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Objectives:
The course, as the name suggests, gives students an overview of the securities markets and the
various products that are available in the markets. It is a course that will cover almost all aspects
related to the financial markets but will not go too much in to the details of each of the functions.
This will therefore work out to be an informative course for those who want to have an idea
about financial markets and products but may not want to pursue a career in core Finance. In
particular, the broad objectives of this course are:
1. To describe the intricacies of financial products such as stocks, bonds, foreign exchange,
and derivatives.
2. To understand the operations of mutual funds, exchange traded funds, and pension
funds.
3. To understand the structure and operations of a brokerage house.
4. To apply the knowledge of financial products and markets to study real‐life issues faced
by traders and financial institutions.
Learning Outcomes:
At the end of this course students should be able to:
1. Understand the similarities and differences between various securities products such as
stocks, bonds, and derivatives.
2. Understand the mechanics and working of financial markets for various products.
3. Understand the operational aspects of mutual funds, and brokerage houses.
4. Appreciate the mechanics of order placement and execution.
5. Appreciate the uses, risks, and limitations of financial products in an actual business
context.
Target Audience:
The course shall be offered to PGP students in Term IV of the 2019 – 2020 academic year.
This course is focused at Non–Finance majors who are seeking to acquire an overview of Finance,
and more specifically a foundation in capital markets, products, and institutions.
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Marketing and other non – finance specialization students passing out of B‐Schools take up jobs
with financial institutions such as banks, mutual funds, insurance companies, and brokerage
houses. Marketing and other non‐Finance students join the BFSI verticals of IT and ITES
companies. Such students need a concise overview of the concepts imparted to Finance majors
in the 2nd year elective courses. This course is designed to address that need.
The course covers the entire gamut of financial products, namely, equities, debt, money markets,
mortgage‐backed securities, foreign exchange, futures, options, and swaps. It also covers the
important topics of mutual funds, and brokerage operations. The issues of market structures and
the intricacies of order‐driven markets are also covered in this course. The course does not pre –
suppose any knowledge of the subject and all that is expected is that the student be comfortable
with the fundamental principles of Finance which are covered in the first year Finance courses.
Further, it is not recommended for students who intend taking the other Finance courses in the
2018 – 2019 academic year.
Faculty:
The course shall be taught by Professor Sankarshan Basu. He can be reached at his office, NFB
203 or on email at sankarshan.basu@iimb.ac.in.
Primary Text:
“Fundamentals of Financial Instruments”; Sunil Parameswaran, Wiley India
Additional Readings:
“Futures Markets Made Easy with 250 Questions & Answers”; Sunil Parameswaran; Tata
McGraw Hill Publishing Company Limited
“Options and Other Derivatives”; John C. Hull and Sankarshan Basu; 10th Edition; Pearson
Education
“Bond Markets, Analysis and Strategies”; Frank Fabozzi
“Fixed Income Securities and Their Derivatives”; Suresh Sundaresan
Handouts:
Relevant handouts wherever required will be handed out in due course and students are
expected to refer to the material covered in the handouts during the course
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Evaluation:
The evaluation pattern will be as follows:
All the components will be exclusively MCQ based. Both theoretical concepts, and concepts
involving numerical calculations, will be tested via this mode.
Two quizzes (one pre‐midterm and the other post‐midterm) with 15% weightage each.
Mid Term: The midterm shall have 35% weightage.
End Term: The end term shall have 35% weightage.
Content to be covered in the course:
The detailed content with the time allotted to each topic is as follows:
Financial Institutions, Instruments and Markets: 2 Sessions
‐ Why financial markets?
‐ Categories of economic units
‐ Financial Claims – Assets & Liabilities
‐ The concept of a balance sheet
‐ Types of securities
o Debt
o Equity
o Preferred Shares
o Derivatives
o Foreign Exchange
o Mortgages
‐ Concept of return or yield
‐ Concept of risk
‐ Concept of liquidity
‐ Classification of markets
o Primary vs. secondary markets
o Direct vs. indirect markets
o Money vs. capital markets
‐ Market Intermediaries
o Brokers
o Dealers
o Investment Bankers
‐ Concept of bid and ask prices
‐ Concept of underwriting of public issues
‐ Stock Exchanges
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‐ Listing of securities
o Listing vs. registration
‐ Bond markets
‐ Derivative markets
‐ The concept of long and short positions
‐ Sell‐side traders vs. Buy‐side traders
‐ The concept of a specialist
‐ Clearing and settlement
‐ Depositories and custodians
‐ The principle of arbitrage
‐ The Eurocurrency market
‐ Floating rate loans
‐ Eurobonds and Foreign bonds
‐ Globalization of equity markets
o Dual listing of shares
‐ ADRs and GDRs
o The Concept of fungibility
‐ International Banking Facilities
Macroeconomics for Financial Markets: 1 session
‐ GDP versus GNP
‐ Calculating GDP: The Aggregate Expenditure Approach
‐ Nominal and Real GDP
‐ Deflators
‐ Consumption Expenditures
‐ Investment Spending
‐ Government Spending
‐ Net Exports
‐ Employment, Unemployment, and the Business Cycle
‐ Inventories & The Business Cycle
‐ Producer Price Index
‐ Consumer Price Index
‐ Price Indexes & The Markets
‐ Price Indexes & The Business Cycle
‐ Inflation, Interest Rates & Bond Prices
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Types of Orders and Market Structures: 2 Sessions
‐ Introduction to orders
‐ Why orders?
‐ Order related terminology
‐ Continuous markets with electronic rule based order matching
o Price and Time priority rules and order matching
o Market vs. Limit orders
o Size as a priority rule
o Stop‐loss orders and Stop‐limit orders
‐ Time conditions
‐ Types of order driven systems
o Oral auctions
o Continuous electronic auctions
The Money Market: 2 Session
‐ The Federal Reserve and its role
o Open market operations
‐ T‐bills
‐ Bankers’ Acceptances
‐ Sight drafts vs. Time Drafts
‐ Letters of credit
‐ Commercial Paper
‐ Rating of commercial paper
‐ Repurchase and reverse repurchase agreements
o Collateral
o Credit risk
o Haircuts
o Market risk and marking to market
‐ Negotiable CDs
Bond Markets: 3 Sessions
- Plain Vanilla Debt
o Valuation on a coupon date
o Price versus yield
o Par, discount and premium bonds
o Zero coupon bonds
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o Floating rate bonds
o LIBOR
o Callable and puttable bonds
o Convertible bonds
- Valuation of bonds in between coupon dates
o The procedure for Treasury bonds
o The procedure for corporate bonds
- The concept of accrued interest
o Clean vs. dirty prices
- Yields
o Current yield
o Yield to maturity
o Sources of returns from a bond
o The reinvestment assumption
o Reinvestment risk
o Realized compound yields
o Horizon yields
o Yield to call
o Portfolio yields
o Risks inherent in bonds
o Credit risk
o Credit evaluation
o Credit rating agencies
o Bond insurance
o Liquidity risk
o Interest rate risk
o Inflation risk
o Timing risk
o Foreign exchange risk
Equity Markets – An Introduction: 2 Sessions
- Nature of common stock
- Voting rights
- Preferred shares
- Margin trading & Short selling
o Federal regulations
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o Concept of owner’s equity
o Concept of maintenance margin
o Short selling and the uptick rule
- Stock indices
- Types of indices
o Price weighted
o Value weighted
o Equally weighted
- Forming mimicking portfolios
‐ Portfolio rebalancing
The Brokerage Industry: 1 Session
- Functions of a broker
- Why do we need a broker?
- Structure of a brokerage firm
o The front office
o Research
o Customer Service
o The back office
- Street name securities
- Credit management
- Stock lending and borrowing
- Types of accounts
o Cash accounts
o Margin accounts
- Brokerage commissions
o The impact of deregulation
o Discount brokers
o Soft commissions
o Directed brokerage
o Interest income
o Short interest rebate
Mutual Funds: 1 Session
- Definition of a mutual fund
- Why invest in such funds?
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- Advantages and disadvantages of investing in such funds
- Open‐end vs. closed‐end funds
- The concept of NAV
- Unit Trusts
- Loads
o Front‐end loads
o Back‐end loads
o Level loads
o No‐loads
- Multiple share classes
- Expense ratio
o Management fees
o 12b‐1 fees
o Other expenses
- Categorization of funds
o Money market funds
o Debt funds
o Equity funds
o Hybrid funds
- Exchange Traded Funds
Fundamentals of Foreign Exchange: 2 Sessions
‐ The spot market
o Direct quotes
o Indirect quotes
o European versus American terms
‐ Arbitrage
o One‐point arbitrage
o Two‐point arbitrage
o Triangular arbitrage
‐ The forward market
‐ Merchant rates and exchange margins
‐ Covered Interest Arbitrage
‐ Inter‐bank swap deals
‐ Option forwards
‐ Covered Interest Arbitrage
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Derivatives Overview – Futures & Options: 3 Sessions
- Forward versus Futures contracts
- Types of assets underlying futures contracts
- Derivative exchanges
- Types of assets underlying options contracts
- Call and Put options
- European versus American options
- Hedgers, Speculators and Arbitrageurs
- The role of futures and options markets
- Standardization of futures contracts
- Margins and marking to market
- Liquidating a futures position
- Role of the clearinghouse
- Trading volume versus Open Interest
- Exercising call and put options
- Cash settlement versus delivery settlement
- Payoffs and profits
- Exchange traded versus OTC options
- Moneyness of the option
- Contract specification
- Adjustments for corporate actions
- Put‐Call Parity
- Valuation of options
o Variables of interest
o The Black‐Scholes model
Mortgage Loans: 1 Session
- Concept of an amortized loan
- Loans with balloon payments
- Refinancing of mortgage loans
- Adjustable rate mortgages
- Rate caps and payment caps
- Graduated payment mortgages
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