stronger
(appreciates).
2. When e (ex-rate) gets smaller, the currency in the DENOMINATOR gets weaker
(depreciates).
3. Since the ex-rate is just a ratio of two currencies, when one ($) gets stronger, the other () gets
weaker.
Two Types of Exchange Rates:
1. Spot Rates (e or E) - Buyer and Seller agree on P (ex-rate) and Q for immediate delivery
(within two days).
2. Forward rates (F) - Buyer and Seller agree on P (ex-rate) and Q for delivery in the future - 1
month, 3 month, 6 months or more in the future.
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CHAPTER 7: DEBT MARKET

Overview
The debt market in India consists of mainly two categoriesthe government securities or the GSec markets comprising central government and state government securities, and the corporate
bond market. In order to finance its fiscal deficit, the government floats fixed income instruments
and borrows money by issuing G-Secs that are sovereign securities issued by the Reserve Bank
of India (RBI) on behalf of the Government of India. The corporate bond market (also known as
the non-Gsec market) consists of financial institutions (FI) bonds, public sector units (PSU)
bonds, and corporate bonds/debentures.The G-secs are the most dominant category of debt
markets and form a major part of the market in terms of outstanding issues, market
capitalization, and trading value. It sets a benchmark for the rest of the market. The market for
debt derivatives have not yet developed appreciably, although a market for OTC derivatives in
interest rate products exists. The exchange-traded interest rate derivatives that were introduced
recently are debt instruments; this market is currently
small, and would gradually pick up in the years to come.
HISTORY
The National Stock Exchange started its trading operations in June 1994 by enabling the
Wholesale Debt Market (WDM) segment of the Exchange. This segment provides a trading
platform for a wide range of fixed income securities that includes central government securities,
treasury bills (T-bills), state development loans (SDLs), bonds
issued by public sector undertakings (PSUs), floating rate bonds (FRBs), zero coupon bonds
(ZCBs), index bonds, commercial papers (CPs), certificates of deposit (CDs), corporate
debentures, SLR and non-SLR bonds issued by financial institutions (FIs), bonds issued by
foreign institutions and units of mutual funds (MFs). This segment provides for a nationwide,
anonymous, order driven, screen based trading system in government securities. In the first
phase, all outstanding and newly issued.
Central government securities were traded in the retail debt market segment. Other securities like
state government securities, T-bills etc. will be added in subsequent phases. The settlement cycle
is same as in the case of equity market i.e., T+2 rolling settlement cycle.
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TYPES OF SECURITES
Treasury Bills: Treasury bills (T-bills) are money market instruments, i.e.,
short-term debt instruments issued by the Government of India, and are
issued in three tenors91 days, 182 days, and 364 days. The T-bills are zero
coupon securities and pay no interest. They are issued at a discount and are
redeemed at face value on maturity.
Cash Management Bills: Cash management bills (CMBs) 3 have the generic
characteristics of T-bills but are issued for a maturity period less than 91
days. Like the T-bills, they are also issued at a discount, and are redeemed at
face value on maturity. The tenure, noticed amount, and date of issue of the
CMBs depend on the temporary cash requirement of the government. The
announcement of their auction is made by the RBI through a Press Release
that would be issued one day prior to the date of auction. The settlement of
the auction is on a T+1 basis.
Dated Government Securities: Dated government securities are long-term
securities that carry a axed or oating coupon (interest rate), which is paid
on the face value, payable at fi xed time periods (usually half-yearly). The
tenor of dated securities can be up to 30 years.
State Development Loans: State governments also raise loans from the
market. State Development Loans (SDLs) are dated securities issued through
an auction similar to the auctions conducted for the dated securities issued
by the central government. Interest is serviced at half-yearly intervals, and
the principal is repaid on the maturity date. Like the dated securities issued
by the central government, the SDLs issued by the state governments qualify
for SLR. They are also eligible as collaterals for borrowing through market
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repo as well as borrowing by eligible entities from the RBI under the Liquidity
Adjustment Facility.
Fixed Rate Bonds: These are bonds on which the coupon rate is fixed for the
entire life of the bond. Most government bonds are issued as
fixed rate
bonds.
Floating Rate Bonds: Floating rate bonds are securities that do not have a
fixed coupon rate. The coupon is re-set at pre-announced intervals (say,
every 6 months, or 1 year) by adding a spread over a base rate. In the case
of most oating rate bonds issued by the Government of India so far, the
base rate is the weighted average cut-off yield of the last three 364-day
Treasury Bill auctions preceding the coupon re-set date, and the spread is
decided through the auction. Floating rate bonds were first issued in India in
September 1995.
Zero Coupon Bonds: Zero coupon bonds are bonds with no coupon
payments. Like T-Bills, they are issued at a discount to the face value. The
Government of India issued such securities in the 90s; it has not issued zero
coupon bonds after that.
Capital Indexed Bonds: These are bonds, the principal of which is linked to an
accepted index of ination with a view to protecting the holder from ination.
Capital indexed bonds, with the principal hedged against ination, were first
issued in December 1997. These bonds matured in 2002. The government is
currently working on a fresh issuance of Ination Indexed Bonds wherein the
payment of both the coupon as well as the principal on the bonds would be
linked to an Ination Index (Wholesale Price Index). In the proposed
structure, the principal will be indexed and the coupon will be calculated on
the indexed principal. In order to provide the holders protection against
actual ination, the final WPI will be used for indexation.
Bonds with Call/Put Options: Bonds can also be issued with features of
optionality, wherein the issuer can have the option to buy back (call option)
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or the investor can have the option to sell the bond (put option) to the issuer
during the currency of the bond. The optionality on the bond could be
exercised after the completion of five years from the date of issue on any
coupon date falling thereafter. The government has the right to buy-back the
bond.
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CHAPTER 8: DERIVATIVES MARKET
Derivative is a product whose value is derived from the value of one or more basic variables,
called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying
asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish
to sell their harvest at a future date to eliminate the risk of
a change in prices by that date. Such a transaction is an example of a derivative. The price of this
derivative is driven by the spot price of wheat which is the underlying.
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines
derivative to include
A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
A contract, which derives its value from the prices, or index of prices, of underlying securities.
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Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by
the regulatory framework under the SC(R)A.
Products, Participants and Functions
Derivative contracts have several variants. The most common variants are forwards, futures,
options and swaps. The following three broad categories of participants - hedgers, speculators,
and arbitrageurs trade in the derivatives market. Hedgers face risk associated with the price of an
asset. They use futures or options markets to reduce or eliminate
this risk. Speculators wish to bet on future movements in the price of an asset. Futures and
options contracts can give them an extra leverage; that is, they can increase both the potential
gains and potential losses in a speculative venture. Arbitrageurs are in
business to take advantage of a discrepancy between prices in two different markets. If, for
example, they see the futures price of an asset getting out of line with the cash price, they will
take offsetting positions in the two markets to lock in a The prices of derivatives converge with
the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in
discovery of future as well as current prices. Second, the derivatives market helps to transfer
risks from those who have them but may not like them to those who have an appetite for them.
Third, derivatives, due to their inherent nature, are linked to the underlying cash markets. With
the introduction of derivatives, the underlying market witnesses higher trading volumes because
of participation by more players who would not otherwise participate for lack of an arrangement
to transfer risk. Fourth, speculative trades shift to a more controlled environment of derivatives
market. In the absence of an organized derivatives market, speculators trade in the underlying
cash markets. Margining, monitoring and surveillance of the activities of various participants
become extremely difficult in these kinds of mixed markets. Fifth, an important incidental
benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial
activity. The derivatives have a history of attracting many bright, creative, well-educated people
with an entrepreneurial attitude. They often energize others to create new businesses, new
products and new employment opportunities, the benefit of which are immense. Finally,
derivatives markets help increase savings and investment in the longrun. Transfer of risk enables
market participants to expand their volume of activity.
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TYPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and options.
Forwards: A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at todays pre-agreed price.
Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense that the former are standardized exchange traded contracts.
Options: Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a given
future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.
Swaps: Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The
two commonly used swaps are:
Interest rate swaps: These entail swapping only the interest related cash flows between the
parties in the same currency and
Currency swaps: These entail swapping both principal and interest between the parties, with the
cash flows in one direction being in a different currency than those in the opposite direction.
35
REGULATORS IN FINANCIAL MARKET

SEBI
The Securities and Exchange Board of India (SEBI) emerged as a non-statutory body in 1988
and became an autonomous body on April 12, 1992, under Securities and Exchange Board of
India Act, 1992. The present Chairman of SEBI is Upendra Kumar Sinha. The board protects the
interests of investors in securities and promotes the development of, and to regulate, the
securities market and for matters connected with them.
SEBI has adopted many rules and regulations for enhancing the Indian capital market regularly.
SEBI made it mandatory for every broker or sub broker to get registered with the body or any
stock exchange in India before getting into the business. An asset limit of 20 lakhs has been fixed
for working as an underwriter. All Indian companies are free to determine their respective share
prices and premiums on the share prices. SEBI have direct control on all mutual funds of both
public and private sector through SEBI (Mutual Funds) Regulation in 1993.
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RBI
Reserve Bank of India is the apex monetary institution of India which is responsible for the
regulation of currency, printing of banknotes and minting coins. It is also called as the central
bank of the country. The bank was established on April1, 1935 in Kolkata according to the
Reserve Bank of India act 1934 but was later shifted to Mumbai in 1937. RBI was initially
privately owned but since nationalization in 1949, the Reserve Bank is owned by
the Government of India. The Governor sits in Central Office where policies are formulated.
FUNCTIONS
It formulates implements and monitors the financial policies of India. It maintains the
price stability and ensures adequate flow of credit to productive sectors.
The Reserve bank suggests parameters of banking operations for the country's banking
and financial system functions. The aim is to maintain public confidence in the system,
protect the interest of depositors and provide cost-effective banking solutions to the
public.
The Reserve bank promotes external trade and payment and orderly development and
maintenance of foreign exchange market in India as per the Foreign Exchange
Management Act, 1999.
RBI issues currency and coins and exchanges or destroys the currency and coins that are
not in circulation.
RBI provides loan to the central and the state governments whenever they are in need so
it acts as merchant banker.
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CHAPTER 9: FINANCIAL INTRUMENTS

INTRODUCTION
A real or virtual document representing a legal agreement involving some sort of monetary
value. In today's financial marketplace, financial instruments can be classified generally as equity
based, representing ownership of the asset, or debt based, representing a loan made by an
investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of
instrument. Different subcategories of each instrument type exist, such as preferred share equity
and common share equity.
Financial instruments are legal documents that embody monetary value. There are a number of
different types of documents that are properly identified as a financial instrument, including cash
instruments and derivatives.
When most people think in terms of financial instruments, they tend to identify what is
commonly known as a cash instrument. This is simply those documents that are recognized as
cash that can be utilized for various transactions. Currency is the most easily identified of all
cash instruments, although such documents as checks or funds transfers from bank accounts are
also seen as cash instruments.
Derivative instruments are another example of the financial instrument. This classification would
include such instruments as futures, options, and swaps. Some analysts also prefer to include
stocks, bonds, and currency futures within this category as well, while others tend to think of
these as cash equivalents, since it is possible to settle debts by transferring ownership of stocks
and bonds. In broad terms, a derivative instrument is some type of contract that has value based
on the current status of the underlying assets.
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Other types of documents are often understood to function as a financial instrument. In the world
or real estate funding, the mortgage qualifies as a financial instrument. A commercial paper or
stock index also meets the basic definition, as do bills of exchange.
TYPES OF FINANCIAL INTRUMENTS

Equities
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Equities are a type of security that represents the ownership in a company. Equities are traded
(bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public
Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term
investment option as the returns on equities over a long time horizon are generally higher than
most other investment avenues. However, along with the possibility of greater returns comes
greater risk.
Equity, also called shares or scrips, is the basic building blocks of a company. A company's
ownership is determined on the basis of its shareholding. Shares are, by far, the most glamorous
financial instruments for investment for the simple reason that, over the longterm, they offer the
highest returns. Predictably, they're also the riskiest investment option. The BSE Sensex is the
most popular index that tracks the movements of shares of 30 blue-chip companies on a
weighted average basis. The rise and fall in the value of the Sensex, measured in points, broadly
indicates the price-movement of the value of shares. Of late, technology has played a major role
in enhancing the efficiency, safety, and transparency of the markets. The introduction of online
trading has made it possible for an investor to trade in equities at the click of a mouse.
Suitability
Shares are meant to belong-term investments. Three golden rules for investment in equity Diversify, Averageout & most importantly stay invested. Shares do generate income from
dividend as well as capital appreciation and have a strong potential to increase value of
investment. But shares are risky - share prices are affected by factors beyond anyone's control
and hence one needs to have an appetite for that kind of risk. If the company earns good profits
and pays dividends regularly, shares are ideal for income purposes. But not all good companies
regularly pay dividends as they may chose to employ the profits for investments and growth
purposes.
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LIQUIDITY
Shares are the most liquid financial instruments as long as there is a buyer for your shares on the
stock exchange. Most shares belonging
To the A Group on the BSE are among the most liquid. However, shares of some companies may
not witness any trading for many days altogether. In such a case, you will not be able to sell your
shares. So, the liquidity factor varies to a large extent.
Tax Implications
While dividend is not taxable at the hands of the investor, capital gains are. When you sell your
shares at a profit, it attracts a capital gains tax. Gains realized within one year of purchase of
shares come under the short-term capital gains tax, and are included in gross taxable income. If
the duration is more than one year, it is termed as long-term
Bonds
Bonds are fixed income instruments which are issued for the purpose of raising capital. Both
private entities, such as companies, financial institutions, and the central or state government and
other government institutions use this instrument as a means of garnering funds. Bonds issued by
the Government carry the lowest level of risk but could deliver fair returns.
A Bond is a loan given by the buyer to the issuer of the instrument. Companies, financial
institutions, or even the government can issue bonds. Over and above the scheduled interest
payments as and when applicable, the holder of a bond is entitled to receive the par value of the
instrument at the specified maturity date.
Bonds can be broadly classified into:
Tax-Saving Bonds
Regular Income Bonds
Tax-Saving Bonds offer tax exemption up to a specified amount of investment, examples are:
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a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b. REC Bonds under Section 54EC of the Income Tax Act, 1961
c. RBI Tax Relief Bonds.
Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at
regular, pre-determined intervals, examples are:
a. Double Your Money Bond
b. Step-Up Interest Bond
c. Retirement Bond
d. En-cash Bond
e. Education Bonds
f. Money Multiplier Bonds/Deep Discount Bond
Similar instruments issued by companies are called debentures.
Suitability
Bonds are usually not suitable for an increase in your investment. However, in the rare situation
where an investor buys bonds at a lower price just before a decline in interest rates, the resultant
drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your
investment. This is called capital appreciation.
Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may
receive interest semi-annually or even monthly, as is the case with monthly income bonds.
Depending on ones capacity to bear risk, one can opt for bonds issued by top ranking corporate,
or that of companies with lower credit ratings. Usually, bonds of top-rated corporate provide
lower yield as compared to those issued by companies that are lower in the ratings.
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RATING
Bonds are rated by specialized credit rating agencies. Credit rating agencies include CARE,
CRISIL, ICRA and Fitch. An AAA rating indicates highest level of safety while D or FD
indicates the least. The yield ona bond varies inversely with its credit (safety) rating. As
mentioned earlier, the safer the instrument, the lower is the rate of interest offered.
LIQUIDITY
Selling in the debt market is an obvious option. Some issues also offer what is known as 'Put and
Call option.' Under the Put option, the investor has the option to approach the issuing entity after
a specified period (say, three years), and sell back the bond to the issuer. In the Call option, the
company has the right to recall its debt obligation after a particular time frame. For instance, a
companyissues a bond at an interest rate of 12 percent. After 2 years, it finds it can raise the same
amount at 10 percent. The company can now exercise the Call option and recall its debt
obligation provided it has declared so in the offer document. Similarly, an investor can exercise
his Put option if interest rates have moved up and there are betteroptions available in the market.
Tax Implications
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There are specific tax saving bonds in the market that offer various concessions and tax-breaks.
Tax-free bonds offer tax relief under Section 88 of the Income Tax Act, 1961. Interest income
from bonds, up to a limit of Rs.12, 000, is exempt under section 80L of the Income tax Act, plus
Rs.3, 000 exclusively for interest from government securities. However, if you sell bonds in the
secondary market, any capital appreciation is subject to the Capital Gains Tax.
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Deposits
Investing in bank or post-office deposits is a very common way of securing surplus funds. These
instruments are at the low end of the risk-return spectrum. When you deposit a certain sum in a
bank with a fixed rate of interest and a specified time period, it is called a bank Fixed Deposit
(FD). At maturity, you are entitled to receive the principal amount as well as the interest earned
at the pre-specified rate during that period. The rate of interest for Bank Fixed Deposits varies
between 4 and 6 per cent, depending on the maturity period of the FD and the amount invested.
The interest can be calculated monthly, quarterly, half-yearly, or annually, and varies from bank
to bank. They are one the most common savings avenue, and account for a substantial portion of
an average investors savings. The facilities vary from bank to bank. Some services offered are
withdrawal through cheques on maturity; break deposit through premature withdrawal; and
overdraft facility etc.
TYPES OF DEPOSITS WITH BANKS

While various deposit products offered by the Bank are assigned different names. The deposit
products can be categorized broadly into the following types. Definition of major deposits
schemes is as under: I) Demand deposits means a deposit received by the Bank which is withdraw able on demand;
ii) Savings deposits means a form of demand deposit which is subject to restrictions as to the
number of withdrawals as also the amounts of withdrawals permitted by the Bank during any
specified period;
iii) Term deposit means a deposit received by the Bank for a fixed period withdraw able only
after the expiry of the fixed period and includes deposits such as Recurring / Double Benefit
Deposits / Short Deposits / Fixed Deposits /Monthly Income Certificate /Quarterly Income
Certificate etc.
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iv) Notice Deposit means term deposit for specific period but withdraw able on giving at least
one complete banking days notice;
v) Current Account means a form of demand deposit wherefrom withdrawals are allowed any
number of times depending upon the balance in the account or up to a particular agreed amount
and will also include other deposit accounts which are neither Savings Deposit nor Term
Deposit;
CORPORATE FIXED DEPOSITS

Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates
offered are generally higher than Bank interest rates and can be in range from 9%-16% . Higher
the interest rates offered higher are the risks involved. Why do companies have these deposits?
When companies have cash crunch and require money, they can offer deposits at attractive rate
of interest to common public, one of the reasons for this can be that they do not want to raise the
additional capital by issuing shares. Corporate Deposits are governed as per Section 58A of
Companies Act; however these are unsecured loans (we will talk about it).
Risks with Company Fixed DepositsThere are two main risks associated with Company Deposits, they are:
A) Default Risk: These Company deposits carry a risk called Default Risk, which means,
at maturity they might not be able to return your maturity amount and default in the
payment. It can happen that company is out of cash at that time or does not have sufficient
money in their hand to pay back , this can happen for many reasons like their business
might not be going good that time or because of recession .
B) Unsecured Deposits: Bank Deposits are secured by RBI up to 1 laces rupees per branch,
which means that if bank does not return you the money or goes bankrupt, RBI will pay
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you up to 1 lacs of deposits. There is no such Insurance on Company Deposits, hence they
are totally unsecured.
Suitability
There is nothing good or bad, some companies which offer Fixed Deposits are very established
and are highly reputed, however you cant take it at face value and ignore the risks involved. If
you want to park money for short-term and are comfortable with the risks which come with
corporate fixed deposits, these corporate fixed deposits can be a good products for you. The point
here is awareness. Its not recommended that you put a big sum in same company. If you want to
invest 2 lacs in company fixed deposits, and then better invest 1 lacs in 2 different companies,
that would diversify your risk to some extent. Also if you are investing for some very important
goal, then better settle with Bank Fixed Deposits and not Corporate deposits, its better to settle
with 2-3% less returns then take unnecessary risk . Here are some words of caution while
choosing Company deposits.
Company Fixed Deposits you should avoid
Companies which offer interest higher than 15%.
Companies which are not paying regular dividends to the shareholder
Companies whose Balance Sheet shows losses
Companies which are below investment grade (A or under) rating.
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CHAPTER 10.MONEY MARKET INSTRUMENTS

Treasury Bills (T-Bills): Treasury Bills, one of the safest money market instruments, are
short term borrowing instruments of the Central Government of the Country issued through the
Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so
attractive. It is available both in primary market as well as secondary market. It is a promise to
pay a said sum after a specified period. T-bills are short-term securities that mature in one year or
less from their issue date. They are issued with three-month, six-month and one-year maturity
periods. The Central Government issues T- Bills at a price less than their face value (par value).
They are issued with a promise to pay full face value on maturity. So, when the T-Bills mature,
the government pays the holder its face value. The difference between the purchase price and the
maturity value is the interest income earned by the purchaser of the instrument. T-Bills are issued
through a bidding process at auctions. The bidcan be prepared either competitively or noncompetitively. In the second type of bidding, return required is not specified and the one
determined at the auction is received on maturity. Whereas, in case of competitive bidding, the
return required on maturity is specified in the bid. In case the return specified is too high then the
T-Bill might not be issued to the bidder. At present, the Government of India issues three types of
treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills
issued by State Governments. Treasury bills are available for a minimum amount of Rs.25K and
in its multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182-day and
364- day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India
issues a quarterly calendar of T-bill auctions which is available at the Banks website. It also
announces the exact dates of auction, the amount to be auctioned and payment dates by issuing
press releases prior to every auction. Payment by allottees at the auction is required to be made
by debit to their/ custodians current account. T-bills auctions are held on the Negotiated Dealing
System (NDS) and the members electronically submit their bids on the system. NDS is an
electronic platform for facilitating dealing in Government Securities and Money Market
Instruments. RBI issues these instruments to absorb liquidity from the market by contracting the
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money supply. In banking terms, this is called Reverse Repurchase (Reverse Repo). On the other
hand, when RBI purchases back these instruments at a specified date mentioned at the time of
transaction, liquidity is infused in the market. This is called Repo (Repurchase) transaction.
Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are

transactions or short term loans in which two parties agree to sell and repurchase the same
security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be
done only between the parties approved by RBI and in RBI approved securities viz. GOI and
State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase
agreement the seller sells specified securities with an agreement to repurchase the same at a
mutually decided future date and price. Similarly, the buyer purchases the securities with an
agreement to resell the same to the seller on an agreed date at a predetermined price. Such a
transaction is called a Repo when viewed from the perspective of the seller of the securities and
Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a
given agreement is termed as a Repo or Reverse Repo depends on which party initiated the
transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds
provided to the counterparty. Effectively the seller of the security borrows money for a period of
time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security
who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The
Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the
underlying securities and is influenced by overall money market conditions.
Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short

term unsecured promissory note issued by corporates and financial institutions at a discounted
value on face value. They are usually issued with fixed maturity between one to 270 days and for
financing of accounts receivables, inventories and meeting short term liabilities. Say, for
example, a company has receivables of Rs 1 lacs with credit period 6 months. It will not be able
to liquidate its receivables before 6 months. The company is in need of funds. It can issue
commercial papers in form of unsecured promissory notes at discount of 10% on face value of
Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers
easily. The company is able to liquidate its receivables immediately and the buyer is able to earn
interest of Rs 10K over a period of 6 months. They yield higher returns as compared to T-Bills as
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they are less secure in comparison to these bills; however chances of default are almost
negligible but are not zero risk instruments. Commercial paper being an instrument not backed
by any collateral, only firms with high quality credit ratings will find buyers easily without
offering any substantial discounts. They are issued by corporates to impart flexibility in raising
working capital resources at market determined rates. Commercial Papers are actively traded in
the secondary market since they are issued in the form of promissory notes and are freely
transferable in demat form.
Certificate of Deposit: It is a short term borrowing more like a bank term deposit account. It
is a promissory note issued by a bank in form of a certificate entitling the bearer to receive
interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be
issued in any denomination. They are stamped and transferred by endorsement. Its term generally
ranges from three months to five years and restricts the holders to withdraw funds on demand.
However, on payment of certain penalty the money can be withdrawn on demand also. The
returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk.
While buying Certificate of Deposit, return method should be seen. Returns can be based on
Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is
based on compounded interest calculation. However, in APR method, simple interest calculation
is done to generate the return. Accordingly, if the interest is paid annually, equal return is
generated by both APY and APR methods. However, if interest is paid more than once in a year,
it is beneficial to opt APY over APR.
Bankers Acceptance: It is a short term credit investment created by a non financial firm and
guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and
accepted by a bank. It is a buyers promise to pay to the seller a certain specified amount at
certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the
goods as collateral. The person drawing the bill must have a good credit rating otherwise the
Bankers Acceptance will not be tradable. The most common term for these instruments
is 90 days. However, they can vary from 30 days to180 days. For corporations, it acts as a
negotiable time draft for financing imports, exports and other transactions in goods and is highly
useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold
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it until maturity and can sell off the same in secondary market at discount from the face value to
liquidate its receivables.
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GOLD
Indians faith in GOD and GOLD dates back to the Vedic times; they worshipped both.According
to the World Gold Council Report, India stands today as the worlds largestsingle market for gold
consumption. In developing countries, people have often trusted gold as a better investment than
bonds and stocks. Gold is an important and popular
Investment for many reasons:
In many countries gold remains an integral part of social and religious customs, besides being
the basic form of saving. Shakespeare called it the saint seducing gold.
Superstition about the healing powers of gold persists. Ayurvedic medicine in India
recommends gold powder and pills for many ailments.
Gold is indestructible. It does not tarnish and is also not corroded by acid except by a mixture
of nitric and hydrochloric acids.
Gold has aesthetic appeal. Its beauty recommends it for ornament making above all other
metals.
Gold is so malleable that one ounce of the metal can be beaten into a sheet covering nearly a
hundred square feet.
Gold is so ductile that one ounce of it can be drawn into fifty miles of thin gold wire.
Gold is an excellent conductor of electricity; a microscopic circuit of liquid gold printed on a
ceramic strip saves miles of wiring in a computer.
Gold is so highly valued that a single smuggler can carry gold worth Rs.50 lac underneath his
shirt.
Gold is so dense that all the tones of gold, which has been estimated; to be mined through
history could be transported by one single modern super tanker.
Finally, gold is scam-free. So far, there have been no Mundra type or Mehta type scams in
gold.
Apparently, gold is the only product, which has an investment as well as ornamental value.
Going beyond the narrow logic of yield and maturity values, thus, the lure of this yellow metal
continues.
53
MUTUAL FUND
A mutual fund allows a group of people to pool their money together and have it professionally
managed, in keeping with a predetermined investment objective. This investment avenue is
popular because of its cost-efficiency, risk-diversification, professional management and sound
regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. There are various
general and thematic mutual funds to choose from and the risk and return possibilities vary
accordingly.
Mutual funds are investment companies that use the funds from investors to invest in other
companies or investment alternatives. They have the advantage of professional management,
diversification, convenience and special services such as cheque writing and telephone account
service. It is generally easy to sell mutual fund shares/units although you run the risk of needing
to sell and being forced to take the price offered. Mutual funds come in various types, allowing
you to choose those funds with objectives, which most closely match your own personal
investment objectives. A load mutual fund is one that has sales charge or commission attached.
The fee is a percentage of the initial investment. Generally, mutual funds sold through brokers
are load funds while funds sold directly to the public are no-load or low-load. As an investor, you
need to decide whether you want to take the time to research prospective mutual funds yourself
or pay the commission and have a broker who will do that for you. All funds have annual
management fees attached.
54
TYPES
Open - Ended Mutual Funds
An open-ended mutual fund is the one whose units can be freely sold and repurchased by the
investors. Such funds are not listed on bourses since the Asset Management Companies (AMCs)
provide the facility for buyback of units from unit-holders either at the NAV, or NAV-linked
prices. Instant liquidity is the USP of open-ended funds: you can invest
in or redeem your units at will in a matter of 2-3 days. In the event of volatile markets, openended funds are also suitable for investment appreciation in the short-term. This is how they
work: if you expect the interest rates to fall, you park your money in an open-ended debt fund.
Then, when the prices of the underlying securities rise, leading to an appreciation in your funds
NAV, you make a killing by selling it off. On the other hand, if you expect the Bombay Stock
Exchange Sensitivity Index the Sensex to gain in the short term, you can pick up the right
open-ended equity fund whose portfolio has scrips likely to gain from the rally, and sell it off
once its NAV goes up.
Close Ended Mutual Funds

Closed-ended mutual funds have a fixed number of units, and a fixed tenure (3, 5, 10, or 15
years), after which their units are redeemed or they are made open-ended. These funds have
various objectives: generating steady income by investing in debt instruments,
Capital appreciation by investing in equities, or both by making an equal allocation of the corpus
in debt and equity instruments.
Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long-term. Such
schemes normally invest a majority of their corpus in equities. It has been proven that returns
from stocks, have outperformed most other kind of investments held over the long term. Growth
schemes are ideal for investors having a long-term outlook seeking growth over a period of time.
55
Income Funds
The aim of income funds is to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures and Government
securities. Income Funds are ideal for capital stability and regular income.
Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed income
securities in the proportion indicated in their offer documents. In a rising stock market, the NAV
of these schemes may not normally keep pace, or fall equally when the market falls. These are
ideal for investors looking for a combination of income and moderate growth.
Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of capital and moderate
income. These schemes generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes
may fluctuate depending upon the interest rates prevailing in the market. These are ideal for
Corporate and individual investors as a means to park their surplus funds for short periods.
Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document. The
investment of these funds is limited to specific industries like InfoTech, FMCG, and
Pharmaceuticals etc.
Sect oral Schemes

Sect oral Funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as 'A' Group shares or initial public offerings.
56
FINANCIAL INTRUMENTS -SUMMARY

A financial instrument is any contract that gives rise to a financial asset of one entity and
a financial liability or equity instrument of another entity. Investments in equity shares are a
form of financial asset.
An equity instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.

A derivative is a financial instrument or other contract with all three of the following
characteristics:
Its
value
changes
in
response
to
the
change
in
an
underlying.
It requires no initial net investment or an initial net investment that is smaller than would be
required
for
other
types
of
contracts.
It is settled at a future date.
Financial instruments are categorized into the following four types: fair value through
profit and loss (FVPL), held-to-maturity (HTM), available-for-sale (AFS), and loans and
receivables (LAR).
Investments in equity shares, futures, and equity options are classified only as either fair
value through profit and loss or as available-for-sale securities.
The fair value of a financial asset or liability is the amount for which the financial asset
could be exchanged, or the financial liability settled, between knowledgeable, willing parties
in an arms-length transaction.
When determining the fair value of a financial instrument, the accounting standards set
out a hierarchy to be applied to the valuation.
An entity should recognize a financial asset on its balance sheet when, and only when,
the entity becomes a party to the contractual provisions of the instrument.
De-recognition of a financial asset or a portion of a financial asset occurs under the

current standards when, and only when, the entity loses control of the contractual rights that
comprise the financial asset.
57
Investments can be in any of three types: physical assets, intangible assets, or financial
assets. This book covers accounting concepts involved in investments in financial assets
comprising equity, equity futures, and equity options.
Speculation is the assumption of the risk of loss, in return for the uncertain possibility of
a reward. If a particular position involves no risk, the position represents an investment.
Two major accounting standards are U.S. GAAP and IFRS.
The United States generally accepted accounting principles (U.S. GAAP) literature is
rule-based.
The International Financial Reporting Standards (IFRS) are principle-based.
Because U.S. GAAP is rule-based and also because it has been around for a longer period
of time than IFRS, U.S. GAAP literature is more voluminous than IFRS literature.
The International Accounting Standards Board (IASB) and the U.S. Financial Accounting
Standards Board (FASB) have been committed to converging IFRS and U.S. GAAP since the
Norwalk Accord of 2002.
According to the American Institute of Certified Public Accountants (AICPA), as of

November 2008, nearly 100 countries require or allow the use of IFRS for the preparation of
financial statements by publicly held companies.
In the United States, the Securities and Exchange Commission (SEC) is considering
taking steps to set a date to allow U.S. public companies to use IFRS, and perhaps make its
adoption mandatory.
58
CHAPTER 11: ANALYSIS

1. Are you aware of Commodities Markets? Have you ever invested in Commodities
Markets?
: A. Yes
B. No
40%
YES
60%
NO
ANALYSIS
40% of
the Customers were unaware of Commodities Markets, whereas 60% of the Customers were
familiar with the Commodities Markets who had invested in Commodity Markets.
59
2. What are your objectives while investing in any of the investment schemes?
a. Short term high priority objective
a. Long term high priority objectives
b. Low priority objectives
c. Money making objectives
15%
SHORT TERM HIGH

PRIORITY
35%
10%
LONG TERM HIGH

PRIORITY
40%
LOW PRIORITY
MONEY MAKING
ANALYSIS
15% of investors have short term high priority objective such as buying a house. 40% of
investors have long term high priority objective like Investing for post retirement or education
of children.
Low priority objective such as Provision for a tour or purchasing an asset is choosed by 10% of
people. While 35% people have Money making objective from their investment.
60
3. What is your basic concern before investing in shares?

a. Uncertainty of returns
b. Risky investment
c. Speculative activities are harmful
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
40%
30%
30%
ANALYSIS
The biggest concern for investors prior to investing in securities is risk involved in their
particular investment avenues which amounts to 40% followed by fear of speculative activities
with the funds of the investors which is 30% & remaining potential investors are concerned
with uncertainty of returns of their funds involved.
61
4. Which kind of return on investment do you expect?

a. Tax benefit
b. High returns
c. Capital appreciation
Sales
30%
20%
TAX BENEFIT
HIGH RETURNS
CAPITAL APPRECIATION
50%
ANALYSIS
50% of investors prefer to invest because of high retuns on investment as to gain more on what
has been invested in particular security . 30% of people expect capital appreciation & rest 20%
want tax benefit from their respective investment.
62
5. Why do you prefer investing in Mutual Funds?

a. Diversified portfolio
b. Benefits of professional management
c. Liquidity
60%
50%
40%
30%
20%
10%
Axis Title
0%
ANALYSIS
50% of the Mutual fund investors prefer investing because Mutual funds are managed by
professional experts. 35% of investors prefer Mutual funds because of diversification
availability in their respective portfolio. 15% appreciate liquidity, hence reasonably safe nature
of the mutual fund.
63
6. What is your considerable average time span while investment?

a. Less than 1 year
b. 1-2 years
c. 3-5 years
d. More than 5 years
30%
40%
LESS THAN 1 YEAR

1-2 YEARS
3-5 YEARS
MORE THAN 5 YEARS
10%
20%
ANALYSIS
40% investors prefer to invest for less than 1 year because most of the investor wanted returns
within short period of time as they have money making objective. 20% prefer to invest for 1-2
years. 10% people prefer to invest for 3-5 years these kind of investors may have less priority
such tour provisions etc. While 30% people invest for more than 5 years these kind of investor
would be thinking for post retirement or children education.
64
7. What is your prime objective for investing in Real estate?

a. Capital appreciation
b. Security against loan
c. Necessity in life or as an asset
d. Rent benefits
35%
30%
25%
20%
30%
25%
25%
20%
15%
10%
5%
0%
ANALYSIS
While investing in real estate, 25% people go for investing in real estate with a view of capital
appreciation. 20% people for as a security against loan. 30% people prefer investing with an
opinion that its a necessity asset in life which will help them sooner or later & 25% people go
for real estate with a hope that they will rent their property & earn returns from rent.
65
8. How do you keep a track of the movements in market after investing?

a. Newspapers
b. Television c. Website d. Broker
15%
35%
10%
NEWSPAPAER
TELEVISION
WEBSITE
40%
BROKER
ANALYSIS
15% of investors track market information via newspapers as they able to get news from
newspaper regarding the markets update . 10% people prefer viewing television. 40% prefer the
websites available in the internet & 35% seek advice from their broker as they believe on the
internet and advice from broker would be perfect as as broker has expert knowledge about
markets and internet would able to provide real time information about markets as well as
reviews from markets experts .
66
9. Which Government securities do you prefer to invest in?

a. Public Provident Fund (PPF)
a. National Savings Certificate
b. Treasury Bills
c. Commercial Paper
10%
10%
20%
PUBLIC PROVIDENT FUNDS

NATIONAL SAVING
CERTIFICATE
60%
TREAURY BILLS
COMMERCIAL PAPER
ANALYSIS
While investing in Government securities 60% investors prefer investing in Public Provident
Funds as investment in PPF is less risky assured returns its is absolutely tax free kind of
investment . 20% people prefer National Saving certificate. 10% people go for Treasury
Bills & Commercial Papers each.
67
10. Which type of Life Insurance do you prefer investing in?

a. Term insurance
b. Whole life policies
c. Endowment insurance plan
d. Money back policy
45%
40%
35%
30%
25%
20%
15%
Axis Title
10%
5%
0%
ANALYSIS
In case of Life Insurance 35% of investors prefer investing in term insurance policy. 20% opt for
whole life policy. Endowment insurance plan is selected by 5% investors & Money back policy,
as the name suggests it provides life coverage during the term of the policy and the maturity
benefits are paid in installments by way of survival benefits in every 5 years is opted by 40% of
the insurance policy seekers.
68
11. When do you prefer to redeem your investment?

a. At maturity
b. As and when necessary
c. After Capital Appreciation
d. As per political economic deviations
5%
AT MATURITY
45%
40%
AS & WHEN NECESSARY

AFTER CAITAL
APPRECIATION
AS PER POLITICAL &
ECONOMIC DEVIATION
10%
ANALYSIS
The investors redeem their investments according to their own personal requirements. 40%
Investors redeem their respective investments at maturity of their securities. 10% redeem as and
whenever necessary. 40% investors prefer to redeem when they receive satisfactory expected
capital appreciation & remaining 5% redeem their investment as per political & economic
deviation.
69
CHAPTER 12 : QUESTIONAIRE
1. Are you aware of Commodities Markets? Have you ever invested in Commodities Markets?
: A Yes
B. No
2. What are your objectives while investing in any of the investment schemes?
a. Short term high priority objective
d. Long term high priority objectives
e. Low priority objectives
f. Money making objectives
3. What is your basic concern before investing in shares?
a. Uncertainty of returns
b. Risky investment
c. Speculative activities are harmful
4. Which kind of return on investment do you expect?
a. Tax benefit
b. High returns
c. Capital appreciation
5. Why do you prefer investing in Mutual Funds?
a. Diversified portfolio
b. Benefits of professional management
c. Liquidity
6. What is your considerable average time span while investment?

a. Less than 1 year
b. 1-2 years
c. 3-5 years
d. More than 5 years
70
7. What is your prime objective for investing in Real estate?

a. Capital appreciation
b. Security against loan
c. Necessity in life or as an asset
d. Rent benefits
8. How do you keep a track of the movements in market after investing?
a. Newspapers
b. Television c. Website d. Broker
9. Which Government securities do you prefer to invest in?

a. Public Provident Fund (PPF)
b. National Savings Certificate
c. Treasury Bills
d. Commercial Paper
10. Which type of Life Insurance do you prefer investing in?
a.
Term insurance
b.
Whole life policies
c.
Endowment insurance plan
d.
Money back policy
11. When do you prefer to redeem your investment?

a.
At maturity
c. After Capital Appreciation
b.
As per political economic deviations
d. As and when necessary
71
CHAPTER 13: CONCLUSION

The contours of the nancial markets are expanding with the advent of new technology,
innovations in products and fast changing customer expectations. The Indian nancial services
sector comprises a good blend of domestic and foreign participants. Opening up of the nancial
markets has resulted in competition and greater eciency; however, foreign participation could
also bring in the baggage of increased risk and exposure as recent events have shown. Stability is
therefore a critical need for nancial markets for which safeguarding mechanisms need to be
established, to prevent systemic risks
A strong bond market is required to drive long term nancing of infrastructure, housing and
private sector development. The role of capital markets is vital for enhancing growth in wealth
distribution and increasing availability of funds for infrastructure development. One of the
underlying challenges that the banking and nancial services sector is dealing with is the issue of
increasing the out-reach & enhancing nancial inclusion.. The road ahead for deepening the
nancial markets needs to be paved by the formulation of a strong linkage between the
development of the economy and the capacity of the nancial system. The global nancial
environment is moving towards an integrated nancial system, and will serve in good stead to
standardize compliance norms and procedures. A greater measure of transparency is also
required to be built into regulatory procedures, to bring in a new dimension to nancial markets,
and take it to the next level.
Investors were well knowledgeable about the diverse Financial Markets & Instruments and also
about various schemes offered by them to customers. All investors were optimistic regarding
investing in the alternatives. Investors had a habit of keeping a close watch on their investment
and they kept a track on their investment in their preferred avenue through different information
channels like newspapers, television, internet and contacting brokers and they were also aware
regarding various risk factors to which a investment alternative is exposed to.
Aim of our research was to understand the motive behind the investment in various asset classes
and to find out if investors actively participate in market or they enter into the market on
occurrence of certain events.
72
CHAPTER 14: BIBLIOGRAPHY
www.wikipedia.com
www.investiopedia.com
www.bse.in
www.financialmoney.in
73

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FINANCIAL MARKET & INSTRUMENTS

A financial market is a market in which people and entities