Fmi Aio

Financial market
Dr.Smita Jape
Financial market
 Where new securities are issued to

the public regularly.
 It is a world full of varied financial
products and services, tailored to
the need of every individual from all
income brackets.
 Financial products are bought and
sold on the capital market, which
is divided into primary market and
secondary market.
 Finance is a prerequisite for modern business and
financial institutions play a vital role in economic
system. It's through financial markets the
financial system of an economy works.
 The main functions of financial markets are:
 To facilitate creation and allocation of credit and
liquidity;
 To serve as intermediaries for mobilization of
savings;
 To assist process of balanced economic growth;
 To provide financial convenience
3
Financial Institutions Role through markets
PROMOTING SAVINGS
MOBILISING SAVINGS
DISTRIBUTING SAVINGS
CREATING CREDIT
FINANCIAL FACILITATING TRADE
INSTITUTIONS
FACILITATING PRODUCTION
FRANCHISING
PROVIDING FINANCIAL SERVICES
STRENGTHENING FINANCIAL MARKETS
BUILDING INFRASTRUCTURE
ACCELERATING ECONOMIC DEVELOPMENT 4

Financial Markets
Financial
Markets
Money Market
Capital Market
Treasury Bills, Call money Market,

Commercial Bills,, Commercial Papers
Industrial Securities Market Certificates of deposit, Term money
Govt. Securities Market
Long term loans Market
Primary Segment
Primary ------Public Issue
Rights Issue
Secondary Segment
Secondary
5
Financial Instruments
Financial
Instruments
Primary Secondary
Securities Securities
Equity, Time deposits,

Preference MF units
shares, Debt Insurance policies
6
What Is Primary Market?
Also known as new issues market.
transaction is conducted between the issuer and the
buyer.
This market creates new securities and offers them to
the public.
For instance, Initial Public Offering (IPO) is an offering
of the primary market where a private company
decides to sell stocks to the public for the first time.
Here, securities are directly purchased from the issuer.
Capital or equity can be raised in
primary market by following
four ways:
 1. Public Issue
 Selling securities to public at large, such as IPO.
 most vital method to sell financial securities.
 2. Rights Issue
 Whenever a company needs to raise
supplementary equity capital, the shares have to
be offered to present shareholders on a pro-rata
basis, which is known as the Rights Issue.
 If rights issue in 1:4 then ??
 Private Placement
 Selling securities to restricted
number of classy investors like
frequent investors, venture capital
funds, mutual funds and banks
comes under Private Placement.
 4. Preferential Allotment
When a listed company issues equity
shares to a selected number of
investors at a price that may or may
not be pertaining to the market price.
Right Issue Bonus Issue
Bonus shares refers to
the shares issued by the
Right shares are the one available to
company free of cost to
the existing shareholders equivalent
the existing shareholders
Meaning to their holdings, that can be bought
in the proportion of their
at a fixed price, for a definite period
holdings, out of
of time.
accumulated profits and
reserves.
Price Issued at discounted prices Issued free of cost
To bring the market price

Objective To raise fresh capital for the firm. per share, within a more
popular range.
Shareholders may fully or partly

Renunciation No such renunciation
renounce their rights.
Paid up
Either fully or partly paid up. Always fully paid up.
value
Minimum
Mandatory Not required
subscription
Split shares
 Stock split, also known as share split, is
the way through which the companies
divide their existing outstanding shares
into multiple shares such as 3 shares for
every 1 share held or 2 shares for every 1
held etc. Market capitalization of the
company during stock split remains the
same, even though the number of shares
increases, there is a corresponding
decrease in price per share.
 Did you wonder when Yes Bank Share prices reduced by 80% on 21
September 2017? It was an example of a share split by the Bank. Yes bank
split the shares in the ratio of 5 for 1 on the above date.
In this case, the total number of outstanding shares of the bank increased
by 5 times, and share price reduced to the same extent, thereby leaving
Market Capitalisation at the same figure of Rs. 85,753.14 Crs
 1. The bonus issue is similar to forward
splits in a way that share price decreases
and the number of shares increases in
both cases.
 2. In case of a bonus issue, the company
gives additional shares to its shareholders
from its free reserves instead of issuing
dividends. However, in case of a share
split, there is no such fresh issue, it is just
manipulation of the already issued capital.
Bonus and stock split
2: 1Number of shares stock split- Face value ½

1Number of shares Bonus FV-Remains same
 1. From an accounting perspective, in case of a
bonus issue, the company issues fresh shares at
the same face value and transfers free reserve
capital to issued share capital. In the case of
share splits, free reserves and issued capital
remain the same.
 2. Among bonus issue and stock splits, bonus
issue may be perceived as more positive as the
company is issuing more shares to shareholders
from its free reserves. This can be perceived as
signaling from management to investors that
they are confident of more growth in the future.
Settlement
 Account period settlement –trades pertaining to

a period stretching over more thane one day are
settled –discontinued since 2002
 Rolling Settlement –trades executed during the
day are settled based on net obligations for the
day.
 Rolling settlement for trades – T +2 days basis
 Eg: Trades executed on Monday settled on
Wednesday
 Underwriting

 Rights issues may be underwritten
 .
 The agreement between the underwriter and the company is set out in a
formal underwriting agreement.
 underwriter passes its risk to the sub-underwriter
 Underwriters and sub-underwriters may be financial institutions,

stock-brokers, major shareholders of the company or other
related or unrelated parties.
 Over‐subscription privilege
 Some rights issues include an "over‐subscription privilege", allowing

investors to buy additional shares beyond the number offered with the
basic subscription privilege, if those additional shares are available.
Typically the number of over‐subscription shares that can be purchased by
an investor is capped as no more than the amount of his/her basic
subscription. If not all the over-subscription rights can be filled, they will
be partially filled on a prorate basis
Book building
 is a systematic process of generating, capturing, and

recording investor demand for shares.
 Usually, the issuer appoints a major investment Bank to
act as a major securities underwriter or book runner
 Method of public issue --applications are accepted from
large buyers such as financial institutions, corporations or
high net-worth individuals, almost on firm allotment basis,
instead of asking them to apply in public offer.
 Book building- first guidelines issued on October 12, 1995
 Shares based on a floor price which is indicated before the
opening of the bidding process.
Book Building
 Process used by companies to launch an issue

 Fixed price case
 Bids are collected for price and quantity
 Price band –(Red Herring Prospectus )
 Floor Price—mini bid price per share
 Cut off price—Willingness to opt price for share
as not sure about the final closing price
 Issue price– Price fixed after close of issue
Allocations in an IPO
Fixed Price Issues

 In case of Book Built issue
 1. In case an issuer company makes an issue of 100% of
the net offer to public through voluntary book building
process under profitability route:
 a) Not less than 35% of the net offer to the public shall be
available for allocation to retail individual investors;
 b) Not less than 15% of the net offer to the public shall be
available for allocation to non‐institutional investors i.e.
investors other than retail individual investors and Qualified
Institutional Buyers;
 c) Not more than 50% of the net offer to the public shall be
available for allocation to Qualified Institutional Buyers.

 2. In case of compulsory Book - Built Issues

a) at least 75% of net offer to public being
allotted to the Qualified Institutional Buyers
(QIBs), failing which the full subscription monies
shall be refunded.
 b) Not more than 15% the net offer to the public
shall be available for allocation to
non‐institutional investors.
 c) Not more than 10% the net offer to the public
shall be available for allocation to retail individual
investors.
 (i) Retail Individual Investors (RIIs)
 ‘Retail individual investor’ means an investor who applies

or bids for securities of or for a value of not more than Rs.
2,00,000.
 (ii) Non Institutional Investors (NIIs)
 All applicants, other than QIBs or individuals applying for
less than Rs. 2,00,000 are considered as NIIs. Typically,
this category includes High Net Worth Individuals (HNIs)
and corporate bodies.
 (iii) Qualified Institutional Buyers (QIBs)
 QIBs are those institutional investors who are perceived to
possess expertise and the financial strength to evaluate
and invest in the capital markets. A QIB is defined by SEBI
as:
Categories of Investors:

 (i) a mutual fund, venture capital fund, Alternative Investment Fund
 foreign venture capital investor registered with SEBI;
 (ii) a foreign institutional investor and sub-account (other than a sub-
 account which is a foreign corporate or foreign individual), registered
with SEBI;
 (iii) a public financial institution (iv) a scheduled commercial bank;
 (v) a multilateral and bilateral development financial institution;
 (vi) a state industrial development corporation;
 (vii) an insurance company registered with the Insurance Regulatory
Development Authority;
 (viii)a provident fund with minimum corpus of 25 crore rupees;
 (ix) a pension fund with minimum corpus of 25 crore rupees;
 (x) National Investment Fund
 (xi) insurance funds set up and managed by army, navy or air force
 of the Union of India;
 (xii) insurance funds set up and managed by the Department of Posts,
India;
 These entities are not required to be registered with SEBI as QIBs. Any
entities falling under the categories specified above are considered as
QIBs for the purpose of participating in primary issuance process.
What Is Secondary Market?
 Trade happens between two investors without

any involvement with the company that issued
the securities in the primary market.
 The secondary market is further divided into two
kinds of market.
 the securities issued in the primary market are
bought and sold. Here, you can buy a share
directly from a seller and the stock exchange or
broker acts as an intermediary between two
parties.
Auction Market
place where buyers and sellers convene at a place

and announce the rate at which they are willing to
sell or buy securities.
 They offer either the ‘bid’ or ‘ask’ prices, publicly.

Since all buyers and sellers are convening at the
same place, there is no need for investors to
seek out profitable options.
 Everything is announced publicly and interested
investors can make their choice easily.
Dealer Market
deliver the best price to the investors.
 In this market none of the parties convene at a common

location. Instead, buying and selling of securities
happen through electronic networks which are
usually fax machines, telephones or custom order-
matching machines.
 Interested sellers deliver their offer through these
mediums, which are then relayed over to the buyers
through the medium of dealers.
 The dealers possess an inventory of securities and earn
their profit through the selling.
 A lot of dealers operate within this market and therefore, a
competition exists between them to deliver the best offer
to their investors. This makes them deliver the best price
to the investors
OTC market
 A variation to the dealer market is the OTC

market. OTC stands for ‘Over the Counter’
market.
 The concept came into existence during the early
1920’s period through Wall Street trading, which
implied the prevalence of an unorganized system
of dealers who conducted trades via networks.
 Stock shops existed to buy and sell shares over-

the-counter. In other words, these were unlisted
stocks which were sold privately.
OTC
 Over time, the notion of OTC underwent a change. These
days the over-the-counter denotes those stocks which are
not traded over stock Exchange (AMEX).
 The over-the-counter implies those stocks which are traded

on the pink sheets or on over-the-counter bulletin
boards (OTCBB).
 Pink sheets are a name given to the daily list of stocks
published with ask and bid prices by the National Quotation
Bureau.
 The OTCBB service is offered by the National Association of
Securities Dealers (NASD) which accurately displays the
last sale prices, real time quotations and other volume
information of over-the-counter securities.
 Types of Financial Markets
I. MONEY MARKET
1. Duration. No physical location. Deals in short-term funds.
2. Major participants. RBI, Non-Banking financial companies, Large
credit companies, Commercial banks, etc.
3. Instruments. Treasury bills, Commercial Bills, Commercial Papers,
Call money and Certificates of Deposit.
4. Investment outlay. Transactions involve huge amounts of money.
5. Liquidity & safety. Between prestigious big financial institutions
therefore easy liquidity and absolutely safe.
6. Expected Return .Very low as it helps in meeting temporary
shortages of funds.
Steps of Fundamental Analysis
Financial market
Dr.Smita Jape
Financial market
 Where new securities are issued to

the public regularly.
 It is a world full of varied financial
products and services, tailored to
the need of every individual from all
income brackets.
 Financial products are bought and
sold on the capital market, which
is divided into primary market and
secondary market.
 Finance is a prerequisite for modern business and
system. It's through financial markets the
financial system of an economy works.
 The main functions of financial markets are:
 To facilitate creation and allocation of credit and
liquidity;
 To serve as intermediaries for mobilization of
savings;
 To assist process of balanced economic growth;
 To provide financial convenience
3
Financial Institutions Role through markets
PROMOTING SAVINGS
MOBILISING SAVINGS
CREATING CREDIT
INSTITUTIONS
FRANCHISING
ACCELERATING ECONOMIC DEVELOPMENT 4

Financial Markets
Financial
Markets
Money Market
Capital Market

Primary Segment
Rights Issue
Secondary Segment
Secondary
5
Financial
Instruments
Primary Secondary

Preference MF units
6
What Is Primary Market?
Also known as new issues market.
transaction is conducted between the issuer and the
buyer.
This market creates new securities and offers them to
the public.
For instance, Initial Public Offering (IPO) is an offering
of the primary market where a private company
decides to sell stocks to the public for the first time.
Here, securities are directly purchased from the issuer.
Capital or equity can be raised in
primary market by following
four ways:
 1. Public Issue
 Selling securities to public at large, such as IPO.
 most vital method to sell financial securities.
 2. Rights Issue
 Whenever a company needs to raise
supplementary equity capital, the shares have to
be offered to present shareholders on a pro-rata
basis, which is known as the Rights Issue.
 If rights issue in 1:4 then ??
 Private Placement
 Selling securities to restricted
number of classy investors like
frequent investors, venture capital
funds, mutual funds and banks
comes under Private Placement.
 4. Preferential Allotment
When a listed company issues equity
shares to a selected number of
investors at a price that may or may
not be pertaining to the market price.
Right Issue Bonus Issue
Bonus shares refers to
the shares issued by the
Right shares are the one available to
company free of cost to
the existing shareholders equivalent
the existing shareholders
Meaning to their holdings, that can be bought
in the proportion of their
at a fixed price, for a definite period
holdings, out of
of time.
accumulated profits and
reserves.
Price Issued at discounted prices Issued free of cost
To bring the market price

Objective To raise fresh capital for the firm. per share, within a more
popular range.
Shareholders may fully or partly

Renunciation No such renunciation
renounce their rights.
Paid up
Either fully or partly paid up. Always fully paid up.
value
Minimum
Mandatory Not required
subscription
Split shares
 Stock split, also known as share split, is
the way through which the companies
divide their existing outstanding shares
into multiple shares such as 3 shares for
every 1 share held or 2 shares for every 1
held etc. Market capitalization of the
company during stock split remains the
same, even though the number of shares
increases, there is a corresponding
decrease in price per share.
 Did you wonder when Yes Bank Share prices reduced by 80% on 21
September 2017? It was an example of a share split by the Bank. Yes bank
split the shares in the ratio of 5 for 1 on the above date.
In this case, the total number of outstanding shares of the bank increased
by 5 times, and share price reduced to the same extent, thereby leaving
Market Capitalisation at the same figure of Rs. 85,753.14 Crs
 1. The bonus issue is similar to forward
splits in a way that share price decreases
and the number of shares increases in
both cases.
 2. In case of a bonus issue, the company
gives additional shares to its shareholders
from its free reserves instead of issuing
dividends. However, in case of a share
split, there is no such fresh issue, it is just
manipulation of the already issued capital.
Bonus and stock split
2: 1Number of shares stock split- Face value ½

1Number of shares Bonus FV-Remains same
 1. From an accounting perspective, in case of a
bonus issue, the company issues fresh shares at
the same face value and transfers free reserve
capital to issued share capital. In the case of
share splits, free reserves and issued capital
remain the same.
 2. Among bonus issue and stock splits, bonus
issue may be perceived as more positive as the
company is issuing more shares to shareholders
from its free reserves. This can be perceived as
signaling from management to investors that
they are confident of more growth in the future.
Settlement
 Account period settlement –trades pertaining to

a period stretching over more thane one day are
settled –discontinued since 2002
 Rolling Settlement –trades executed during the
day are settled based on net obligations for the
day.
 Rolling settlement for trades – T +2 days basis
 Eg: Trades executed on Monday settled on
Wednesday
 Underwriting

 Rights issues may be underwritten
 .
 The agreement between the underwriter and the company is set out in a
formal underwriting agreement.
 underwriter passes its risk to the sub-underwriter
 Underwriters and sub-underwriters may be financial institutions,

stock-brokers, major shareholders of the company or other
related or unrelated parties.
 Over‐subscription privilege
 Some rights issues include an "over‐subscription privilege", allowing

investors to buy additional shares beyond the number offered with the
basic subscription privilege, if those additional shares are available.
Typically the number of over‐subscription shares that can be purchased by
an investor is capped as no more than the amount of his/her basic
subscription. If not all the over-subscription rights can be filled, they will
be partially filled on a prorate basis
Book building
 is a systematic process of generating, capturing, and

recording investor demand for shares.
 Usually, the issuer appoints a major investment Bank to
act as a major securities underwriter or book runner
 Method of public issue --applications are accepted from
large buyers such as financial institutions, corporations or
high net-worth individuals, almost on firm allotment basis,
instead of asking them to apply in public offer.
 Book building- first guidelines issued on October 12, 1995
 Shares based on a floor price which is indicated before the
opening of the bidding process.
Book Building
 Process used by companies to launch an issue

 Fixed price case
 Bids are collected for price and quantity
 Price band –(Red Herring Prospectus )
 Floor Price—mini bid price per share
 Cut off price—Willingness to opt price for share
as not sure about the final closing price
 Issue price– Price fixed after close of issue
Allocations in an IPO
Fixed Price Issues

 In case of Book Built issue
 1. In case an issuer company makes an issue of 100% of
the net offer to public through voluntary book building
process under profitability route:
 a) Not less than 35% of the net offer to the public shall be
available for allocation to retail individual investors;
 b) Not less than 15% of the net offer to the public shall be
available for allocation to non‐institutional investors i.e.
investors other than retail individual investors and Qualified
Institutional Buyers;
 c) Not more than 50% of the net offer to the public shall be
available for allocation to Qualified Institutional Buyers.

 2. In case of compulsory Book - Built Issues

a) at least 75% of net offer to public being
allotted to the Qualified Institutional Buyers
(QIBs), failing which the full subscription monies
shall be refunded.
 b) Not more than 15% the net offer to the public
shall be available for allocation to
non‐institutional investors.
 c) Not more than 10% the net offer to the public
shall be available for allocation to retail individual
investors.
 (i) Retail Individual Investors (RIIs)
 ‘Retail individual investor’ means an investor who applies

or bids for securities of or for a value of not more than Rs.
2,00,000.
 (ii) Non Institutional Investors (NIIs)
 All applicants, other than QIBs or individuals applying for
less than Rs. 2,00,000 are considered as NIIs. Typically,
this category includes High Net Worth Individuals (HNIs)
and corporate bodies.
 (iii) Qualified Institutional Buyers (QIBs)
 QIBs are those institutional investors who are perceived to
possess expertise and the financial strength to evaluate
and invest in the capital markets. A QIB is defined by SEBI
as:
Categories of Investors:

 (i) a mutual fund, venture capital fund, Alternative Investment Fund
 foreign venture capital investor registered with SEBI;
 (ii) a foreign institutional investor and sub-account (other than a sub-
 account which is a foreign corporate or foreign individual), registered
with SEBI;
 (iii) a public financial institution (iv) a scheduled commercial bank;
 (v) a multilateral and bilateral development financial institution;
 (vi) a state industrial development corporation;
 (vii) an insurance company registered with the Insurance Regulatory
Development Authority;
 (viii)a provident fund with minimum corpus of 25 crore rupees;
 (ix) a pension fund with minimum corpus of 25 crore rupees;
 (x) National Investment Fund
 (xi) insurance funds set up and managed by army, navy or air force
 of the Union of India;
 (xii) insurance funds set up and managed by the Department of Posts,
India;
 These entities are not required to be registered with SEBI as QIBs. Any
entities falling under the categories specified above are considered as
QIBs for the purpose of participating in primary issuance process.
What Is Secondary Market?
 Trade happens between two investors without

any involvement with the company that issued
the securities in the primary market.
 The secondary market is further divided into two
kinds of market.
 the securities issued in the primary market are
bought and sold. Here, you can buy a share
directly from a seller and the stock exchange or
broker acts as an intermediary between two
parties.
Auction Market
place where buyers and sellers convene at a place

and announce the rate at which they are willing to
sell or buy securities.
 They offer either the ‘bid’ or ‘ask’ prices, publicly.

Since all buyers and sellers are convening at the
same place, there is no need for investors to
seek out profitable options.
 Everything is announced publicly and interested
investors can make their choice easily.
Dealer Market
deliver the best price to the investors.
 In this market none of the parties convene at a common

location. Instead, buying and selling of securities
happen through electronic networks which are
usually fax machines, telephones or custom order-
matching machines.
 Interested sellers deliver their offer through these
mediums, which are then relayed over to the buyers
through the medium of dealers.
 The dealers possess an inventory of securities and earn
their profit through the selling.
 A lot of dealers operate within this market and therefore, a
competition exists between them to deliver the best offer
to their investors. This makes them deliver the best price
to the investors
OTC market
 A variation to the dealer market is the OTC

market. OTC stands for ‘Over the Counter’
market.
 The concept came into existence during the early
1920’s period through Wall Street trading, which
implied the prevalence of an unorganized system
of dealers who conducted trades via networks.
 Stock shops existed to buy and sell shares over-

the-counter. In other words, these were unlisted
stocks which were sold privately.
OTC
 Over time, the notion of OTC underwent a change. These
days the over-the-counter denotes those stocks which are
not traded over stock Exchange (AMEX).
 The over-the-counter implies those stocks which are traded

on the pink sheets or on over-the-counter bulletin
boards (OTCBB).
 Pink sheets are a name given to the daily list of stocks
published with ask and bid prices by the National Quotation
Bureau.
 The OTCBB service is offered by the National Association of
Securities Dealers (NASD) which accurately displays the
last sale prices, real time quotations and other volume
information of over-the-counter securities.
 Types of Financial Markets
I. MONEY MARKET
1. Duration. No physical location. Deals in short-term funds.
2. Major participants. RBI, Non-Banking financial companies, Large
credit companies, Commercial banks, etc.
3. Instruments. Treasury bills, Commercial Bills, Commercial Papers,
Call money and Certificates of Deposit.
4. Investment outlay. Transactions involve huge amounts of money.
5. Liquidity & safety. Between prestigious big financial institutions
therefore easy liquidity and absolutely safe.
6. Expected Return .Very low as it helps in meeting temporary
shortages of funds.
Screener
Stock screen
Screener
Steps of Fundamental Analysis
 https://www.deccanherald.com/business/
business-news/paytms-rs-18300-crore-
ipo-indias-largest-fully-subscribed-
1049198.html
 https://www.5paisa.com/blog/list-of-upco
 ming-ipos-in-november-2021
One97 Communications Ltd
 Paytm's Rs 18,300-crore IPO, India's largest, fully subscribed IPO of
Paytm's One97 Communications Ltd received bids for 5.24 crore equity
shares against the offer size of 4.83 crore shares
 Qualified institutional buyers (QIBs), who were less than enthusiastic in

participating in the IPO in the initial two days, flooded the issue, seeking
1.59 times the shares reserved for them.
 Foreign institutional investors (FIIs) sought 4.17 crore shares as against

2.63 crore shares reserved for QIBs.
 Investment banks, including Morgan Stanley, Goldman Sachs
Group Inc., Citigroup Inc. and ICICI Securities Ltd, are managing
the share sale.
 half of the offer for sale by existing shareholders will be by Paytm’s
biggest investor Ant Financial, which currently owns 29.6% of the
company,Alibaba,Softbank
 https://www.moneycontrol.com/news/business/ipo/paytm-
operator-one97-communications-sees-a-tepid-debut-stock-
opens-at-rs-1950-7733641.html
9Fixed income securities Bond
characteristics
CHAPTER 9
Spot rates and forward rates, yield curve, theories of term
structure, risk measures: duration, modified duration, convexity
and price value of basis point.
1
Bonds
 Bonds and debentures are terms used
interchangeably .
 Both represent long term fixed income
securities .The cash flow stream (in form of
interest and principal) as well as the time
horizon (i.e. the date of maturity) are well
specified and fixed Bond returns can be
calculated in various ways Coupon rate
 Current yield
 Spot interest rate
 Yield to maturity (YTM) Yield to call (YTC) 2
Coupon rate
 It is the nominal rate of interest that is fixed
and is printed on the bond certificate
 It is calculated on the face value of the bond
 It is the rate at which interest is paid by the
company to the bondholder .
 It is payable by the company at periodical
intervals of time till maturity
 A bond has a face value of Rs 1000 with an
interest rate of 12% p.a. It means that Rs 120
will be paid by the company on an annual
basis to the bond holder till maturity
3
Characteristics of a Bond
A bond is generally a form of debt which the

investors pay to the issuers for a defined time
frame.
 In a layman’s language, bond holders offer credit
to the company issuing the bond.
 Bonds generally have a fixed maturity date.
 All bonds repay the principal amount after the
maturity date; however some bonds do pay the
interest along with the principal to the bond
holders. 4
Bond valuation
 Technique for determining the fair value of a particular bond.
 includes calculating the present value of the bond's future interest
payments, also known as its cash flow,
 and the bond's value upon maturity, also known as its face value or par
value.
 As bond's par value and interest payments are fixed, an investor uses
bond valuation to determine what rate of return is required for an
investment in a particular bond to be worthwhile.
 Bond valuation is only one of the factors investors consider in

determining whether to invest in a particular bond.
 Other important considerations are: the issuing company's
creditworthiness, the bond's price appreciation potential, as determined
by the issuing company's growth prospects; and prevailing market
interest rates and whether they are projected to go up or down in the
5
future.
A bond yield
 is the amount of return an investor realizes on a bond.
 Types of bond yields --

 nominal yield which is the interest paid divided by the face value of the bond,

 current yield which equals annual earnings of the bond divided by its
current market price.
 When investors buy bonds, they essentially lend bond issuers money.
 1) In return, bond issuers pay interest on bonds throughout their lifetime and
face value of bonds upon maturity. The money that investors earn is called yield.
 if Investors do not hold bonds to maturity.
 Instead, they may sell them for a higher or lower price to other investors, and if an
investor makes money on the sale of a bond, that is also part of its yield.
6
Yield /Current yield
 Yield : Current yield and YTM
 Current Yield = Coupon/ MP*100
 The current market price of the bond in the secondary market

may differ from its face value (i.e. it may be currently selling at
a discount or at a premium)
 Current yield relates the annual interest receivable on a bond

to its current market price
 It measures the annual return accruing to a bondholder who
purchases the bond from the secondary market and sells it
before maturity presumably at a price at which he bought the
bond
7
Yield Example
 A bond has a face value of Rs 1000 and a
coupon rate of 12%. It is currently selling for
Rs 800.
 The current yield = 120 * 100/ 800 = 15%
Rs 900.
 The current yield =80/900*100=8.89%
 Current yield > coupon rate : when bond is
selling at a discount
 Current yield < coupon rate : when bond is
selling at a premium 8
Types of Bonds
Fixed(pre decided coupon )
 Bonds with Coupon
Floating (not pre decided)
 Zero Coupon
 PlainVanilla (pre decided coupon, duration,

Redemption in lump sum/
 Non Plain Vanilla (coupon not same/
redemption in parts )
9
Types of Bond
 Zero coupon bond or Deep discount bond is a
special type of bond which does not pay annual
interest
 bonds are issued at a discount to be redeemed at
par The return comes in form of the difference
between the issue price and the maturity value
 Callable bonds: company can redeem bond at any
time may be,after 3years before maturity of 5
years )
10
Types of Bond
 Put able Bond : Investor can redeem bond at

any time may be after 3 years before maturity
of 5 years
 Perpetual Bond : Like equity ,no maturity of
bonds ,Regular cash flow through coupons
 V= I/K
 K required rate of return
11
Example:
A zero coupon bond has a face value of Rs

1000 and maturity period of five years. If the
issue price of the bond is Rs 519.37, what is
the spot interest rate?
 It is that rate of interest which makes the PV
of 1000 = 519.37
 519.37 = 1000 (1 + i) 5
 = 0.14 or 14%
12
Yield to maturity (YTM)
 It is the rate of return that an investor is expected

to earn on an annualized basis expressed in %
terms from a bond purchased at the current
market price and held till maturity
 It is the internal rate of return earned on a bond if
held till maturity YTM is that rate of discount (r)
which makes the present value of cash inflows
from the bond (in form of interest and redemption
value) equal to the cash outflow on purchase of the
bond 13
14
Example
 A bond of face value Rs 1000 and a coupon rate
of 15% is currently available at Rs 900. Five
years remain to maturity and bond is
redeemable at par. Calculate YTM.
 MP = 900, fv = 1000 = 15% of Rs 1000 =I
 = 150 = 5 YTM = I + (RV – MP) / N =
 RV + MP) / 2
 150 + (1000 – 900) / 5 = 0.1789
 (1000 + 900) / 2
 or 17.89% Thus actual YTM would lie between
17% and 19%, which can be arrived at through
interpolation 15
Yield to call (YTC)
 Some bonds may be redeemable before their full maturity at the
option of the issuer or the investor In such cases, two yields are
calculated:
 YTM (assuming that the bond will be redeemed only at the end
of full maturity period)
 YTC (assuming that the bond will be redeemed at a call date
before maturity)
 YTC is computed on the assumption that the bond’s cash
inflows are terminated at the call date with redemption of the
bond at the specific call price
 Thus, YTC is that rate of discount which makes the present
value of cash inflows till call equal to the current market price of
the bond
 Same method as YTM would be used except for ‘N’ now being
years remaining to call. YTC > YTM , it would be advantageous
to the investor to exercise the redemption option at the call date
If YTM > YTC , it would be better to hold the bond till final 16
maturity
Yield to call (YTC) and Yield to
call (YTP)
 YTC yield to call =A bond of face value Rs
1000/-issued at coupon rate of 10% for
5 years
If this bond is callable after 3 years and
redeemable at 5%premium then what will be
YTC ?(Yield to call)
If this bond is put able after 3 years and
redeemable at 5% discount then what will be
YTP ?(Yield to put )
17
call (YTP)
 YTC= I +(FV-P)/n
 (FV+P)/2
 = 100+(1050-900)/3
1050+900/2
Put-able
YTP = 100+(950-900)/3
950+900/2
= 12.61% Investors want to redeem
before maturity so company will agree only
when it is issued at discount @ 5%
Realized YTM
1. The calculation of YTM assumes that cash flows received
through the life of the bond are being reinvested at a rate
equal to YTM .
However, the reinvestment rate may differ over time. In such
cases, Realized YTM is a more appropriate measure
1. A Rs 1000 par value bond carrying a coupon rate of 15%

maturing after 5 years is being considered. The present
market price of this bond is Rs 850. The reinvestment rate
applicable to future cash flows is 16%. Calculate realized
YTM.
19
1. 0 1 2 3 4 5
2. Investment 850
3. Annual interest 150 150 150 150 150
4. Reinvestment period
5. @ 16% 4 3 2 1 0
6. FV of these CFs 271.5 234 202.5 174 150
7. Maturity value 1000
8. Total FVs = 271.5 + 234 + 202.5 + 174 + 150 +
1000 = 2032 For calculating Realized YTM,
9. MP (1+r)^ 5 = 2032
10.850 (1+r) ^5 = 2032
11. r = 0.19 or 19% 20
Bond prices
Intrinsic value of bond is equal to the present values of all future cash
flows discounted at the required rate of return
P 0 = I * PVAF (r%, n) + RV * PVF (r%, n)
where P 0 : Present value of the bond today
I : Annual interest payments
RV : Redemption value
required rate of return n : number of years
1. Example A bond has a face value of Rs 1000 and was issued five
years ago at a coupon rate of 10%. The bond had a maturity period
of 10 years. If the current market interest rate is 14%, what should
be the PV of the bond?
2. I = 1000 * 10% = 100
3. n=5
4. RV = 1000 r = 14%
5. P 0 = I * PVAF (r%, n) + RV * PVF (r%, n) =
6. 100 * PVAF (14%, 5) + 1000 * PVF (14%, 5) = Rs 862.71 21
Example
1. If in the above question, interest is payable semi-annually,

what would be the intrinsic value of the bond?
2. I = 1000 * 10% * ½ = 50
3. n = 5 * 2 = 10
4. RV = 1000
5. r = 14% * ½ = 7%
6. P 0 = I * PVAF (r%, n) + RV * PVF (r%, n)
7. 50 * PVAF (7%, 10) + 1000 * PVF (7%, 10) = Rs 859.48
22
Exercise
1. An investor is considering the purchase of a bond currently

selling for Rs 878.50. The bond has four years to maturity, a
face value of Rs 1000 and a coupon rate of 8%. The
appropriate discount rate for investments of similar risk is
10%. Calculate the YTM of the bond. Based on the
calculation, should the investor purchase the bond?
2. 2 An investor recently purchased a bond with Rs 1000 face
value, 10% coupon rate and six years to maturity. The bond
makes annual interest payments. The investor paid Rs
1032.50 for the bond.
3. What is the YTM of the bond.If the bond can be called two
years from now at a price of Rs 1080, what is its YTC?
4. Would such a call be advantageous for the investor?
23
1. A company issues a deep discount bond of the face value of
Rs 5000 at an issue price of Rs 3550. The maturity period of
the bond is 7 years. Determine the spot interest rate of the
bond.
2. A bond of Rs 1000 was issued five years ago at a coupon rate

of 6%. The bond had a maturity period of 10 years to be
redeemable at par. The market interest rate currently is 10%.
Determine the value of the bond.
3. A 20 year, 10% coupon rate bond has Rs 1000 face value.

The market rate of interest is 8%. Compute the intrinsic value
of this bond if it has five years remaining to maturity. Assume
that interest is paid 1. annually 2. semi annually 3. quarterly
24
Exercise 6 and notes
1. Rs 1000 par value bond carrying a coupon rate of 10% maturing after 5 years is being
considered. The present market price of this bond is Rs 900. The reinvestment rate
applicable to future cash flows is 12%. Calculate realized YTM.
2. Bond pricing Bonds are issued at a fixed rate of interest payable on the face value
which is referred to as COUPON RATE
3. At the time of issue, coupon rate is representative of the then prevailing market
interest rate
4. However, subsequent changes in the market interest rates may have its affect on the
bond prices
5. If market interest rate rises above the coupon rate
6. The existing bonds would start providing lower return Thus becoming unattractive
7. Thus the price of the bond would fall below its face value i.e. the bond would start
selling at a discount If market interest rate falls below the coupon rate
8. The existing bonds would start providing relatively higher return Thus becoming very
attractive
9. Thus the price of the bond would rise above its face value i.e. the bond would start
selling at a premium
10. Long maturity bonds A change in interest rate structure would result in a relatively
large price change in a long maturity bond
25
Bond risks
1. Risk is the possibility of variation in returns
2. The actual returns realized from investing in bond may vary from what was
expected on account of:
3. Default or delay on part of the issuer to pay interest or principal Change in
market interest rates
4. Thus there are two broad sources of risk associated with bonds: Default risk
Interest rate risk
5. Default risk :It refers to the possibility that a company may fail to pay the
interest or principal on stipulated dates
6. Poor financial performance of the company may lead to such default Credit
rating of debt securities is a mechanism adopted for assessing the credit risk
involved Credit rating process involves: Qualitative assessment of company’s
business and management Quantitative assessment of company’s financial
performance Specific features of the bond being issued
7. Credit rating is an opinion of the credit rating agency regarding the relative
ability of issuer of debt to fulfill the debt obligations in respect of interest and
repayment 26
Interest rate risk
 It refers to variation in returns of bond because of a change in market interest rates
Interest rate risk is composed of two risks:
 Reinvestment risk
 Price risk
 Reinvestment risk
 An investor in bonds receives interest annually or semi-annually

 He reinvests it each year at the then prevailing interest rate. Thus interest is earned on
the interest received from the bonds each year
 If the market interest rate moves up, the investor would be able to reinvest the annual
interest received from the bond at a higher rate than expected. Thus he would gain from
the reinvestment activity When the market interest rates moves down, the investor would
be able to reinvest the interest only at a lower rate than expected. Thus he would lose on
reinvestment activity
27
Price risk “
 The price of the bond is inversely related to

changes in market interest rate If the market
interest rate moves up, bond price may
decline below its face value. Thus the
investor would suffer a loss while selling the
bond
 If the market interest rate goes down, the
existing bonds may start selling at a
premium. Thus the investor would gain from
sale of such bond 28
 Interest rate risk When the market interest rate rises Investor can
reinvest the interest at a higher rate, thus gaining from reinvestment
 However the future bond price would decline, thus losing on sale of
the bond
 If the gain on reinvestment > loss on sale of bond: Net Gain
 If the gain on reinvestment < loss on sale of bond: Net loss
 When the market interest rate falls
 Investor can reinvest the interest at a lower rate, thus losing from
reinvestment
 However the future bond price would rise, thus gaining on sale of the
bond
 If the loss on reinvestment > gain on sale of bond: Net loss If the loss
on reinvestment < gain on sale of bond: Net gain Thus, reinvestment
risk and price risk are inversely related. Together they constitute
interest rate risk
29
Bond duration
1. When considering the reinvestment risk and price risk, loss in one may
be exactly compensated for by the gain in the other, thus completely
eliminating the interest rate risk This particular holding period at which
the interest rate risk disappears is referred to as Bond Duration
2. Bond duration is calculated as the weighted average measure of the
bond’s life d = 1I 1 + 2I 2 + 3I 3 +……………..+ nI n + RV n / P 0 1+k) 1
(1+k) 2 (1+k) 3 (1+k) n
3. A bond with face value of Rs 100 with 12% coupon rate issued 3 years
ago is redeemable after 5 years from now at a premium of 5%. The
interest rate prevailing in the market currently is 14%. Calculate bond
duration. d = 386.0402 / 95.7354 = 4.03 years
4. Year Cash flow PVF(14%) PV PV * Year 1 12 0.8772 10.5264 10.5264 2
12 0.7695 9.234 18.468 3 12 0.675 8.1 24.3 4 12 0.5921 7.1052
28.4208 5 12 0.5194 6.2328 31.164 5 105 0.5194 54.537 272.68530
95.7354 386.0402
Exercise 7
1. A new bond with face value Rs 100 is issued at a coupon rate
of 15% and maturity period of 5 years. It is redeemable at par.
Calculate the bond duration
2. Exercise 8 An investor has a 14% debenture with face value
Rs 100 that matures at par in 15 years. The debenture is
callable in 5 years at Rs 114. It is currently selling for Rs 105.
Calculate: YTM ,YTC, Current yield
3. Exercise 9 A person owns a Rs 1000 face value bond with 5
years to maturity. The bond makes annual interest payments
of Rs 80. The bond is currently priced at Rs 960. Given that
the market interest rate is 10%, should the investor hold or sell
the bond?
Exercise 10 A bond pays interest annually and sells for Rs 835.
It has 6 years remaining to maturity and a par value of Rs 1000.
What is the coupon rate if it is promised a YTM of 12%?
31
A floating rate note, also
known as a floater or FRN
 is a debt instrument with a variable interest
rate.
 A floating rate note’s interest rate, since it is
not fixed, is tied to a benchmark such as the
Treasury bill rate,
 Floaters are mainly issued by financial
institutions and governments, and they
typically have a two- to five-year term to
maturity.
32
FRNs
 tend to become more popular when interest rates are

expected to increase.
 Compared to fixed-rate debt instruments, floaters
protect investors against a rise in interest rates.
 This is because interest rates have an inverse
relationship with bond prices, and the market price a
fixed-rate note will drop if interest rates increase. For
this reason, however, FRNs carry lower yields than
fixed notes of the same maturity.
33
What is an 'Inverse Floater'
 An inverse floater is a bond or other type of debt
whose coupon rate has an inverse relationship to
a benchmark rate.
 An inverse floater adjusts its coupon payment as
the interest rate changes.
 When the interest rate goes up the coupon payment
rate will go down because the interest rate is
deducted from the coupon payment. A higher
interest rate means more is deducted, thus less is
paid to the holder.
34
inverse floater
 You would want to invest in an inverse floater if the
benchmark rate is high and you think the rate will
decrease in the future at a faster rate than the
forwards show. With an inverse floater, as interest
rates fall, the coupon rate rises because less is taken
off.
One more strategy is to buy an interest rate floater if
the rates are low now and you expect them to stay
low, but the forwards are implying an increase. If
you were correct and the rates do not change, you
will outperform the floating rate note by purchasing
the inverse floating rate note.
35
A floating rate note, also
known as a floater or FRN
 is a debt instrument with a variable interest
rate.
 A floating rate note’s interest rate, since it is
not fixed, is tied to a benchmark such as the
Treasury bill rate,
 Floaters are mainly issued by financial
institutions and governments, and they
typically have a two- to five-year term to
maturity.
36
FRNs
 tend to become more popular when interest rates are

expected to increase.
 Compared to fixed-rate debt instruments, floaters
protect investors against a rise in interest rates.
 This is because interest rates have an inverse
relationship with bond prices, and the market price a
fixed-rate note will drop if interest rates increase. For
this reason, however, FRNs carry lower yields than
fixed notes of the same maturity.
37
38
39
40
Spot Rates
 spot contract, spot transaction,

 is a contract of buying or selling a commodity, security, or
currency for settlement (payment and delivery) on the spot date,
which is normally two business days after the trade date.
 The settlement price (or rate) is called a "spot price" or "spot
rate. "
 For bonds, spot rates are estimated via the bootstrapping
method, which uses prices of the securities currently trading in
market, that is, from the cash or coupon curve.
 The result is the spot curve, which exists for fixed income
securities.
41
Spot interest rate
 Spot interest rate is the return on deep

discount bonds when expressed in % terms on
an annual basis Mathematically it is that rate
of discount which makes the present value of
the single cash inflow to the investor (on
redemption of bond, no interest being payable
annually) equal to the cost of the bond
42
Forward Rates
 Forward contract where contract terms are agreed now but
delivery and payment will occur at a future date.
 The settlement price of a forward contract is called a "forward
price" or "forward rate. "
 Depending on the item being traded, spot prices can indicate
market expectations of future price movements. In other words,
spot rates can be used to calculate forward rates.
 In theory, the difference in spot and forward prices should be
equal to the finance charges, plus any earnings due to the holder
of the security, according to the cost of carry model. For
example, on a share, the difference in price between the spot and
forward is usually accounted for almost entirely by any
dividends payable in the period minus the interest payable on
the purchase price.
43
bootstrapping
 Method for constructing a (zero-coupon) fixed-

income yield curve
 from the prices of a set of coupon-bearing products
(e.g., bonds and swaps)
 Using these zero-coupon products, it becomes
possible to derive par swap rates (forward and spot)
for all maturities by making a few assumptions
 The term structure of spot returns is recovered from
the bond yields by solving for them recursively, by
forward substitution. This iterative process is called
the Bootstrap Method.
44
characteristics
CHAPTER 9
1
Bonds
 Bonds and debentures are terms used
interchangeably .
 Both represent long term fixed income
securities .The cash flow stream (in form of
interest and principal) as well as the time
horizon (i.e. the date of maturity) are well
specified and fixed Bond returns can be
calculated in various ways Coupon rate
 Current yield
 Spot interest rate
 Yield to maturity (YTM) Yield to call (YTC) 2
Coupon rate
 It is the nominal rate of interest that is fixed
and is printed on the bond certificate
 It is calculated on the face value of the bond
 It is the rate at which interest is paid by the
company to the bondholder .
 It is payable by the company at periodical
intervals of time till maturity
 A bond has a face value of Rs 1000 with an
interest rate of 12% p.a. It means that Rs 120
will be paid by the company on an annual
basis to the bond holder till maturity
3
Characteristics of a Bond
A bond is generally a form of debt which the

investors pay to the issuers for a defined time
frame.
 In a layman’s language, bond holders offer credit
to the company issuing the bond.
 Bonds generally have a fixed maturity date.
 All bonds repay the principal amount after the
maturity date; however some bonds do pay the
interest along with the principal to the bond
holders. 4
Bond valuation
 Technique for determining the fair value of a particular bond.
 includes calculating the present value of the bond's future interest
payments, also known as its cash flow,
 and the bond's value upon maturity, also known as its face value or par
value.
 As bond's par value and interest payments are fixed, an investor uses
bond valuation to determine what rate of return is required for an
investment in a particular bond to be worthwhile.
 Bond valuation is only one of the factors investors consider in

determining whether to invest in a particular bond.
 Other important considerations are: the issuing company's
creditworthiness, the bond's price appreciation potential, as determined
by the issuing company's growth prospects; and prevailing market
interest rates and whether they are projected to go up or down in the
5
future.
A bond yield
 is the amount of return an investor realizes on a bond.
 Types of bond yields --

 nominal yield which is the interest paid divided by the face value of the bond,

 current yield which equals annual earnings of the bond divided by its
current market price.
 When investors buy bonds, they essentially lend bond issuers money.
 1) In return, bond issuers pay interest on bonds throughout their lifetime and
face value of bonds upon maturity. The money that investors earn is called yield.
 if Investors do not hold bonds to maturity.
 Instead, they may sell them for a higher or lower price to other investors, and if an
investor makes money on the sale of a bond, that is also part of its yield.
6
Yield /Current yield
 Yield : Current yield and YTM
 Current Yield = Coupon/ MP*100
 The current market price of the bond in the secondary market

may differ from its face value (i.e. it may be currently selling at
a discount or at a premium)
 Current yield relates the annual interest receivable on a bond

to its current market price
 It measures the annual return accruing to a bondholder who
purchases the bond from the secondary market and sells it
before maturity presumably at a price at which he bought the
bond
7
Yield Example
Rs 800.
 The current yield = 120 * 100/ 800 = 15%
Rs 900.
 The current yield =80/900*100=8.89%
 Current yield > coupon rate : when bond is
selling at a discount
 Current yield < coupon rate : when bond is
selling at a premium 8
Types of Bonds
Fixed(pre decided coupon )
 Bonds with Coupon
Floating (not pre decided)
 Zero Coupon
 PlainVanilla (pre decided coupon, duration,

Redemption in lump sum/
 Non Plain Vanilla (coupon not same/
redemption in parts )
9
Types of Bond
 Zero coupon bond or Deep discount bond is a
special type of bond which does not pay annual
interest
 bonds are issued at a discount to be redeemed at
par The return comes in form of the difference
between the issue price and the maturity value
 Callable bonds: company can redeem bond at any
time may be,after 3years before maturity of 5
years )
10
Types of Bond
 Put able Bond : Investor can redeem bond at

any time may be after 3 years before maturity
of 5 years
 Perpetual Bond : Like equity ,no maturity of
bonds ,Regular cash flow through coupons
 V= I/K
 K required rate of return
11
Example:
A zero coupon bond has a face value of Rs

1000 and maturity period of five years. If the
issue price of the bond is Rs 519.37, what is
the spot interest rate?
 It is that rate of interest which makes the PV
of 1000 = 519.37
 519.37 = 1000 (1 + i) 5
 = 0.14 or 14%
12
 It is the rate of return that an investor is expected

to earn on an annualized basis expressed in %
terms from a bond purchased at the current
market price and held till maturity
 It is the internal rate of return earned on a bond if
held till maturity YTM is that rate of discount (r)
which makes the present value of cash inflows
from the bond (in form of interest and redemption
value) equal to the cash outflow on purchase of the
bond 13
14
Example
 A bond of face value Rs 1000 and a coupon rate
of 15% is currently available at Rs 900. Five
years remain to maturity and bond is
redeemable at par. Calculate YTM.
 MP = 900, fv = 1000 = 15% of Rs 1000 =I
 = 150 = 5 YTM = I + (RV – MP) / N =
 RV + MP) / 2
 150 + (1000 – 900) / 5 = 0.1789
 (1000 + 900) / 2
 or 17.89% Thus actual YTM would lie between
17% and 19%, which can be arrived at through
interpolation 15
Yield to call (YTC)
 Some bonds may be redeemable before their full maturity at the
option of the issuer or the investor In such cases, two yields are
calculated:
 YTM (assuming that the bond will be redeemed only at the end
of full maturity period)
 YTC (assuming that the bond will be redeemed at a call date
before maturity)
 YTC is computed on the assumption that the bond’s cash
inflows are terminated at the call date with redemption of the
bond at the specific call price
 Thus, YTC is that rate of discount which makes the present
value of cash inflows till call equal to the current market price of
the bond
 Same method as YTM would be used except for ‘N’ now being
years remaining to call. YTC > YTM , it would be advantageous
to the investor to exercise the redemption option at the call date
If YTM > YTC , it would be better to hold the bond till final 16
maturity
call (YTP)
 YTC yield to call =A bond of face value Rs
1000/-issued at coupon rate of 10% for
5 years
If this bond is callable after 3 years and
redeemable at 5%premium then what will be
YTC ?(Yield to call)
If this bond is put able after 3 years and
redeemable at 5% discount then what will be
YTP ?(Yield to put )
17
call (YTP)
 YTC= I +(FV-P)/n
 (FV+P)/2
 = 100+(1050-900)/3
1050+900/2
Put-able
YTP = 100+(950-900)/3
950+900/2
= 12.61% Investors want to redeem
before maturity so company will agree only
when it is issued at discount @ 5%
characteristics
CHAPTER 9 part 2
, term structure,. Price value Spot rates and forward rates yield
curve
1
2
Convexity of bond indicates measurement error
.It is caused due to non linear relationship
between price of bond and yield. Points “c”(in
blue) unable to capture relationship between
price of bond and its yield
3
Bond convexity
Price of Bond if yield increase + price of
bond if yield decrease – 2 Initial Price
C=
2 *Initial Price * (Δy )^2
4
Bond convexity
Yield /coupon rate BP Non Linear
10%- 1000 Relationship
11% 913 913+1102-2(1000)
C=
9% 1102 2(1000) * (1%)^2
What will be Convexity ? = 75
10%- 1000 Linear
11% 900 Relationship
9% 1100
C= ???
Price of Bond if yield increase + price of
bond if yield decrease – 2 Initial Price
C=
2 *Initial Price * (Δy )^2 5
u FV of bond =1000 Current price of bond 964.42
u Maturity=2 years modified duration = - 1.7955
u Coupon 8 %
u Yield =10% if increases to 11% BP = 947.42
u Calculate Modified duration and convexity
u %Change in yield = 947.42- 964.42 = -1.775%
u 964.42
u decreases to 9% BP= 982.06- 964.42 = 1.817 %
u 964.42
u T his error can be reduced by Convexity C
6
C= 947.42+ 982.06- 2 (964.54)
2 (964.54) (1%) ^2
C = 2.09
Convexity Adjustment = C *( % change )^2
= 2.09 * (1%)^2
= 0.0209 %
Accurate duration with convexity
Y 10 % -------11%---- -1.7955+0.0209= - 1.775% 7
Y 10%-------9% ------ 1.7955 + 0.0209 = 1.816 %
Term Structure Of Interest
Rates
u What is Term Structure Of Interest Rates?
u Term structure of interest rates, commonly
known as the yield curve, depicts the interest
rates of similar quality bonds at different
maturities.
u Essentially, term structure of interest rates is
the relationship between interest rates or
bond yields and different terms or maturities.
8
term structure of interest
rates- yield curve
u When graphed, the term structure of interest
rates is known as a yield curve, and it plays a
crucial role in identifying the current state of
an economy.
u The term structure of interest rates reflects
expectations of market participants about
future changes in interest rates and their
assessment of monetary policy conditions.
9
10
yields increase in line with maturity, giving rise
to an upward-sloping, or normal, yield curve.
The yield curve is primarily used to illustrate

the term structure of interest rates for standard
government-issued securities.
This is important as it is a gauge of the debt

market's feeling about risk.
One commonly used yield curve compares the
three-month, two-year, five-year, 10-year, and
30-year
11
Term structure of interest
rates has three primary
shapes.
u Upward sloping—long term yields are higher than short term
yields. This is considered to be the "normal" slope of the yield
curve and signals that the economy is in an expansionary mode.
u Downward sloping—short term yields are higher than long term
yields. Dubbed as an "inverted" yield curve and signifies that
the economy is in, or about to enter, a recessive period.
u Flat—very little variation between short and long term yields.
Signals that the market is unsure about the future direction of
the economy.
12
Paying more on long
term than short term
If more demand for

long term bonds will
bring rise in price of
bond as CY
=Coupon/Bond Price
So CY
13
Spot Rates
u spot contract, spot transaction,

u is a contract of buying or selling a commodity, security, or
currency for settlement (payment and delivery) on the spot date,
The settlement price (or rate) is called a "spot price" or "spot
rate. "
u For bonds, spot rates are estimated via the bootstrapping
method, which uses prices of the securities currently trading in
market, that is, from the cash or coupon curve.
u The result is the spot curve, which exists for fixed income
securities.
14
Spot interest rate
Spot interest rate is the return on deep discount
bonds when expressed in % terms on an annual
basis
it is that rate of discount which makes the
present value of the single cash inflow to the
investor (on redemption of bond, no interest
being payable annually) equal to the cost of the
bond
15
Forward Rates
u Forward contract-
u where contract terms are agreed now but delivery and payment
will occur at a future date.
u The settlement price of a forward contract is called a "forward

price" or "forward rate. "
u spot prices can indicate market expectations of future price
movements.
u spot rates can be used to calculate forward rates.
u In theory, the difference in spot and forward prices should be
equal to the finance charges, plus any earnings due to the holder
of the security, according to the cost of carry model.
16
What Is a Forward Rate?
u is an interest rate applicable to a financial
transaction that will take place in the future.
Forward rates are calculated from the spot rate
and are adjusted for the cost of carry to
determine the future interest rate that equates the
total return of a longer-term investment with a
strategy of rolling over a shorter-term investment.
17
u In the context of bonds, forward rates are
calculated to determine future values. For
example, an investor can purchase a one-year
Treasury bill or buy a six-month bill and roll it
into another six-month bill once it matures. The
investor will be indifferent if both investments
produce the same total return.
u For example, the investor will know the spot rate
for the six-month bill and will also know the rate
of a one-year bond at the initiation of the
investment, but he or she will not know the value
of a six-month bill that is to be purchased six
months from now.
18
u Forward Rates in Practice
u To mitigate reinvestment risks, the investor
could enter into a contractual agreement
that would allow him or her to invest funds
six months from now at the current forward
rate.
u Now, fast-forward six months. If the market
spot rate for a new six-month investment is
lower, the investor could use the forward
rate agreement to invest the funds from the
matured t-bill at the more favorable forward
rate. If the spot rate is high enough, the
investor could cancel the forward rate
agreement and invest the funds at the 19
prevailing market rate of interest on a new
Bootstrapping
u Method for constructing a (zero-coupon) fixed-

income yield curve
u from the prices of a set of coupon-bearing products
(e.g., bonds and swaps)
u Using these zero-coupon products, it becomes
possible to derive par swap rates (forward and spot)
for all maturities by making a few assumptions
u The term structure of spot returns is recovered from
the bond yields by solving for them recursively, by
forward substitution. This iterative process is called
the Bootstrap Method.
20
Spot Rate /Forward Rates
u Forward rate calculated today for future

u by using spot rates
u EX: Today Loan taken for 3 years
u After 2 years
u Interest rate will be ?
u f( 2, 3 )--------Starting 2 years from now for 3
years
u f( 2,1)--------- 2years from now for 1 year
u f(2,2,)-- ?? F( 2,3 )-------?? 21
22
Forward rate
23
Spot Rates/Forward Rates
u Spot rates for bond for 4 years

u Year Spot Rate . What is the price of 4 year
4% coupon bond with face value of Rs 100/-
by assuming bond pays an annual coupon
u 1 4%
u 2 5% PV = ?
u 3 6%
u 4 7%
24
Spot Rates/Forward Rates
25
PV = 4 + 4 + 4 + 4
( 1+.04)^1 ( 1+.05)^2 ( 1+.06)^3 (1+.07)^4
= 90.17
Forward Rates can be f(1,2) , f(3,2) f(4,3) ??
F(1,2)= (1.05)^2 - 1 = 6.01%
(1.04)^1
f(3,2) =( 1+ spot rate of 3yr)^3 / 1+spot rate of 2yrs)^2
= (1+ 0.06)^3 - 1 = 8.07%
(1 + 0.05)^2
f(3,1) = ?? = 10.07% 26
27
u FV =1000 Forward Rate – I year from now
u Coupon 10% - 2 years from now
u Maturity T 4 years - 3 years from now
u Value of Bond = ?
u YTM=?
u Spot Rates Calculate value of bond
using forward rates ?
u 1=5%
u 2-7%
Coupon – 10% 1000= 100
u 3-12%
u 4-15%
28
29
30
31
Calculate forward rate
Bond A * * 1,00,000
91,500
What will be spot rate ?
91,500(1+r) ^1 = 1,00,000
(1+r)^1=1,00,000
91,500
r = 1,00,000 - 1
91,500
r= 9.29%
32
10,000 10,000 maturity 2 years
coupon rate 10%
Bond B * 1 yr * 1 yr * 1,00,000
98,500
r01=9.29%
*
r02?
What will be spot rate for 2 years ? 98,500
33
98,500= 10,000 + 1,10,00

( 1+ro1) ( 1+ro2)^2
98,500= 10000/ + 1,10,00
1+o.929 ( 1+ro2)^2
ro2 = 1,10,000 ^1/2 - 1

89350-
ro2= 10.96%
34
maturity 3 years
coupon rate 10.5%
10,500 10,500 10500 +
Bond C* 1 yr * 2 yr * 3yrs 1,00,000
99000
*
r01=9.29%
r02=10.96% r03?
What will be spot rate for 3 years ?

35
99,000= 10,500 + 10,500 + 1,10,500

( 1+ro1)^1 ( 1+ro2)^2 ( 1+ro3)^3
99,000= 10500/ + 10500 + 1,10,500

1+o.929 ( 1+0.1096)^2 ( 1+ro3)^3
99,000 =960747+8528.18 + 1,10500

( 1+ro3)^3
ro3 = 1,10,500 ^1/3 - 1
3086435 ro3= 10.97% 36
Term Structure
Bond Maturity Spot Rate
Bond A 1 9. 29 %
Bond B 2 10.96 %
Bond C 3 10.97 %
37
Exercise
1. An investor is considering the purchase of a bond currently

selling for Rs 878.50. The bond has four years to maturity, a
face value of Rs 1000 and a coupon rate of 8%. The
appropriate discount rate for investments of similar risk is
10%. Calculate the YTM of the bond. Based on the
calculation, should the investor purchase the bond?
2. 2 An investor recently purchased a bond with Rs 1000 face
value, 10% coupon rate and six years to maturity. The bond
makes annual interest payments. The investor paid Rs
1032.50 for the bond.
3. What is the YTM of the bond. If the bond can be called two
years from now at a price of Rs 1080, what is its YTC?
4. Would such a call be advantageous for the investor?
38
1. A company issues a deep discount bond of the face value of
Rs 5000 at an issue price of Rs 3550. The maturity period of
the bond is 7 years. Determine the spot interest rate of the
bond.
2. A bond of Rs 1000 was issued five years ago at a coupon rate

of 6%. The bond had a maturity period of 10 years to be
redeemable at par. The market interest rate currently is 10%.
Determine the value of the bond.
3. A 20 year, 10% coupon rate bond has Rs 1000 face value.

The market rate of interest is 8%. Compute the intrinsic value
of this bond if it has five years remaining to maturity. Assume
that interest is paid 1. annually 2. semi annually 3. quarterly
39
Exercise 6
1. Rs 1000 par value bond carrying a coupon rate of 10% maturing after 5 years is being
considered. The present market price of this bond is Rs 900. The reinvestment rate
applicable to future cash flows is 12%. Calculate realized YTM.
2. Bond pricing Bonds are issued at a fixed rate of interest payable on the face value
which is referred to as COUPON RATE
3. At the time of issue, coupon rate is representative of the then prevailing market
interest rate
4. However, subsequent changes in the market interest rates may have its affect on the
bond prices
5. If market interest rate rises above the coupon rate
6. The existing bonds would start providing lower return Thus becoming unattractive
7. Thus the price of the bond would fall below its face value i.e. the bond would start
selling at a discount If market interest rate falls below the coupon rate
8. The existing bonds would start providing relatively higher return Thus becoming very
attractive
9. Thus the price of the bond would rise above its face value i.e. the bond would start
selling at a premium
10. Long maturity bonds A change in interest rate structure would result in a relatively
large price change in a long maturity bond
40
Financial Markets and
Institutions
Dr.Smita Jape
Associate Professor
DR.V.N.BRIMS
Derivatives
Chapter 5
Derivatives - (Meaning)
• Derivatives: derivatives are instruments which
include a) Security derived from a debt
instrument share, loan, risk instrument or
contract for differences of any other form of
security and ,b) a contract that derives its value
from the price/index of prices of underlying
securities.
• Derivatives (Definition) A financial
instrument whose value is derived
from its underlying assets , typically a
commodity, bond, equity or currency.
Examples of derivatives include
futures and options.
• Advanced investors sometimes
purchase or sell derivatives to manage
the risk associated with the underlying
security, to protect against fluctuations
in value, or to profit from periods of
inactivity or decline. These techniques
can be quite complicated and quite
risky.
• Basics Four Parts:
• 1. Forward
• 2. Future
• 3.Option
• 4. Swap
forward contracts
• The salient features of forward contracts are as
follows:• They are bilateral contracts and
hence, exposed to counterparty risk.• Each
contract is customer designed, and hence is
unique in terms of contract six, expiration date
and the asset type and quality.• The contract
price is generally not available in public
domain.• On the expiration date, the contract
has to be settled by delivery of the asset and• If
party wishes to reverse the contract.
Limitations of Forward contract
• . Forward markets are afflicted by several
problems:2. Lack of centralization of trading,3.
Liquidity and Counterparty risk.• The basic
problem in the first two is that they have too
much flexibility and generality.• Counterparty
risk arises from the possibility of default by any
one party to the transaction. When one of the
two sides to the transaction declares
bankruptcy, the other suffers
FUTURE CONTRACT:-
• Future 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 contract are standardized and stock ex-
changed traded.
• The standardized items in a futures contract
are:1. Quantity of the underlying,2. Quality of the
underlying,3. The date/month of delivery,4. The
units of price quotation and minimum price
change and5. Location of settlement.
Distinction between futures
and forward
• .1 Traded on an organized stock / Over the
Counter (OTC) in nature exchange
• 2 Standardized contract terms/ Customized
contract terms, hence, more liquid. less liquid
• 3 No margin payment/ Requires margin
payments
• 4 4 Settlement happens at the end of the/
Follows daily settlement period
Over The Counter(OTC)
Trading•
• In general, the reason for which a stock is traded
over-the-counter is usually because the company
is small, making it unable to meet exchange
listing requirements. Also known as "unlisted
stock", these securities are traded by broker-
dealers who negotiate directly with one another
over computer networks and by phone. OTC
stocks are generally unlisted stocks which trade
on the Over the Counter Bulletin Board (OTCBB)
• Important terms in future contract• Spot price:
The price at which an instrument/asset trades
in the spot market.• Future Price: The price at
which the futures contract trade in the future
market.• Contract cycle: The period over which
a contract trades. The index futures contract
typically have one month, two months and
three months expiry cycles that expire on the
last Thursday of the month.
• Expiry date: It is the date specified in the
futures contract. This is the last day on which
the contract will be traded, at the end of which
it will cease to exist.• Contract size: The
amount of asset that has to be delivered under
one contract.• Basis: Basis is defined as the
future price minus the spot price. There will be
different basis for each delivery month for each
contract. In the a normal market, basis will be
positive. This reflects that futures prices
normally exceed spot prices.
• Cost of Carry: The relationship between futures
prices and spot prices can be summarised in terms of
the cost of carry.• Initial Margin: The amount that
must be deposited in the margin account at the time
a futures contract is first entered into is the initial
margin.
• Pay off for Futures A pay off is the likely profit/loss
that would accrue to a market participant with
change in the price of the underlying asset. Futures
contracts have linear pay off.Linear pay off: “ losses
as well as profits for both the buyer and the seller of
futures are unlimited”
• Pay off for Buyer of Futures: (Long Future) The
pay offs for a person who buys a futures
contract is similar to the pay off for a person
who holds an asset. He has a potentially
unlimited upside as well as downside.e.g. Take
the case of a speculator who sells a two month
Nifty index futures contact when the Nifty
stands at 1220. the underlying asset in this
case is the nifty portfolio. When the index
moves down the short futures position starts
making profits and when the index moves up it
starts making losses.
• Pay off for Seller Futures (short future)• The pay
off for a person who sells a futures contract is
similar to the pay off for a person who shorts an
asset. he has potentially unlimited upside as well
as downside.
• OPTIONS/Meaning of options: An option is the
right, but not theobligation to buy or sell
something on aspecified date at a specified price.
In thesecurities market, an option is a
contractbetween two parties to buy or sell
specifiednumber of shares at a later date for an
agreedprice.
• There are three parties involved in the option
trading, the option seller, buyer and the
broker.1. The option seller or writer is a person
who grants someone else the option to buy or
sell. He receives premium on its price.2. The
option buyer pays a price to the option writer to
induce him to write the option.3. The securities
broker acts as an agent to find the option buyer
and the seller, and receives a commission or
fee for it.
• Options An option to buy anything is known as a CALLwhile an
option to sell a thing is called a PUT.Options trade in an
organized market but,large percentage of it is traded over
thecounter (i.e. privately). Note that this is just an option.
Thatmeans it is a right and not an obligation. Strike price:
Price specified in the optionscontract is known as the strike
price orexercise price.
• 23. Types of Options1. Call option: A call option is a contract
giving the right to buy the shares.2. Put option is a contract
giving the right to sell the shares.Call option that gives the
right to buy in its contract gives the particulars of• The name
of the company whose shares are to be bought.• The number
of shares to be purchased.• The purchase price or the exercise
price or the strike price of the shares to be bought.• The
expiration date, the date on which the contract or the option
expires.
• Put option• Put option gives its owner the right to
sell (or put) an asset or security to someone else.Put
option contract contains:1. The name of the company
shares to be sold.2. The number of shares to be
sold.3. The selling price or the striking price.4. The
expiration date of the option.
• 25. Distinction between Futures and OptionsFutures
Options• Exchange traded, with novation • Same as
futures• Exchange defines the product • Same as
futures• Price is zero, strike price moves • Strike
price is fixed, price moves• Price is zero • Price is
always positive• Linear payoff • Non linear payoff•
Both long and short at risk • Only short at risk
• Novation1. The substitution of a new contract for an old
one; or the substitution of one party in a contract with
another party.2. The replacement of existing debt or
obligation with a new one.
• 27. SWAPS (Meaning)• 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.
• 28. Commonly two kind of swaps• Interest rate swaps:
These entail swapping only the interest related cash
flows between the parties in the same currency.•
Currency swaps: These entail swapping both principal
and interest between the parties, with the cash flows in
one direction being in a different currency than those in
the opposite direction.
• Types Of Swaps
• There are four types of swaps.
• (1).Interest Rate Swaps
• .(2).Currency Swaps.
• (3).Commodity Swaps.
• (4).Equity Swaps.
FUTURES
• Future contract is an agreement betweentwo parties
to buy or sell an asset at a certain time in the future,
at a certain price. But unlike forward contract,
futures contract are standardized and stock ex-
changed traded.
• Future is a financial contract which derives its value
from the underlying asset. For example: Sugar cane
or wheat or cotton farmers may wish to have
contracts to sell their harvest at a future date to
eliminate the risk of change in price by that date.
There are commodity futures and financial futures.
• In the financial futures, there are foreign currencies,
interest rate and market index futures.• Market
index futures directly related with the stock market.
• The standardized items in a futures contract are:1.
Quantity of the underlying,2. Quality of the
underlying,3. The date/month of delivery,4. The
units of price quotation and minimum price change
and5. Location of settlement.
• Futures markets are designed to solve the problems
of trading, liquidity and counterparty risk. Basically,
futures markets resemble the forward marketThree
distinct features of the futures markets are: -
standardized contracts - centralized trading-
Settlement through clearing houses to avoid
counterparty risk.
• Types Of Swaps
• Types Of Swaps
• Types Of Swaps
Example #1 – Forwards
• Let us assume that corn flakes are manufactured by ABC Inc for which the company needs to
purchase corn at a price of $10 per quintal from the supplier of corns named Bruce Corns. By
making a purchase at $10, ABC Inc is making the required margin. However, there is a possibility
of heavy rainfall which may destroy the crops planted by Bruce Corns and in turn increase the
prices of corn in the market which will affect the profit margins of ABC. However, Bruce Corns
have made all the possible provisions to save the crops and have this year used better farming
equipment for the corns, therefore, expects higher than the normal growth of the corns, without
any damage by the rains.
• Therefore, the two parties come into an agreement for 6 months to fix the price of corn per
quintal at $10. Even if the rainfall destroys the crops and the prices increase, ABC would be
paying only $10 per quintal and Bruce Corns is also obligated to follow the same terms.
• However, if the price of the corn falls in the market – in the case where the rainfall was not as
heavy as expected and the demand has risen, ABC Inc would be still paying $10/ quintal which
may be exorbitant during the time. ABC Inc might have its margins affected too. Bruce Corns
would be making clear profits from this forward contract.
Example #2 – Futures
• Futures are similar to forwards. The major difference remains as Forward

contracts are Over-the-Counter instruments. They can, therefore, be
customized. The same contract if is traded through the exchange, it becomes a
Future contract and is, therefore, an exchange-traded instrument where
supervision of an exchange regulator exists.
• The above example can be a Future contract too. Corn Futures are trading in the
market and with news of heavy rainfall corn futures with an expiry date of post
6 months can be purchased by ABC Inc at its current price which is $40 per
contract. ABC buys 10000 such future contracts. If it really rains, the futures
contracts for corn become expensive and are trading at $60 per contract. ABC
clearly makes a gain of $20000. However, if the rainfall prediction is wrong and
the market is the same, with the improved production of corn there is a huge
demand among the customers. The prices gradually tend to decline. The future
contract available now is worth $20. ABC Inc, in this case, would then decide to
purchase more such contracts to square off any losses arising out of these
contracts.
• The most practical example globally for future contracts is for commodity oil,
which is scarce and has a huge demand. They are investing in oil price contracts
and ultimately gasoline.
Example #3 – Options
• Out of the Money / In the money

• When you are buying a call option – the strike price
of the option will be based on the current stock
price of the stock in the market. For example, if the
share price of a given stock is at $1,500, the strike
price above this would be termed as “out of the
money”, and the vice-versa would be called “ in-
the-money”. In case of put options, the opposite
holds true for out of the money and in the money
options.
Purchasing Put or Call Option
• When you are purchasing “ Put option”, you are

actually foreseeing conditions where the market or the
underlying stock to go down i.e. you are bearish over
the stock. For example, if you are purchasing a put
option for Microsoft Corp with its current market price
of $126 per share, you are ultimately being bearish of
the stock and expect it to fall may be up to $120 per
share over a period of time, by looking at the current
market scenario. So, since you make a purchase of
MSFT.O stock at $126, and you see it declining, you can
actually sell the option at the same price.
Example #4 – Swaps
• Let us consider a vanilla swap where there are 2 parties involved – where one party pays a
flexible interest rate and the other pays a fixed interest rate.
• The party with the flexible interest rate believes that the interest rates may go up and take
advantage of that situation if it occurs by earning higher interest payments, while, the party with
the fixed interest rate assumes that the rates may increase and does not want to take any
chances for which the rates are fixed.
• So, for example, there are 2 parties, let’s say Sara & Co and Winrar & Co- involved who want to
enter a one-year interest rate swap with a value of $10 million. Let’s assume the current rate of
LIBOR is 3%. Sara & Co offers Winra &Co a fixed annual rate of 4% in exchange for LIBOR’s rate
plus 1%. If the LIBOR Rate remains 3% at the end of the year, Sara & Co will pay $400,000, which
is 4% of $10 mn.
• In case LIBOR is 3.5% at the end of the year, Winrar & Co will have to make a payment of
$450,000 (as agreed à 3.5%+1%=4.5% of $10 mn) to Sara & Co.
• The value of the swap transaction, in this case, would be $50,000 – which is basically the
difference between what is received and what is paid in terms of the interest payments. This is
an Interest rate swap and is one of the most widely used derivative globally.
 Emerging Markets and Products Alternate
finance products and players, such as crowd
funding, ELSS equity linked saving scheme
product to product finance, interest-free
financial products, thematic indexes
 Hybrid Securities
 Alternate debt finance option
 Issued by company other than main company
( subsidiary /group of companies )
 An exchangeable bond authorizes the holder
the option to replace the bond for the stock
of a company other than the issuer (usually a
subsidiary) at a predetermined future date
and under prescribed conditions.
 For Large Corporates with several group of
companies to reap benefit of *float without
selling shares at the time of issuing bonds
 EB can be issued by giving an offer of converting
bonds in to shares of group of companies at the
time of maturity
 Bonds will be tradable and will carry competitive
coupon rate
 These are different from FCCB as those can be
redeemed only for shares of issuing company
and not for shares of a group company in which
it has stake
 *A company’s FLOAT is an important number for investors because it indicates how many shares are
actually available to be bought and sold by the general investing public.
 Issue of Shares to Qualified Institutional
Investors—Created opportunity for Rupee
denominated convertible bonds
 For Foreign or domestic holders
 Tax Planning—exemption
 Merchant Bankers will be allowed to structure
instruments with up to 5 years and will have
conversion of with no lock in
 if issued and converted may be seen as long
term investment and not attract capital gains
 Policy guidelines to Foreign companies having JV
in India want approval for new projects
 Set in numbers by Dept. of Industrial Policy and
Promotion
 For whom--- public Information
 Foreign company enter into an agreement for JV
or for technology transfer or trade mark
agreement with domestic company will not get
automatic approval from RBI but will route
through Foreign Investment Promotion
Board(FIPB)
 Bulk allotment to Individuals, companies, venture capitalists or
any other person through fresh issue
 Entire allotment is made to pre identified people at
predetermined price
 Promoters, Venture capitalists financial institutions, Buyers of
companies products, suppliers,
 Route by which company can secure equity participation of those
who it feels can be of value as shareholders for whom may be
difficult to get through at market rates
 Made by special resolution ---passed by 3/4th existing
shareholders
 Sebi –prescribed min pricing formula for preferential allotment
 Avg of high and low of 26 weeks preceeding the date on which
board resolves to make the preferential allotment is preferential
allotment price at which allotment can be made
 If above 15% preferential allotment ---will require to give open
offer to existing shareholders
 Issued outside India but denominated in Indian Rupees, rather than the
local currency of outside country

 Term”Masala” used by the International Finance Corporation (IFC) to
evoke the culture and cuisine of India.
 Unlike dollar bonds, where the borrower takes the currency risk, Masala
bond makes the investors bear the risk.
 The first Masala bond issued by the World Bank- backed IFC in
November 2014 when it raised 1,000 crore bond to fund infrastructure
projects in India.
 Later in August 2015 International Financial Cooperation for the first
time issued green masala bonds and raised Rupees 3.15 Billion to be
used for private sector investments that address climate change in India.

 In July 2016 HDFC raised 3,000 crore rupees from Masala bonds and
thereby became the first Indian company to issue masala bonds.
 In the month of August 2016 public sector unit NTPC issued first
corporate green masala bonds worth 2,000 crore rupees.
On Friday, August 2019 the Kerala Infrastructure Investment Fund
Board issued Masala Bonds to raise funds from the overseas market.
While Indian companies have been raising debt from overseas markets for
decades including through bond offerings, those borrowings have been
denominated in dollar or other currencies.
These, are rupee-denominated bonds i.e the funds would be raised from
overseas market in Indian rupees.
According to RBI, any corporate, body corporate and Indian bank is eligible to issue
Rupee denominated bonds overseas.
While companies can raise funds through these bonds, there are limitations for the
use of such proceeds.
RBI mandates that the money raised through such bonds cannot be used for
real estate activities other than for development of integrated township or
affordable housing projects.
It also can’t be used for investing in capital markets, purchase of land and
on-lending to other entities for such activities as stated above.
 According to RBI, the minimum maturity amount
and period for Masala Bonds raised
 up to Rupee equivalent of USD 50 million in a
financial year should be 3 years and
 for bonds raised above USD 50 million

equivalent in INR per financial year should be 5
years.
 The conversion for such bonds will happen at the
market rate on the date of settlement of
transactions undertaken for issue and servicing
of the bonds, including its redemption.
 Bulk allotment to Individuals, companies, venture capitalists or
any other person through fresh issue
 Entire allotment is made to pre identified people at
predetermined price
 Promoters, Venture capitalists financial institutions, Buyers of
companies products, suppliers,
 Route by which company can secure equity participation of those
who it feels can be of value as shareholders for whom may be
difficult to get through at market rates
 Made by special resolution ---passed by 3/4th existing
shareholders
 Sebi –prescribed min pricing formula for preferential allotment
 Avg of high and low of 26 weeks preceding the date on which
board resolves to make the preferential allotment is preferential
allotment price at which allotment can be made
 If above 15% preferential allotment ---will require to give open
offer to existing shareholders
 Allow to issue shares with differential rights
 Non voting rights—up to extent of 25% of share
capital issues provide had distributable profits
 In 3 years preceding such issue
 Not allow to convert its regular equity shares
with regular voting rights with differential voting
rights and vice versa
 Approval of existing shareholders
 Defaulted companies in payment of tax, failed to
pay deposits /interests or dividends---will not
be eligible to such issue
 Funds that prioritize the selection of investments and their
inclusion in the portfolio based on a predetermined theme or
specific issue.
 For example, the PowerShares Cleantech Portfolio invests
only in the stocks of clean technology and related
companies. Another example is the Market Vectors
Agribusiness ETF , which invests in companies focusing on
agri-chemicals, farm equipment, animal health and related
agricultural products.
 Thematic funds cover a wide range of issues, including

workspace equality, global water, socially responsible
companies, nuclear energy, robotics and more.
 objective is to deliver optimal returns by
investing in stocks which qualify to belong within
the particular theme that is considered.
 Theme could vary from multi-sector,
international exposure, commodity exposure
etc.,
 unlike a sector fund, theme funds have a broader
spectrum to operate in. Theme based funds are
often mistaken to be sector funds. Although one
could draw some broad comparisons, the scope
of a theme fund is typically wider.
 Have a broader spectrum when compared to sector funds,
 but limited when compared to Diversified equity mutual
funds.
 Thematic funds by nature are more prone to risk and
volatility.
 The performance of these funds is dependent on the
performance of a particular set sector or a theme, unlike a
diversified fund which moves in line with the broader
markets.
 Thematic funds could have themes ranging from Multi-
Sector, International / Multi - Economy, Commodity,
particular style of investing etc.
 Thematic funds are suited for investors who are well
versed with market trends and are hence in a better
position to take thematic calls.
Thematic funds are based on a particular
theme which varies from being multi-sector,
international exposure, etc.
Hence being risky in nature, financial advisor
advices investors to limit their exposure to
10-12% and invest in only those funds which
compliment their existing portfolio.
 valuation nuances that the fund manager looks into whilst
picking up the holding for each of the funds.
 Firstly conduct an assessment whether the fund falls
within the theme.
 Post ,conduct a valuation based on which an appropriate
position is initiated within the portfolio. Some of the funds
below have done extremely well
 Fidelity International opportunities ,
 Sundaram Rural India ,
 Birla SL Buy India,

 Thematic funds are not restricted to equities alone, there
could debt funds with themes
 UTI Spread , Canara Robeco Indigo are classic examples
within this cadre
 Nothing International about the Fidelity
International opportunity,
 company have made a stake acquisition in NSE
via private placement which would provide huge
value unlocking when NSE goes for an IPO.
 The other funds have typically picked stories
which are grossly undervalued and where the
upside potential is huge.
 The thesis however, could go either way and the
mettle of the fund manager is evaluated to the
maximum extent how he manages a theme fund.
The expense ratio for theme funds could range
between 2.25%-2.5%, marginally higher than
diversified equity mutual funds.
 Thematic funds operate within their own
spectrum and hence benchmarking them to
an index may not give a definite picture.
However, to get a picture of how they are
doing with respect to the market, they are
often benchmarked against broader indices
such as BSE 200 or BSE 500.
 The underlying instruments may vary as per
the theme that the individual fund deals with;
Tough to understand the objective / real
Fidelity International Opportunities Fund
theme of the fund by merely looking at the
Holdings %
fund name.
Its pertinent to read the prospectus,
National Stock Exchange of India Limited 14.57
the investment objective,
Tata Consultancy Services 4.53
HDFC Bank 4.37 the fund managers background
Reliance Industries 4.24 and his past performance in handling
Cipla 3.46
other funds.
HSBC Progressive Themes Fund
For a novice investor to assess the right
FAG Bearings India 8.11
Jammu and Kashmir Bank 6.53 theme could be a herculean task, hence for
Polaris Financial Technology 5.25 someone starting out to invest in mutual
Bombay Dyeing and Manufacturing
Company
5.05 funds, it is best that they stick to diversified
ICICI Bank 3.97 equity mutual funds.
Birla Sun Life India Reforms Fund Further, theme based funds should not be
ICICI Bank 7.93 a part of ones core portfolio, the exposure
Bharti Airtel 4.82
Larsen 4.77 should be categorically limited to 10% -
Sadbhav Eng 4.18 12% and one should add themes which
HPCL 4.01
complement the existing portfolio.
Donation-based crowdfunding is a way to source
money for a project by asking a large number of
contributors to donate a small amount to it. In
return, backers may receive token rewards that
increase in prestige as the size of the donation
increases;
for small sums, the funder may receive nothing at
all. Sometimes referred to as rewards
crowdfunding, the tokens for donations may
include pre-sales of an item to be produced with
funds raised.
Donation-based crowdfunding can also be used in
an effort to raise funds for charitable causes.
 If an entrepreneur or inventor has a great idea for a
new product or service, crowdfunding offers an
alternative way to raise money, as opposed to
traditional methods of bank or private loans or by
offering equity shares.
 Through donation-based crowdfunding, the

entrepreneur can pre-sell his product to a large
number of backers who each donate a relatively small
sum toward the project.
 To encourage higher donation amounts, the
entrepreneur may also offer token rewards of
increasing value or significance, while retaining full
ownership of the project or company . (shark tank)
 is the use of small amounts of capital from a
large number of individuals to finance a new
business venture.
 Crowdfunding makes use of the easy accessibility
of vast networks of people through social
media and crowdfunding websites to bring
investors and entrepreneurs together.
 Crowdfunding has the potential to increase
entrepreneurship by expanding the pool of
investors from whom funds can be raised beyond
the traditional funding.
 Entail obtaining debt as well as equity stakes.
 Micro-loan providers are a source of debt investment

whereby a large group of individuals invest in a small
piece of a larger loan.
Lenders know the purpose of the loan and the terms
including interest rate, length of the loan, and
estimated credit rating of the borrower.
Lenders receive an interest rate higher than other debt
instruments due to the credit risk associated with borrowers;
however, they can spread a large amount of money
incrementally across a large number of loans.
Borrowers may seek this sort of financing when traditional

borrowing is too costly, or is not an option for them.
 Seed money to start a new business by taking loans from banks, family
friends, or by offering equity ownership in return for investment from family
& friends or from angel and venture capital investors.
 Investment crowdfunding now allows a start-up to seek relatively small

investments from a large number of backers when other fundraising options
are not available or come with too much cost. Backers receive shares of the
new company commensurate with the amount invested.
 Popular platforms for equity crowdfunding are SeedInvest and FoundersClub.
 Micro-lending platforms such as Lending Club and Prosper allow for crowd
funded debt financing where a backer, instead of owning part of the
company, becomes a creditor and receives regular interest payments until
the loan is eventually paid back in full.
 Both equity and debt investment crowdfunding can be risky, but investors
can diversify a sum of money across a wide range of choices.

 Second round of financing for a business through any type of
investment including private equity investors and venture
capitalists .
 Successive rounds of financing or funding a business are

consecutively termed Series A, Series B and Series C financing.
 The Series B round --- when the company has accomplished

certain milestones in developing its business.
 Companies have generally advanced their business, resulting in a

higher valuation by this time.
 Various ways to raise funds in a Series B financing round.
Investors usually pay a higher price for investing in the company
than the Series A investors.
 For publicly traded companies, an increased number of shares
can be issued on the open market.
 Investor who either provides capital to start up ventures or supports small
companies that wish to expand but do not have access to equities markets.
 Venture capitalists are willing to invest in such companies because they can earn a
massive return on their investments if these companies are a success.
 Venture capitalists also experience major losses when their picks fail, but these
investors are typically wealthy enough that they can afford to take the risks
associated with funding young, unproven companies that appear to have a great
idea and a great management team.
 Well-known venture capitalists include Jim Breyer, an early Facebook investor,

 Peter Fenton, an investor in Twitter
 Peter Theil, the co-founder of PayPal and
 Facebook's first investor, Jeremy Levine, the largest investor in Pinterest, and
Chris Sacca, early investor in Twitter
 and ride-share company Uber.
 India:Sequoai capital, Kai Capital, SIDBI Venture capital Reliance venture, Helion
venture partner –ET announced largest domestic capita venture firm (investment
in Big Basket and Make My Trip)
 Hedge funds are alternative investments using pooled
funds that employ numerous different strategies to
earn active return , or alpha, for their investors.
 Hedge funds may be aggressively managed or make use
of derivatives and leverage in both domestic and
international markets with the goal of generating
high returns
 hedge funds are accessible to accredited investors as they
require less SEC regulations than other funds.
 One aspect that has set the hedge fund industry apart is
the fact that hedge funds face less regulation than mutual
funds and other investment vehicles.

 Hedge fund is constructed to take advantage of certain identifiable
market opportunities.
 Hedge funds use different investment strategies and thus are often
classified according to investment style .
 There is substantial diversity in risk attributes and investments
among styles.
 Legally, hedge funds are most often set up as private
investment limited partnerships that are open to a limited number
of accredited investors and require a large initial minimum
investment.
 Investments in hedge funds are illiquid as they often require
investors keep their money in the fund for at least one year, a time
known as the lock up period.
 Withdrawals may also only happen at certain intervals such as
quarterly or bi-annually.

 The Reserve Bank of India (RBI) proposed opening of “Islamic
window” in conventional banks for “gradual” introduction of
Sharia-compliant or interest-free banking in the country.
 Both the Centre and RBI are exploring the possibility of

introduction of Islamic banking to ensure financial inclusion of
those sections of the society that remain excluded due to
religious reasons.
 “In our considered opinion, given the complexities of Islamic
finance and various regulatory and supervisory challenges
involved in the matter and also due to the fact that Indian banks
have no experience in this field, Islamic banking may be
introduced in India in a gradual manner.
 “Initially, a few simple products which are similar to conventional
banking products may be considered for introduction through
Islamic window of the conventional banks after necessary
notification by the government.
 Introduction of full-fledged Islamic banking with profit-loss sharing
complex products may be considered at a later stage on the basis of
experience gained in course of time,” the RBI has told Finance Ministry in
a letter, a copy of which was received in response to an RTI query filed
by PTI.
 Islamic or Sharia banking is a finance system based on the principles of
not charging interest, which is prohibited under Islam.
 “It is also our understanding that interest-free banking for financial

inclusion will require a proper process of the product being certified as
Sharia compliant will be required both on the asset and liability side and
the funds received under the interest-free banking could not be mingled
with other funds and therefore, this banking will have to be conducted
under a separate window,”
 The central bank’s proposal is based on examination of legal, technical
and regulatory issues regarding feasibility of introducing Islamic banking
in India on the basis of recommendation of the Inter Departmental
Group (IDG).
 The work areas include operationalisation of Sharia boards and committees,
feasibility of extending deposit insurance to Islamic banking deposits, identifying
the financial risk and suggesting appropriate accounting framework for these
products
 The RBI in February this year sent a copy of the IDG to the Finance Ministry.
 It said the RBI also needs to work on formulating suitability and appropriate
criteria for Islamic products in addition to what would be determined under
Sharia.
 In its annual report for 2015-16, the central bank had said that some sections of
Indian society have remained financially excluded for religious reasons that
preclude them from using banking products with an element of interest.
 “Towards mainstreaming these excluded sections, it is proposed to explore the
modalities of introducing interest- free banking products in the country in
consultation with the government,”
 In late 2008, a committee on Financial Sector Reforms, headed by former RBI
Governor Raghuram Rajan, had opined the need for a closer look at the issue of
interest-free banking in the country.
 The non- availability of interest-free banking products results in some Indians,
including those in the economically disadvantaged strata of society, not being
able to access banking products and services due to reasons of faith.”
 “
 Household Income Income
 Product Markets Goods

products
 Resource Markets Factor

Services
Land labor,Capital
Entrepreneurship Business Markets

Revenue
A commercial bank (or business bank) is a type
of financial institution and intermediary.
It is a bank that provides transactional ,
savings, and money market accounts and that
accepts time deposits
 processing of payments by way of telegraphic
transfer, internet banking, or other means
 issuing bank drafts and cheques
 accepting money on term deposits
 lending money by overdraft, installment loan, or
other means
 providing documentary and standby letter of
credit, guarantees, performance bonds securities
underwriting commitments and other forms of
off balance sheet exposures
 safekeeping of documents and other items in
safe deposit boxes
 distribution or brokerage, with or without advice,
of insurance, unit trusts and similar financial
products as a “financial supermarket”
 cash management and treasury
 banking and private equity financing
 traditionally, large commercial banks also
underwrite bonds, and make markets in
currency, interest rates, and credit-related
securities, but today large commercial banks
usually have an investment bank arm that is
involved in the mentioned activities.
 Unsecured loan
 are monetary loans that are not secured against the
borrower's assets . These may be available from
financial institutions under many different guises or
marketing packages:
 Bank overdraft :---- An overdraft occurs when
money is withdrawn from a bank account and the
available balance goes below zero. In this situation the
account is said to be "overdrawn". If there is a prior
agreement with the account provider for an overdraft,
and the amount overdrawn is within the authorized
overdraft limit, then interest is normally charged at the
agreed rate. If the POSITIVE balance exceeds the agreed
terms, then additional fees may be charged and higher
 Corporate bonds
 credit card debt
 credit facilities or lines of credit
 personal loans
 What makes a bank limited liability company
 A corporate bond is a bond issued by a
corporation. It is a bond that a corporation issues
to raise money in order to expand its business. The
term is usually applied to longer-term debt
instruments, generally with a maturity date falling
at least a year after their issue date. (The term
"commercial paper" is sometimes used for
instruments with a shorter maturity.)
 often listed on major exchanges (bonds there
are called "listed" bonds)
 However, despite being listed on exchanges, the
vast majority of trading volume in corporate
bonds in most developed markets takes place in
decentralized, dealer-based, over-the-counter
markets. Some corporate bonds have an
embedded call option that allows the issuer to
redeem the debt before its maturity date. Other
bonds, known as convertible bonds, allow
investors to convert the bond into equity
 A standard, commercial letter of credit is a document
issued mostly by a financial Institution used primarily in
trade finance , which usually provides an irrevocable
payment undertaking.
 The letter of credit can also be payment for a transaction,
meaning that redeeming the letter of credit pays an
exporter. Letters of credit are used primarily in
international trade
 international trade .transactions of significant value, for
deals between a supplier in one country and a customer
in another
 They are also used in the land development
process to ensure that approved public facilities
will be built.
 The parties ---- beneficiary who is to receive the
money, the issuing bank of whom the applicant
is a client, and the advising bank of whom the
beneficiary is a client.
 Almost all letters of credit are irrevocable, i.e.,
cannot be amended or canceled without prior
agreement of the beneficiary,
 Travelers cheques, commercial invoice, bill of
lading , and documents proving the shipment
 After a contract is concluded between buyer and
seller, buyer's bank supplies a letter of credit to seller.
 Seller consigns the goods to a carrier in exchange for
a bill of lading.
 Seller provides bill of lading to bank in exchange for
payment. Seller's bank exchanges bill of lading for
payment from buyer's bank. Buyer's bank exchanges
bill of lading for payment from the buyer.
 Buyer provides bill of lading to carrier and takes
delivery of goods.
 To receive payment, an exporter or shipper must
present the documents required by the letter of
credit. Typically, the payee presents a document
proving the goods were sent instead of showing
the actual goods.
 The Original Bill of Lading (OBL) is normally the
document accepted by banks as proof that goods
have been shipped. However, the list and form of
documents is open to imagination and
negotiation and might contain requirements to
present documents issued by a neutral third party
evidencing the quality of the goods shipped, or
their place of origin or place.
 Financial Documents
 Bill of Exchange, ----Co-accepted Draft
 Commercial Documents Invoice, Packing list -----
 Shipping Documents Transport Document, Insurance
Certificate, Commercial,
 Official or Legal Documents Official Documents
 License, Embassy legalization, Origin Certificate,
Inspection Certificate,
 Transport Documents
 Bill of Lading (ocean or multi-modal or Charter party),
Airway bill, Lorry/truck receipt, railway receipt, CMC
Other than Mate Receipt, Forwarder Cargo Receipt,
Deliver Challan...etc
 Insurance documents
 Insurance policy, or Certificate but not a cover note.
 All banks Institutions can participate
 Funds Are lent for 1 day-14 days From Sat-
Mon
 Borrowers lenders –current account in the RBI
 Timely quick Debit,credit operations
 Interest rate highly Volatile(2-3%-7.0%)
 High risk
 Temporary parking place for funds on short
term basis
 Used for credit extension by banks to
customers
 Banks can rediscount the bills & ready money
 Bill Should arise out of trade /commercial
transactions(RBI)
 Maturity date should not fall within 90days
from the date of rediscounting
 Less volatility in interest rate in bill
rediscounting market then in the call money
 Short term Govt. Security introduced in 1986
 It is issued at discount by RBI (the difference between
selling price and redemption value is return on T bils
or T bills rate (6.27% current /Avg 7.51 betn 1995-
2017) & F/V is paid to holder on maturity
 Every fortnight RBI invite bids for 182 days treasury bill
 Successful bidders collect letter of acceptance &deposit
amt with apex bank within 24 hrs
 All banks, ,institutions, local bodies, corporations.
individuals,PF,Priary Dealers,foreign Banks,FII(Foreign
Institutional Investors) can submit bids
 Eligible for SLR requirement for banks
 Handy instrument for banks for conversion from cash
to treasury & vise versa
 Short term negotiable instrument issued by
companies redeemable at par to the holders on
maturity
 Scheme introduced in 1990 by RBI
 Issued by Companies in the form Promissory note
 Period of C.P. 15-365 days
 Maxi amt for which cp can be released is limited
to 100% of working capital sanctioned by
companies bank
 A C.P issue of minimum size Rs 25lakh
 Good investment for short term cash surplus
 It is a financial service covering the risk of
non subscription to the new issues in the
capital market
 I t is a contract between the issuer of
securities and the underwriter to the effect
that the latter assures the subscription from
the public to the extent of the amount agreed
upon .
 Organized Markets
 RBI
 Banks
 Money Market/stock Capital Market
 Bullion Market
 Unorganized Market
 Money Lenders
 Brokers ,Traders, Landlords
 Financial System
 A trading in liquidity
 Cash,(RBI)
 Credit (Banks)
 lending and borrowings,
 claims on money(Financial Markets)
 RBI as a lender of Last Resort, Banks, LIC,UTI,
 Financial Markets, Mobilization of savings and
promotion of investment .
 Sectors Household sector/Foreign
Sector/Business Sector/Govt Sector
 Markets Primary Sector, Secondary, Tertiary
Market
Foreign Exchange Market
1
Foreign exchange market India
• growing very rapidly.
• The annual turnover of the market is more than $600
billion.
• This transaction does not include the inter-bank
transactions.
• RBI, the average monthly turnover in the merchant
segment was $40.5 billion and the inter-bank
transaction was $134.2 for the same period(RBI) The
average total monthly turnover was about $174.7
billion for the same period.
• . 2
Foreign exchange market India
• The transactions are made on
spot and also on forward basis,
which include currency swaps and
interest rate swaps.
•
• The Indian foreign exchange
market consists of the buyers,
sellers, market intermediaries and
the monetary authority of India
3
Swaps
• Swaps are derivatives contracts where
one counterparty agrees to exchange cash
flows with another.
• Interest rate swaps involve exchanging
cash flows generated from two different
interest rates—for example, fixed vs.
floating.
• Currency swaps involve exchanging cash
flows generated from two different
currencies to hedge against exchange rate
fluctuations. 4
LIBOR
• London Inter bank offered Rate
• LIBOR is considered a benchmark interest rate that

major global banks lend to each other in the
interbank market for short-term borrowings
5
Interest Rate Swaps
• An interest rate swap is a financial derivative contract in which two parties agree
to exchange their interest rate cash flows. The interest rate swap generally involves
exchanges between predetermined notional amounts with fixed and floating rates.
• For example, assume bank ABC owns a Rs 10 million investment, which pays the
London Interbank Offered Rate (LIBOR) plus 3% every month. Therefore, this is
considered a floating payment because as the LIBOR fluctuates, so does the cash
flow.
• On the other hand, assume bank DEF owns a $10 million investment which pays a
fixed rate of 5% every month. Bank ABC decides it would rather receive a constant
monthly payment while bank DEF decides to take a chance on receiving higher
payments. Therefore, the two banks agree to enter into an interest rate swap
contract. Bank ABC agrees to pay bank DEF the LIBOR plus 3% per month on the
notional amount of $10 million. Bank DEF agrees to pay bank ABC a fixed 5%
monthly rate on the notional amount of $10 million.
6
Interest Rate Swaps-example
• As another example, assume Mr. Sharma prefers a fixed-rate loan and has loans
available at a floating rate (LIBOR) ( REFERENCE RATE/BENCHMARK RATE T BILS
+0.5%) or at a fixed rate (10.75%).
• Mr. Gupta prefers a floating rate loan and has loans available at a floating rate
(LIBOR/Reference rate +0.25%) or at a fixed rate (10%).
• Due to a better credit rating, Mr Gupta has an advantage over Mr.Sharma in both
the floating rate market (by 0.25%) and in the fixed-rate market (by 0.75%). His
advantage is greater in the fixed-rate market so he picks up the fixed-rate loan.
However, since he prefers the floating rate, he gets into a swap contract with a
bank to pay LIBOR and receive a 10% fixed rate.
• Mr.Sharma pays (LIBOR+0.5%) to the lender and 10.10% to the bank, and receives
LIBOR from the bank. His net payment is 10.6% (fixed). The swap effectively
converted his original floating payment to a fixed rate, getting him the most
economical rate. Similarly, Mr Gupta pays 10% to the lender and LIBOR to the
bank and receives 10% from the bank. His net payment is LIBOR (floating). The
swap effectively converted his original fixed payment to the desired floating,
getting him the most economical rate. The bank takes a cut of 0.10% from what it
receives from Mr Sharma and pays to Mr Gupta
7
Currency Swaps
• Currency swaps are a foreign exchange agreement between two parties to

exchange cash flow streams in one currency to another.
• While currency swaps involve two currencies, interest rate swaps only deal with
one currency.2
• For example, assume bank XYZ operates in the United States and deals only with
U.S. dollars, while bank QRS operates in India and deals only with Rupees.
• Suppose bank QRS has investments in the United States worth $5 million. Assume
the two banks agree to enter into a currency swap.
• Bank XYZ ( US) agrees to pay bank DEF the LIBOR plus 1% per month on the
notional amount of $5 million.
• Bank QRS (India) agrees to pay bank ABC a fixed 5% monthly rate on the notional
amount of 253,697,500 Rs, assuming $1 is equal to 75.74 Rupees.
• By agreeing to a swap, both firms were able to secure low-cost loans and hedge
against interest rate fluctuations. Variations also exist in currency swaps, including
fixed vs. floating and floating vs.floating. In sum, parties are able to hedge against
volatility in forex rates, secure improved lending rates, and receive foreign capital.
8
Currency swaps
• Currency swaps are primarily used to hedge potential
risks associated with fluctuations in currency exchange
rates or to obtain lower interest rates on loans in a
foreign currency. The swaps are commonly used by
companies that operate in different countries. For
example, if a company is conducting business abroad,
it would often use currency swaps to retrieve more
favorable loan rates in their local currency, as opposed
to borrowing money from a foreign bank.
9
currency swap contracts
• let’s consider the following example. Company A is a US-based
company that is planning to expand its operations in Europe.
Company A requires €850,000 to finance its European expansion.
• On the other hand, Company B is a German company that operates

in the United States. Company B wants to acquire a company in the
United States to diversify its business. The acquisition deal requires
US$1 million in financing.
• Neither Company A nor Company B holds enough cash to finance

their respective projects. Thus, both companies will seek to obtain
the necessary funds through debt financing. Company A and
Company B will prefer to borrow in their domestic currencies (that
can be borrowed at a lower interest rate) and then enter into the
currency swap agreement with each other.
10
Currency swap
• The currency swap between Company A and Company B can be designed in the
following manner.
• Company A obtains a credit line of $1 million from Bank A with a fixed interest rate
of 3.5%.
• At the same time, Company B borrows €850,000 from Bank B with the floating
interest rate of 6-month LIBOR.
• The companies decide to create a swap agreement with each other.
• According to the agreement, Company A and Company B must exchange the

principal amounts ($1 million and €850,000) at the beginning of the transaction. In
addition, the parties must exchange the interest payments semi-annually.
• Company A must pay Company B the floating rate interest payments denominated
in euros, while Company B will pay Company A the fixed interest rate payments in
US dollars. On the maturity date, the companies will exchange back the principal
amounts at the same rate ($1 = €0.85).
•
11
Centers of foreign exchange
• The main center in India is Mumbai, the
commercial capital of the country.
• Centers for foreign exchange transactions in
the country including Kolkata, New Delhi,
Chennai, Bangalore, Pondicherry and Cochin.
12
13
Regulator
• regulated by the reserve bank of India through the
Exchange Control Department.
• At the same time, Foreign Exchange Dealers
Association (voluntary association) also provides some
help in regulating the market.
• The Authorized Dealers (Authorized by the RBI) and
the accredited brokers are eligible to participate in the
foreign Exchange market in India.
14
Regulator
• When the foreign exchange trade is going on
between Authorized Dealers and RBI or
between the Authorized Dealers and the
Overseas banks, the brokers have no role to
play.
• regulated by the Foreign Exchange
Management Act, 1999 or FEMA. Before this
act was introduced, the market was regulated
by the FERA
15
Participants
• Apart from the Authorized Dealers and
brokers, there are some others who are
provided with the restricted rights to accept
the foreign currency or travellers cheque.
• Among these, there are the authorized money
changers, travel agents, certain hotels and
government shops.
• The IDBI and Exim bank are also permitted
conditionally to hold foreign currency.
16
17
RBI/FEDAI
• RBI has prescribed guidelines for authorized dealers, permitted by it, to deal in foreign
exchange and handle foreign currency transactions.
• 64. FEMA 1999 also prescribes rules for persons, corporate etc in handing foreign
currencies, as also transactions denominated therein.
• 65. The RBI is issued licenses to Authorized Dealers to undertake foreign exchange
transactions in India.
• 66. The RBI has also issued Money Changer License to a large number of established
firms, companies, hotels, shops etc. to deal in foreign currency notes, coins and TCs
• 67. Full Fledged Money Changers (FFMC) : Entities authorized to buy and sell foreign
currency notes, coins and TCs
68. Restricted Money Changers (RMCs): Entities authorized to buy foreign currency.
• 69. Categories of Authorized Dealers; in the year 2005, the categorization of dealers
authorized to deal in foreign exchange has been changed.
Category Entities
AD - Category I Banks, FIs and other entities allowed to handle all types of Forex
AD - Category II Money Changers (FFMCs)
AD - Category III Money Changers (RMCs)
• 70. Foreign Exchange Dealers Association of India, FEDAI (ESTD 1958) prescribes
guidelines and rules of the game for market operations, merchant rates, quotations,
delivery dates, holiday, interest on defaults , Handling of export – Import Bills, Transit
period, crystallization of Bills and other related issues.
18
major risks associated with the dealing
operations
• # Operational Risk
• # Exchange Risk
• # Credit Risk
• # Settlement Risk
• # Liquidity Risk
• # Gap Risk/ Interest/ Rate Risk
• # Market Risk
• # Legal Risk
• # Systemic Risk
• # Country Risk
• # Sovereign Risk
19
Types of Risks
• . The Operation Risk is arising on account of human errors,
technical faults, infrastructure breakdown, faulty systems and
procedures or lack of internal controls.
• The Exchange Risk is the most common and obvious risk in

foreign exchange dealing operations and arise mainly on
account of fluctuations in exchange rates and/ or when
mismatches occur in assets/ liabilities and receivables/
payables.
• . Credit risk arises due to inability or unwillingness of the

counterpart to meet the obligations at maturity of the
underlying transactions.
•
20
• Credit Risk is classified into : # Pre- Settlement Risk , # Settlement Risk
• Pre Settlement Risk is the risk of failure of the counter party before maturity of the contract
thereby exposing the other party to cover the transaction at the ongoing market rates.
• . Settlement Risk is Failure of the counter party during the course of settlement, due to the
time zone differences, between the two currencies to be exchanged.
• Liquidity Risk is the potential for liabilities to drain from the bank at a faster rate than assets.
The mismatches in the maturity patterns of assets and liabilities give rise to liquidity risk.
• Gap Risk/ Interest Rate Risk are the risk arising out of adverse movements in implied interest
rates or actual interest rate differentials.
• Market Risk: This is arises out of adverse movement of market variables when the players
are unable to exit the positions quickly.
• . Legal Risk is arising on account of non-enforceability of contract against a counter party.
• . Systemic Risk is the possibility of a major bank failing and the resultant losses to counter
parties reverberating into a banking crisis.
• Country Risk is risk of counter party situated in a different country unable to perform its part
of the contractual obligations despite its willingness to do so due to local government
regularizations or political or economic instability in that country.
• Sovereign Risk is over all country risk

21
Popular Currency Profiles
• USD - US Dollar
• EUR - Euro
• GBP - British Pound
• INR - Indian Rupee
• AUD - Australian Dollar
• CAD - Canadian Dollar
• SGD - Singapore Dollar
• CHF - Swiss Franc
• MYR - Malaysian Ringgit
• JPY - Japanese Yen
• CNY - Chinese Yuan
22
1. Definition and Organization of the
Foreign Exchange Markets
• foreign exchange markets are markets on which
individuals, firms and banks buy and sell foreign
currencies:
– foreign exchange trading occurs with the help of the
telecommunication net between buyers and sellers of
foreign exchange that are located all over the world
– a single international foreign exchange market for
every single currency
– foreign exchange trading takes place at least in some
of the world financial centers in every moment
23
The Currency Market
Where money denominated in one currency is
bought and sold with money denominated in
another currency.
International Trade and Capital Transactions:
• facilitated with the ability to transfer
purchasing power between countries.
24
Location
1. OTC-type: no specific location
2. Most trades by phone, telex, or SWIFT
SWIFT: Society for Worldwide Interbank
Financial Telecommunications
25
Participants in the foreign exchange
market
Participants at 2 Levels
1. Wholesale Level (95%) - major banks
2. Retail Level (business customers)
Two Types of Currency Markets
1. Spot Market:
- immediate transaction
- recorded by 2nd business day
2. Forward Market:
- transactions take place at a specified future date
26
Participants by Market
• Spot Market
a. commercial banks
b. Brokers
c. customers of commercial and central banks
• Forward Market
a. arbitrageurs
b. traders
c. hedgers
d. speculators
27
Hedgers :
• They are generally the commercial producers and

consumers of the traded commodities. They
participate in the market to manage their spot market
price risk.
• Currency/commodity prices are volatile and their
participation in the futures market allows them to
hedge or protect themselves against the risk of losses
from fluctuating prices.
• For e.g. a copper smelter will hedge by selling copper
futures, since it is exposed to the risk of falling copper
prices.
28
Arbitrageurs :
• They are traders who buy and sell to make money on price
differentials across different markets. Arbitrage involves
simultaneous sale and purchase of the same commodities in
different markets. Arbitrage keeps the prices in different markets in
line with each other. Usually such transactions are risk free.
• The market functions because of the differing risk profiles of the

market participants. The fluctuation in commodity prices represents
both, a risk and a potential for profit. The hedgers transfer this risk
by foregoing the associated profit potential. The speculators
assume this risk in the hope of realizing profits by predicting price
movements. The arbitrageurs make the process of price discovery
more efficient.
29
Speculators :
• They are traders who speculate on the

direction of the futures prices with the
intention of making money. Thus, for the
speculators, trading in futures is an
investment option. Most Speculators do not
prefer to make or accept deliveries of the
actual commodities; rather they liquidate
their positions before the expiry date of the
contract.
30
Forex Business :
• Banks buy Currencies and Sell.
• Principle is BUY LOW AND SELL HIGH .
• Difference between buy rate and sell rate is known as spread and is also
known as profit ( provided buy > sell ) .
• For example -
• Bank can buy US dollar at Rs 65 from an exporter and sell the same at Rs 66
to an importer.
• Rs 1 will be the profit of the bank.
• Now Suppose Bank has bought 10 USD and could sell only 8 dollars, the 2
dollar which will be left with the Bank is known as open position.
• In this case Bank will be in the position known as overbought, similarly if

Bank had bought only 10 USD and entered into a contract to sell 12 USD
bank would be in a position called oversold.
• Banks generally try to square off their position by buying equal and selling
equal amount of currency so that at the end of the day it is not left with any
open position so as to avoid exchange risk. 31
Case I:
• Suppose a Bank for the sake of trading profits enter into a deal to buy 1 million
USD, 1 month from now at Rs 60. Now if after 1 month USD is valued at Rs 65 bank
will make profit of Rs 50 lakh since it can buy USD at Rs 60 while their market value
is Rs 65.
• However, if after 1 month USD is valued at Rs 55, Bank will lose Rs 50 lakh.
• Here the deal to buy 1 million USD is known as position of the Bank.
• When the deal is to buy it is called long position, when the deal is to sell it is called
short position.
• As already stated earlier the deals are made by single dealer and that too quickly
based on his assessment and judgment, if a dealer is allowed to make any size of
deal he can even make a deal of 1 billion USD in which case bank in scenario 2 of
dollar at Rs 55 will suffer loss of Rs 500 crore.
• Thus there is a need to put restrictions on the deal size which a dealer can make.
32
• Case II :
• Suppose a bank enters into a deal to buy 100 dollars at Rs
60, and at the same time enter into a contract to sell 100
dollars at Rs 61.
• The position here is called covered position as bank has

matched the buy and sells position and at the end of day
Bank will make profit of Rs 100.
• However, if bank has bought 100 dollars and at the end of

day there is no customer to whom it can sell, bank faces
risk. First it has blocked its money in buying the dollars and
secondly value of dollar may fall from Rs 60, resulting into
loss to the bank.
•
• This position here where buy and sell orders are not
matched is known as open position. Bank imposes limits on
these open positions
33
ELECTRONIC TRADING
A. Automated Trading
- genuine screen-based market
B. Results:
1. Reduces cost of trading
2. Threatens traders’ ( information)
3. Provides liquidity
34
2. Foreign Exchange Market Functions
• Clearing of currencies:
– service of exchanging one currency for another
• Provision of Credit:
– trader that bought a certain good from the
manufacturer, needs time to sell this good to the
final customer and to pay the manufacturer with
the money he received from the customer
35
Foreign Exchange Market and Insurance
Against Foreign Exchange Risk
– activities with which the foreign exchange
market participants avoid exchange rate risk
or activities with which they are closing
their open foreign exchange position
– closed foreign exchange position:
• size of the assets in a certain currency is equal
to the size of the liabilities in the same currency
• full insurance against exchange rate risk with
respect to this currency
36
Foreign Exchange Market and Insurance
Against Foreign Exchange Risk
– open foreign exchange position:
• long: net assets in a certain currency
• short: net liabilities in a certain currency
– in the spot or forward foreign exchange market
– standardized forward contracts and options
37
Foreign Exchange Markets and Conscious
Foreign Exchange Risk Acceptance
• activities in which economic agents
consciously open their foreign exchange
positions – long or short – hoping to get
profits in all foreign exchange market
segments
38
Exchange Rates in the Long Run: Factors Affecting
Exchange Rates in Long Run
• Basic Principle: If a factor increases demand

for domestic goods relative to foreign goods,
the exchange rate 
• The four major factors are relative price levels,
tariffs and quotas, preferences for domestic v.
foreign goods, and productivity.
13-39
• Relative price levels: a rise in relative

price levels cause a country’s currency
to depreciate.
• Tariffs and quotas: Trade barriers causes a
country’s currency to appreciate.
13-40
• Preferences for domestic v. foreign goods:

increased demand for a country’s good causes
its currency to appreciate; increased demand
for imports causes the domestic currency to
depreciate.
• Productivity: if a country is more productive
relative to another, its currency appreciates.
13-41
• The following table summarizes these

relationships. By convention, we are quoting,
for example, the exchange rate, E, as units of
foreign currency / 1 US dollar.
13-42
13-43
Exchange Rates in the Short Run
• In the short run, it is key to recognize that an
exchange rate is nothing more than the price
of domestic bank deposits in terms of foreign
bank deposits.
• Because of this, we will rely on the tools
developed for the determinants of asset
demand.
13-44
Exchange Rates in the Short Run: Equilibrium
13-45
Key Cross Rates
Data delayed by at least 15 min
Key Cross Rates

INR USD EUR
INR 1.0000 65.4550 77.0340

INVERSE 1.0000 0.0153 0.0130
USD 0.0153 1.0000 1.1769

INVERSE 65.4550 1.0000 0.8495
EURO 0.0130 0.8495 1.0000

INVERSE 77.0340 1.1769 1.0000
13-46
Exchange Rates in the Long Run: Theory of Purchasing
Power Parity (PPP)
• The theory of PPP states that exchange rates

between two currencies will adjust to reflect
changes in price levels.
• PPP  Domestic price level  10%, domestic
currency  10%
– Application of law of one price to price levels
– Works in long run, not short run
13-47
3. Foreign Exchange Market Participants
Economic Agents and Types of Activities on Foreign
Exchange Markets
Client buys $
with €
Local bank
Purchases and sales

Main banks’ of big mu ltinational
Bro kers
interbank market companies
Local bank
Client buys €
with $ 48
Economic Agents and Types of Activities
on Foreign Exchange Markets
• bank clients (individuals, firms, non-banking
financial institutions):
– all those groups of legal and physical persons that
need foreign currency in doing their commercial
or investment business
• commercial banks:
the most important group of foreign exchange
market participants
they buy and sell foreign currencies for their
clients and trade for themselves
49
• brokers:
– agents that connects dealers interested in
buying and selling foreign exchange, but does
not become an active client in the transaction
– they provide their client, the bank, with the
information about the exchange rates at which
banks are willing to buy or sell a particular
currency
50
• central banks:
foreign exchange market interventions are meant
to influence the exchange rate of the domestic
currency in a way that is beneficial for the
domestic economy and, consequently, for the
country
it does not necessarily have a profit, it can also
have a loss
51
Economic Agents and Motivation for the
Foreign Exchange Market Participation
• arbitragers:
– they want to earn a profit without taking
any kind of risk (usually commercial banks):
• try to profit from simultaneous exchange rate
differences in different markets
• making use of the interest rate differences that
exist in national financial markets of two
countries along with transactions on spot and
forward foreign exchange market at the same
time (covered interest parity)
52
Economic Agents and Motivation for the
Foreign Exchange Market Participation
• hedgers and speculators:
hedgers do not want to take risk while
participating in the market, they want to insure
themselves against the exchange rate changes
speculators think they know what the future
exchange rate of a particular currency will be, and
they are willing to accept exchange rate risk with
the goal of making profit
every foreign exchange market participant can
behave either as a hedger or as a speculator in the
context of a particular transaction
53
4. Size and Structure of Foreign
Exchange Market Transactions
• the biggest share of all financial markets in the world
Deutsche
Mark, was
the official
currency of
Germany. It
was replaced
by the Euro
in 1999.
French Franc
Switzerland
is the Swiss
Franc (CHF).
54
5. Types of Foreign Exchange Market
Transactions Spot Foreign Exchange
Transactions
• almost immediate delivery of foreign
exchange
Outright Forward Transactions
 buyer and seller establish the exchange rate at the time of

the agreement, payment and delivery are not required until
maturity
 forward exchange rates:
 1, 3, 6, 9 months, one year
55
Swap Transactions
• simultaneous purchase and sale of a given
amount of foreign exchange for two different
value dates:
– “spot against forward” swaps:
56
Hedging
• the act of reducing exchange rate risk
Forward Rate Quotations
Two Methods:
a) Outright Rate: quoted to
commercial customers.
b) Swap Rate: quoted in the interbank
market as a discount or premium.
57
Futures positions
• Futures are similar to forwards
• First, futures positions require a margin deposit to be
posted and maintained daily.
• If a loss is taken on the contract, the amount is debited
from the margin account after the close of trading.
• In other words, these futures are cash settled and no
underlying instruments or principals are exchanged.
• Secondly, all contract specifications such as expiration

time, face amount, and margins are determined by the
exchange instead of by the individual trading parties.
58
Futures
• basic characteristics of futures:
– the amount of the currency that is being traded
– type of currency quotation
– contract expiration
– last day of trading with the contract
– settlement day
– margin requirements
• information about futures trading
• futures usage:
– arbitrage between outright forward contract and
futures
– rarely used as an insurance instrument (rigidity!)
59
• similarities and differences between outright forward
contract and futures:
– both need to be executed unconditionally
– they are usually established for at most one year
Characteristic Futures Outright Forward Contract
Size of the contracts standardized for a given currency depends on the individual needs of the
client
Location and trade at the stock exchange or at a given with the provision of agents, connected
activity location; actively traded in an among each other with the help of
organized market telecommunications; not traded in an
organized market
Duration of the standardized, but at most a year depends on the individual needs of the
contract client , but not more than a year
Contract has to be yes yes
executed
Insurance and insurance explicitly required (margin insurance not required explicitly
Security of doing requirements); high security of doing (implicit insurance are affiliations of
Business with the business with the instrument two partners up till now); lower
Instrument security than futures
Trade regulation regulated with the stock exchange regulation not explicitly determined
rules
60
Options
• Options are a way of buying or selling a currency
at a certain point in the future.
• An option is a contract which specifies the price
at which an amount of currency can be bought at
a date in the future called the expiration date.
• Unlike forwards and futures, the owner of an
option does not have to go through with the
transaction if he or she does not wish to do so.
61
Types of options
• The buyer of a call has the right but not the obligation to buy the
underlying asset at the strike price on or before a specified date in
the future.
• However, the seller has a potential obligation to sell the underlying
asset at the strike price on or before a specified date in the future if
the holder of the option exercises his or her right.
• The buyer of a put has the right but not the obligation to sell the
underlying asset at the strike price on or before a specified date in
the future.
• On the other hand, the seller of a put has a potential obligation to
buy the underlying asset at the strike price on or before a specified
date in the future if the holder of the option exercises his/her right.
62
Options
• basic characteristics of options:
– financial instrument that gives the buyer the
right, but not the obligation, to buy or sell a
standardized amount of a foreign currency, that
is traded, at a fixed price at a particular time, or
until a particular time in the future
– call option and put option
– three different prices:
• exercise/strike price
• cost, price or value of the option
• underlying or actual spot exchange rate
63
Options
• types of options trading:
– in organized markets:
• standardized contracts with given strike prices,
standardized durations (1, 3, 6, 9, 12 months) and
expirations
• only certain currencies, contract amounts are
standardized
– over-the-counter trading:
• expiration date, strike price and contract amount
depend on the individual needs of the client
• counterparty risk!
• retail and interbank market
64
Options
• Usage of options:
– when the economic agent expects that the
exchange rate trend of a particular currency
could change drastically
– when the economic agent does not know for
sure that a certain foreign exchange flow will
occur in the future
– advantages:
• fixed option costs
• options do not need to be executed
65
6. Quotations of Currencies on Foreign
Exchange Markets
• quotation of a currency tells us at what price is a
financial mediator willing to buy or sell a certain
currency
Currency Quotations in Spot Foreign Exchange

Markets
 European and American quotation
 direct and indirect quotation (which currency is regarded
as a domestic/basis currency)
66
Forward Contract
• an agreement between a bank and a customer
to deliver a specified amount of currency
against another currency at a specified future
date and at a fixed exchange rate.
67
• EXCHANGE RATES AND FOREX BUSINESS
• . In a perfect market, with no restriction on finance and trade, the interest
factor is the basic factor in arriving at the forward rate.
• The Forward price of a currency against another can be worked out with
the following factors:
• # Spot price of the currencies involved
# The Interest rate differentials for the currencies.
# The term i.e. the future period for which the price is worked out.
• The price of currency can be expressed in two ways

• i.e. Direct Quote, Indirect Quote.
• Under Direct Quote, the local currency is variable

• E.g.: 1 USD = `75.10
• Direct Quote rates are also called Home Currency or Price Quotations.
• Under indirect Quote, the local currency remains fixed, while the
number of units of foreign currency varies. E.g. `100 = 2.05 USD
• Globally all currencies (Except a few) are quoted as Direct Quotes, in

terms of USD = So many units of another currency)
• . Only in case of GBP (Great Britain Pound) £, €, AU$ and NZ$, the
currencies are quoted as indirect rates.
• Japanese Yen being quoted per 100 Units.
68
Exchange Rate
• European firm invest in Japan
• €= 80,000 Want to Buy Yen ?
• Rate of €/ ¥ =0.00093/0.00097
• S B
• Rate is of ? Yen
• ¥ = 80000/0.00097 = 82,47,423
69
Exchange rate
• Indian Student want to Study CPA Course in
US
• Fees = $ 1800 Rs =?
• Ru/$ =59.10/ 59.40 Rate is of $ and fees in$
• S B so *
• Rs= 59.40 * 1800= 1,06,920
•
70
Exchange Rate
• US Firm exported to India Received
• Rs 42,80,000 =
• Ru/$ =59.1/59,4 Rate is of $
• S B
• $ = 42,80,000/59.4 = $ 72,053.87
71
Inverse rate
• Ru/$ =59.10/59.40
• $/ Ru = ?
• Inverse Rate = 1/59.40/ 1/59.10
• = 0.016835/ 0.016920
• =
72
Exchange Rate
• Bank A Ru/$ = 55.40/55.80
S B
• Bank B Ru/$ = 55.90/56.40

• S B
• Arbitrage ?
73
Overlapping
• Bank A Ru/$ = 55.40/55.80
S B loss
• Bank B Ru/$ = 55.60/56.40

S B
• Overlapping Arbitrage ? Not possible
74
Cross rates
• Ru/$ a b
$/ € c d
Ru/ € ? a*c/ b*d
75
• Cross Currency Rates: When dealing in a market where rates for a
particular currency pair are not directly available, the price for the said
currency pair is then obtained indirectly with the help of Cross rate
mechanism.
• How to calculate Cross Rate?:
The math is simple algebra: [a/b] x [b/c] = a/c
Substitute currency pairs for the fractions shown above, and you get, for
instance,
GBP/AUD x AUD/JPY = GBP/JPY.
This is the implied (or theoretical) value of the GBP/JPY, based on the
value of the other two pairs. The actual value of the GBP/JPY will vary
around this implied value,as the following calculation shows.
• Here are Friday's actual closing BID prices for the 3 currency pairs in this
example (taken from FXCM's Trading Station platform): GBP/AUD =
1.73449, AUD/JPY = 0.85535 and GBP/JPY = 1.48417.
Now, let's do the math:
GBP/AUD x AUD/JPY = GBP/JPY
1.73449 x 0.85535 = 1.4836, which is not exactly the same as the actual
market price
Here's why. During market hours (Sunday afternoon to Friday afternoon,
EST), all prices are LIVE, and small departures from the mathematical
relationships can exist momentarily.
76
• Direct quote is when a unit of foreign currency is expressed in terms
of home currency
• E.g. SD/INR 45.00.
• Indirect quotes is when a unit of home currency is expressed in

terms of a foreign currency
• E.g. 1 unit of euro is equal to USD 1.40 – only a few currencies like
GBP/Euro, Euro/USD and AUD/USD are quoted in this manner.
• In cross currency quotes where home currency (say, INR) is not

involved, the currency to the right side of the quote is known as
terms currency and the currency to the left side is base currency.
77
• The usage applies to direct as well as indirect quotes.
• TOD (or cash) is delivery on the same day (today) and TOM is
delivery next day (tomorrow)
• All the rates quoted by banks are interbank rates i.e. these rates are
applicable between banks. For a customer margin is added or
deducted When a customer wishes to buy currency .
• Base currency is the currency which is being bought and sold and
the other currency is incidental.
• Forwards are quoted as follows

• • Spot/1 month 17/18
• • Spot/ 2 months 35/37
• • Spot/ 3 months 53/56
• If forward differentials are in the ascending order (1st figure is
lower than the 2nd) the base currency is at premium.
78
Numerical:
• 1. Based on the data given below answer the questions
from (i) to (iii)
• Following are Inter-bank quotes on certain date
• Spot USD/INR 45.70/75
• 1 month 5/7
• 2 month 8/10
• 3 month 12/15
• Spot GBP/USD 1.8000/8010
• 1 month 30/25
• 2 month 50/45
• 3 month 60/65
• Margin of the bank is 3 paise
79
• i) An exporter presents a sight bill. What rate will
be quoted to the exporter.
• Ans. Spot USD/INR is 45.70/45.75.
• This means bank is willing to buy USD at 45.70
and sell at 45.75. When an export customer goes
to bank he will be selling currency to bank thus
bank will be buying currency from the customer.
• The basic principle followed by bank is buy low

sell high. Whenever bank buys currency it
deducts margin from the spot so that it has to
pay lower to the customer. In this case bank will
buy at Spot – Margin ie. 45.70 -0.05 = 45.65.
Thus rate quoted to the customer will be 45.65
80
• (ii) Another exporter submitted 3 month
usance bill. What rate will be quoted to the
customer.
• Ans: Usance bills mean payment will be made
after a specified period. 3 month export
usance bill means foreign exchange will be
received by the bank 3 months from now. To
arrive at this forward rate add premium to the
spot rate ie 45.70+0.12 = 45.82 from this
deduct margin hence rate given to customer
will be 45.79
81
iii) Calculate GBP/INR rate
• Ans: This is the example of calculating cross rate.

Here USD/INR is 45.70/75 & GBP/USD is
1.8000/8010. Now we need to calculate GBP/INR
which means how many INRs will be equal to 1
GBP.
• Here 45.70 INR= 1 USD and 1.8000USD equals 1
GBP .
• It means 1.8000* 1 USD = 1 GBP .
• Thus 1.8000* 45.70 = 1 GBP thus GBP/INR is
82.26/40
82
• So a currency with higher demand will be
a stronger currency. Dollar has very high
demand and is thus a strong currency.
•
strongest currency in the world ????
83
• Another factor which determines exchange rate between
two countries is the interest rate between two countries.
Remember one rule a country with high interest rates has
weak currency and country with low interest rate has
strong currency.
• A country like India which has interest rate of 8-9% has
weak currency while a country like US has interest rate of
around 0.25 % .
• So suppose you want to buy one dollar now you can buy it
a spot Rate lets say that rate is 1$= Rs 62. But what if you
want to know what would be rate of this dollar 3 months
from now? This will depend upon premium or discount. If a
country has lower interest rate it will be at premium, if
currency has higher rate of interest it will be at discount.
• We add premium to the spot rate and deduct discount
from spot rate to arrive at the future rate known as
forward rate.
84
• Calculation of Rates:
• Illustration 1:
• Spot USD is Rs 44.80/44.85.
• If forward premium is given as under
• 1M – 0234/0239
• 2M-0303/0307
• 3M – 0323/0327
• What rate will be quoted to an export customer who books 1
month forward contract .
• Ans 1: Spot rate is given as 44.80/44.85 here 44.80 is the bid rate
and 44.85 is the ask rate.
• Now always remember that questions here are to be solved from
the point of view of bank and not of customer. 44.80 which is bid
rate means bank is willing to buy one dollar for Rs 44.80 from a
customer but will sell one dollar for Rs 44.85 to a customer.
85
• Now always remember export customer means a
customer who has made exports and receives foreign
exchange. He will go to bank to sell this foreign
exchange to the bank which in other language means
bank will buy foreign exchange from the exporter. So
when quoting rates to an exporter buy rate of bank is
to be considered which Rs 44.80 in this case. However
forward contract for 1month to be booked which
means bank will buy this exchange one month from
now and hence one month rate is to be arrived.
• The premium for one month is 0234.
• We will add this premium to the spot rate to arrive at

one month forward rate,
86
• Thus one month forward rate at which
contract is to be booked is
• Spot rate --- ------------ 44.8000
• Add- 1M Premium----- 0.0234
• -------------
• 44.8234
87
strongest currency
• Kuwaiti Dinar is the strongest currency the
world
1 KWD = 3.42 USD
1 KWD = 2.80 Euro
1 KWD = 217.97 Indian Rupee –
88
Exchange rate
• Royalty of $ 1600 is being received by an Indian
teacher how much amount will he get in Rs
=?
• Ru/$ =75.10/ 75.40
• US Firm exported to India Received

• Rs 42,80,000 =
• Ru/$ =79.1/79.4
• How many dollars ?
89
Exchange Rate
90
Inverse rate
• Ru/$ =59.10/59.40
• $/ Ru = ?
• Inverse Rate = 1/59.40/ 1/59.10
• = 0.016835/ 0.016920
• =
91
Monetary policy
8-1
8-2
Financial Institutions Role
PROMOTING SAVINGS
MOBILISING SAVINGS
CREATING CREDIT
INSTITUTIONS
FRANCHISING
ACCELERATING ECONOMIC DEVELOPMENT

3
8-3
Functions of Financial institutions
 Finance is a prerequisite for modern business and

system. It's through financial markets the financial
system of an economy works.
 The main functions of financial institutions are:
 To facilitate creation and allocation of credit and
liquidity;
 To serve as intermediaries for mobilization of
savings;
 To assist process of balanced economic growth;
 To provide financial convenience 4
8-4
Financial services
 Industrial promotion through merchant banking services(project
report,feasibility study ,financing structures corporate advisory on
m&a,deals
 Working capital management through factoring
 Equipment machines financing through leasing
 Financial resources to industries through mutual funds Long term
risk capital through venture capital
 Risk management through hedging derivatives
 Debenture issue through credit rating services
 Industrial development through specialised services
 Underwritng,bills discounting,refinancing,promoting backward
areas,depository services credit card,stock broking services
8-5
8-6
Monetary policy
 policy of the central bank with regard to the

use of monetary instruments under its
control to achieve the goals specified in the
Act.
 The Reserve Bank of India (RBI) is vested
with the responsibility
 This is explicitly mandated under the
Reserve Bank of India Act, 1934.
8-7
Monetary policy
Fiscal policy
 Demand supply of money/revenue and exp

of govt
 Economic Stability/growth
 Repo rate,CRR/tax rate Demonetisation
 RBI/ Ministry of Finance
 No intervention of govt/Intervention
 No specific period as and when
required/every year in feb
8-8
Goals of monetary
policy
 To maintain price stability while keeping in mind the
objective of growth
 inflation target to be set by the Government of India,
in consultation with the Reserve Bank, once in every
five years.
 Accordingly, the Central Government has notified in
the Official Gazette 4 per cent Consumer Price
Index (CPI) inflation as the target for the period from
August 5, 2016 to March 31, 2021 with the upper
tolerance limit of 6 per cent and the lower tolerance
limit of 2 per cent.
8-9
The Monetary Policy
Process
 Section 45ZB of the amended RBI Act, 1934 provides for an
empowered six-member monetary policy committee (MPC)
to be constituted by the Central Government by notification
in the Official Gazette. Accordingly, the Central Government
in September 2016 constituted the MPC as under:
 1. Governor of the Reserve Bank of India – Chairperson, ex officio;
 2. Deputy Governor of the Reserve Bank of India, in charge of
Monetary Policy – Member, ex officio;
 3. One officer of the Reserve Bank of India to be nominated by the
Central Board – Member, ex officio;
 4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) –
Member;
 5. Professor Pami Dua, Director, Delhi School of Economics –
Member; and
 6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management,
Ahmedabad – Member.
8-10  Members referred to at 4 to 6 above, will hold office for a period of four years or until further orders,
whichever is earlier.)
Monetary policy
committee (MPC)
 MPC determines the policy interest rate required to achieve the inflation target.
 The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the
monetary policy.
 Views of key stakeholders in the economy, and analytical work of the Reserve Bank contribute
to the process for arriving at the decision on the policy repo rate.
 The Financial Markets Operations Department (FMOD)--- day-to-day liquidity management
operations.
 The Financial Markets Committee (FMC) meets daily to review the liquidity conditions so as to
ensure that the operating target of monetary policy (weighted average lending rate) is kept
close to the policy repo rate.
 Technical Advisory Committee (TAC) on monetary policy with experts from monetary
economics, central banking, financial markets and public finance advised the Reserve Bank on
the stance of monetary policy. However, its role was only advisory in nature.
8-11
Instruments of Monetary
Policy
 Repo Rate: The (fixed) interest rate at which the
Reserve Bank provides overnight liquidity to
banks against the collateral of government and
other approved securities under the liquidity
adjustment facility (LAF).
 Reverse Repo Rate: The (fixed) interest rate at
which the Reserve Bank absorbs liquidity, on an
overnight basis, from banks against the collateral
of eligible government securities under the LAF.
8-12
Liquidity Adjustment
Facility (LAF):
 The LAF consists of overnight as well as term repo
auctions. Progressively, the Reserve Bank has
increased the proportion of liquidity injected under
fine-tuning variable rate repo auctions of range of
tenors.
 The aim of term repo is to help develop the inter-bank
term money market, which in turn can set market
based benchmarks for pricing of loans and deposits,
and hence improve transmission of monetary policy.
The Reserve Bank also conducts variable interest rate
reverse repo auctions, as necessitated under the
market conditions.
8-13
Marginal Standing Facility
(MSF):
A facility under which scheduled
commercial banks can borrow additional
amount of overnight money from the
Reserve Bank by dipping into their
Statutory Liquidity Ratio (SLR) portfolio
up to a limit at a penal rate of interest.
 This
provides a safety valve against
unanticipated liquidity shocks to the
banking system.
8-14
Corridor/ Bank Rate:
 Corridor: The MSF rate and reverse repo rate
determine the corridor for the daily movement in
the weighted average call money rate.
 Bank Rate: It is the rate at which the Reserve
Bank is ready to buy or rediscount bills of
exchange or other commercial papers.
 The Bank Rate is published under Section 49 of
the Reserve Bank of India Act, 1934.
 This rate has been aligned to the MSF rate and,
therefore, changes automatically as and when the
MSF rate changes alongside policy repo rate
8-15 changes.
Cash Reserve Ratio (CRR):/
Statutory Liquidity Ratio (SLR):
 Cash Reserve Ratio (CRR): The average daily balance
that a bank is required to maintain with the Reserve
Bank as a share of such per cent of its Net demand and
time liabilities (NDTL) that the Reserve Bank may notify
from time to time in the Gazette of India.
 Statutory Liquidity Ratio (SLR): The share of NDTL
that a bank is required to maintain in safe and liquid
assets, such as, unencumbered government securities,
cash and gold.
 Changes in SLR often influence the availability of
resources in the banking system for lending to the
8-16 private sector.
Open Market Operations (OMOs):/
Market Stabilisation Scheme (MSS):
 Open Market Operations (OMOs): These include both,

outright purchase and sale of government securities, for
injection and absorption of durable liquidity.
 Market Stabilisation Scheme (MSS): This instrument for
monetary management was introduced in 2004.
 Surplus liquidity of a more enduring nature arising
from large capital inflows is absorbed through sale
of short-dated government securities and treasury
bills. The cash so mobilised is held in a separate
government account with the Reserve Bank.
8-17
8-18
8-19
8-20
Impact monetary policy
 https://www.moneycontrol.com/news/business/ec
onomy/rbi-governor-press-conference-live-
monetary-policy-announcement-shaktikanta-das-
mpc-meeting-repo-rate-5653371.html
 https://www.indiatoday.in/business/story/share-
market-sensex-nse-bse-august-6-live-updates-
1708238-2020-08-06
 https://www.moneycontrol.com/news/business/startup/explained-why-rbi-is-pushing-for-new-
umbrella-entities-for-retail-payments-who-can-set-them-up-and-other-questions-answered-
5728161.html
 https://www.moneycontrol.com/news/business/startup/comment-how-robots-chatbots-will-
changeway-you-handle-your-money-1057547.html
8-21
Stock market -Crashes of year 2015/2016 Crashes of 2016
 Crashes of year 2015
 The stock markets in India continued to fall in

 On 6 Jan 2015, the Sensex fell by 854 2016.
points to 26,987.  By 16 February 2016, the BSE had seen a fall
 On 24 August 2015, the BSE Sensex of 26% over the past eleven months, losing
1607 points in four consecutive days of
crashed by 1,624 points and the NSE fell February
by 490 points. Finally the indices closed
at 25,741 points and the Nifty to 7,809  . The reasons given for this included NPAs of
Indian banks, "global weaknesses" and
points. The reason given for this crash "global factors". In the four months from
was given as a ripple effect due to fears November 2015 to February 2016, FIIs were
over a slowdown in China, as the Yuan reported to have sold equities worth Rs
had been devalued two weeks ago 17,318 crore as, in the opinion of analysts,
leading to a fall in the currency rates of concerns grew over growth in China and as
other currencies and the rapid selling of crude oil prices tumbled below $30 per
barrel[24]
stocks in China and India. The Shanghai
stock exchange too fell by 8.5%. A  On 9 November 2016, crashed by 1689 points,
variety of other reasons too were given believed by analysts to be due to the crack
down on black money by the Indian
for this fall by analysts including government, resulting in frantic selling. The
disappointing earnings in the first sensex nosedived by 6% to 26,902 and the
quarter for many Indian companies, Nifty dropped by 541 points to 8002. These
somber commentaries by their were said to be due to the demonetization
management leading to doubts drive by the Modi government. The Hindu was
regarding their recovery and a below of the opinion that the weakening rupee and
the US presidential election too had some
average monsoon for that year.[23] bearing on the behavior of investors. The fall
was concurrent with falls in other Asian stock
markets including the Hang Seng, Nikkei and
the Shanghai Composite. The S&P had also
fallen by 4.45%.[25]
8-22
Stock market -Crashes of year 2018
 Crashes of 2018
 Although not classified as a crash, the BSE and
NSE fell sharply on 2 and 5 February 2018, sparked
by the comments of the Finance minister's
proposal in the budget speech to introduce a 10%
long term capital gains tax (LTCG) on equity shares
sold after 12 months
 The BSE Sensex fell by 600 points in two days, and
the Nifty 50 fell by about 400 points to 10,676 on
5th.[29] Earlier, the BSE Sensex had fallen by 570
points to 35,328 on 2 February and the NSE Nifty by
190 points to a low of 10,826.[30]
8-23
Stock market -Crashes of year 2020
 On 1 February 2020, as the FY 2020-21 Union budget was presented
in the lower house of the Indian parliament,
 Nifty fell by over 3% (373.95 points) while Sensex fell by more than
2% (987.96 points). The fall was also weighed by the global
breakdown amid coronavirus pandemic centered in China.[31]
 On 28 February 2020, Sensex lost 1448 points and Nifty fell by 432
points due to growing global tension caused by Corona virus,
which W.H.O said has a pandemic potential. ] Both BSE and NSE
fell for the entire five days of the week ending with the worst weekly
fall since 2009
 On March 4 and 6, markets fell by around 1000 points and several
crores of wealth was wiped out. On 6 March 2020,
 Yes Bank was taken over by RBI under its management for
reconstruction and will be merged with SBI. This was done to
ensure smooth functioning of the bank as it was struggling for
couple of years to cope up with heavy pressure due to cleaning of
bad loans.
 On 9 March 2020, the Sensex fell by 1,941.67 points, while Nifty-50
broke down by 538 points. The fear of COVID-19 outbreak has
created havoc all over the globe and India is no exception. Further,
the recent Yes Bank crisis also made the markets fell. The markets
8-24 ended in red with Sensex closing on 35,634.95 and Nifty-50 on
Mutual Funds
Dr.Smita Jape
What are Mutual Funds?
Types of Mutual Funds,
Schemes and Benefits –
• The latest Mutual fund investment scheme in India is
developing at a really fast rate. In February 2019, this sector
recorded a total amount of up to 23.16 trillion in AAUM
(Average Assets Under Management). In 2009, AAUM showed
approximately 5 trillion. The figures clearly suggest how this
industry has increased by 4 times within 10 years. Currently,
India has over 2,500 mutual fund schemes and 44 AMFI.
• As mutual funds differ in types, it gets quite challenging for
investors to pick the right type of investment funds and kick start
their investment careers. In this PPT, we'll talk about mutual
funds, the types, benefits of investing in MF, total schemes, and
etc. But before we get started, let's have a quick look at the
meaning of mutual funds investment.
• Mutual fund is a mechanism for pooling money

• by issuing units to the investors and
• investing funds in securities in accordance with objectives as disclosed in offer document.
• Investments in securities are spread across a wide cross-section of industries and sectors and
thus the risk is diversified because all stocks may not move in the same direction in the same
proportion at the same time.
• Mutual funds issue units to the investors in accordance with quantum of money invested by
them.
• Investors of mutual funds are known as unitholders. The profits or losses are shared by
investors in proportion to their investments. Mutual funds normally come out with a number
of schemes which are launched from time to time with different investment objectives. A
mutual fund is required to be registered with Securities and Exchange Board of India (SEBI)
before it can collect funds from the public
• A mutual fund is one of the famous investment instruments that collect money from
novices and professional investors. The money is collected in different asset classes
namely equity shares, debt, gold, foreign securities, and the list goes on. Mutual
Funds are regulated and managed by SEBI and the Association of Mutual Funds in
India. They are safe, transparent, reliable, and flexible forms of investment. But,
the question is why people love to invest in mutual funds?
• It is no longer an era when people would invest in traditional investment

instruments. Whether it is a beginner or professional investor, mutual funds seem
the most reliable and secure option for investment. Furthermore, these funds come
in a wide range of schemes and types. You can build your investment portfolio for
just 500/-
• Depending on the investment plan you choose, mutual funds allow

investors to build their investment portfolio for Rs 500 and get started
with the investment procedure. Another major advantage of mutual
funds is that it is handled by professional fund managers, who possess
years of experience in managing financial profiles of the investors. No
matter which mutual fund investment scheme you opt for, you can rest
assured that your money is safe with financial experts. Let’s learn about
the types of mutual funds in India.
Asset Management Company (AMC)
• A mutual fund is set up in the form of a trust, which has sponsor, trustees, AMC and custodian.
• The trust is established by a sponsor or more than one sponsor who is like promoter of a company.
• The trustees of the mutual fund hold its property for the benefit of the unitholders.
• AMC approved by SEBI manages the funds by making investments in various types of securities.
• Custodian, who is required to be registered with SEBI, holds the securities of various schemes of the
fund in its custody.
• The trustees are vested with the general power of superintendence and direction over AMC. They
monitor the performance and compliance of SEBI Regulations by the mutual fund.
• SEBI Regulations require that at least two-thirds of the directors of trustee company or board of trustees
must be independent i.e. they should not be associated with the sponsors.
• Also, 50% of the directors of AMC must be independent.
• All mutual funds are required to be registered with SEBI before they launch any scheme.
What is Net Asset Value (NAV) of a scheme?
• The performance of a particular scheme of a mutual fund is denoted by Net Asset

Value (NAV).
• Mutual funds invest the money collected from investors in securities markets.
• In simple words, NAV is the market value of the securities held by the scheme. Since
market value of securities changes every day, NAV of a scheme also varies on day to
day basis.
• The NAV per unit is the market value of securities of a scheme divided by the total
number of units of the scheme on any particular date. For example, if the market
value of securities of a mutual fund scheme is INR 200 lakh and the mutual fund has
issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the
fund is INR 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed by the mutual
funds on a daily basis. The NAV per unit of all mutual fund schemes have to be
updated on AMFI‟s website and the Mutual Funds‟ website by 9 p.m. of the same
day. Fund of Funds are allowed time till 10 a.m. the following business day to
update the information
Types of Mutual Funds
• Basically, there are three types of mutual funds categories in India –

debt funds, equity funds, and hybrid funds. Depending on your risk
appetite, investment goals, and overall investment profile; you can pick
any of the below-listed mutual funds.
1) Equity Funds
• One of the most common types of equity funds, in which more than 65% of the
investments are used for equity instruments, are known as equity funds. In the
simplest terms, equity funds are long-term investment plans where investors put
their money in reputable companies. The growth of the companies decides the rate
of returns for investors. Equity funds are the most reliable option for investors who
are ready to bear significant risk in order to obtain fruitful results.
• As equity funds depend on the stock and economy, they come with a high risk.
That's the reason why they are only preferred by professional investors. According
to SEBI and AMFI, there are a total of 11 types of equity funds out on the market.
However, the most common type of equity fund is ELSS (Equity Linked Savings
Scheme). It is specially developed for investors who are on the lookout for a tax-
saving investment funds option.
ELSS-Equity Linked saving scheme
• The investments in ELSS can save you up to 1.5 lakh on tax. However,
there is a specific lock-in period (usually, 3 years) in the tax-saving
investment funds. It is important to note that equity funds come with a
lock-in period. You might need to invest funds for as long as 5 years if
you want to receive the maximum perks. This is because the growth of
the companies takes years. If you want your money to grow rapidly, then
equity funds are the best pick!
Balanced or Hybrid Funds:
• These are funds that invest in a mix of asset classes. In some

cases, the proportion of equity is higher than debt while in others
it is the other way round. Risk and returns are balanced out this
way. An example of a hybrid fund would be Franklin India Balanced
Fund-DP (G) because in this fund, 65% to 80% of the investment is
made in equities and the remaining 20% to 35% is invested in the
debt market. This is so because the debt markets offer a lower
risk than the equity market.
Schemes according to Maturity Period:
• A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
• Open-ended Fund/Scheme An open-ended fund or scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a fixed maturity period.
Investors can conveniently buy and sell units at Net Asset Value (NAV) per unit which is declared
on a daily basis. The key feature of open-end schemes is liquidity.
• Close-ended Fund/Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 3-
5 years.
• The fund is open for subscription only during a specified period at the time of launch of the
scheme. Investors can invest in the scheme at the time of the new fund offer and thereafter they
can buy or sell the units of the scheme on the stock exchanges where the units are listed. In
order to provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is provided to the investor i.e.
either repurchase facility or through listing on stock exchanges
Growth funds:
• Under these schemes, money is invested primarily in equity stocks

with the purpose of providing capital appreciation. They are
considered to be risky funds ideal for investors with a long-term
investment timeline. Since they are risky funds they are also ideal
for those who are looking for higher returns on their investments.
Income funds/ Liquid funds
• Income funds: Under these schemes, money is invested primarily

in fixed-income instruments e.g. bonds, debentures etc. with the
purpose of providing capital protection and regular income to
investors.
• Liquid funds: Under these schemes, money is invested primarily in
short-term or very short-term instruments e.g. T-Bills, CPs etc.
with the purpose of providing liquidity. They are considered to be
low on risk with moderate returns and are ideal for investors with
short-term investment timelines.
Commodity focused stock funds/ Market
neutral funds
• Commodity focused stock funds: These funds don’t invest directly

in the commodities. They invest in companies that are working in
the commodities market, such as mining companies or producers
of commodities. These funds can, at times, perform the same way
the commodity is as a result of their association with their
production.
• Market neutral funds: The reason that these funds are called
market neutral is that they don’t invest in the markets directly.
They invest in treasury bills, ETFs and securities and try to target
a fixed and steady growth.
Gilt Funds/ Exchange traded funds
• Gilt Funds: Gilt funds are mutual funds where the funds are
invested in government securities for a long term. Since they are
invested in government securities, they are virtually risk free and
can be the ideal investment to those who don’t want to take risks.
• Exchange traded funds: These are funds that are a mix of both
open and close ended mutual funds and are traded on the stock
markets. These funds are not actively managed, they are managed
passively and can offer a lot of liquidity. As a result of their being
managed passively, they tend to have lower service charges
(entry/exit load) associated with them.
What is a Load or no-load Fund?
• A Load Fund is one that charges a percentage of NAV for entry or exit andthe
load structure in a scheme has to be disclosed in its offer documents. Suppose
the NAV per unit is INR 10. If the entry as well as exit load charged is 1%, then
the investors who buy would be required to pay INR 10.10 (10 + 1% of 10) per
unit and those who offer their units for repurchase to the mutual fund will get
only INR 9.90 (10 – 1% of 10) per unit.
• Currently, in India, the exit load charged is credited to the scheme. The
investors should take the loads into consideration while making investment as
these affect their returns. However, the investors should also consider the
performance track record and service standards of the mutual fund which are
more important.
• A no-load fund is one that does not charge for entry or exit. It means the
investors can enter the fund/scheme at NAV and no additional charges are
payable on purchase or sale of units. SEBI has mandated that no entry load can
be charged for any mutual fund scheme in India.
What is expense ratio?
• Expense ratio represents the annual fund operating expenses of a

scheme, expressed as a percentage of the fund‟s daily net assets.
• Operating expenses of a scheme are administration, management,
advertising related expenses, etc.
• An expense ratio of 1% per annum means that each year 1% of the fund‟s
total assets will be used to cover expenses.
• Information on expense ratio that may be applicable to a scheme is
mentioned in the offer document.
• Currently, in India, the expense ratio is fungible, i.e., there is no limit
on any particular type of allowed expense as long as the total expense
ratio is within the prescribed limit. For limits on expense ratio, refer to
regulation 52 of the SEBI (Mutual Funds) Regulations, 1996.
What is a Systematic Investment Plan (SIP)?
• A SIP allows an investor to invest regularly. One puts in a small amount every month that is invested
in a mutual fund. A SIP allows one to take part in the stock market without trying to second-guess
its movements. For example X decides to invest INR 1,000 per month for a year. When the market
price of shares fall, X benefits by purchasing more units; and is protected by purchasing less when
the price rises as explained below. Date NAV Approx number of units you will get at 1000
• 1-Jan 10 100
• 1-Feb 10.5 95.24
• 1-Mar 11 90.91
• 1-Apr 9.5 105.26
• 1-May 9 111.11
• 1-Jun 11.5 86.96
• 1-Jul 11 90.91
• 1-Aug 10.5 95.24
• 1-Sep 10 100
• 1-Oct 9.5 105.26
• 1-Nov 10 100
SIP
• 1-Dec 9.5 105.26

• 1186.15
• Within one year, X has 1,186 units by investing just INR 1,000
every month at an average cost of 12000/1186.15 = 10.1170. This
is as against 12,000/10 = 1,000 units or 12000/11.5 = 1043.5 units
or 12000/9 = 1,333.3 units if X had invested lump sum on 1 Jan, 1
Jun or 1 May, respectively
Indian Financial System
Dr.Mrs.S.Jape
1
Financial Markets and Institutions
 Learning Objectives
 1 To understand different components of the
Indian Financial system and their functions.
 2 To comprehend various products issued
through different financial institutions in the
primary and secondary markets.
 3 To understand the fixed income market, the
different instruments and concepts related to it.

2
1 Financial Markets and Institutions
 1Historical evolution of IFS. Different
components of the financial system and their
functions Financial markets - primary and
secondary markets; OTC and exchange
markets; and equity and debt markets.
 2 The Role of the Central Bank – RBI’s
monetary policy in its proper perspective in the
overall IFS.
 3 Stock Exchanges of the Country and Primary
Markets. Evolution of stock exchange and their
role in shaping the financial scenario of a
country 3
 4 Secondary Markets Products involved in markets,
institutions involved, stock and other exchanges, clearing
house mechanisms and clearing corporation, broking
houses and portfolio management services.
 5 Emerging Markets and Products Alternate finance
products and players, such as crowd funding, product to
product finance, interest-free financial products, thematic
indexes.
 6 Derivatives Products-Forwards, futures, options and
swaps, Exotic options. Financial market activities –
speculation, hedging and arbitrage.

4
 7Intermediaries Mutual funds, insurance firms and hedge
funds, commercial banks and investment banks.
 8Fixed income securities Bond characteristics, bond
types, coupon types, computation of different yields and
bond price, relationship between yield and price, floaters
and inverse floaters.
 9Fixed income securities Spot rates and forward rates,
zero coupon yield curve, theories of term structure of
interest rates. Fixed income risk measures: duration,
modified duration, convexity and price value of basis
point.
 10 Foreign Exchange Markets: General understanding of
5
currency markets and its role in the financial system
Text Books/ Reference Books
 1 Bharati V. Pathak, The Indian Financial
System-Markets, Institutions and Services.
 2 Mishkin and Eakins, Financial Markets and
Institutions.
 3 L M Bhole and Jitendra Mahakud, Financial
Markets & Institutions.
 Reference Book 1 Fabozzi, The Handbook of
Fixed Income Securities.
 2 Anthony Saunders, Financial Markets and
Institutions.
 3 Meir Kohn, Financial Institutions & Markets. 6
E books
https://www.theresistanceunited.com/book/show/334604-financial-institutions-and-markets-amp-from-
srp-true-amp-qid-crxhe9ryfm-amp-rank-915
https://library.ccis.edu/finance/markets
https://books.google.co.in/books?id=8zWrDwAAQBAJ&pg=PT126&source=gbs_selected_pages&cad=2
#v=onepage&q&f=false
7
Indian Financial System
Indian financial system consists of formal

and informal financial system.
 Based on the financial system financial
market, financial instruments and financial
intermediation can be categorized
depending upon functionality.
8
Key Indicators of economy New Policy Rates
by RBI in Indian Banking ( October 08, 2021):
•SLR Rate : 18.00%
•CRR : 4.00%
•MSF : 4.25%
•Repo Rate : 4.00%
•Reverse Repo Rate : 3.35%
•Bank Rate : 4.25%
New Lending/ Deposit Rates By RBI (as on October 08, 2021):
•Base Rate : 7.30% - 8.80%
•MCLR (Overnight) : 6.55% - 7.00%
•Savings Deposit Rate : 2.70% - 3.00%
•Term Deposit Rate > 1 Year : 4.90% - 5.50% Marginal standing facility Rate When
the interbank liquidity dries up
completely it is the rate at which banks
can borrow from RBI at a rate more
than repo rate in case of an
emergency or over midnight by
pledging Government securities
9
Reserve Ratios
Cash Reserve Ratio (CRR) : 4%
Per cent of their deposits which all types of banks hold with RBI in the
form of cash.
Currently RBI does not pay any interest on CRR deposit to banks.
CRR Liquidity or Money flow in the system
Statutory Liquidity Ratio (SLR) : 18%
The ratio which every bank has to maintain it’s Net Demand and Time
Liabilities as liquid assets in the form of cash, gold and un-encumbered
approved securities such as government securities.
Banks generally earn some interest on SLR holdings. (Near about 8% as

on Jun’15)
Statutory liquidity ratio (SLR) is the Indian government term for Reserve
requirement that the commercial banks in India require to maintain in the form of
gold, government approved securities before providing credit to the customers.
Determined by Reserve Bank of India maintained by banks in order to control

the expansion of bank credit.
The SLR = percentage of total demand and time liabilities.

SLR rate = (liquid assets / (demand + time liabilities)) × 100%
Time Liabilities refer to the liabilities which the commercial banks are liable to
pay to the customers after a certain period mutually agreed upon, and demand
liabilities are such deposits of the customers which are payable on demand.
An example of time liability is a six month fixed deposit which is not payable on
demand but only after six months.
An example of demand liability is a deposit maintained in saving account or
current account that is payable on demand through a withdrawal form such as a
cheque. 11
21.05 %percent.
Indian Financial System – An Overview
 Orderly mechanism & structure in economy.

 Mobilises the monetary resources/capital from
surplus sectors.
 Distributes resources to needy sectors.
 Transformation of savings into investment &
consumption.
 Financial Markets – Places where the
above activities take place
12
Indian Financial System – An Overview
PHASES
* Upto 1951 Pvt. Sector
* 1951 to 1990 Public Sector
* Early Nineties Privatisation
* Present Status Globalisation
13
2.3) EVOLUTION OF INDIAN FINANCIAL
SYSTEM
 The first phase concentrates on pre-1951 organization period.

Phase II is denoted from 1951 to 1990 period and Phase-III
concentrates on Post-1990 period.
 industrial financing organizations are the closed-circle character of
industrial entrepreneurship a semi organised and
 Narrow industrial securities market,
 absence of participation by intermediary financial institutions in the
long-tem financing of the industry.
 As a result, the industry had very restricted access to outside
savings.
 The act that industry had no easy access to the outside savings is
another way of saying that the financial system was not responsive
to opportunities for industrial investment.
14
Pre 1951
1. Control of Money Lenders

2. No Laws / Total Private Sector
3. No Regulatory Bodies
4. Hardly any industrialization
5. Banks – Traditional lenders for Trade and that too
short term
6. Main concentration on Traditional Agriculture
7. Narrow industrial securities market (i.e.
Gold/Bullion/Metal but largely linked to London Market)
8. Absence of intermediatary institutions in long-term
financing of industry
9. Industry had limited access to outside
saving/resources.
15
1951 to 1990
Moneylenders ruled till 1951. Banks not helped much .
Industries depended upon their own money. 1951
onwards 5 years PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR – MIXED
ECONOMY
1st 5 year PLAN in 1951 – Planned Economic Process.
As part of Alignment of Financial Systems – Priorities
laid down by Govt. – Policies.
MAIN Elements of Fin. Organisations
i. Public ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation in Corporate Management 16
v. Organisational Deficiencies.
second phase
 Ability of the system to supply finance and credit to

varied enterprises in diverse forms was greatly
strengthened during the second phase
 The introduction of planning had important implications

for the financial system.
 With the adoption of mixed economy as the pattern of

industrial development,--- complementary role was
conceived for the public and private sectors
17
Public ownership of financial
institutions:-
 progressive transfer of its important constituents
from private ownership to public control.
 Important segments of the financial mechanism

were assigned to the direct control of public
authorities through nationalization measures, as
well as through the creation of entirely new
institutions in the public sector.
18
NATIONALISATION:
 The nationalization of the Reserve bank of India (RBI) in 1948
marked the beginning of the transfer of the important financial
intermediaries to Governmental control.
 This was followed in 1956 by the setting up of the State bank of

India by taking over the imperial Bank of India.
 In the same year, 245 life insurance companies were

nationalized and merged in sate-owned monolithic life Insurance
Corporation of India (LIC).
 The year 1969 was a land mark in the history of public control of the
private financial intuitions, when fourteen major 14 commercial
banks were brought under the direct ownership of the Government
of India.

19
Nationalization
 Yet another measure, which deserves mention in this
connection, was the setting up of the General Insurance
Corporation (GIC) in 1972, as a result of the
nationalization of general insurance companies.
 Finally, six more commercial banks were brought
under the public ownership in 1980.
 In addition to nationalization, the control of public
authorities on the sources of credit and fiancé led to the
creation of battery of new intuitions in the public sector.
20
1951-1990
Nationalization
RBI 1948
SBI 1956 (take-over of Imperial Bank of India)
LIC 1956 (Merges of over 250 Life Insurance Companies)
Banks 1969 (14 major banks with Deposits of over Rs. 50
Crs.nationalised)
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National.
21
Industrial Finance Corporation of
India (IFCI)
 The setting up of the Industrial Finance Corporation of India (IFCI) in
1948 has given the beginning of the era of development banking in
India.
 The full potentialities of these institutions were realized only after
some experience in planning, which began in 1951
 IFCI was established to give medium and long term credit to
industrial enterprises in circumstances where normal banking
accommodation was inappropriate,
 Under the State Financial Corporations Act, 1951, as counter part
of the IFCI at the state level, regional institutions. State Financial
Corporations (SFCs), were organised to assist the small-medium
enterprise.
 These institutions, however, functioned purely as industrial
mortgage banks.
22
Industrial Credit and Investment
Corporation of India (ICICI)
Ltd/IDBI
 The establishment of the industrial Credit and Investment
Corporation of India (ICICI) Ltd, in 1955 represented a landmark in
the diversification of development banking in India,
 as it was a pioneer in many respects like underwriting of issues of
capital, chanelization of foreign currency loans from the World Bank
to private industry and so.
 The most important in the sphere of development banking in India
 took place in 1964, when the IDBI was established as a
subsidiary of the Reserve Bank of India.
 In 1971, with the functional reorientation of the development banks,
the Industrial Reconstruction Corporation of India (IRCI) Ltd was
jointly set up by the IDBI, banks and LIC to look after the
rehabilitation of sick mills. It was renamed as the industrial
Reconstruction Bank of India (IRBI) in 1984.
 It was converted into a full-fledged public financial institution (PFI) 23
and was renamed as the Industrial Investment Bank of India (IIBI) in
1951-1990
setting up of the Small Industrial

Development Bank of India (SIDBI) as a
subsidiary of the IDBI, for fostering the
development of small and medium
enterprises.
24
1951-1990
Development
• Directing the Capital in conformity with Planning priorities
• Encouragement to new entrepreneurs and small set-ups
• Development of Backward Region
• IFCI (1948)
• State Finance Corporation (1951) Purely Mortgage institution
• IDBI (1964) As subsidiary of RBI to provide Project / Term Finance
• ICICI (1966) Channelizing of Foreign Currency Loan from World
Bank to Pvt. Sector and underwriting of Capital issues.
• SIDC’s & SIIC State Level Corporations for SME sector
• UTI (1964) to enable small investors to share Industrial Growth
• IRCI(Industrial Reconstruction Corporation of India (IRCI) Ltd
(1971) to take care of rehabilitation of sick-mills promoted by IDBI,
Banks & LIC-Name changed to IIBI in 1997
25
POST 1990s
IMPORTANT DEVELOPMENTS
Development Financial Institutions : (DFIs)

• Started providing Working Capital also
• Set up CREDIT RATING AGENCIES
CRISIL(IPO IN 1993-94; standard & poor acquires 9.68% in 1996-97 S & P
acquires shares / holding up to 58.46%)
ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And
Moody’s CARE Set-up by IFCI/Banks.
FITCH a 100% subsidiary of FITCH Group.
• Privatisation of DFI
Reduction in Govt. holding & Public Participation e.g. IFCI Ltd., IDBI Ltd.,
ICICI Ltd.
• Conversion into Banking / Merger into Banking Companies IDBI Bank &
ICICI Bank
• Issuance of Bond by DFIs without Govt.’s Guarantees to mobilize resources.
• Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing

26
POST 1990
INDUSTRIES
• Rise & Growth of Service Sector industries.
• Reliance & Dependence on technology.
• E-mail & mobile made sea-change in communication, data collection etc.
• Computerization – a catch phrase and inevitable need of an hour.
• Dependent on Capital Market rather than only Debts dependency.
• Scalability of operations through globally competitive size.
• Broad basing of Board.
• Professional Management.
NBFC
• NBFC under RBI governance to finance retail assets and mobilize
small/medium sized savings.
• Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata
Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.
27
POST 1990
 Commercial Bank
 Mutual Funds
 Capital Market
 Secondary Market
 Money Market
28
Indian
Financial
System
Formal Informal
(organized (Unorganized
Financial financial
system) system)
Regulators; Financial Money lenders,

Financial Financial Financial
MoF, SEBI, Institutions Local bankers,
Markets Instrument Services
RBI, IRDA (Intermediaries) Traders
29
STRUCTURE OF FINANCIAL MARKETS REGULATORS
IN INDIA
Financial Markets in India
Debt Market Forex Capital Market Insurance Banks (including Mutual Funds,
Primary / Market Primary / Life/General RRBs, co-op etc) Venture Funds,
Secondary Secondary & Investment
Depository Bonds
RBI RBI SEBI IRDA RBI RBI/SEBI
REGULATORY AUTHORITY
30
Indian Financial system
Regional rural bank

Classification of Banks
 Central Bank- Reserve Bank of India (RBI)

 To Control other Banks & Economy
 Commercial Banks (CB) To accept Deposit & Lend to Individual &
Corporate Clients e.g. ICICI Bank
 Industrial & Development Banks To accept Deposit & Lend major
focus is on Industrial Development
 Co-operative Banks :Similar to CB’s except they have to abide by
different laws & they are generally smaller in operation & size.
e.g. TJSB
 International Banks :Similar to CB’s only difference big nation of
origin. e.g. Citi Bank
Merchant Banks – e.g. Goldman Sachs, Morgan Stanley
modern merchant banks offer a wide range of activities: issue
management, portfolio management, credit syndication , acceptance
credit, counsel on mergers &acquisitions, insurance, etc.
Difference between NBFCs & Banks
NBFCs perform functions similar to that of banks but there are a few
differences-
Provides Banking services to People without holding a Bank license,
An NBFC cannot accept Demand Deposits,
An NBFC is not a part of the payment and settlement system and as such,
An NBFC cannot issue Cheques drawn on itself, and Deposit insurance

facility of the Deposit Insurance and Credit Guarantee Corporation is not
available for NBFC depositors,
An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-

Purchase, Construction of Immovable Property
33
Foreign Investment allowed up to 100%.
34
Investment Banking Services
Capital Sales & Asset

Corporate Markets Trading Management
Finance
 Capital Raising  Equity  Wealth

 Mergers &
(IPO, FCCB, Research Management
Acquisition
Rights Issue , for HNI
(Cross
ADR/GDR, QIP)  Trading &
Border,
Brokerage for  Managed
Domestic &
 FCCB/Debt Indian / Foreign Funds
Distressed
Restructuring funds ((including
Assets)
(Proprietary, arbitrage)
Debt Institutional,
 Private
Syndication Stocks, F&O)  Debt Market
Equity
(ECB/Rupee Loan Trading
Syndication
/ Promoter  Debt Market
Financing Trading
DRs (Depositary Receipts)
A depository receipt is a negotiable financial instrument issued by a bank to
represent a foreign company's publicly traded securities.
The depositary receipt trades on a local stock exchange , such as the new
York Stock Exchange in the U.S., but represents an interest in a company
that is headquartered outside of the United States.
A depositary receipt traded in Germany would represent a non-German

company.
An ADR is a negotiable certificate issued by a U.S. bank representing a
specified number of shares in a foreign (i.e. non-U.S.) stock that is traded on
a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying
security held by a U.S. financial institution overseas. ADRs help to reduce
administration and duty costs that would otherwise be levied on each
transaction
36
Syndication and foreign currency convertible bond
(FCCB
A temporary group of investment banks and broker-dealers who come

together to sell new offerings of equity or debt securities to investors.
The underwriter syndicate is formed and led by the lead underwriter for a
security issue.
An underwriter syndicate is usually formed when an issue is too large for
a single firm to handle. The syndicate is compensated by the underwriting
spread, which is the difference between the price paid to the issuer and
the price received from investors and other broker-dealers.
A foreign currency convertible bond (FCCB) is a type of convertible bond

issued in a currency
I e. the money being raised by the issuing company is in the form of a
foreign currency.
A convertible bond is a mix between a debt and equity instrument. It acts
like a bond by making regular coupon and principal payments, but these
bonds also give the bondholder the option to convert the bond into stock 37
External commercial borrowing (ECBs) are loans in India made by non-resident
lenders in foreign currency to Indian borrowers.
They are used widely in India to facilitate access to foreign money by Indian
corporations and PSUs
ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised
instruments such as floating rate notes and fixed rate bonds etc., credit from official
export credit agencies and commercial borrowings from the private sector window
of multilateral financial institutions
ECBs cannot be used for investment in stock market or speculation in real estate.
The DEA (Department of Economic Affairs), Ministry of Finance, Government of
India along with RBI , monitors and regulates ECB guidelines and policies.
Most of these loans are provided by foreign commercial banks and other
institutions.
Contribution of ECBs was between 20 to 35 percent of the total capital flows into
India. Large number of Indian corporate and PSUs have used the ECBs as sources
of investment.
38
Formal and Informal Financial
System
 The financial systems of most developing
countries are characterized by co-existence and
co-operation between the formal and informal
financial sectors.
 The formal financial sector is characterized by
the presence of an organized, institutional and
regulated system which caters to the financial
needs of the modern spheres of economy.
 The informal financial sector is an
unorganized, non-institutional and non-regulated
system dealing with traditional and rural spheres
of the economy.
39
Component of Formal Financial
System
Regulators
Financial Institutions
Financial Markets
Financial Instruments
Financial Services
40
Regulators
The formal financial system comes under

the regulations of the ministry of finance
(MOF), reserve Bank of India (RBI),
Securities and Exchange board of India
(SEBI) and other regulatory bodies.
41
Financial Institutions
Financial
Institutions
(Intermediaries)
Insurance
Banking Non-Banking and
Mutual Funds
Institutions Institutions Housing
Finance companies
Public sector Private Sector
42
Financial
Instruments
Primary Secondary

Preference MF units
43
Financial Markets
Financial
Markets
Money Market
Capital Market

Primary Segment
Rights Issue
Secondary Segment
Secondary
44
Foreign Institutional Investor
 Is an investor or an investment fund registered in
a country outside of one in which it is investing.
 Institutional investors mostly include MF,
Pension Funds, hedge funds and Insurance
companies
 For eg: Mutual fund in US sees an investment
opportunity in an Indian based company it can
purchase an equity on Indian public exchange
and can take long position in high growth
potential
45
Foreign Institutional Investor(fII)
 Investment through capital markets i.e. Investment in
foreign stock market
 Is an investor or an investment fund ,firm registered in a
country outside of one in which it is investing.
 Institutional investors mostly include MF, Pension Funds,
hedge funds and Insurance companies
 For eg: Mutual fund in US sees an investment
opportunity in an Indian based company it can purchase
an equity on Indian public exchange and can take long
position in high growth potential
 More fluctuations in foreign markets because of FII
taking out their money /pouring money
46
 Can not buy more than 10% ,Can not buy FCD
Foreign direct investment(FDI)
 Foreign firm wants to invest in India and chooses to do it by setting
up a company branch office in India investment in foreign company
for control
 Can be in various sectors like electricity road,
healthcare,factory,insurance
 If FDI is not allowed 100% then they tie up with their Indian
counterparts and start .
 ICICI Lombard, Bharti –AXA ,PNB Meltife
 FDI—IBM India subsidiary of IBM
 FDI can buy 49%shares of insurance companies and 74%shares in
private banks20%in public sector banks,print media 20%others 10%
 FDI company has to take permission from government for buying
FCD
47
Foreign direct investment(FDI)
Foreign Institutional Investor(fII)
 Foreign company/foreign exchange
 Long term/short term
 Entry and exit difficult
 Transfer of funds technology, resources
strategies, from developed to developing
countries/only fund transfer
 Play role in economic development of country/no
role
 Power control/no power control
 Increase in gdp/increase in capital 48
Financial Institutions Role PROMOTING SAVINGS
MOBILISING SAVINGS
CREATING CREDIT
INSTITUTIONS
FRANCHISING
ACCELERATING ECONOMIC DEVELOPMENT

49
Finance is a prerequisite for modern
business and financial institutions play a
vital role in economic system. It's through
financial markets the financial system of
an economy works.
 The main functions of financial markets are:
 To facilitate creation and allocation of credit and
liquidity;
 To serve as intermediaries for mobilization of
savings;
 To assist process of balanced economic growth;
 To provide financial convenience
50
SEBI- Regulation of Mutual Funds
in India
Dipti Periwal
17/12/2021
Inception of Mutual Fund in India
• In the year 1963, the industry of mutual funds was
established with the development of the Unit Trust
of India (UTI), an initiative of the Indian
government and the Reserve Bank of India.
• Later in the year 1987, the first NON-UTI mutual
fund launched in India was the SBI Mutual Fund.
The year 1993 was marked as a new era in this
industry of mutual funds with the entry of private
companies.
• It was 1996 when the SEBI Mutual Fund
Regulations came into existence after the passing of
the Securities and Exchange Board of India (SEBI)
Act of 1992.
Regulation of Mutual Funds in India
Regulation of Mutual Funds in India
• Mutual funds in India are regulated by the Securities
and Exchange Board of India (SEBI) primarily.
• They are governed by the Securities Exchange
Board of India (Mutual Fund) Regulations 1996,
except for Unit Trust of India (UTI).
• UTI was formed by the UTI Act passed by the
Parliament of India. All mutual funds must be
registered with SEBI.
• Besides SEBI, mutual funds are regulated by RBI,
Indian Companies Act 1956, Stock exchange, Indian
Trust Act, 1882 and Ministry of Finance.
AMFI - The Association of Mutual Funds
in India
• As the industry developed, there was a necessity to
promote healthy and ethical marketing practices
and maintain standards in all areas in the mutual
fund industry of India with a view to protect and
promote the interests of mutual funds and their unit
holders.
• The Association of Mutual Funds in India (AMFI), a
non-profit organization, was formed with this
objective in 1995.
• The certificate of AMFI made mandatory by SEBI
for all those who are engaged in marketing mutual
fund products.
Structure of mutual fund in India
• Mutual Funds in India primarily have a 3-tier

structure i.e. Sponsor (1st tier), Public Trust (2nd tier)
and Asset Management Company (3rd tier).
• Sponsor is any person who himself or in association
with another corporate, establishes a mutual fund.
The Sponsor seeks approval from the Securities &
Exchange Board of India (SEBI).
• Once SEBI approves it, the sponsor creates the
Public Trust as per the Indian Trusts Act, 1882.
Since Trusts have no legal identity in India, the
Trust itself cannot enter into contracts.
• Thus, Trustees are appointed who are authorized
to act on behalf of the Trust.
• The instrument of trust must be in the form of a
deed between the Sponsor and the trustees of
the mutual fund registered under the provisions
of the Indian Registration Act.
• The Trust is then registered with SEBI leading to
formation of mutual fund.
• Henceforth, the Trust is known as mutual fund.
Sponsor and the Trust are two separate entities.
• The fund has 5 crs of outstanding units
Important steps taken by SEBI for the
regulation of mutual funds are listed
below:
• Formation:
• Registration:
• Documents:
• Code of advertisement:
• Assurance on returns:
• Minimum corpus:
• Institutionalization:
• Investment of funds mobilized:
• Investment in money market:
• Valuation of investment:
• Inspection:
• Underwriting:
• Conduct:
• Voting rights:
Source -
https://www.yourarticlelibrary.com/econom
ics/14-important-steps-taken-by-sebi-for-
regulating-mutual-funds-in-india/1335
REGISTRATION OF MUTUAL FUND
• An application for registration of a mutual fund

shall be made to the Board in Form A by the
sponsor.
• Application fee to accompany the application-
Every application for registration under
regulation 3 shall be accompanied by
nonrefundable application fee as specified in the
Second Schedule
• Application to conform to the requirements - An
application, which is not complete in all respects
shall be liable to be rejected: Provided that,
before rejecting any such application, the
applicant shall be given an opportunity to
complete such formalities within such time as
may be specified by the Board.
• Furnishing information - . The Board may
require the sponsor to furnish such further
information or clarification as may be required
by it.
• Eligibility criteria - For the purpose of grant of a
certificate of registration, the applicant has to
fulfill the following, namely—
(a) the sponsor should have a sound track record and general
reputation of fairness and integrity in all his business
transactions.
(b) Explanation: For the purposes of this clause ―sound track
record shall mean the sponsor should—
(i) be carrying on business in financial services for a period of not
less than five years; and
(ii) the net worth is positive in all the immediately preceding five
years; and
(iii) the net worth in the immediately preceding year is more
than the capital contribution of the sponsor in the asset
management company; and
(iv) the sponsor has profits after providing for depreciation,
interest and tax in three out of the immediately preceding
five years, including the fifth year.
• (b) in the case of an existing mutual fund, such fund
is in the form of a trust and the trust deed has been
approved by the Board;
• (c) the sponsor has contributed or contributes at
least 40% to the net worth of the asset management
company: Provided that any person who holds 40%
or more of the net worth of an asset management
company shall be deemed to be a sponsor and will
be required to fulfill the eligibility criteria specified
in these regulations;
• (d) the sponsor or any of its directors or the
principal officer to be employed by the mutual fund
should not have been guilty of fraud or has not been
convicted of an offence involving moral turpitude or
has not been found guilty of any economic offence;
• (e) appointment of trustees to act as trustees for the
mutual fund in accordance with the provisions of the
regulations;
• (f) appointment of asset management company to
manage the mutual fund and operate the scheme of
such funds in accordance with the provisions of
these regulations
• appointment of custodian in order to keep
custody of the securities or gold and gold related
instrument or other assets of the mutual fund
held in terms of these regulations, and provide
such other custodial services as may be
authorised by the trustees.
Criteria for fit and proper person - .For the
purpose of determining whether an applicant or
the mutual funds is fit and proper person the
Board may take into account the criteria
specified in schedule II of the Securities and
Exchange Board of India (Intermediaries)
Regulations,2008.]
• Consideration of application - The Board, may
on receipt of all information decide the
application.
• Grant of Certificate of Registration - The Board

may register the mutual fund and grant a
certificate in Form B on the applicant paying the
registration fee as specified in Second Schedule.
Restrictions on business activities of
the asset management company
• The asset management company shall, - (a) not act
as a trustee of any mutual fund;
• (b) not undertake any business activities other than
in the nature of management and advisory services
provided to pooled assets including offshore funds,
insurance funds, pension funds, provident funds,
49[or Category I foreign portfolio investor as
specified in Securities and Exchange Board of India
(Foreign Portfolio Investors) Regulations, 2014], if
any of such activities are not in conflict with the
activities of the mutual fund:
• Provided that the asset management company
may itself or through its subsidiaries undertake
such activities, as permitted under clause (b), if,
- (i) it satisfies the Board that bank and
securities accounts are segregated activity wise;
STOCK EXCHANGE
Dr.Smita Jape
Sensex
Industrial securities Market
• 1) New Issue Market
• 2) Stock Exchange
Functional Difference :-New securities issues for
first time for public subscription /Ready market for
existing securities
Organisational difference :-No tangible form or
oraganisational administrative set up /place of
existence physical where dealers meet regularly
Contribution to industrial finance :-Funds for
starting new enterprise or expansion extension /
Provides marketability to shares
Functions of New Issue Market:
• Transfer funds from savers(individuals, commercial banks,
insurance companies) to users(Public ltd Companies and
government
• 1)Origination(a)Careful study of technical, economic and
financial viability of project
• B)Advisory services:-type of issue/time of floating an
issue/methods of issue/types/pricing
• 2) underwriting (Standing behind issue/outright
purchase/consortium method
• (Can be of 2types
• Institutional (LIC,UTI,IDBI,ICICI,GIC, Commercial banks)
• Non institutional :- Brokers
• 3) Distribution:-sale of securities to investors
Definition:
• The Securities Contracts
(Regulation) Act, 1956, has
defined Stock Exchange as an
“association, organization or
Body of Individuals, whether
incorporated or not,
established for the purpose
of assisting, regulating and
controlling business of
buying, selling and dealing in
securities.”
WHAT IS STOCK EXCHANGE?
This comes under treasury sector ,which provides service to stock

brokers & traders to trade stocks ,bonds and securities.
Stock exchanges helps the companies to raise their fund.

Therefore the companies needs to list themselves in the Stock
Exchange and the shares will be issued which is known as equity or
a ordinary share .
shareholders are the real owners of the company
Board Of Directors of the Company are elected out of these Equity
Shareholders only.
FEATURES OF STOCK EXCHANGE
 It is an organized market
 It is a securities market
 It is an important constituent of capital market i.e., market for long-
term finance
 It is a voluntary association of persons desirous of dealing in securities
 In a stock exchange, only the members can deal in i.e., buy & sell
securities
 The members of a stock exchange can buy and sell securities either as
brokers for & on behalf of their clients
 The dealings in a stock exchange are under certain accepted code of
conduct i.e., rules and regulations
FUNCTIONs OF STOCK EXCHANGE
 Provide central and convenient meeting places for sellers and buyer of
securities
 Increase the marketability and liquidity of securities
 Contribute to stability of prices of securities
 Equalization of price of securities
 Help the investors to know the worth of their holdings
 Promote the habit of saving and investment
 Help capital formation
 Help companies and government to raise funds from the investors
 Provide hedging / forecasting service
Issues
• Price Riggng: Artificial manipulation of securities by forming cartels
of Bulls and Bears
• A bull market is a financial market of a group of securities in which
prices are rising or are expected to rise. The term "bull market" is
most often used to refer to the stock market but can be applied to
anything that is traded, such as bonds, currencies and
commodities.
• Insider Trading :-
Excessive speculation:-
• Short selling:- selling of scrip's without owning them by bear cartels
with the anticipation that these shares could be purchased at much
lesser prices in future .This creates extreme volatility in the market
• cartel is a collection of otherwise independent businesses or

countries that act together as if they were a single producer and
thus are able to fix prices for the goods they produce and the
services they render without competition.
HISTORY OF STOCK EXCHANGE
The stock exchange was established by “East India

company” in 18th century . In India it was established
in 1850 with 22 stock brokers opposite to town hall
Bombay .This stock exchange is known as oldest stock
exchange of Asia.
Initial members who are
still running their business
in stock exchange are
D.S.Prabhudas &company
Jamnadas Morarjee
Champak lal Devidas
Brijmohan Laxminarayan
History Of Stock Exchanges in India
• It all started in 1875, when 318
persons came together to form
“Native Shares and Stock Brokers
Association” and the membership
fee was Re.1.00.
This association is now known as the

Bombay Stock Exchange (BSE) and in
1965.
• National Stock Exchange (NSE) is
the second popular stock market of
India.
• Sensex or the 30 stock sensitive
index was first compiled in 1986.
Nifty is the stock sensitive index for
NSE.
Bombay Stock Exchange Limited
• BSE is the oldest stock exchange
in Asia with a rich heritage of
over 163 years of existence.
• BSE is the first stock exchange in

the country which obtained
permanent recognition (in 1956)
from the Government of India
under the Securities Contracts
(Regulation) Act (SCRA), 1956.
• BSE’s pivotal and pre-eminent

role in the development of the
Indian capital market is widely
recognized.
The National Stock Exchange
•
(NSE) (Rashtriya Share Bazaar) is

National Stock Exchange
stock exchange located at
Mumbai, India.
• NSE has a market capitalization
of around US$2.27 trillion and
over 1952 covering volume of 442
Billion listings as of 2018
• accounts for only 4% of GDP
• The NSE's key index is the S&P
CNX Nifty, known as the NSE
NIFTY (National Stock Exchange
Fifty), an index of fifty companies
and major stocks weighted by
market capitalisation.
National Stock Exchange Limited
It is the 9th largest stock exchange in the world by market
capitalization and
 largest in India by daily turnover and number of trades, for both
equities and derivative trading.
 Though a number of other exchanges exist, NSE and
the Bombay Stock Exchange are the two most significant stock
exchanges in India, and are responsible for the vast majority of
share transactions.
The NSE's key index is the S&P CNX Nifty, known as the
NSE NIFTY (National Stock Exchange Fifty), an index of fifty major
stocks weighted by market capitalization.
NSE is mutually-owned by a set of leading financial institutions,

banks, insurance companies and other financial intermediaries in
India but its ownership and management operate as separate
entities.
NATIONAL STOCK
EXCHANGE OF INDIA(NSE
OR NSEI)
The NSE of India is the leading stock
exchange of India, covering 370 cities and
towns in the
country. It was established in1994 as a TAX
company. It was established by 21 leading
financial institutions and banks like the
IDBI,ICICI,IFCI,LIC,SBI,etc.
Features of NSEI
Nation wide coverage i.e., investors from all over country
Ringless i.e., it has no ring or trading floor
Screen-based trading i.e., trading in this stock exchange is done electronically.
Transparency,i.e.,the use of computer screen for trading makes the dealings in
securities transparent.
Professionalization in trading, i.e., it brings professionalism in its functions
OVER-THE-COUNTER EXCHANGE
OF INDIA(OTCEI)
The OTCEI is a national,ringless and computerized stock
exchange. It was established in october,1990.it started its
operation in september,1992.
Features of OTCEI
1. It is a nation-wide stock exchange. Its operational areas cover entire India.
2. It is a ringless stock exchange. The trading ring(i.e., trading place)commonly found in a
traditional stock exchange is not found in the OTCEI.
3. It is a computerized stock exchange
Advantages of OTCEI
1. It helps the investors to have easy and direct access to the stock exchange
2. It helps investors to get fair prices for their securities
3. It provide safety to the investors
4. To provide computerized trading system
5. To provide investors a convenient,effcient and transparent mode of
investment
SECURITIES AND EXCHANGE
BOARD OF INDIA(SEBI)
The SEBI was constituted on 12th April,1988 under a
resolution of the Government of India. On 31st
january,1992,it was made a statutory body by the
Securities and Exchange board of India Act,1992.
The Companies (Amendment) Act,2000 has given certain
powers to SEBI as regards the issues and transfer of
securities and non-payment of dividend
Function Of SEBI
Regulating the business in stock exchange and any other securities
markets.
Promoting and regulating self-regulatory organization.
Registering and regulating the work of collective investment
scheme,incluing mutual funds.
Prohibiting fraudulent and unfair trade practices relating to
securities market.
Promoting education, and training of intermediaries of securities
market
Power of SEBI
Power to approve the bye-laws of stock exchange
Power to inspect the books of accounts
Power to grant license to any person for the purpose of dealing in certain areas.
Power to delegate powers exercisable by it.
Power to try directly the foliation of certain provision of the company Act
BROKER AND JOBBER
 BROKER: He is one acts as a intermidiary on behalf
of others. A broker in a stock exchange ,is a
commission agent who transacts business in securities
on behalf of non members.
 He is member of recognized stock exchange who is
permitted to do trades on screen based trading system
of different stock exchanges
 JOBBER: He is not allowed to deal with the public
directly .He deals with brokers who are engaged with
the investors . Thus, the securities are bought by the
jobber from members and sells to members who are
operating on the stock exchange as broker.
DIFFERENCES BETWEEN A JOBBER AND A BROKER
JOBBER BROKER
 A jobber is an independent  A broker deals with the jobber
dealer in securities, purchasing on behalf of his clients. in other
or selling securities on his own words, a broker is a middleman
account between a jobber and clients
 A jobber deals only with the  A broker is merely an agent,
brokers ,does not deal with the buying or selling securities on
general public behalf of his clients
 A jobber earns profit from his  A broker gets only commission
operations i.e., buying and for his dealings
selling activities  The broker deals in all types of
 Each jobber specializes in certain securities
group of securities
SPECULATION AND SPECULATOR
 SPECULATION : It is the transaction of members to
buy or sell securities on stock exchange with a view to
make profits to anticipated raise or fall in price of
securities.
 SPECULATOR : The dealer in stock exchange who
indulge in speculation are called speculator . They do not
take delivery of securities purchased or sold by them , but
only pay or rescue the difference between the purchase
price and sale price . The different types of speculators are
BULL
BEAR
STAG
LAME DUCK
BULL {TEJIWALA}
He is speculator who expects the future raise in price of

securities he buys the securities to sell them at future date
at the higher price.
He is called as bull because his activities resembles as a bull ,
as the bull tends to throw its victims up in the air through its
horns. In simple the bull speculator tries to raise the price of
securities by placing a big purchase orders.
BEAR {MANDIWALA}
He is speculator who
expects future fall in prices
he does an agreement to
sell securities at future
date at the present market
rate .
He is called as bear because
his altitude resembles with
bear , as the bear tends to
stamp its victims down to
earth through its paws . In
simple the bear speculator
forces of prices of
securities to fall through
his activities.
Bear market examples
• Bear markets are quite common. Since 1900, there have been 33 of them,
so they occur every 3.6 years on average. Just to name the three most
recent notable examples:
• 2000-2002 dot-com crash: Growing use of the internet in the late 1990s
led to a massive speculative bubble in technology stocks. While all major
indices fell into bear market territory after the bubble burst, the Nasdaq was
hit especially hard: By late 2002, it had fallen by about 75% from its
previous highs.
• 2008-2009 financial crisis: Due to a wave of subprime mortgage lending
and the subsequent packaging of these loans into investable securities, a
financial crisis spread across the globe in 2008. Many banks failed, and
massive bailouts were required to prevent the U.S. banking system from
collapsing. By its March 2009 lows, the S&P 500 had fallen by more than
50% from its previous highs.
• 2020 COVID-19 crash: The 2020 bear market was triggered by the COVID-
19 pandemic spreading across the world and causing economic shutdowns
in most developed countries, including the U.S. Because of the speed at
which economic uncertainty spread, the stock market's plunge into a bear
market in early 2020 was the most rapid in history.
STAG {DEER}
He operates in new issue
of market . He is just like a
bull speculator . He applies
large number of shares in
the issue market only by
paying , application money
, allotment money. He is
not a genuine investor
because , he sells the
alloted securities at the
premium and makes profit.
In simple he is cautious in
his dealings . He creates an
artificial rise in prices of
new shares and makes
profits.
LAME DUCK
He is speculator when the
bear operator finds it
difficult to deliver the
securities to the consumer
on a particular day as
agreed upon , he struggles
as a lame duck in fullfilling
his commitment . This
happens when the prices
do not fall as expected by
the bear and the other
party is not willing to
postpone the settlement to
the next period.
Largest stock exchanges
IN THE WORLD IN INDIA
 LONDON STOCK EXCHANGE  NATIONAL STOCK EXCHANGE
 NEW YORK STOCK EXCHANGE  BOMBAY STOCK EXCHANGE
 SHANHAI STOCK EXCHANGE  CALCUTTA STOCK EXCHANGE
 AUSTRALIA STOCK EXCHANGE  COCHIN STOCK EXCHANGE
 TOKYO STOCK EXCHANGE  MULTI COMMODITY
 HONG KONG STOCK EXCHANGE
EXCHANGE  DERIVATIVES EXCHANGE
 TORONTO STOCK EXCHANGE  OTC EXCHANGE
 DEUTSCHE BORSE  PUNE STOCK EXCHANGE
 NASDAQ OMX STOCK  INTERCONNECTS EXCHANGE
EXCHANGE
Methods of buying/selling of stocks
Following are the types of orders which are used for buying and selling of stocks.
Market Order - When you put buy or sell price at market rate then the price get
executes at the current rate of market.
Limit Order -
It’s totally different to market order. In limit order the buying or selling price has
to be mentioned and when the stock price comes to that price then your order
will get executed with the mentioned price by you.
Stop Loss Trigger Price-

Stop loss and trigger price are used to reduce the losses.
This is very important term especially if you are doing day trading (intraday).
Stop Loss as the name indicates this is used to reduce the loss.
Rules for margin trading
Easiest way to earn money without investing a huge amount,

Corporate brokers with net worth of at least Rs 3 crore only
can provide margin trading facility to their clients with an
agreement
 Facility for group 1 securities offered through IPO
 Client should not get this facility from more than 1 brokers
 Margin trading facilty should not be more than amount

borrowed and should not exceed 50% of his net worth
 Exposure to single (one client) not more than 10% to total
exposure
Initial margin 50% and maitainence margin 40%
For margin trading facility broker may use his own funds or get
amount from NBFC or scheduled commercial banks
Buying Stocks on Margin
Stocks or securities which you buy act as the collateral.

Need to pay the margin amount, which is a percentage of
the total value of the order and the minimum margin
while opening the margin account.
Based on the credit repayability, the minimum margin

and maintenance margin values are decided.
value of stocks falls below a minimum margin, the

broker would ask to maintain the minimum balance of
your margin account.
You could do this by depositing additional cash or by
selling the securities to compensate the amount.
Group A ,group B 1 and Group B Shares
Group A--- Shares represent large and well
established company having broad investor base
and attract lot of speculative multiples
Group A– Conditions as per BSE ---
Equity base Rs 10 Cr.
Market capitalisation of Rs 25 to 30 Crore
Public holding of 35-40%
Shareholding population of 15000-20000
Dividend paid
B1---Well traded among B Group ---weekly
settlement
C---Odd Lots(less than market lot))---listed on other
stock exchanges
Fortnight settlement
clearing:
The procedure --- clearing house becomes the buyer to each seller of a
futures contract and the seller to each buyer,
and assumes the responsibility of ensuring that each buyer and seller
performs on each contract.
Clearing is a fundamental benefit in the futures markets.
Long before a trade is cleared through a clearing house, clearing firms check the
financial strength of both parties to the trade, whether they’re a big institution
or an individual trader.
They also provide access to trading platforms, where the buyer and seller agree
on the price, quantity and maturity of the contract.
Then, when the contract is cleared by matching these offsetting (one buy, one
sell) positions together, the clearing house guarantees that both buyer and
seller get paid.
This offsetting or “netting” process takes risk out of the financial system as a
whole.
Future/Forward
What is a 'Clearing House'
Intermediary between buyers and sellers of financial instruments.
an agency or separate corporation of a futures exchange responsible
1)for setting trading accounts ,
2)clearing trades, 3)collecting and maintaining margin money,4) regulating delivery,
and 5) reporting trading data.
It acts as third parties to all futures and options contracts , as buyers to every
clearing member seller, and as sellers to every clearing member buyer.
A clearing house takes the opposite position of each side of a trade.
When two investors agree to the terms of a financial transaction, such as the
purchase or sale of a security, a clearing house acts as the middle man on behalf of
both parties.
The purpose of a clearing house, is to improve the efficiency of the markets and add
stability to the financial system.
Functions Broker-Dealer
Providing investment advice to customers,

Supplying liquidity through market-making activities,
Facilitating trading activities,
Publishing investment research and
Raising capital for companies.
Broker-dealers may range in size from small independent to

large subsidiaries of giant commercial and investment banks
The Multiple Roles of a Broker-Dealer

By definition, broker-dealers are buyers and sellers of securities,
and they are also distributors of other investment products.
Perform a dual role in carrying out their responsibilities.
As dealers, they act on behalf of the brokerage firm, initiating
transactions for the firm’s own account.
As brokers, they handle transactions, buying and selling securities on
behalf of their clients.
In their dual roles ,they facilitate the free flow of securities on the open
market, and they buy or sell securities in their own accounts to ensure
there is a market in those securities for their clients.
earning a fee on either or both sides of a securities transaction.
broker-dealers that are tied directly to an investment banking operation

engage in the underwriting of securities offerings.
When a broker-dealer acts as an agent of the issuing company, either as a

principal underwriter of the stock or bond offering, or as a member of
the underwriting syndicate,
they enter into a contractual arrangement, acting on a “firm
commitment” with the issuer that obligates them to distribute a certain
amount of the securities offering to the public in exchange for an
underwriting fee. They may also acquire a piece of the securities offering
for their own
How to see the value of
shares in stock exchange
SENSEX is an indicator to checkout in
BSE
NIFTY is an indicator to checkout in NSE
Latest news of BSE and NSE
Most profitable company in BSE is
RELIANCE,TCS,HDFC
Public Sector –IOC,ONGC
Most profitable company in NSE --RELIANCE and
ICICI
During last three months nearly only 26% of
profit is earned by our stock exchanges
Working hours --9:30 to 3:30 Monday to
Friday
The Daily graph of the
companies will be showed in
following manner
How stock exchanges get
money
They get their money by listing fees
paid by the corporation to have their
company traded
HOW TO DEAL AND INVEST IN
STOCK EXCHANGE
In order to deal with a securities one as to have an
account called Demat a/c or Trading a/c.
It is just like a bank account. Same procedure of
opening the bank account is followed to open the a/c.
But all the banks does not give this facility of opening
the account , only few banks provide this facility. After
demat a/c or Trading a/s is opened then the securities
is bought and sold. The banks which gives facility of
demat a/c in India is
 ICICI Bank
 Citi Bank
 Bank of Baroda
Major Stock Exchanges:
• New York Stock Exchange (NYSE- USA)

• Toronto Stock Exchange (Canada)
• Amsterdam Stock Exchange
• London Stock Exchange
• Singapore Exchange
• Tokyo Stock Exchange
• Hong Kong Stock Exchange
• Bombay Stock Exchange (BSE- India)
On 8 July 2015, Sucheta Dalal wrote an article on Moneylife alleging that
some NSE employees were leaking sensitive data related to high-
frequency trading or co-location servers to a select set of market
participants so that they could trade faster than their competitors. NSE
alleged defamation in the article by Moneycontrol.
On 22 July 2015, NSE filed a ₹1 billion (US$14 million) suit against

Moneycontrol.[23] However, on 9 September 2015, the Bombay High
Court dismissed the case and fined NSE ₹5 million (US$70,000) in this
defamation case against Moneycontrol (www.moneylife.in).[24] The High
Court asked NSE to pay ₹150,000 (US$2,100) to each journalist
Debashis Basu and Sucheta Dalal and the remaining ₹4.7
million (US$66,000) to two hospitals.
The Bombay High Court has stayed the order on costs for a period of two
weeks, pending the hearing of the appeal filed by NSE.[25]
In May 2019 SEBI has debarred NSE from accessing the markets for a period of 6
months. While NSE confirmed this will not impact their functioning, they won't be
able to list their IPO or introduce any new trading products for that period.
Additionally, the watchdog also ordered NSE to disgorge Rs 624.9 crores (along
with accrued interest for the period), an amount equivalent to the profits it made
from the unfair trade practice of co-location servers they provided during the period
from 2010–11 to 2013–14.
The board also passed orders against 16 individuals including former managing
directors and CEOs Ravi Narain and Chitra Ramakrishna ordering them to disgorge
25% of their salaries during that period along with interest. All money is to be paid
into the Investor protection and education fund. These individuals have also been
debarred from the markets or holding any position in a listed company for a period
of five years.[26]
LONDON STOCK EXCHANGE
It was the first stock exchange established by
east India company in 18th century in London.
The top gainer of LONDON STOCK EXCHANGE
is “Blue chip shares”.
New York StockExchange (NYSE – USA)
The New York Stock Exchange (NYSE), sometimes known as the "Big

Board", is anAmerican stock exchange located at 11 wall street, Lower

Manhattan, New York City, USA.
It is by far the world's largest stock exchange by market capitalization
of its listed companies at US$16.6 trillion as of February2016.
The NYSE is owned by Intercontinental Exchange, an American

holding company it also lists.

The NYSE has been the subject of several lawsuits regarding fraud or

breach ofdutyand was sued by its former CEO for breach of contract
and defamation.
Continue…..
The NYSE is owned by Intercontinental Exchange, an American


holding company it also lists (NYSE).

NYSE and Euronext now operate as divisions of

IntercontinentalExchange.
The NYSE's opening and closing bells mark the beginning and the end

of each trading day.

'Opening Bell' Is Rung At 9:30 AM, At 4 PM ET The 'Closing Bell' Is

Rung And Trading For The Day Stops.

London Stock Exchange
The London Stock Exchange is a stock exchange
located in the City of London in the United
Kingdom.
As of December 2014, the Exchange had a market
capitalization of US$6.37 trillion (short scale),
making it the fifth-largest stock exchange in the
world by this measurement (and the second-largest
in Europe, after Euronext).
The Exchange was founded in 1801 .
The Exchange is part of the London Stock Exchange
Group.
Continue…..
Issuer services help companies from around the world to join the
London equity market in order to gain access to capital.
The LSE allows company to raise money, increase their profile and
obtain a market valuation through a variety of routes, thus following the
firms throughout the whole IPO process.
The London Stock Exchange runs several markets for listing, giving an
opportunity for different sized companies to list.
In terms of smaller SME’s the Stock Exchange operates the Alternative
Investment Market (AIM). For international companies that fall outside of
the EU, it operates the Depository Receipt (DR) scheme as a way of
listing and raising capital.
Professional Securities Market This market

facilitates the raising of capital through the issue of

specialist debt securities or depositary receipts
(DRs) to professional investors.
Specialist Fund Market Is the London Stock

Exchange dedicated market, designed to accept

more sophisticated fund vehicles, governance models
and security.
The LSE supplies its participants with real time

prices and trading data creating the transparency

and liquidity through several services. Feeds are also
available through providers such as Bloomberg and
Thomson Reuters.
Tokyo Stock Exchange
The Tokyo Stock Exchange (TōkyōShōkenTorihikijo),which
is calledTōshō or TSE for short, is a stock exchange located
in Tokyo,Japan.
It is the third largest stock exchange in the world by
aggregate market capitalization of its listed companies.
It had 2,292 listed companies with a combined market
capitalization of US$4.5 trillion as of November 2013.
InJuly 2012 a planned merger with the Osaka Securities
Exchange was approved by the Japan Fair TradeCommission.
The TSE is incorporated as a kabushikigaishawith nine
directors, four auditors and eight executive officers.
Continue…
Its headquarters are located at 2-1Nihonbashi-


kabutocho),Chūō,Tokyo, or "Kabutocho", which is the largest

financial district in Japan.
Its operating hours are from 8:00 to 11:30 a.m., and from 12:30

to 5:00 p.m. From April 24, 2006, the afternoon trading session
started at its usual time of 12:30 p.m..
Stocks listed on the TSE are separated into the First Section

for large companies, the Second Section for mid-sized

companies, and the Mothers (Market of the high-growth and
emerging stocks) section for high-growthstart upcompanies.
Stock Trading
Buying and Selling of stocks is called stock trading.
Mainly there are two ways of doing stock trading.
Online Stock Trading
Offline Stock Trading

Different types of stock trading
Day trading and Delivery trading are the two
main types of stocks trading.
Day trading
Delivery Trading
Please Note - First you have to buy and sell. You can’t sell
before buying in delivery trading while it’s possible in day
trading.

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Financial market

 Where new securities are issued to

FINANCIAL FACILITATING TRADE

PROVIDING FINANCIAL SERVICES

STRENGTHENING FINANCIAL MARKETS

ACCELERATING ECONOMIC DEVELOPMENT 4

Treasury Bills, Call money Market,

Equity, Time deposits,

Price Issued at discounted prices Issued free of cost

To bring the market price

Shareholders may fully or partly

2: 1Number of shares stock split- Face value ½

 Account period settlement –trades pertaining to

 Underwriters and sub-underwriters may be financial institutions,

 Some rights issues include an "over‐subscription privilege", allowing

 is a systematic process of generating, capturing, and

 Process used by companies to launch an issue

Fixed Price Issues

 ‘Retail individual investor’ means an investor who applies

 Trade happens between two investors without

place where buyers and sellers convene at a place

 They offer either the ‘bid’ or ‘ask’ prices, publicly.

 In this market none of the parties convene at a common

 A variation to the dealer market is the OTC

 Stock shops existed to buy and sell shares over-

 The over-the-counter implies those stocks which are traded

 Where new securities are issued to

FINANCIAL FACILITATING TRADE

PROVIDING FINANCIAL SERVICES

STRENGTHENING FINANCIAL MARKETS

ACCELERATING ECONOMIC DEVELOPMENT 4

Treasury Bills, Call money Market,

Equity, Time deposits,

Price Issued at discounted prices Issued free of cost

To bring the market price

Shareholders may fully or partly

2: 1Number of shares stock split- Face value ½

 Account period settlement –trades pertaining to

 Underwriters and sub-underwriters may be financial institutions,

 Some rights issues include an "over‐subscription privilege", allowing

 is a systematic process of generating, capturing, and

 Process used by companies to launch an issue

Fixed Price Issues

 ‘Retail individual investor’ means an investor who applies

 Trade happens between two investors without

place where buyers and sellers convene at a place

 They offer either the ‘bid’ or ‘ask’ prices, publicly.

 In this market none of the parties convene at a common

 A variation to the dealer market is the OTC

 Stock shops existed to buy and sell shares over-

 The over-the-counter implies those stocks which are traded

 Qualified institutional buyers (QIBs), who were less than enthusiastic in

 Foreign institutional investors (FIIs) sought 4.17 crore shares as against

A bond is generally a form of debt which the

 Bond valuation is only one of the factors investors consider in

 Types of bond yields --

 The current market price of the bond in the secondary market

 Current yield relates the annual interest receivable on a bond

 PlainVanilla (pre decided coupon, duration,