Description
Finance is a prerequisite for modern business and financial institutions play a vital role in economic systems. It is through the help of financial markets that the financial system of an economy works. The main functions of financial markets are: (a) to facilitate creation and allocation of credit and liquidity; (b) to serve as intermediaries for mobilization of savings; (c) to assist process of balanced economic growth; (d) to provide financial convenience A Financial Market can be defined as the situation in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves the creation or transfer of a financial asset. Financial Assets or Financial Instruments represent claims to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.
The financial market has four main components, namely: (i) the money market, (ii) the capital market, (iii) foreign exchange market and (v) the credit market .
ANALYSIS OF DIFFERENT FINANCIAL INSTRUMENTS IN INDIA
MASTERS IN FINANCE MANAGEMENT
PARIKSHIT JADHAV, ROLL NO – 16
RICHA PARIKSHIT JADHAV, ROLL NO - 17
PROF. MISHU TRIPATHI
THAKUR INSTITUTE OF MANAGEMENT STUDIES & RESEARCH
MFM 201-16
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Chapter I : Introduction
Financial Markets Finance is a prerequisite for modern business and financial institutions play
a vital role in economic systems. It is through the help of financial markets that the financial
system of an economy works. The main functions of financial markets are: (a) to facilitate
creation and allocation of credit and liquidity (b) to serve as intermediaries for mobili!ation of
savings (c) to assist process of balanced economic growth (d) to provide financial convenience
" Financial #arket can be defined as the situation in which financial assets are created or
transferred. "s against a real transaction that involves e$change of money for real goods or
services% a financial transaction involves the creation or transfer of a financial asset. Financial
"ssets or Financial Instruments represent claims to the payment of a sum of money sometime in
the future and &or periodic payment in the form of interest or dividend.
The financial market has four main components% namely: (i) the money market% (ii) the capital
market% (iii) foreign e$change market and (v) the credit market
(i) Money Market ' the money market is a wholesale debt market for low'risk% highly'liquid%
short'term instrument. Funds are available in this market for periods ranging from a single day
up to a year. This market is dominated mostly by government% banks and financial institutions.
(ii) Capital Market ' the capital market is designed to finance the long'term investments of the
economy. The transactions taking place in this market will be for periods over a year.
(iii) Foreign Exchange Market ' the Foreign e$change market deals with the multicurrency
requirements% which are met by the e$change of currencies. (epending on the e$change rate that
is applicable% the transfer of funds takes place in this market. This is one of the most developed
and integrated market across the globe.
(iv) Credit Market ' )redit market is a place where banks% FIs and *+F)s purvey short%
medium and long'term loans to corporate and individuals.
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P"-*
Financial Instruments There is important constituent of the financial system% they are financial
instruments. They represent a claim against the future income and wealth of others. It will be a
claim against a person or an institution% for the payment of money at a specified future date.
(a) Money Market Instruments
The money market can be defined as a market for short'term money and financial assets that are
near substitutes for money. The term short'term means generally a period of up to one year. The
instruments used in the money market are near substitutes to money. They are financial assets
which can be quickly converted into money with minimum transaction cost.
,ome of the important money market instruments are briefly discussed below:
-. )all&*otice #oney
.. Treasury +ills
/. Term #oney
0. )ertificate of (eposit
1. )ommercial 2apers
(b) Capital Market Instruments
The capital market generally consists of a long term period% that is% more than one year period%
financial instruments in the equity segment% 3quity shares% preference shares% convertible
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 7
preference shares% non'convertible preference shares etc. and in the debt segment debentures%
!ero coupon bonds% deep discount bonds etc.
(C) Foreign exchange market Instruments
(fore$% F4% or currency market) is a global decentrali!ed market for the trading of currencies. In
terms of volume of trading% it is by far the largest market in the world.The main participants in
this market are the larger international banks. Financial centres around the world function as
anchors of trading between a wide range of multiple types of buyers and sellers around the clock%
with the e$ception of weekends. The foreign e$change market determines the relative values of
different currencies.
(D) Credit Market Instruments
The broad market for companies looking to raise funds through debt issuance. The credit market
encompasses both investment'grade bonds and 5unk bonds% as well as short'term commercial
paper. The market for debt offerings as seen by investors of bonds% notes and securiti!ed
obligations such as mortgage pools and collaterali!ed debt obligations ()(6s).
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* :
Chapter II – esearch Methodology
esearch !b"ecti#e :
To study analysis of different financial Instruments in india. Financial instruments are tradable
assets of any kind. They can be cash% evidence of an ownership interest in an entity% or a
contractual right to receive or deliver cash or another financial instrument.
$ypes !F esearch : ,econdary 7esearch .
Data %ources :
,econdary (ata ,ources : The present study is based on the secondary data which has been
collected through Internet and other various sources i.e. )ompany 8aw 9ournals% +anking
8aw9ournals% ,ecretary 9ournals and various *ewspapers vi!. Financial 3$press%3conomic
Times% +usiness India etc. 3fforts have been made to update every aspectwith the help of
relevant cases in order to bring good response.
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 6
Chapter III& Di''erent Financial Instruments
(() Call )*otice&Money
)all&*otice money is the money borrowed or lent on demand for a very short period. :hen
money is borrowed or lent for a day% it is known as )all&6vernight #oney. Intervening holidays
and&or ,unday are e$cluded for this purpose. Thus money% borrowed on a day and repaid on the
ne$t working day% (irrespective of the number of intervening holidays) is
all #oney;. :hen
money is borrowed or lent for more than a day and up to -0 days% it is ;*otice #oney;. *o
collateral security is required to cover these transactions.
(+) Inter&,ank $erm Money
Inter'bank market for deposits of maturity beyond -0 days is referred to as the term money
market. The entry restrictions are the same as those for )all&*otice #oney e$cept that% as per
e$isting regulations% the specified entities are not allowed to lend beyond -0 days.
(-) $reasury ,ills.
Treasury +ills are short term (up to one year) borrowing instruments of the union government. It
is an I6< of the =overnment. It is a promise by the =overnment to pay a stated sum after e$piry
of the stated period from the date of issue (-0&>-&-?.&/@0 days i.e. less than one year). They are
issued at a discount to the face value% and on maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price are determined at each auction.
(/) Certi'icate o' Deposits
)ertificates of (eposit ()(s) is a negotiable money market instrument% issued in dematerialised
form or as a <sance 2romissory *ote% for funds deposited at a bank or other eligible financial
institution for a specified time period. =uidelines for the issue of )(s are presently governed by
various directives issued by the 7eserve +ank of India% as amended from time to time. )(s can
be issued by (i) scheduled commercial banks e$cluding 7egional 7ural +anks (77+s) and 8ocal
"rea +anks (8"+s) and (ii) select all'India Financial Institutions that have been permitted by
7+I to raise short'term resources within the umbrella fi$ed by 7+I. +anks have the freedom to
issue )(s depending on their requirements. " Financial Institution (FI) may issue )(s within
the overall umbrella limit fi$ed by 7+I.
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P"-* 7
(0) Commercial 1apers
" )ommercial 2aper ()2) is a note in evidence of the debt obligation of the issuer. 6n issuing a
commercial paper the debt obligation is transformed into an instrument. " )ommercial 2aper is%
thus% an unsecured promissory note privately placed with investors at a discount rate to face
value determined by market forces. " )ommercial 2aper is freely negotiable by endorsement and
delivery. " company shall be eligible to issue )ommercial 2apers provided:
(i) the tangible net worth of the company% as per the latest audited balance sheet% is not less than
7s. 0 crore
(ii) the working capital (fund'based) limit of the company from the banking system is not less
than 7s.0 crore and
(iii) the borrowerAs account of the company is classified as a ,tandard "sset by the financing
banks. The minimum maturity period of )2 is B days. The minimum credit rating shall be as
determined by market forces or such equivalent rating by other agencies in India.
(2) %pot
" spot transaction is a two'day delivery transaction (e$cept in the case of trades between the <,
dollar% )anadian dollar% Turkish lira% euro and 7ussian ruble% which settle the ne$t business day)%
as opposed to the future contracts. which are usually three months. This trade represents a Cdirect
e$changeD between two currencies% has the shortest time frame% involves cash rather than a
contract% and interest is not included in the agreed'upon transaction. ,pot trading is one of the
most common types of Fore$ Trading. 6ften% a fore$ broker will charge a small fee to the client
to roll'over the e$piring transaction into a new identical transaction for a continuum of the trade.
This roll'over fee is known as the ;,wap; fee.
(3) For4ard
6ne way to deal with the foreign e$change risk is to engage in a forward transaction. In this
transaction% money does not actually change hands until some agreed upon future date. " buyer
and seller agree on an e$change rate for any date in the future% and the transaction occurs on that
date% regardless of what the market rates are then. The duration of the trade can be one day% a few
days% months or years. <sually the date is decided by both parties. Then the forward contract is
negotiated and agreed upon by both parties.
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(5) %4ap
The most common type of forward transaction is the foreign e$change swap. In a swap% two
parties e$change currencies for a certain length of time and agree to reverse the transaction at a
later date. These are not standardi!ed contracts and are not traded through an e$change. " deposit
is often required in order to hold the position open until the transaction is completed.
(6)%imple 7oan
which we have already discussed% in which the lender provides the borrower with an amount of
funds% which must be repaid to the lender at the maturity date along with an additional payment
for the interest. #any money market instruments are of this typeEfor e$ample% commercial
loans to businesses.
((8)Fixed 1ayment 7oan
(which is also called a fully amorti!ed loan) in which the lender provides the borrower with an
amount of funds% which must be repaid by making the same payment every period (such as a
month)% consisting of part of the principal and interest for a set number of years. For e$ample% if
you borrowed F-%GGG% a fi$ed'payment loan might require you to pay F-.@ every year for .1
years. Installment loans (such as auto loans) and mortgages are frequently of the fi$edpayment
type.
((()Discount ,ond
" discount bond (also called a !ero'coupon bond) is bought at a price below its face value (at a
discount)% and the face value is repaid at the maturity date. <nlike a coupon bond% a discount
bond does not make any interest payments it 5ust pays off the face value. For e$ample% a one'
year discount bond with a face value of F-%GGG might be bought for F>GG in a yearHs time the
owner would be repaid the face value of F-%GGG. <.,. Treasury bills% <.,. savings bonds% and
long'term !ero'coupon bonds are e$amples of discount bonds.
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((+)Coupon bond
" coupon bond pays the owner of the bond a fi$ed interest payment (coupon payment) every
year until the maturity date% when a specified final amount (face value or par value) is repaid.
(The coupon payment is so named because the bondholder used to obtain payment by clipping a
coupon off the bond and sending it to the bond issuer% who then sent the payment to the holder.
Today% it is no longer necessary to send in coupons to receive these payments.) " coupon bond
with F-%GGG face value% )apital market instruments such as <.,. Treasury bonds and notes and
corporate bonds are e$amples of coupon bonds.
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 10
Chapter I9& Financial Instruments : India
In India% the money market is regulated by the 7eserve bank of India (www.rbi.org.in) and
,ecurities 3$change +oard of India (,3+I) Iwww.sebi.gov.inJ regulates the capital market. The
)apital market consists of primary market and secondary market. "ll Initial 2ublic 6fferings
comes under the primary market and all secondary market transactions dealings are in the
secondary market. The secondary market refers to a market where securities are traded after
being initially offered to the public in the primary market and&or listed on the ,tock 3$change.
The secondary market comprises of the equity markets and the debt markets. In the secondary
market transactions +,3 and *,3 play a very significant role in the e$change of capital market
instruments. The ,ecurities and 3$change +oard (,3+I) is the umbrella body overseeing the
smooth functioning of the Indian Financial ,ystem. Kence% the responsibility for regulating the
financial system is 5ointly shared by the (epartment of 3conomic "ffairs ((3")% the #inistry of
)ompany "ffairs (#6)")% ,3+I and the 7eserve +ank of India (7+I).
The activities of these agencies are carefully co'ordinated by a high level )ommittee on )apital
and Financial markets. The orders of ,3+I under the securities laws are appealable before the
,ecurities "ppellate Tribunal. ,3+I is the regulator for the corporate debt market and
investments in debt instruments by FIIs are also under the supervisory eye of ,3+I. ,3+I gets
involved whenever there is any entity raising money from the Indian )apital #arket. It has to
make ensure that there is fair play for the retail investors. ,3+I therefore% is charged with the
protection of investors and regulating the market% making sure that there is growth and
development.
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 11
Chapter 9 & Case %tudy
The terms LcontractA and LcontractualA refer to an agreement between two or more parties that
has clear economic consequences that the parties have little% if any% discretion to avoid% usually
because the agreement is enforceable by law. )ontracts% and thus financial instruments% may take
a variety of forms and need not be in writing. For a contract to be valid% both parties must give
their approval. "pproval may be given indirectly (eg by an entity acting in such a way that the
other parties involved believe the entityAs intention is to make a contract). For e$ample% if an
entity purchases or sells goods% buys property% engages a builder to carry out work% borrows
money% or orders goods or machinery from a manufacturer% these are all types of contracts.
Examples M financial instruments 3$ - " bank advances an entity a five'year loan. The bank also
provided the entity with an overdraft facility for a number of years.
The entity has two financial liabilitiesEthe obligation to repay the five'year loan and the
obligation to repay the bank overdraft to the e$tent that it has borrowed using the overdraft
facility. +oth the loan and the overdraft result in contractual obligations for the entity to pay cash
to the bank for the interest incurred and for the return of the principal of the definition of a
financial liability. The amounts due from the entity under the loan and overdraft facility are
financial assets of the bank. *ote: The bank cannot apply the IF7, for ,#3s.
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 12
Chapter 9I & Conclusion o' ;nalysis o' Financial Instruments
" financial instrument is a contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity. *otes 3quity is the residual interest in the assets
of the entity after deducting all its liabilities. For the purposes of ,ection --% a financial asset
could be described as any asset that is (a) cash (b) an equity instrument of another entity (c) a
contractual right: (i) to receive cash or another financial asset from another entity or (ii) to
e$change financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity or (d) a contract that will or may be settled in the entityAs
own equity instruments and under which the entity is or may be obliged to receive a variable
number of the entityAs own equity instruments. For the purposes of ,ection --% a financial
liability could be described as any liability that is: (a) a contractual obligation: (i) to deliver cash
or another financial asset to another entity or (ii) to e$change financial assets or financial
liabilities with another entity under conditions that are potentially unfavourable to the entity or
(b) a contract that will or may be settled in the entityAs own equity instruments and under which
the entity is or may be obliged to deliver a variable number of the entityAs own equity
instruments.
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P"-* 1
Chapter 9II – e'erences
https://en.wikipedia.org/wiki/Financial_instrument
http://www.finance-assignments.com/category/hybrid-financing-instruments
http://www.investopedia.com/terms/f/financialinstrument.asp
http://www.business-standard.com/article/economy-policy/two-financial-
instruments-that-saved-the-rupee-11301!00110_1.html
https://en.wikipedia.org/wiki/Foreign_e"change_market
https://www.#uora.com/Foreign-$"change-%arket
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 17
doc_240818727.docx
Finance is a prerequisite for modern business and financial institutions play a vital role in economic systems. It is through the help of financial markets that the financial system of an economy works. The main functions of financial markets are: (a) to facilitate creation and allocation of credit and liquidity; (b) to serve as intermediaries for mobilization of savings; (c) to assist process of balanced economic growth; (d) to provide financial convenience A Financial Market can be defined as the situation in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves the creation or transfer of a financial asset. Financial Assets or Financial Instruments represent claims to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.
The financial market has four main components, namely: (i) the money market, (ii) the capital market, (iii) foreign exchange market and (v) the credit market .
ANALYSIS OF DIFFERENT FINANCIAL INSTRUMENTS IN INDIA
MASTERS IN FINANCE MANAGEMENT
PARIKSHIT JADHAV, ROLL NO – 16
RICHA PARIKSHIT JADHAV, ROLL NO - 17
PROF. MISHU TRIPATHI
THAKUR INSTITUTE OF MANAGEMENT STUDIES & RESEARCH
MFM 201-16
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M$.6")-700101.
CONTENT LIST
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Chapter I : Introduction
Financial Markets Finance is a prerequisite for modern business and financial institutions play
a vital role in economic systems. It is through the help of financial markets that the financial
system of an economy works. The main functions of financial markets are: (a) to facilitate
creation and allocation of credit and liquidity (b) to serve as intermediaries for mobili!ation of
savings (c) to assist process of balanced economic growth (d) to provide financial convenience
" Financial #arket can be defined as the situation in which financial assets are created or
transferred. "s against a real transaction that involves e$change of money for real goods or
services% a financial transaction involves the creation or transfer of a financial asset. Financial
"ssets or Financial Instruments represent claims to the payment of a sum of money sometime in
the future and &or periodic payment in the form of interest or dividend.
The financial market has four main components% namely: (i) the money market% (ii) the capital
market% (iii) foreign e$change market and (v) the credit market
(i) Money Market ' the money market is a wholesale debt market for low'risk% highly'liquid%
short'term instrument. Funds are available in this market for periods ranging from a single day
up to a year. This market is dominated mostly by government% banks and financial institutions.
(ii) Capital Market ' the capital market is designed to finance the long'term investments of the
economy. The transactions taking place in this market will be for periods over a year.
(iii) Foreign Exchange Market ' the Foreign e$change market deals with the multicurrency
requirements% which are met by the e$change of currencies. (epending on the e$change rate that
is applicable% the transfer of funds takes place in this market. This is one of the most developed
and integrated market across the globe.
(iv) Credit Market ' )redit market is a place where banks% FIs and *+F)s purvey short%
medium and long'term loans to corporate and individuals.
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-*
Financial Instruments There is important constituent of the financial system% they are financial
instruments. They represent a claim against the future income and wealth of others. It will be a
claim against a person or an institution% for the payment of money at a specified future date.
(a) Money Market Instruments
The money market can be defined as a market for short'term money and financial assets that are
near substitutes for money. The term short'term means generally a period of up to one year. The
instruments used in the money market are near substitutes to money. They are financial assets
which can be quickly converted into money with minimum transaction cost.
,ome of the important money market instruments are briefly discussed below:
-. )all&*otice #oney
.. Treasury +ills
/. Term #oney
0. )ertificate of (eposit
1. )ommercial 2apers
(b) Capital Market Instruments
The capital market generally consists of a long term period% that is% more than one year period%
financial instruments in the equity segment% 3quity shares% preference shares% convertible
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 7
preference shares% non'convertible preference shares etc. and in the debt segment debentures%
!ero coupon bonds% deep discount bonds etc.
(C) Foreign exchange market Instruments
(fore$% F4% or currency market) is a global decentrali!ed market for the trading of currencies. In
terms of volume of trading% it is by far the largest market in the world.The main participants in
this market are the larger international banks. Financial centres around the world function as
anchors of trading between a wide range of multiple types of buyers and sellers around the clock%
with the e$ception of weekends. The foreign e$change market determines the relative values of
different currencies.
(D) Credit Market Instruments
The broad market for companies looking to raise funds through debt issuance. The credit market
encompasses both investment'grade bonds and 5unk bonds% as well as short'term commercial
paper. The market for debt offerings as seen by investors of bonds% notes and securiti!ed
obligations such as mortgage pools and collaterali!ed debt obligations ()(6s).
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* :
Chapter II – esearch Methodology
esearch !b"ecti#e :
To study analysis of different financial Instruments in india. Financial instruments are tradable
assets of any kind. They can be cash% evidence of an ownership interest in an entity% or a
contractual right to receive or deliver cash or another financial instrument.
$ypes !F esearch : ,econdary 7esearch .
Data %ources :
,econdary (ata ,ources : The present study is based on the secondary data which has been
collected through Internet and other various sources i.e. )ompany 8aw 9ournals% +anking
8aw9ournals% ,ecretary 9ournals and various *ewspapers vi!. Financial 3$press%3conomic
Times% +usiness India etc. 3fforts have been made to update every aspectwith the help of
relevant cases in order to bring good response.
A&"21')' +, D)8*%*&( F)&"&0)"2 I&'(%$.*&(' I& I&/)"
P"-* 6
Chapter III& Di''erent Financial Instruments
(() Call )*otice&Money
)all&*otice money is the money borrowed or lent on demand for a very short period. :hen
money is borrowed or lent for a day% it is known as )all&6vernight #oney. Intervening holidays
and&or ,unday are e$cluded for this purpose. Thus money% borrowed on a day and repaid on the
ne$t working day% (irrespective of the number of intervening holidays) is
all #oney;. :henmoney is borrowed or lent for more than a day and up to -0 days% it is ;*otice #oney;. *o
collateral security is required to cover these transactions.
(+) Inter&,ank $erm Money
Inter'bank market for deposits of maturity beyond -0 days is referred to as the term money
market. The entry restrictions are the same as those for )all&*otice #oney e$cept that% as per
e$isting regulations% the specified entities are not allowed to lend beyond -0 days.
(-) $reasury ,ills.
Treasury +ills are short term (up to one year) borrowing instruments of the union government. It
is an I6< of the =overnment. It is a promise by the =overnment to pay a stated sum after e$piry
of the stated period from the date of issue (-0&>-&-?.&/@0 days i.e. less than one year). They are
issued at a discount to the face value% and on maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price are determined at each auction.
(/) Certi'icate o' Deposits
)ertificates of (eposit ()(s) is a negotiable money market instrument% issued in dematerialised
form or as a <sance 2romissory *ote% for funds deposited at a bank or other eligible financial
institution for a specified time period. =uidelines for the issue of )(s are presently governed by
various directives issued by the 7eserve +ank of India% as amended from time to time. )(s can
be issued by (i) scheduled commercial banks e$cluding 7egional 7ural +anks (77+s) and 8ocal
"rea +anks (8"+s) and (ii) select all'India Financial Institutions that have been permitted by
7+I to raise short'term resources within the umbrella fi$ed by 7+I. +anks have the freedom to
issue )(s depending on their requirements. " Financial Institution (FI) may issue )(s within
the overall umbrella limit fi$ed by 7+I.
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(0) Commercial 1apers
" )ommercial 2aper ()2) is a note in evidence of the debt obligation of the issuer. 6n issuing a
commercial paper the debt obligation is transformed into an instrument. " )ommercial 2aper is%
thus% an unsecured promissory note privately placed with investors at a discount rate to face
value determined by market forces. " )ommercial 2aper is freely negotiable by endorsement and
delivery. " company shall be eligible to issue )ommercial 2apers provided:
(i) the tangible net worth of the company% as per the latest audited balance sheet% is not less than
7s. 0 crore
(ii) the working capital (fund'based) limit of the company from the banking system is not less
than 7s.0 crore and
(iii) the borrowerAs account of the company is classified as a ,tandard "sset by the financing
banks. The minimum maturity period of )2 is B days. The minimum credit rating shall be as
determined by market forces or such equivalent rating by other agencies in India.
(2) %pot
" spot transaction is a two'day delivery transaction (e$cept in the case of trades between the <,
dollar% )anadian dollar% Turkish lira% euro and 7ussian ruble% which settle the ne$t business day)%
as opposed to the future contracts. which are usually three months. This trade represents a Cdirect
e$changeD between two currencies% has the shortest time frame% involves cash rather than a
contract% and interest is not included in the agreed'upon transaction. ,pot trading is one of the
most common types of Fore$ Trading. 6ften% a fore$ broker will charge a small fee to the client
to roll'over the e$piring transaction into a new identical transaction for a continuum of the trade.
This roll'over fee is known as the ;,wap; fee.
(3) For4ard
6ne way to deal with the foreign e$change risk is to engage in a forward transaction. In this
transaction% money does not actually change hands until some agreed upon future date. " buyer
and seller agree on an e$change rate for any date in the future% and the transaction occurs on that
date% regardless of what the market rates are then. The duration of the trade can be one day% a few
days% months or years. <sually the date is decided by both parties. Then the forward contract is
negotiated and agreed upon by both parties.
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(5) %4ap
The most common type of forward transaction is the foreign e$change swap. In a swap% two
parties e$change currencies for a certain length of time and agree to reverse the transaction at a
later date. These are not standardi!ed contracts and are not traded through an e$change. " deposit
is often required in order to hold the position open until the transaction is completed.
(6)%imple 7oan
which we have already discussed% in which the lender provides the borrower with an amount of
funds% which must be repaid to the lender at the maturity date along with an additional payment
for the interest. #any money market instruments are of this typeEfor e$ample% commercial
loans to businesses.
((8)Fixed 1ayment 7oan
(which is also called a fully amorti!ed loan) in which the lender provides the borrower with an
amount of funds% which must be repaid by making the same payment every period (such as a
month)% consisting of part of the principal and interest for a set number of years. For e$ample% if
you borrowed F-%GGG% a fi$ed'payment loan might require you to pay F-.@ every year for .1
years. Installment loans (such as auto loans) and mortgages are frequently of the fi$edpayment
type.
((()Discount ,ond
" discount bond (also called a !ero'coupon bond) is bought at a price below its face value (at a
discount)% and the face value is repaid at the maturity date. <nlike a coupon bond% a discount
bond does not make any interest payments it 5ust pays off the face value. For e$ample% a one'
year discount bond with a face value of F-%GGG might be bought for F>GG in a yearHs time the
owner would be repaid the face value of F-%GGG. <.,. Treasury bills% <.,. savings bonds% and
long'term !ero'coupon bonds are e$amples of discount bonds.
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((+)Coupon bond
" coupon bond pays the owner of the bond a fi$ed interest payment (coupon payment) every
year until the maturity date% when a specified final amount (face value or par value) is repaid.
(The coupon payment is so named because the bondholder used to obtain payment by clipping a
coupon off the bond and sending it to the bond issuer% who then sent the payment to the holder.
Today% it is no longer necessary to send in coupons to receive these payments.) " coupon bond
with F-%GGG face value% )apital market instruments such as <.,. Treasury bonds and notes and
corporate bonds are e$amples of coupon bonds.
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Chapter I9& Financial Instruments : India
In India% the money market is regulated by the 7eserve bank of India (www.rbi.org.in) and
,ecurities 3$change +oard of India (,3+I) Iwww.sebi.gov.inJ regulates the capital market. The
)apital market consists of primary market and secondary market. "ll Initial 2ublic 6fferings
comes under the primary market and all secondary market transactions dealings are in the
secondary market. The secondary market refers to a market where securities are traded after
being initially offered to the public in the primary market and&or listed on the ,tock 3$change.
The secondary market comprises of the equity markets and the debt markets. In the secondary
market transactions +,3 and *,3 play a very significant role in the e$change of capital market
instruments. The ,ecurities and 3$change +oard (,3+I) is the umbrella body overseeing the
smooth functioning of the Indian Financial ,ystem. Kence% the responsibility for regulating the
financial system is 5ointly shared by the (epartment of 3conomic "ffairs ((3")% the #inistry of
)ompany "ffairs (#6)")% ,3+I and the 7eserve +ank of India (7+I).
The activities of these agencies are carefully co'ordinated by a high level )ommittee on )apital
and Financial markets. The orders of ,3+I under the securities laws are appealable before the
,ecurities "ppellate Tribunal. ,3+I is the regulator for the corporate debt market and
investments in debt instruments by FIIs are also under the supervisory eye of ,3+I. ,3+I gets
involved whenever there is any entity raising money from the Indian )apital #arket. It has to
make ensure that there is fair play for the retail investors. ,3+I therefore% is charged with the
protection of investors and regulating the market% making sure that there is growth and
development.
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Chapter 9 & Case %tudy
The terms LcontractA and LcontractualA refer to an agreement between two or more parties that
has clear economic consequences that the parties have little% if any% discretion to avoid% usually
because the agreement is enforceable by law. )ontracts% and thus financial instruments% may take
a variety of forms and need not be in writing. For a contract to be valid% both parties must give
their approval. "pproval may be given indirectly (eg by an entity acting in such a way that the
other parties involved believe the entityAs intention is to make a contract). For e$ample% if an
entity purchases or sells goods% buys property% engages a builder to carry out work% borrows
money% or orders goods or machinery from a manufacturer% these are all types of contracts.
Examples M financial instruments 3$ - " bank advances an entity a five'year loan. The bank also
provided the entity with an overdraft facility for a number of years.
The entity has two financial liabilitiesEthe obligation to repay the five'year loan and the
obligation to repay the bank overdraft to the e$tent that it has borrowed using the overdraft
facility. +oth the loan and the overdraft result in contractual obligations for the entity to pay cash
to the bank for the interest incurred and for the return of the principal of the definition of a
financial liability. The amounts due from the entity under the loan and overdraft facility are
financial assets of the bank. *ote: The bank cannot apply the IF7, for ,#3s.
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Chapter 9I & Conclusion o' ;nalysis o' Financial Instruments
" financial instrument is a contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity. *otes 3quity is the residual interest in the assets
of the entity after deducting all its liabilities. For the purposes of ,ection --% a financial asset
could be described as any asset that is (a) cash (b) an equity instrument of another entity (c) a
contractual right: (i) to receive cash or another financial asset from another entity or (ii) to
e$change financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity or (d) a contract that will or may be settled in the entityAs
own equity instruments and under which the entity is or may be obliged to receive a variable
number of the entityAs own equity instruments. For the purposes of ,ection --% a financial
liability could be described as any liability that is: (a) a contractual obligation: (i) to deliver cash
or another financial asset to another entity or (ii) to e$change financial assets or financial
liabilities with another entity under conditions that are potentially unfavourable to the entity or
(b) a contract that will or may be settled in the entityAs own equity instruments and under which
the entity is or may be obliged to deliver a variable number of the entityAs own equity
instruments.
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Chapter 9II – e'erences
https://en.wikipedia.org/wiki/Financial_instrument
http://www.finance-assignments.com/category/hybrid-financing-instruments
http://www.investopedia.com/terms/f/financialinstrument.asp
http://www.business-standard.com/article/economy-policy/two-financial-
instruments-that-saved-the-rupee-11301!00110_1.html
https://en.wikipedia.org/wiki/Foreign_e"change_market
https://www.#uora.com/Foreign-$"change-%arket
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