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A presentationA presentation

ononFundamentals of FinanceFundamentals of Finance

saibabasaibaba

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Introduction to the nancialIntroduction to the nancial

marketsmarkets

Money MarketMoney Market

Capital marketCapital market

Derivatives marketDerivatives market Forex marketForex market

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Capital MarketsCapital Markets

Instruments:Instruments:

Debenturesbonds issued byDebenturesbonds issued by

corporations!corporations!

"tocks"tocks

#layers:#layers:

Individuals$ Financial institutions$Individuals$ Financial institutions$

banks$ corporations$ etc%banks$ corporations$ etc%

Click here&Click here&

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Features of bonds:Features of bonds:

Face value:Face value:

If the bond is issued at discount$ faceIf the bond is issued at discount$ facevalue e'uals the redemption value%value e'uals the redemption value%

Coupon rate:Coupon rate:

(he rate at )hich the payments are *iven(he rate at )hich the payments are *iven

Maturity Date:Maturity Date:

(he tenor for )hich the bond has to be(he tenor for )hich the bond has to beholdhold

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(ypes of +onds(ypes of +onds

,ero Coupon +onds,ero Coupon +onds

#erpetual bonds#erpetual bonds

Floatin* -ate +ondsFloatin* -ate +onds +onds )ith embedded options+onds )ith embedded options

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Features of "tocksFeatures of "tocks

.o xed income like coupons in.o xed income like coupons in

bonds%bonds%

Dividends are not compulsoryDividends are not compulsory -e'uired rate of return is hi*h-e'uired rate of return is hi*h

May be issued at par or premiumMay be issued at par or premium

/ife of a stock ends )hen once the/ife of a stock ends )hen once thecompany ceases to existcompany ceases to exist

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(ypes of stocks:(ypes of stocks:

0rdinary stocks0rdinary stocks #referential stocks:#referential stocks:

It has both the features of bond as well as ordinaryIt has both the features of bond as well as ordinary

stocks. Diidends are constant!like cou"on in debts#. Itstocks. Diidends are constant!like cou"on in debts#. Ite$ists till the co%"any e$ists!like ordinary stocks#.e$ists till the co%"any e$ists!like ordinary stocks#.

&ut they don't hae otin( ri(hts. )he other difference&ut they don't hae otin( ri(hts. )he other differenceis that when the co%"any is windin( u"* the liabilitiesis that when the co%"any is windin( u"* the liabilitiesa(ainst the "referential share holders are "aid first and thea(ainst the "referential share holders are "aid first and theresidual is shared a%on( the ordinary share holders.residual is shared a%on( the ordinary share holders.

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Constituents of stockConstituents of stock

Dividends:Dividends:

(he prot that is *iven to shareholders(he prot that is *iven to shareholdersasas re)ard for their investment%re)ard for their investment%

Dividends areDividends are *iven on face value of*iven on face value ofthe stock and not atthe stock and not at )hich the)hich theprice you bou*ht the share for%price you bou*ht the share for%

Capital Appreciation:Capital Appreciation:

Chan*e in the price of stock durin* theChan*e in the price of stock durin* theholdin* periodholdin* period

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1here should I invest21here should I invest2

bonds or shares!bonds or shares!)he return in bonds is less thou(h fi$ed where as the return)he return in bonds is less thou(h fi$ed where as the returnin shares is hi(h. &ut there is hi(h risk inoled with sharesin shares is hi(h. &ut there is hi(h risk inoled with sharesco%"ared to that of bonds.co%"ared to that of bonds.

De"endin( on the behaior of the inestor !whether riskDe"endin( on the behaior of the inestor !whether riskaerse or risk loer#* one %ay inest in bonds or stocks.aerse or risk loer#* one %ay inest in bonds or stocks.

It is not -ust the riskreturn "rofile that "lays* the ta$ factorIt is not -ust the riskreturn "rofile that "lays* the ta$ factor

should also be considered. )here used to be so%e rebate inshould also be considered. )here used to be so%e rebate inta$ if we inest in bonds. hort ter% ca"ital (ains are ta$edta$ if we inest in bonds. hort ter% ca"ital (ains are ta$edin the case of stocks. )here %i(ht be a transaction cost.in the case of stocks. )here %i(ht be a transaction cost.

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3xample:3xample:

4lobe0p "oft)are "olutions /td% is a4lobe0p "oft)are "olutions /td% is a

one year old company%It needs 5croreone year old company%It needs 5crore

for further expansion%for further expansion%

It issues 5mn shares each )orth -s%56It issues 5mn shares each )orth -s%56

#romoters holdin*: 768 I%e 7 lakh shares#romoters holdin*: 768 I%e 7 lakh shares

Investors holdin*: 968 I%e 9 lakh sharesInvestors holdin*: 968 I%e 9 lakh shares

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(ypes of 0rders(ypes of 0rders

(ime conditions(ime conditions 4ood till Cancelled4(C!4ood till Cancelled4(C!

4ood till Date4(D!4ood till Date4(D!

Immediate or CancelI0C!Immediate or CancelI0C!

#rice conditions#rice conditions Market #riceMarket #rice

/imit order/imit order

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Clearin* and "ettlementClearin* and "ettlement

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"ensex"ensex

Index on any day Index on any day

that day;s market capitalialue

+ase market capitali

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DerivativesDerivatives

Instruments:Instruments:

0ptions0ptions

")aps")aps

FuturesFutures

For)ardsFor)ards

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Features of an 0ptionFeatures of an 0ption

An underlyin* assetAn underlyin* asset 0ption price:0ption price:

(he price paid for the option%Also referred to(he price paid for the option%Also referred to

as 0ption premium%as 0ption premium% "trike price:"trike price:

(he price at )hich the underlyin* asset has(he price at )hich the underlyin* asset hasto be bou*ht or sold dependin* on theto be bou*ht or sold dependin* on theoption%option%

"pot price:"pot price:

(he price of the underlyin* on the expiry(he price of the underlyin* on the expirydate of the option%date of the option%

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(ypes of 0ptions:(ypes of 0ptions:

Call 0ption:Call 0ption:all o"tion (ies the buyer the ri(ht to buy* but not an obli(ation* aall o"tion (ies the buyer the ri(ht to buy* but not an obli(ation* acertain uantity of an underlyin( asset at a "articular "rice on orcertain uantity of an underlyin( asset at a "articular "rice on orbefore a "articular date.before a "articular date.

#ut 0ption:#ut 0ption:

ut o"tion (ies the buyer the ri(ht to sell* but not an obli(ation* aut o"tion (ies the buyer the ri(ht to sell* but not an obli(ation* acertain uantity of an underlyin( asset at a "articular "rice on orcertain uantity of an underlyin( asset at a "articular "rice on orbefore a "articular date.before a "articular date.

"tions which can be e$ercised on or before the e$"iration date"tions which can be e$ercised on or before the e$"iration date

are called %erican "tions. ther o"tions which can be e$ercisedare called %erican "tions. ther o"tions which can be e$ercised

only on the e$"iration date are called uro"ean "tions.only on the e$"iration date are called uro"ean "tions.

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#ositions in 0ptions#ositions in 0ptions

/on* Call/on* Call

"hort Call"hort Call

/on* #ut/on* #ut "hort #ut"hort #ut

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#rot ? /oss in positions#rot ? /oss in positions

/on* call:/on* call:

If the current position is lon*$ itIf the current position is lon*$ it

implies that )e bou*ht the callimplies that )e bou*ht the calloption%option%

3%*: A call option to buy 5-eliance3%*: A call option to buy 5-elianceshare @ -s%566% (he price of theshare @ -s%566% (he price of the

option is -s%7option is -s%7

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/on* Call:/on* Call:

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"hort Call"hort Call

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")aps")aps

A s)ap is an exchan*e of one set oA s)ap is an exchan*e of one set of futuref future

Cash Bo)s for anotherCash Bo)s for another

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MechanismMechanism

Any s)ap transaction includes t)oAny s)ap transaction includes t)o

counterparties% (here is a notionalcounterparties% (here is a notional

principal on )hich the cashprincipal on )hich the cash

Bo)sinterest payments! areBo)sinterest payments! arecalculated% (he payments arecalculated% (he payments are

calculated dependin* on )hether itcalculated dependin* on )hether it

is Boatin* rate or xed rate% Itis Boatin* rate or xed rate% Itfurther depends on the type of thefurther depends on the type of the

s)ap%s)ap%

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(ypes of ")aps(ypes of ")aps

Interest -ate ")apsInterest -ate ")aps

+asis ")aps+asis ")aps

Currency ")apsCurrency ")aps

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Weather DerivativesWeather Derivatives

Weather derivativesWeather derivativesare nancialare nancial

instruments that can be used byinstruments that can be used by

or*ani

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Money marketMoney market

A fe) instruments&A fe) instruments&

+onds+onds -epo-epo -everse -epo-everse -epo (reasury bills(reasury bills

EEback%%EEback%%

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-epo:-epo:

(he rate at )hich -+I lends to(he rate at )hich -+I lends tobanks a*ainst securitiesbanks a*ainst securities

-everse -epo:-everse -epo:(he operational rate at )hich banks(he operational rate at )hich banks

park shortterm funds )ith -+Ipark shortterm funds )ith -+I

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A fe) interestin*A fe) interestin*

'uestions&'uestions& In India are )e really *ettin* positive interestIn India are )e really *ettin* positive interest

for our deposits2for our deposits2

A+C corporation announced 5668 dividend2A+C corporation announced 5668 dividend2

is the ne)s really positive2!is the ne)s really positive2!

(C" public issue has been oversubscribed by G6(C" public issue has been oversubscribed by G6

times% Does this have a positive impact intimes% Does this have a positive impact in

analysts; minds2analysts; minds2

1ho )on in the battle bet)een 0sama and1ho )on in the battle bet)een 0sama and

+ush2+ush2

1ho is your role model: Harshad Mehta or1ho is your role model: Harshad Mehta or

Manmohan2Manmohan2

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uestions2uestions2

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(hank Jou(hank Jou