DISSERTATION ON FINANCIAL MARKET AND ITS INSTRUMENTS

CONTENTS
Acknowledgement Preface Declaration Objectives Introduction Research methodology Chapterization Chapter 1- Analysis of financial market Chapter 2- Money market and its instruments Chapter 3- Defects of money market Chapter 4- Reforms of money market Chapter 5- capital market and its instruments Finding study Conclusion Bibliography

ACKNOWLEDGEMENT
I am extremely grateful to that entire member who extends their co-operation and guidance for my projects. I am thankful to Mr. Devesh Gupta for their external support I would also thank my project guide Mr. Nityanand. Whose valuable advice and guidance helped me to complete this dissertation report. Lastly I thank to the respondent in company, parents and relatives, for their co-operation, love and blessing and thankful to my all friends and companions who directly- indirectly co-operate with me in completing this dissertation report.

ADITI GUPTA S.S.I.T.M ALIGARH

DECLARATION

I, FURQUAN KHAN, a student of MBA 4th sem SSITM, ALIGARH batch 2007-2009 and roll no. 0700770023, here by declare that dissertation report entitled ROLE OF FDI IN RETAIL SECTOR, is the out come of my own work and same has not been submitted to any university/ institute for the award of any degree or professional diploma.

FURQUAN KHAN

PREFACE
The project entitled FINANCIAL MARKET AND ITS INSTRUMENTS was under taken by me during the month of march 2008 in fulfilment of requirement of MBA 4th sem. The information used in the project is based on the primary as well as secondary data, it able to me learn about the marketing skills, environment, contributing to highly satisfactory performance of the bank. Similarly, secondary data used in this project have taken from the journals and bank websites. Due care, has been taken to present that material, so gathered in a scientific & systematic manner And in this projects to mentioned the all activity of the financial market and its instruments and mentioned the defects and reforms of the money market in the RBI.

OBJECTIVES
To analysis the financial market To analysis the money market and its instruments

OBJECTIVES

To study the causes of money market

To analysis the reforms of the money market

To study the capital market and its instruments

INTRODUCTION OF FINANCIAL MARKET

HISTORY OF FINANCIAL MARKET

Here we look at the historical and empirical evidence surrounding financial markets and assets. The first part surveys the innovations regarding financial instruments and the trading process in financial markets. The second part surveys the history of investment returns on financial assets. Three questions are addressed in particular: What return can investors expect to earn when investing in various types of financial assets? What are the risk characteristics of these returns? Are returns and risk characteristics linked? An interesting issue is the historic relationship between the risk and return on various instruments. If investors are risk averse we expect to find they demand compensation for holding risky portfolios. This will be discussed in relation to the so called equity premium puzzle.

A HISTORY OF FINANCIAL INNOVATION

Many early civilisations made use of loan agreements between individuals, and in the old Babylonia and Assyria there were at least two banking firms in existence several thousand years BC Equities and bonds were developed during the sixteenth century. Convertible securities also have a long history. In continental Europe in the sixteenth century there existed equity issues that could be converted into debt if certain regulations were broken. Similarly, preferred stock has been in use for a long time. Exchange trading of financial securities also has a surprisingly long history. Equity was traded in Antwerp and Amsterdam in the 1600s. Moreover, options and futures (called time bargains at the time) were traded on the Amsterdam Bourse after it was opened in 1611. Many of the European stock markets experienced major stock market bubbles in the eighteenth century. A famous example is the South Sea Bubble (1720) where the price of the South Sea Company rose from 131% of par in February to 950% by June 23, then fell back to 200% by December. This bubble led to the so called Bubble Act which made it illegal to form a company without a charter or to pursue any line of business other than the one specified in the charter.

RECENT FINANCIAL INNOVATION

The 1960s witnessed a number of innovations driven by regulatory Constraints. The Eurobond market emerged where non-US companies could borrow in US $. At the time foreign borrowers were excluded from the US markets. Similarly, currency swaps were developed during this period to circumvent UK exchange controls. The 1970s witnessed the introduction of floating-rate instruments (bonds with coupons tied to a floating rate such as the LIBOR rate in London), and the trading of financial

futures, such as futures on foreign currency, futures on interest rates, and futures on stock market indices. Often, the innovation of new securities is initially driven to circumvent regulatory constraints or to exploit market demand for new types of claims. Once they become established, however, the investors find they have other, broader, advantages that make them a useful addition to the financial system. Below you can find a few case studies of new innovations.

Case study 1: Floating rate debt

Floating-rate notes were first issued in 1970, and it was an instrument that was linked to a floating reference rate the London Interbank Offered Rate (LIBOR). These instruments came in during a period where inflation risk became a serious threat, so the nominal rate would fluctuate dramatically. Allowing loan rates to vary in accordance with these fluctuations was a natural response. In the mid-1970s the market for floating rate debt started growing significantly, and these instruments were fairly widely used in the early 1980s. Most floating-rate debt is issued in the European market, and these instruments have never been particularly popular in the US. A spinoff innovation is floating-rate preferred stock a preferred stock in which the dividend yield is linked to the variations in the reference rate.

Case study 2: Zero-coupon bonds

These bonds were first issued in the 1960s, but they did not become popular until the 1980s. The use of these instruments was aided by an anomaly in the US tax system, which allowed for deduction of the discount on bonds relative to their par value. This rule ignored the compounding of interest, and leads to

significant tax-savings when the interest rates are high or the security has long maturity. Although the tax-loophole was closed fairly quickly, the bonds were desirable to investors because they were very simple investment tools. For a bond that has interim coupon payments the investor would have to reinvest these coupon payments and there may be considerable risk tied to these reinvestment strategies. A zero-coupon bond has no reinvestment risk.

Case study 3: Poison pill securities

The popularity of corporate acquisitions and mergers has promoted the emergence of a number of antitakeover techniques. Some of these have taken the form of financial innovations. One of the earliest was the so called preferred stock plans. With these, the target company (the one that the bidding company seeks to acquire) issues a dividend of convertible preferred stock to its shareholders which grants certain rights if the bidding company buys a large position in the target firm. These rights might be in the form that the stockholders can require the acquiring firm to redeem the preferred stock at the highest price paid for common stock in the past year. If the takeover actually goes through, the highest price will almost certainly be the takeover price, and the acquiring company must, therefore, issue a number of new stock at the takeover price in exchange for the old preferred stock already issued. This will, obviously, dilute the gains of the takeover to the acquiring party and reduce the likelihood of a takeover. Another poison pill security is the so called flip-over plan. This consists of the issue of a common stock dividend consisting of a special right. This right enables the holder to purchase common stock at an

exercise price well above the current market price. Normally, nobody would exercise these rights as the exercise price is high compared to the current market price. However, in the event of a merger, they flipover and give the right to purchase common stock at an exercise price well below the current market price. Again, this makes takeovers costly as the bidders profits from the takeover are heavily diluted by the exercise of the flip-over plans.

Case study 4: Swaps

The first swaps emerged in the 1960s and were currency swaps, and they emerged like many other innovations on the back of regulation. In this case, a UK based multinational company might have a surplus of funds in the UK that it wished to invest in a US subsidiary but was prevented due to UK exchange controls. A counter party in the US with the opposite problem, a surplus of US funds but a need to invest in a UK subsidiary, could often be identified. Since regulation prevented a straight transfer within each company, the companies could circumvent the rules by simply using parallel loans the US firm promised to lend dollars to the UK subsidiary against the UK firm promising to lend pounds to the US subsidiary. A major problem with these arrangements soon emerged, however, which was that there was a considerable amount of counterparty risk involved. A company might have entered into the agreement fully solvent but might experience problems in the interim period before expiry. If one party defaulted, would the other party still be obliged to fulfil their part of the arrangement? This deficiency could be overcome by the swap agreement, where in principle the companies deposited money with each other and paid the interim interest payments to each other according

to the prevailing interest rates in the two currencies, and finally the principal amount is cleared at the end of the agreement. The interim payments are normally netted out using the prevailing exchange rate, so there is only one payment made. The swap agreement has also been modified to agreements involving swapping cash flows of adjustable (floating) rate loans and cash flows of fixed rate loans. Principal payments are in this case not made in the same way as currency swaps these are also netted out so that the swap agreement effectively consists of a series of single payments.

Case study 5: Futures trading

The standardised financial futures contracts are a relatively recent innovation, in contrast to the older, forward style agreements that have existed since the emergence of a financial system. An important feature of this contract is the way it is traded, which makes it easy for investors to enter and exit existing futures agreements in between the start of the contract and the maturity date of the contract. More importantly, however, is that futures trading allow investors to shift large amounts of risk with very little investment. Futures trades are, therefore, highly levered. For example, margin trading of equity typically involves a margin of 50%, so even if the investor can borrow he still needs to finance half the investment cost (and further margin calls if the stock price goes down). With futures positions, investors normally maintain margins less than 10% of the face value of the futures contract. The futures contract is marked to market each day, so the investor can unwind his position (sell if the original transaction was a buy and vice versa)

and his account is settled with no further cash flows taking place

Investment returns in equity and bond markets

What returns have investors historically made in the bond and equity markets around the world? We have about a hundred years of data on stock market returns, and the brief answer globally is that the countries most devastated by World War II had the lowest long-run cumulative returns - Italy, Belgium, Germany and Japan. The countries that experienced the least damage, in contrast, have the highest long run cumulative returns - Australia, Canada, and the US. However, the real returns (corrected for inflation) are pretty much similar across all countries. A major theoretical prediction from pricing models is that the expected or average return on assets is linked to the risk of holding these assets. Again, the overall empirical evidence supports this prediction. Looking, for instance, to the US experience from 1926 to 2002, we find the following. Asset type Geometric average Arithmetic average return Small-company stocks 11.64% 17.74% Large-company stocks 10.01% 12.04% Long-term treasury bonds 5.38% 5.68% US T-bills 3.78% 3.82% Inflation 3.05% 3.14%

The equity premium puzzle

The return on equity is greater than the return on bonds because the risk is smaller. What has been found, however, is that the difference (the so called

equity premium) appears to be bigger than should be expected. The following example from US stock and bond markets is compelling. A person who invested $1000 in Treasury bills on December 31, 1925 and kept it in safe US Treasury bills until December 31, 1995 would have an investment in 1995 worth $12,720. If the money were invested in the stock market the corresponding number is $842,000 (66 times the amount for T-bills). Considering that the equity investment would have survived two large stock market crashes (one in 1929 and another one in 1987), the difference is strikingly large. How should we compare a risky investment with a risk free one? One way to do this is by assuming a risk averse investor holds both risk free T-bills and risky equities in his portfolio (for a review of utility theory and risk aversion). The premium on the equity is then compensation for his risk aversion. The greater the premium is, the greater the risk aversion of the investor must be. Using historical data, we can therefore make inferences about the risk aversion of investors. Risk aversion is measured by the risk Aversion coefficient, formally derived from the utility function by the relationship. This is a fairly reasonable number, but asset returns are not normal so we cannot use this simple model to estimate the implied risk aversion coefficient. This is the motivation for Mehra and Prescotts study. They fit a rigorous theoretical model to data on the return on stock market investments and government bonds. The model generates the risk aversion coefficient of a representative investor. Can the equity premium puzzle be resolved? Mehra and Prescott might have sampled data that were special in two senses. First, it might have been too short so there is a possibility that the period was in some sense too special to make safe inferences about the implied risk aversion

coefficient. Their work has been extended to include data all the way back to 1802. The main finding of this exercise is that the real returns of short-term fixed income have fallen dramatically over time. The real excess return on equity would, therefore, on average be about one percentage point lower than that reported by Mehra and Prescott. This will of course reduce the magnitude of the risk aversion coefficient but it is doubtful that the puzzle would be completely resolved. The second way the data might have been special is that the time series are too long. This might lead to survivorship bias in the data. When collecting masses of data we inevitably sample those data-series that have survived for a long time. The long-surviving data series would also tend to be healthier and show average returns that are higher than the perceived expected returns at historical points in time. Investors might reasonably worry about the risk of a crisis or catastrophe that can wipe out the entire market overnight. And indeed, of the 36 stock exchanges that operated at the early 1900s, more than one-half experienced significant interruptions or were abolished outright up to the current time. Hence, the equity premium might include some bias if estimated by long time series of data. Again, survivorship bias might be a source of some errors in the estimation of the risk aversion coefficient but it is unclear how much it contributes.

INTRODUCTION OF FINANCIAL MARKET

What are the financial markets? If you are confused, there is a good reason. Thats because financial markets go by many terms, including capital markets, Wall Street, even the markets. Some experts even simply refer to it as the stock market, even though they are referring to stocks, bonds and commodities. Quite simply, that is what the financial markets are any type of financial transaction that you can think of that helps businesses grow and investors make money. Here is an overview of the financial markets, from the simple to the complex.

Stock and stock investing

Stocks are shares of ownership of a public corporation which are sold to investors to allow the companies to raise a lot of cash at once. The investors profit when the companies increase their earnings which keeps the U.S. economy growing. It is easy to buy stocks, but takes a lot of knowledge to buy stocks in the right company.

What Are the Components of the Stock Market?

To a lot of people, the Dow is the stock market. However, the Dow, which is the nickname for the Dow Jones Industrial Average, is just one component among many. There is also the Dow Jones Transportation Average and the Dow Jones Utilities Average. The stocks that make up these averages are traded on the worlds exchanges, two of which include the New York Stock Exchange and the NASDAQ.

What Are Mutual Funds?

Mutual funds give you the ability to buy a lot of stocks at once. In a way this makes them an easier tool to invest in than individual stocks. By reducing stock market volatility, they have also had a calming effect on the U.S. economy. Despite their benefits, you still need to learn how to select a good mutual fund.

What Is the Bond Market?

Generally, when stocks go up, bonds go down. However, there are many different types of bonds, including Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that helps keep the U.S. economy lubricated. Their most important effect is on mortgage interest rates.

What Are Commodities?

The most important commodity to the U.S. economy is oil, and its price is determined in the commodities futures market. What are futures? They are a way to

pay for something today that is delivered tomorrow, which helps to remove some of the volatility in the U.S. economy. However, futures also increase the traders leverage by allowing him to borrow the money to purchase the commodity. This can have a huge impact on the stock market, and the U.S. economy, if the trader guesses wrong.

What Are Hedge Funds?

Recently, hedge funds have increased in popularity due to their supposed higher returns for high-end investors. Since hedge funds invest heavily in futures, some have argued they have decreased the volatility of the stock market and therefore the U.S. economy. However, in 1997 the worlds largest hedge fund at the time, Long Term Capital Management, practically brought down the U.S. economy.

BASIC TERMS
An asset is anything of durable value, that is, anything that acts as a means to store value over time. Real assets are assets in physical form (e.g., land, equipment, houses,...), including "human capital" assets embodied in people (natural abilities,

learned skills, knowledge,..). Financial assets are claims against real assets, either directly (e.g., stock share equity claims) or indirectly (e.g., money holdings, or claims to future income streams that originate ultimately from real assets). Securities are financial assets exchanged in auction and over-thecounter markets (see below) whose distribution is subject to legal requirements and restrictions (e.g., information disclosure requirements).

Lenders are people who have available funds in

excess of their desired expenditures that they are attempting to loan out, and borrowers are people who have a shortage of funds relative to their desired expenditures who are seeking to obtain loans. Borrowers attempt to obtain funds from lenders by selling to lenders newly issued claims against the borrowers' real assets, i.e., by selling the lenders newly issued financial assets. A financial market is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets, financial markets facilitate borrowing and lending by facilitating the sale by newly issued financial assets. Examples of financial markets include the New York Stock Exchange (resale of previously issued stock shares), the U.S. government bond market (resale of previously issued bonds), and the U.S. Treasury bills auction (sales of newly issued T-bills). A financial institution is an institution whose primary source of profits is through financial asset transactions. Examples of such financial institutions include discount brokers (e.g., Charles Schwab and Associates), banks, insurance companies, and complex multi-function financial institutions such as Merrill Lynch.

MEANING OF FINANCIAL MARKET

A financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets)

and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

DEFINITION OF FINANCIAL MARKET

A financial market is a process that allows people to easily buy and sell financial securities, commodities and other fungible items of value at low transaction costs and at prices that reflect efficient markets.

FUNCTIONS OF FINANCIAL MARKET

Borrowin g and Lending Price determin ation

FUNCTIONS OF FINANCIAL MARKET

Efficienc y

Liquidity Risk Sharing

Informati on aggregati on and coordinat ionnn

Borrowing and Lending: Financial markets

permit the transfer of funds (purchasing power) from one agent to another for either investment or consumption purposes.

Price Determination: Financial markets

provide vehicles by which prices are set both for newly issued financial assets and for the existing stock of financial assets.

Information Aggregation and Coordination: Financial markets act as collectors

and aggregators of information about financial asset values and the flow of funds from lenders to borrowers.

Risk Sharing: Financial markets allow a transfer

of risk from those who undertake investments to those who provide funds for those investments.

Liquidity: Financial markets provide the holders

of financial assets with a chance to resell or liquidate these assets.

Efficiency: Financial markets reduce transaction

costs and information costs.

MAJOR PLAYERS IN FINANCIAL MARKET

By definition, financial institutions are institutions that participate in financial markets, i.e., in the creation and/or exchange of financial assets. At present in the United States, financial institutions can be roughly classified into the following four categories: "brokers;" "dealers;" "investment bankers;" and "financial intermediaries."

MAJOR PALYERS OF FINANCIAL MARKET

BROKERS

DEALERS

INVESTMENT BANKERS

FINANCIAL INTERMEDIARIES

Brokers:
A broker is a commissioned agent of a buyer (or seller) who facilitates trade by locating a seller (or buyer) to complete the desired transaction. A broker does not take a position in the assets he or she trades -- that is, the broker does not maintain inventories in these assets. The profits of brokers are determined by the commissions they charge to the users of their services (the buyers, the sellers, or both). Examples of brokers include real estate brokers and stock brokers. Diagrammatic Illustration of a Stock Broker: Payment ----------------- Payment ------------>| |-------------> Stock | | Stock Buyer | Stock Broker | Seller <-------------|<----------------|<------------Stock | (Passed Thru) | Stock Shares ----------------Shares

Dealers:
Like brokers, dealers facilitate trade by matching buyers with sellers of assets; they do not engage in asset transformation. Unlike brokers, however, a dealer can and does "take positions" (i.e., maintain inventories) in the assets he or she trades that permit the dealer to sell out of inventory rather than always having to locate sellers to match every offer to buy. Also, unlike brokers, dealers do not receive sales commissions. Rather, dealers make profits by buying assets at relatively low prices and reselling them at relatively high prices (buy low - sell high). The price at which a dealer offers to sell an asset (the "asked price") minus the price at which a dealer offers to buy an asset (the "bid price") is called the bid-ask spread and represents the dealer's profit margin on the asset exchange. Real-world examples of dealers include car dealers, dealers in U.S. government bonds, and NASDAQ stock dealers. Diagrammatic Illustration of a Bond Dealer: Payment ----------------- Payment ------------>| |-------------> Bond | Dealer | Bond Buyer | | Seller <-------------| Bond Inventory |<------------Bonds | | Bonds
-----------------

Investment Banks:
An investment bank assists in the initial sale of newly issued securities (i.e., in IPOs = Initial Public Offerings) by engaging in a number of different activities:

Advice: Advising corporations on whether they should issue bonds or stock, and, for bond issues, on the particular types of payment schedules these securities should offer; Underwriting: Guaranteeing corporations a price on the securities they offer, either individually or by having several different investment banks form a syndicate to underwrite the issue jointly; Sales Assistance: Assisting in the sale of these securities to the public.

Financial Intermediaries:
Unlike brokers, dealers, and investment banks, financial intermediaries are financial institutions that engage in financial asset transformation. That is, financial intermediaries purchase one kind of financial asset from borrowers -- generally some kind of longterm loan contract whose terms are adapted to the specific circumstances of the borrower (e.g., a mortgage) -- and sell a different kind of financial asset to savers, generally some kind of relatively liquid claim against the financial intermediary (e.g., a deposit account). In addition, unlike brokers and dealers, financial intermediaries typically hold financial assets as part of an investment portfolio rather than as an inventory for resale. In addition to making profits on their investment portfolios, financial intermediaries make profits by charging relatively high interest rates to borrowers and paying relatively low interest rates to savers. Types of financial intermediaries include: Depository Institutions (commercial banks, savings and loan associations, mutual savings banks, credit unions); Contractual Savings Institutions (life insurance companies, fire and casualty insurance

companies, pension funds, government retirement funds); and Investment Intermediaries (finance companies, stock and bond mutual funds, money market mutual funds). Diagrammatic Example of a Financial Intermediary: A Commercial Bank Lending by B Borrowing by B ------| H | -------

Deposited ------Funds ------funds | |<............. | | <............. | | F |.............> | B | ..............> | ------Loan ------deposit Contracts accounts Loan contracts Issued by F to B Are liabilities of F And assets of B

Deposit accounts issued by B to H are liabilities of B and assets of H

NOTE: F=Firms, B=Commercial Bank, and H=Households Important Caution: These four types of financial institutions are simplified idealized classifications, and many actual financial institutions in the fast-changing financial landscape today engage in activities that overlap two or more of these classifications, or even to some extent fall outside these classifications. A prime example is Merrill Lynch, which simultaneously acts as a broker, a dealer (taking positions in certain stocks and bonds it sells), a financial intermediary (e.g., through its provision of mutual funds and CMA checkable deposit accounts), and an investment banker.

What Types of Financial Market Structures Exist?

The costs of collecting and aggregating information determine, to a large extent, the types of financial market structures that emerge. These structures take four basic forms: Auction markets conducted through brokers; Over-the-counter (OTC) markets conducted through dealers; Organized Exchanges, such as the New York Stock Exchange, which combine auction and OTC market features. Specifically, organized exchanges permit buyers and sellers to trade with each other in a centralized location, like an auction. However, securities are traded on the floor of the exchange with the help of specialist traders who combine broker and dealer functions. The specialists broker trades but also stand ready to buy and sell stocks from personal inventories if buy and sell orders do not match up. Intermediation financial markets conducted through financial intermediaries;

Financial markets taking the first three forms are generally referred to as securities markets. Some financial markets combine features from more than one of these categories, so the categories constitute only rough guidelines.

Auction Markets:
An auction market is some form of centralized facility (or clearing house) by which buyers and sellers, through their commissioned agents

(brokers), execute trades in an open and competitive bidding process. The "centralized facility" is not necessarily a place where buyers and sellers physically meet. Rather, it is any institution that provides buyers and sellers with a centralized access to the bidding process. All of the needed information about offers to buy (bid prices) and offers to sell (asked prices) is centralized in one location which is readily accessible to all would-be buyers and sellers, e.g., through a computer network. No private exchanges between individual buyers and sellers are made outside of the centralized facility. An auction market is typically a public market in the sense that it open to all agents who wish to participate. Auction markets can either be call markets -- such as art auctions -- for which bid and asked prices are all posted at one time, or continuous markets -- such as stock exchanges and real estate markets -- for which bid and asked prices can be posted at any time the market is open and exchanges take place on a continual basis. Experimental economists have devoted a tremendous amount of attention in recent years to auction markets. Many auction markets trade in relatively homogeneous assets (e.g., Treasury bills, notes, and bonds) to cut down on information costs. Alternatively, some auction markets (e.g., in second-hand jewellery, furniture, paintings etc.) allow would-be buyers to inspect the goods to be sold prior to the opening of the actual bidding process. This inspection can take the form of a warehouse tour, a catalogue issued with pictures and descriptions of items to be sold, or (in

televised auctions) a time during which assets are simply displayed one by one to viewers prior to bidding. Auction markets depend on participation for any one type of asset not being too "thin." The costs of collecting information about any one type of asset are sunk costs independent of the volume of trading in that asset. Consequently, auction markets depend on volume to spread these costs over a wide number of participants. Over-the-Counter Markets: An over-the-counter market has no centralized mechanism or facility for trading. Instead, the market is a public market consisting of a number of dealers spread across a region, a country, or indeed the world, who make the market in some type of asset. That is, the dealers themselves post bid and asked prices for this asset and then stand ready to buy or sell units of this asset with anyone who chooses to trade at these posted prices. The dealers provide customers more flexibility in trading than brokers, because dealers can offset imbalances in the demand and supply of assets by trading out of their own accounts. Many well-known common stocks are traded overthe-counter in the United States through NASDAQ (National Association of Secures Dealers' Automated Quotation System).

Intermediation Financial Markets:

An intermediation financial market is a financial market in which financial intermediaries help transfer funds from savers to borrowers by issuing certain types of financial assets to savers

and receiving other types of financial assets from borrowers. The financial assets issued to savers are claims against the financial intermediaries, hence liabilities of the financial intermediaries, whereas the financial assets received from borrowers are claims against the borrowers, hence assets of the financial intermediaries.

Asymmetric Information in Financial Markets

Asymmetric information in a market for goods, services, or assets refers to differences ("asymmetries") between the information available to buyers and the information available to sellers. For example, in markets for financial assets, asymmetric information may arise between lenders (buyers of financial assets) and borrowers (sellers of financial assets). Problems arising in markets due to asymmetric information are typically divided into two basic types: "adverse selection;" and "moral hazard." This section explains these two types of problems, using financial markets for concrete illustration.

1. Adverse Selection Adverse selection is a problem that arises for a buyer of goods, services, or assets when the buyer has difficulty assessing the quality of these items in advance of purchase. Consequently, adverse selection is a problem that arises because of different ("asymmetric")

information between a buyer and a seller before any purchase agreement takes place. An Illustration of Adverse Selection in Loan Markets: In the context of a loan market, an adverse selection problem arises if the contractual terms that a lender sets in advance in an attempt to protect himself against the consequences of inadvertently lending to high risk borrowers have the perverse effect of encouraging high risk borrowers to self-select into the lender's loan applicant pool while at the same time encouraging low risk borrowers to self-select out of this pool. In this case, the lender's pool of loan applicants is adversely affected in the sense that the average quality of borrowers in the pool decreases. Moral Hazard Moral hazard is said to exist in a market if, after the signing of a purchase agreement between the buyer and seller of a good, service, or asset: the seller changes his or her behaviour in such a way that the probabilities (risk calculations) used by the buyer to determine the terms of the purchase agreement are no longer accurate; The buyer is only imperfectly able to monitor (observe) this change in the seller's behaviour.

For example, a moral hazard problem arises if, after a lender purchases a loan contract from a borrower, the borrower increases the risks

originally associated with the loan contract by investing his borrowed funds in more risky projects than he originally reported to the lender.

CLASSIFICATION OF FINANCIAL MARKET

The capital market is the market for the issue and trade of long-term securities.

The money market is that of short-term securities.

The timing difference between the closing of the transaction and the delivering of the goods or settlement of the transaction

The difference in certainty that the other party will honour the transaction.

ORGANISATION STRUCTURE OF FINANCIAL MARKET

Deputy Governor

Executive general manager market Head of department Secretary

Senior deputy head Treasury operation division

Secretary

Market operation division

Treasury division Deputy Head

Deputy Head

Deputy Head

Market research Assit. Head Trade settlement Asst. head Credit risk And compliance Asst. head

Market operation

Reserves management and correspondent banking Asst head Management support Asst. head

The key functions of the Financial Markets Department are:

 Implementing the Reserve Banks monetary policy decisions. This entails refinancing the banks' liquidity requirements through repurchase transactions and other facilities such as the averaging of cash reserves or marginal lending, as well as managing liquidity in the money market through open-market operations such as debentures, longer-term reverse repurchase transactions and foreign currency swaps. Participating in the spot and forward foreign exchange markets to service the foreign exchange needs of the Reserve Bank and its clients. Acting as funding agent of the government by conducting bond and Treasury bills auctions, participating in the formulation of debt management strategies, conducting surveillance over primary dealers in the bond market and managing the investment portfolio of the Corporation for Public Deposits (CPD). Facilitating the effective functioning of the domestic financial markets through its participation in these markets. Managing the Reserve Banks gold and foreign exchange reserves. Maintaining correspondent banking relationships by interacting with the Banks counterparties, both domestic and foreign, to assist the Reserve Bank in achieving its goals. An important aspect of this function is the negotiation and administration of foreign loans or credit lines, which the Bank may draw down from time to time to augment its foreign exchange reserves. Providing market information and analyses to assist the Governors in their decision-making.

 Providing custody and settlement services to the government and the banks. Managing the risk inherent in gold, foreign exchange, refinancing and government funding activities

TYPES OF FINANCIAL MARKET

Equity market Money market Capital market Foreign exchange market EQUITY MARKET Equity market is a system through which company shares are traded. The equity market offers investors an opportunity to participate in a company's success through an increase in its stock price. With enhanced opportunity, however, the equity market usually carries greater risk than debt markets. The U.S. equity market focuses on the New York Stock Exchange, with its large trading floor and system of specialists. The other major component of the U.S. equity market is the NASDAQ, a computerized system of brokers/dealers with no physical trading space. The

U.S. equity market also comprises trading on the American Stock Exchange, regional stock exchanges, so-called ECNs. MONEY MARKET The money market is the global financial market for short-term borrowing and lending. It provides shortterm liquidity funding for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.

CAPITAL MARKET
The capital market is the market for securities, where companies and governments can raise longterm funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated countries to ensure that investors are protected against fraud. The capital

markets consist of the primary market and the secondary market. The primary markets are where new stock and bonds issues are sold (underwriting) to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange (e.g. the New York Stock Exchange).

FOREIGN EXCHANGE MARKET

The foreign exchange (currency, forex or FX) market is where currency trading takes place. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global forex and related markets is continuously growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International Settlement. Since then, the market has continued to grow. According to Euro money's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

RESEARCH METHODOLOGY

SOURCES OF DATA

RESEARCH METHODOLGY

PRIMARY DATA

SECONDARY DATA

PRIMARY DATA
A primary source which is the initial material that is collected during the research process. Primary data is the data that the researcher is collecting themselves using methods such as surveys, direct observations, interviews, as well as logs(objective data sources). Primary data is a reliable way to collect data because the researcher will know where it came from and how it was collected and analyzed since they did it themselves.

SECONDARY DATA
Secondary sources on the other hand are sources that are based upon the data that was collected from the primary source. Secondary sources take the role of analyzing, explaining, and combining the information from the primary source with additional information. In this project we use the secondary data as well as primary data it able to me learn about the financial market and market condition and we collect the data through the journals, books and the company websites.

CHAPTERIZATION
CHAPTER 1

To analysis the financial market

FINANCIAL MARKET ANALYSIS

Financial Market Analysis deals with the performance of a particular financial market(s). The performance of a financial market depends upon the performance of the total number of securities that are traded in that market. On a given day when the market closes with the prices of most of its securities on the higher side, then it could be said to have performed well. This is reflected in a market indicator called Index which tracks the performance of some of the more popular and steady securities that are traded in that particular financial market. Some of the most famous securities market indexes of the world are:

Footsie London financial market Dow Jones New York financial market Hang Seng Hong Kong financial market BSE Sensex Mumbai financial market Nikkei Tokyo financial market Nifty Indian national financial market The financial market index has become particularly important in todays market economy, which is integrating very fast on a global scale. Traders do not confine trading in securities to just one or two markets in the country of their origin but invest in a large number of markets across the globe. With more and more investment companies developing global dimensions financial markets around the world are integrating on a scale never imagined before.

As a result, analysis of the financial markets has become one of the main activities covering a very large number of factors both within the market and outside it. For instance, when the government of the country where the market is located, announces a new policy measure aimed at deregulating a particularly stifling part of an industry segment, it may have a positive impact on the financial market. Financial market analysts cannot anticipate such factors and therefore the impact of these factors do not come under the main purview of financial market analysis. However, most analysts do set aside some space for the impact of extraneous factors on the market and they do so in equal measure for both positive as well as negative factors. Financial market analysis has become a highly specialized activity confined to select groups of experts known as technical analysts. In most cases they are professionally trained in financial analysis and are reasonably familiar with the tools used to analyze a particular market. In certain other cases they are economists or veteran investors with a special interest in financial market analysis and market economics. The numbers of factors that directly or indirectly impact the financial markets are increasing rapidly with more analysts digging deeper into the circumstances that influence financial market behaviour. On the other hand, the integration of information technology in market analysis is increasingly meeting the challenge posed by the complexities of financial market analysis. Some of the most important types of analysis affecting financial markets are:

Fundamental Analysis

Securities Market Analysis Securities Market Technical Analysis Index Momentum Analysis Securities Momentum Analysis Securities Chart Analysis Market Analysis Market Trend Indicators

FUNDAMENTAL ANALYSISA method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies).The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price in hopes of figuring out what sort of position to take with that security (under priced = buy, overpriced = sell or short). Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

SECURITIES MARKET ANALYSISThe market grew by approximately 15% Commoditisation is affecting the more established sectors of the security market, and this process will accelerate as a result of increasing pressure from the big IT infrastructure vendors. Commoditisation will

be slow to blanket the entire security market because of the many product types within it, and the multitude of approaches to delivering security. The dynamic nature of the threat environment and business security needs means that the industry will have to remain dynamic in developing its offerings, and this will help to stave off the dead hand of commoditisation. the growth in revenues for managed security services was around 25% per year. It was notable that the range of services grew, for example, to include vulnerability analysis services for merchants to satisfy the requirements of the payment card industry. However, this sub-sector still accounts for only a small proportion of security spending. In future, the development of cloud based services in the service provider network will open up new opportunities, particularly in the SME sector. SECURITIES MARKET TECHNICAL ANALYSIS A technical analyst doesn't look at income statements, balance sheets, company policies, or anything fundamental about the company. Technical analysis looks at the actual history of trading and the price of a security or index. This is usually done in the form of a chart. The financial product can be a stock, future or an index,. The technical analyst believes that securities move in trends. And these trends continue until something happens to change the trend. With trends, patterns and levels are detectable. Sometimes the analysis is wrong. However, in the overwhelming majority of instances, it's extremely accurate. Technical analysis is stock market research of price action over time and charts are what an analyst works with as their primary record of price action. Behind every price is an investor who had a reason for buying or selling. Traders generally act alone but often their

weight of numbers has a direct influence on short term prices. Researching the stock market with charts and technical indicators is the study of group behaviour and sentiment. It is done with science and art. We use science because we use mathematical formula, computers and statistics. Charting is the study of price action of a market itself as opposed to the study of the goods in which a market deals. Technical analysis is simply a different means of using stock market research to arrive at the same investment objectives. INDEX MOMENTUM ANALYSIS This indicator is interpreted in the same manner as the RSI where readings below 30 are deemed to be oversold and levels over 70 are deemed to be overbought. The number of time periods used in the dynamic momentum index decreases as volatility in the underlying asset increases, making this indicator more responsive to changing prices than the RSI. SECURITIES MOMENTUM ANALYSIS The Enhanced Quotes are designed to cut through the clutter of fundamental and technical information and provide Investors with a meaningful and precise view into key indicators for publicly traded companies, c/w AAT short term Analysis and Momentum Indicators.

RECENT SITUATION IN FINANCIAL MARKET

The last two days the stock market has recovered some lost ground. On Friday, it recovered because of the Fed action to reduce the discount rate. Much was said about this but what does it really mean? It means that banks can borrow money from the Fed at a reasonable market rate that hopefully allows them to invest and earn a profit. This helps with liquidity. It does not, however, address the most fundamental issues facing the market, unless it results in an overall reduction in interest rates along the yield curve. Let me explain this. The basic problem with the "subprime" crisis is that liberal lending standards have resulted in large pools of assets that investors of all sorts have purchased at relatively low spreads over the market interest rates. This means that there is a low risk premium built into those investments. If in fact, the underlying mortgages have higher than expected default rates, higher foreclosure rates, and higher loss rates, the investors are not fairly compensated and the investments in those bonds are not worth what was paid for them. While we cannot predict the future, it appears that this will in fact be the case. Mortgage default rates are increasing, real estate values are decreasing, and the likely result is that more losses will accrue on those portfolios and the bonds will be worth less than full value. Now let's say that you are a Hedge fund. If you purchased a lot of these bonds and in order to increase the return on the equity put into your Hedge fund, you leveraged those bonds by borrowing against them, then the value of your assets may be less

relative to the debt you owe against them. Then the value of the equity investments in your fund can rapidly decline or become zero. So what would a Hedge fund manager or any other holder of the bonds want to do? Sell them. The problem is that the market now perceives the risk to be a lot higher and so requires a higher return. That means they have to buy the bonds at a lower price. Consequently, the current holder of the bonds will have to write them off at a loss. While the Fed has provided liquidity to the holders of these investments, allowing them to hold onto them longer rather than fire selling them, this does not affect the value of the actual investment in the long run. So until the market establishes a new value for all these mortgage backed investments, we will not know the extent of losses that various players will incur. Only know this, there will be a steady stream of loss announcements coming out of the financial sector. We have not even begun to see these. So how do you invest? Good question. The value of stocks have fallen appreciably. So it may be time to buy for the long term. On the other hand, the market might react negatively to these earnings announcements and stock values may suffer. The overall economy is strong. The folks losing money are the ones that should lose money. They provided funds to a mortgage market without adequate risk protection. Their losses will be someone else's gain. My suggestion is that you expect more negative reactions in the stock market for certain firms. This will create some stock price volatility. Yet, in the long

run, the economy will produce positive returns for most firms including financial firms. Virtually all firms have been punished in the declining market, yet some will not be that adversely affected. Pick your investments. Know if you can stay in for the long run or not. Evaluate the balance sheets of the companies you have invested in to see what their potential loss exposure is, and reallocate or not based on your findings. Neither over nor under estimate what the Fed can do. If it can lower all interest rates, the value of bonds will increase and losses will be minimized. But the Fed can only control short term interest rates and the policies it pursues can have additional affects on the value of the dollar and future inflation, which can turn long term interest rates the opposite direction, reducing the value of long term bonds.

CHAPTER -2

To analysis the money market and its instruments

WHAT IS MONEY MARKET

The money market is a mechanism that deals with the lending and borrowing of short term funds. The India Money Market has come of age in the past two decades. In order to study the money market of India in detail, we at first need to understand the parameters around which the money market in India revolves. The slice of the financial market where instruments with high liquidity and very short maturities are traded is called money market. This is a generic definition. Who uses money market? The players who indulge in short term from several days to less than a year. It

is mainly used for borrowing and lending over this short term. Due to the highly liquid nature of the securities and short maturities, money market is perceived as a safe place to lock in money. The participants in the financial market perceive a thin line, differentiating between the capital market and the money market. In money market, there is borrowing and lending for periods of a year or less. Capital market refers to stock markets where the common stocks are traded, and bond markets where bonds are issued and traded. This is in sharp contrast to money markets which provide short term debt financing and investment. The major purpose of financial markets is to transfer funds from lenders to borrowers Financial market participants commonly distinguish between the "capital market" and the "money market," with the latter term generally referring to borrowing and lending for periods of a year or less. The United States money market is very efficient in that it enables large sums of money to be transferred quickly and at a low cost from one economic unit (business, government, bank, etc.) to another for relatively short periods of time. The need for a money market arises because receipts of economic units do not coincide with their expenditures. These units can hold money balances that is, transactions balances in the form of currency, demand deposits, or NOW accountsto insure that planned expenditures can be maintained independently of cash receipts. Holding these balances, however, involves a cost in the form of foregone interest. minimize this cost, economic units usually seek to hold the minimum money balances required for day-today transactions. They supplement these balances with holdings of money market instruments that can be

Converted to cash quickly and at a relatively low cost and that have low price risk due to their short maturities. Economic units can also meet their shortterm cash demands by maintaining access to the money market and raising funds there when required. The money market encompasses a group of shortterm credit market instruments, futures market instruments, and the Federal Reserve's discount window. MAJOR PLAYERS IN MONEY MARKET Commercial banks Governments Corporation Government-sponsored enterprise Money market mutual funds Future market exchange Brokers and dealers The federal reserve

How can I participate in the Money Markets

Due to the large denominations that are traded in the money markets, it is nearly impossible for most individual investors to directly access this market without using an intermediary. Individuals can enter into the money market through money market mutual funds by opening a money market account at a banking institution or even with a brokerage company. It is like setting up a checking account which earns more interest than a traditional bank account would. You can write checks against it; add funds and withdraws funds on demand.

The performance of the Indian Money Market is heavily dependent on real interest rate that is the interest rate that is inflation adjusted. Though the money market is free from interest rate ceilings, structural barriers and other institutional factors can be held responsible for creating distortions in India Money Market. Apart from the call market rates, the other interest rates in the Indian Money Market usually do not change in the short run. It is due to this disparity between the opposite forces that is prevalent in the money market in India that a well defined income path cannot be traced. Owing to the deregulation of the interest rate in the early nineties following the economic reforms laid down by the then finance minister Dr. Manmohan Singh, studies concerning the behavior of interest rate was restricted. However the liquidity of the market makes its a good subject for empirical research. The Indian Money Market involves a wide range of instruments. Here, maturities range from one day to a year, issued by banks and corporates of various sizes. The money market is also closely linked with the Foreign Exchange Market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates. To analyze the interest rates that characterize the Indian Money Market, the following elements need to be covered:

The term structure of interest rate. The difference between domestic and international interest rates

The market structure differences between the auction markets that clear continuously and the. customer markets. The credit speed between instruments involving similar maturity but diverse risk factor.

MONEY MARKET UPDATES

G-sec Market: The benchmark 10-year security 6.05% GOI 2019 opened at Rs93.50 implying a yield of 7.08% higher than previous close of 7.02%. The G-sec market is expected to trade on a bearish note tracking announcement of Auction Calendar on Thursday. RBI announced that Government would borrow Rs2,41,000 crore in the first half of FY 2009-10. RBI also announced it would purchase securities worth Rs80,000 crore under Open Market Operations in the first half of FY 2009-10. The G-sec yields are likely to be rangebound between 7.00% - 7.20%.

Money market:
The Call rate and CBLO rate opened at 5.20% higher than previous days high of 5.00%. The Money Market rates are expected to harden tracking concerns over liquidity in the system ahead of the huge borrowing program.

Swap Market:
The 5Y OIS swap rate opened at 5.67% higher than previous close of 5.59%. The OIS swap rates are expected to harden tracking the movement in G-sec yields.

Forex Market:

The INR opened at Rs50.88 against the USD, depreciating from yesterdays closing level of Rs50.60. Rupee is expected to trade in the range of 50.65 51.00.

MONEY MARKET SCHEME

Money market schemes invest in short-term (maturing within one year) interest bearing debt instruments These securities are highly liquid and provide safety of investment, thus making money market schemes the safest investment option when compared with other mutual fund schemes. However, even money market schemes are exposed to the interest rate risk. The typical investment options for these funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

MONEY MARKET OPERATION

MONEY MARKETS @ Volume (One Leg) A. Overnight Segment (I+II+III) I. Call Money II. CBLO III. Market Repo B. Notice and Term Money Segment I. Notice Money II. Term Money RBI OPERATIONS 73,915.24 14,468.96 36,198.70 23,247.58 Wtd.Avg.Rate Range

4.09 4.23 3.93 4.26

2.10-4.75 2.10-4.30 3.85-4.18 3.95-4.75

0.20 180.00

3.40 Amount Outstanding

3.40-3.40 6.80-9.10 Rate 5.50

C. Standing Liquidity Facility Availed from RBI

6,437.08

of which Special Refinance Facility* D. Liquidity Adjustment Facility (i) Repo (1 Day) (14/15 days)# (1/ 2/ 3 month[s])^ (ii) Reverse Repo RESERVE POSITION @ (1 Day) 17/01/2009

4,946.55 0.00 920.00 1,040.00 49,225.00 219,219.45 5.50 5.50 5.50 4.00

E. Scheduled Commercial Bank's Cumulative Cash Balances with RBI as on

18/01/2009 for the fortnight ending 30-01-2009

438,438.90

@ Based on provisional Reserve Bank of India / Clearing Corporation of India Limited Data - Not Applicable / No Transaction, # under special term repo facility ^ under forex swap facility *Under Section 17(3B) of the RBI Act 1934

MONEY MARKET FUTURE

Money market future share futures contracts based on short-term interest rates. Futures contracts for financial instruments are a relatively recent innovation. Although futures markets have existed over 100years in the United States, futures trading was limited to contracts for agricultural and other commodities before 1972. The introduction of foreign currency futures that year by the newly formed International Monetary Market (IMM) division of the Chicago Mercantile Exchange (CME) marked the advent of trading in financial futures. Four different futures contracts based on money market interest rates are actively traded at present

date, the IMM has been the site of the most active trading in money market futures. The three-month U.S. Treasury bill contract, introduced by the IMM in 1976, was the first futures contract based on short-term interest rates. Three-month Eurodollar time deposit futures, now one of the most actively traded of all futures contracts, started trading in 1981. More recently, both the CBT and the IMM introduced futures contracts based on one-month interest rates. The CBT listed its 30-day interest rate futures contract in 1989, while the Chicago Mercantile Exchange introduced a one-month LIBOR futures contract in 1990.

Futures Contracts
Futures contracts traditionally have been characterized as exchange-traded, standardized agreements to buy or sell some underlying item on a specified future date. For example, the buyer of a Treasury bill futures contractwho is said to take on a "long" futures positioncommits to purchase a 13week Treasury bill with a face value of $1 million on some specified future date at a price negotiated at the time of the futures transaction; the sellerwho is said to take on a "short" positionagrees to deliver the specified bill in accordance with the terms of the contract. In contrast, a "cash" or "spot" market transaction simultaneously prices and transfers physical ownership of the item being soldThe advent of cash-settled futures contracts such as Eurodollar futures has rendered this traditional definition overly restrictive, however, because actual delivery never takes place with cash-settled contracts. Instead, the buyer and seller exchange payments based on changes in the price of a specified underlying item or the returns to an underlying security. For example, parties to an IMM Eurodollar contract

exchange payments based on changes in market interest rates for three-month Eurodollar deposits the underlying deposits are neither "bought" nor "sold" on the contract maturity date. A more general definition of a futures contract, therefore, is a standardized, transferable agreement that provides for the exchange of cash flows based on changes in the market price of some commodity or returns to a specified security. Futures contracts trade on organized exchanges that determine standardized specifications for traded contracts. All futures contracts for a given item specify the same delivery requirements and one of a limited number of designated contract maturity dates, called settlement dates. Each futures exchange has an affiliated clearinghouse that records all transactions and ensures that all buy and sell trades match. The clearing organization also assures the financial integrity of contracts traded on the exchange by guaranteeing contract performance and supervising the process of delivery for contracts held to maturity.

Futures Exchanges
In addition to providing a physical facility where trading takes place, a futures exchange determines the specifications of traded contracts and regulates trading practices. There are 13 futures exchanges in the United States at present. The principal exchanges are in Chicago and New York. Each futures exchange is a corporate entity owned by its members. The right to conduct transactions on the floor of a futures exchange is limited to exchange members, although trading privileges can be leased to non members. Members have voting rights that give them a voice in the management of the exchange. Memberships, or

"seats," can be bought and sold: futures exchanges routinely make public the most recent selling and current offer price for a seat on the exchange. Trading takes place in designated areas, known as "pits," on the floor of the futures exchange through a system of open outcry in which traders announce bids to buy and offers to sell contracts. Traders on the floor of the exchangecan be grouped into two broad categories: floor brokers and floor traders. Floor brokers, also known as commission brokers, execute orders for offexchange customers and other members. Some floor brokers are employees of commission firms, known as Futures Commission Merchants, while others are independent operators who contract to execute trades for brokerage firms.

Futures Commission Merchants

A Futures Commission Merchant (FCM) handles orders to buy or sell futures contracts from off-exchange customers. All FCMs must be licensed by the Commodity Futures Trading Commission (CFTC), which is the government agency responsible for regulating futures markets. An FCM can be a person or a firm. Some FCMs are exchange members employing their own floor brokers. FCMs that are not exchange members must make arrangements with a member to execute customer orders on their behalf.

Role of the Exchange Clearinghouse

Each futures exchange has an affiliated exchange clearinghouse whose purpose is to match and record all trades and to guarantee contract performance. In most cases the

exchange clearinghouse is an independently incorporated organization, but it can also be a department of the exchange. The Board of Trade Clearing Corporation, the CBT's clearinghouse, is a separate corporation affiliated with the exchange, while the CME Clearing House Division is a department of the exchange. Clearing member firms act as intermediaries between traders on the floor of the exchange and the clearinghouse. They assist in recording transactions and assume responsibility for contract performance on the part of floor traders and commission merchants who are their customers. Although clearing member firms are all members of the exchange, not all exchange members are clearing members. All transactions taking place on the floor of the exchange must be settled through a clearing member. Brokers or floor traders not directly affiliated with a clearing member must make arrangements with one to act as a designated clearing agent. The clearinghouse requires each clearing member firm to guarantee contract performance for all of its customers. If a clearing member's customer defaultson an outstanding futures commitment, the clearinghouse holds the clearing member responsible for any resulting losses.

Margin Requirements
Margin deposits on futures contracts are often mistakenly compared to stock margins. Despite the similarity in terminology, however, futures margins differ fundamentally from stock margins. Stock margin refers to a down payment on the purchase of an equity security on credit, and so represents funds surrendered to gain physical possession of a security. In contrast, a margin deposit on a

futures contract is a performance bond posted to ensure that traders honor their contractual obligations, and not a down payment on a credit transaction. The value of a futures contract is zero to both the buyer and the seller at the time it is negotiated, so a futures transaction involves no exchange of money at the outset. The practice of collecting margin deposits dates back to the early days of trading in time contracts, as the precursors of futures contracts were then called. Before the institution of margin requirements, traders adversely affected by price movements frequently defaulted on their contractual obligations, often simply disappearing as the delivery date on their contracts drew near. In response to these events, futures exchanges instituted a system of margin requirements, and also began requiring traders to recognize any gains or losses on their outstanding futures commitments at the end of each trading session through a daily settlement procedure known as "marking to market."

ROLE OF RESERVE BANK OF INDIA (RBI)

HISTORY OF RESERVE BANK OF INDIA

The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.

The Reserve Bank of India was set up on the basis of the recommendations of the Royal Commission on Indian Currency and Finance also known as the HiltonYoung Commission.

HILTON YOUNG COMMISSION

FIRST CENTRAL BOARD OF DIRECTOR

The Reserve Bank of India was set up as a Share Holders' Bank. The Share Issue of the Bank offered in March, 1935 was the largest share issue in India at the time. The matter was further compounded by the conditions and restrictions imposed under the Act. These conditions related to qualifications of the shareholders, the geographical distribution and allotment of shares (to avoid concentration of shares and to ensure that those holding the shares were fit and proper. To simplify matters, Share Certificate Forms of the different registers were printed in different colours. Despite the intricate and gigantic nature of the task, it was carried out with great 'accuracy and dispatch'.

SHARE CERTIFICATES

A message sent by the Viceroy to the Governor, Osborne Smith when the Reserve Bank of India commenced its operations on 1st April, 1935
Message OSBORNE SMITH GOVERNOR RESERVE BANK CALCUTTA. FOLLOWING HAS BEEN RECEIVED FROM SECRETARY FOR YOU. BEGINS, AS RESERVE BANK COMMENCES OPERATIONS TODAY I TAKE OPPORTUNITY TO CONVEY YOU AND YOUR COLLEAGUES ON THE BOARD MY MOST GOOD WISHES AND TO EXPRESS MY CONFIDENCE THAT THIS GREAT UNDERTAKING WILL CONTRIBUTE LARGELY TO THE ECONOMIC WELL BEING OF INDIA AND OF ITS PEOPLE. PRIVATE SECRETARY VICEROY

TELEGRAM

RBI COMMENCEMENT

The Reserve Bank of India was nationalised with effect from 1st January, 1949 on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation. The image is a newspaper clipping giving the views of Governor CD Deshmukh, prior to nationalisation.

RBI NATIONALISATION

RBI HISTORY

The Bank was constituted to

Regulate the issue of banknotes Maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the

Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949. An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development. The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country. With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets. ESTABLISHEMENT Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central

Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. PREAMBLE The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

CENTRAL BOARD
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

Appointed/nominated for a period of four years Constitution: o Official Directors Full-time : Governor and not more than four Deputy Governors o Non-Official Directors Nominated by Government: ten Directors from various fields and one government Official Others: four Directors - one each from four local boards

LOCAL BOARDS

One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi Membership consist of five members each

appointed by the Central Government for a term of four years

Function: To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time FINANCIAL SUPERVISION The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India. Objectives Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and nonbanking finance companies. Constitution The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board. BFS Meeting The Board is required to meet normally once every month. It considers inspection reports and other

supervisory issues placed before it by the supervisory departments. BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members. The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of NonBanking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. Functions Some of the initiatives taken by BFS include: restructuring of the system of bank inspections introduction of off-site surveillance, strengthening of the role of statutory auditors and strengthening of the internal defences of supervised institutions.

The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions. Current Focus

supervision of financial institutions consolidated accounting

legal issues in bank frauds divergence in assessments of non-performing assets and supervisory rating model for banks.

LEGAL FRAMEWORK

Umbrella Acts

Reserve Bank of India Act, 1934: governs the Reserve Bank functions Banking Regulation Act, 1949: governs the financial sector

Acts governing specific functions

Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market Securities Contract (Regulation) Act, 1956: Regulates government securities market Indian Coinage Act, 1906:Governs currency and coins Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market

Acts governing Banking Operations

Companies companies

Act,

1956:Governs

banks

as

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

Acts governing Individual Institutions

State Bank of India Act, 1954 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 National Bank for Agriculture and Rural Development Act National Housing Bank Act Deposit Insurance and Credit Guarantee Corporation Act.

MAIN FUNCTIONS
Monetary Authority:

Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. and supervisor of the financial

Regulator system:

Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to support national objectives.

Related Functions

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

Offices

Has 22 regional offices, most of them in state capitals.

Training Establishments
Has six training establishments

Three, namely, College of Agricultural Banking, Bankers Training College and Reserve Bank of India Staff College are part of the Reserve Bank Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT)

Subsidiaries
Fully owned: National Housing Bank(NHB), Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL) Majority stake: National Bank for Agriculture and Rural Development (NABARD) The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India.

INSTRUMENTS OF MONEY MARKET

Commer cial paper Certificat e of deposit

Treasur y bills

Instruments of Money market

Call/ notice/ term money

Repo/ reverse repo

Bills rediscou ntin-g

Banker acceptance

COMMERCIAL PAPER
Commercial paper is an unsecured promissory note with a fixed maturity of one to 270 days. Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet

short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries shorter repayment dates than bonds. The longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates

DEFINITION
An investor deposits Rs.one crore in a company for 6 months and gets a promissory note from the company, this promissory note will be called a commercial paper A commercial paper is a shot term unsecured loan of fixed maturity, bearing interest or issued at discount, given to a company in exchange for a promissory note which is negotiable by endorsement and delivery.

FEATURES They are basically some features of the commercial paper are as follows-: Short term instrument Commercial paper is a short term money market instrument in the form of a promissory note or in dematerialised form and has fixed maturity. Unsecured

The debts are unsecured. Issued at discount or bear interest Commercial papers bear interest at fixed rate. Issued by banks, insurance and finance companies etc. Commercial paper can be issued directly by banks, insurance or finance companies to investors. Issuing organization can buy back the CPs should there be need. High denomination The minimum amount investible in commercial paper is Rs 10 lakhs and any further amount in multiples of rs. 5 lakhs. Easy negotiability Commercial paper can be easily negotiated by endorsement and delivery. Purchasers of C.P.S CPS may be held by individuals banks, companies, foreign financial institutions and non-resident Indians.

RBI GUIDELINES ABOUT ISSUE OF COMMERCIAL PAPERS

Qualifications of the issuing institutions Only those institutions and companies can issue commercial papers which satisfy the following conditions Have a net tangible worth Rs. 4 crores

 Have a minimum current ratio of 1.33:1 Have fund base working capital limit of Rs 5 crores or more Have debt servicing ratio closer to 2 Are listed on a stock exchange Are subject to CAS discipline Have a credit rating of P2 from CRISIL, or A2 from ICRA Amount of minimum investment Commercial papers shall be issued for minimum amount of Rs. 10 lakhs and in multiples of Rs. 5 lakhs thereafter. Maturity period Commercial papers shall be issued for a minimum maturity period of 15 days and maximum period of 1 year. Total amount of issue The aggregate amount shall not exceed 75% of the issuers fund based working capital Form of issue Commercial paper shall be issued in the form of promissory note with maturity after some definite period. It can be issued in dematerialised form also. Who can invest Investment in commercial papers can be made by any individual bank, Indian companies, other association persons and foreign financial institutions. NRIs can invest on non- repatriation basis.

Compliance of law The companies issuing commercial papers have to ensure that provisions of various statutes such as Companies Act, Income Tax Act, and Negotiable Instruments Act are complied with. Issuing and paying agents Only scheduled banks can act as an issuing and paying agents.

ADVANTAGES
Simple to issue Unlike issue of shares, issues of commercial papers does not involve much formalities or documentation between the issuers and the investors. Only a promissory note is to be issued Flexibilities The issuers i.e. the company can issue commercial papers with maturities tailors- made to its requirements i.e. the period for which it needs money Borrowing at cheaper rates A company of good reputation and credit standing can obtain shot term funds through this method at cheaper rates than borrowings from banks or through other money markets instruments

Higher returns to investors By investing through commercial papers investors can earn higher rate of interest than through investment in banks for short term Creation of secondary market Commercial papers issued in the form of promissory notes are negotiable instruments and can be bought and sold in the secondary market, this results in transfer of funds from cash surplus entities to cash deficient entities. Lesser handling costs As the commercial papers are issued for Rs. 10 lakhs or more, accounts have to be kept for a new investors only and not for a large number of small investors as in the case of public deposits

LIMITATIONS Structural rigidity such as credit rating requirements, timings and terms of issue , maturity range, high denomination and low interest rates have hindered the development of commercial paper market.

CERTIFICATE OF DEPOSITS
Certificates of Deposit (CD) were introduced in 1989 following the acceptance of the Vaghul Working Group of Money Market. These are also usance promissory notes issued at a discount to the face value and transferable in demat form. They attract stamp duty. CDs are issued by scheduled commercial banks and it

offers them an opportunity to mobilise bulk resources for better fund management. To the investors they offer better cash management opportunity with market related yield and high safety. When an investors deposits a large sum( minimum Rs. 10 lakhs) in a bank for short period and the bank gives a promissory note in returns, it is called a certificate of deposit or CD in short.

Definition
Certificates of deposits are marketable receipts of funds in the form of promissory notes deposited in banks for specified periods at a specified rate of interest. FEATURES AND RBI GUIDELINES Issued by banks CDs are issued by banks or financial institutions Period These are issued for a period between 91 days to 1 year. Term lending institutions can issue CDs with maturity periods 1 to 3 years. Form The receipts for deposits are in the form of promissory notes. The debts are unsecured. Transferability CDs are freely transferable by endorsement and delivery after a lock-in- period of 30 days from the date of issue. Interest These are issued at discount or bear a fixed rate of interest.

Minimum amount The minimum size of an issue to a single investor is Rs. 10 lakhs and in multiples of Rs. 5 lakhs thereafter. Who can issue CDs All banks (except regional rural banks), IDBI, ICICI, IFCI are all allowed to issue CDs without any ceiling. To whom issued These can be issued to individuals, corporations, companies, trust funds, associations and to NRIs on non- repatriation basis. No buy back or loans Issuing banks can not buy back the CDs before maturity or grant loan against them. Stamp duty CDs are subject to stamp duty. CDs are subject to CRA and SLR requirements. ADVANTAGES Simple to issue CDs are simple to issue, they do not require any documentation. Liquidity CDs offers maximum liquidity, they are easily transferable. Return Investment in CDs provide good return to investors having short term surplus funds Profitable employment of funds From the point of view of banks CDs provide them avenues for short term gainful employment of funds. CD can not be encashed before maturity date nor

loans granted against them. LIMITATIONS Though scheme of CDs has been operation since 1989 it is yet to prove popular, it has remained confined to less than fifty banks. The main reasons for their unpopularity are: Stamp duty CDs are subject to stamp duty which makes them less attractive Lack of secondary market There is limited secondary market for CDs inspite of efforts of the Discount and Finance House of India. CD holders get attractive returns on them and therefore are reluctant to part with them before maturity Lock in period CDs can not be negotiated before expiry of 30 days from the date of issue, this restricts their transferability. The money is tied along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity SIMILARITIES BETWEEN CPs AND CDs Both are short term unsecured investment Both are issued in the form of promissory notes or dematerialised form. Both are transferable by endorsement and delivery. Both have to bear stamp duty.

 Practically all kinds of investors can invest in them.

TREASURY BILLS
Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.

Types Of Treasury Bills

There are different types of Treasury bills based on the maturity period and utility of the issuance like, adhoc Treasury bills, 3 months, 12months Treasury bills etc. In India, at present, the Treasury Bills are the 91days and 364-days Treasury bills.

Benefits Of Investment In Treasury Bills

No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency

Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.

Features
Form The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form. Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof. Eligibility: All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. Repayment The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. Availability All the treasury Bills are highly liquid instruments available both in the primary and secondary market. Day Count For treasury bills the day count is taken as 365 days for a year. Yield Calculation The yield of a Treasury Bill is calculated as per the

following formula: (100-P)*365*100 P*D Wherein Y= discounted yield P = price D = date of maturity Example A cooperative bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2002 on Oct. 12, 2002. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The YTM can be calculated as following: The days to maturity of Treasury bill are 55 (October 20 days, November 30 days and December 5 days) YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70% Similarly if the YTM is quoted by the seller price can be calculated by inputting the price in above formula. Primary Market In the primary market, treasury bills are issued by auction technique. CALENDAR OF AUCTION AS ANNOUNCED BY RESERVE BANK OF INDIA FOR 2002-03 Treasury Notified Bill amount (Rs crore) 91 day 500 Day of auction Day of payment

Every Wednesday Following

Friday 364 day 1000 Wednesday to coincide with reporting Friday Following Friday

Salient Features Of The Auction Technique The auction of treasury bills is done only at Reserve Bank of India, Mumbai. Bids are to be submitted on NDS by 2:30 PM on Wednesday. If Wednesday happens to be a holiday then bids are to submitted on Tuesday. Bids are submitted in terms of price per Rs 100. For example, a bid for 91-day Treasury bill auction could be for Rs 97.50. Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day. Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected. Types Of Auctions There are two types of auction for treasury bills: Multiple Price Based or French Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him. This method is followed in the case of 364days treasury bills and is valid only for competitive bidders. Uniform Price Based or Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off

level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him. This method is applicable in the case of 91 days treasury bills only. The system of Dutch auction has been done away with by the RBI wef 08.12.2002 for the 91 day treasury T Bill. Secondary Market & Palyers The major participants in the secondary market are scheduled banks, financial Institutions, Primary dealers, mutual funds, insurance companies and corporate treasuries. Other entities like cooperative and regional rural banks, educational and religious trusts etc. have also begun investing their short term funds in treasury bills.

Advantages
Market related yields Ideal matching for funds management particularly for short term tenors of less than 15 days Transparency in operations as the transactions would be put through Reserve Bank of Indias SGL or Clients Gilt account only Two way quotes offered by primary dealers for purchase and sale of treasury bills. Certainty in terms of availability, entry & exit An Effective Cash Management Product Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximise returns Banks do not pay any interest on fixed deposits of less than 15 days,or balances

maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a 91 days treasury bills maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements. Example : Suppose party A has a surplus cash of Rs 200 crore to be deployed in a project. However, it does not require the funds at one go but requires them at different points of time as detailed below: Funds Available as on 1.1.2000 Rs. 200 crore Deployment in a project Rs. 200 crore As per the requirements 6.1.2000 Rs. 13.1.200 Rs. 0 02.2.200 Rs. 0 08.2.200 Rs. 0 50 crore 20 crore 30 crore 100 crore

Out of the above funds and the requirement schedule, the party has following two options for effective cash

management of funds: Option I Invest the cash not required within 15 days in bank deposits The party can invest a total of Rs 130 crore only, since the balance Rs 70 crores is required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by the company works out to Rs 76 lacs approximately. Option II Invest in Treasury Bills of various maturities depending on the funds requirements The party can invest the entire Rs 200 crore in treasury bills as treasury bills of even less than 15 days maturity are also available. The return to the party by this deal works out to around Rs 125 lacs, assuming returns on Treasury Bills in the range of 8% to 9% for the above periods. Portfolio Management Strategies Strategies for managing a portfolio can broadly be classified as active or passive strategies. Buy And Hold A buy and hold strategy can be described as a passive strategy since the Treasury bills once purchased, would be held till its maturity. The salient features of this strategy are: Return is fixed or locked in at the time of investment itself The exposure to price variations due to secondary market fluctuations is eliminated. There is no risk of default on maturity.

Buy And Trade This strategy can also be described as an active market strategy. The returns on this strategy are higher than the buy and hold strategy as the yield can be optimised by actively trading the treasury bills in the secondary market before maturity.

Repo/ Reverse Repo

It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds. Thus, whether a given agreement is termed as Repo or a Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions. The Repo/Reverse Repo transaction can only be done

at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities). Uses of Repo It helps banks to invest surplus cash It helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better rates An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously. RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system.

Inter Corporate Deposits

For short term cash management of the rich corporates, the company offers to borrow through Inter corporate deposits. The company has P1+ credit rating (Highest Rating in its category) for an amount of Rs. 250 crores. The company offers two variables of the Inter Corporate Deposits: Fixed Rate ICD : the quantum/ rates/ term to maturity of the ICD are negotitaed by the two parties at the beginning of the contract and remains same for the entire term of the ICD. As per the RBI guidelines the minimum period of the ICD is 7 days and can be extended to peiod of 1 year. The rates are generally linked to Interbank Call Money Market Rates. Floating Rate ICD : Corporates interested in using the daily volatility of the call money market are offered Floating Rate ICD which may be benchmarked/

linked to either NSE Overnight Call/ Reuters Overnight Call rates. The corporates are also given Put/ Call option after 7 days for managing their funds in the event of uncertainity of availability of idle funds.

Bills Rediscounting
The bills rediscounting scheme was introduced by RBI in November 1970 under which all licensed scheduled commercial banks were eligible to rediscount with RBI genuine trade bills arising out of sale/ purchase of goods. In November 1981 RBI stopped rediscounting bills but permitted banks to rediscount the bills with one another as well as with approved Financial institutions. To augment facilities for this activity and also make a larger pool of resources available, RBI has been progressively enlarging the number of institutions eligible for bills rediscounting including primary dealers.

Call/ Notice/ Term Money

Call money market is that part of the national money market where the day to day surplus of funds, of banks and primary dealers, are traded in.Call/ Notice/ term money market ranges between one day to 15 days borrowing and considered as highly liquid. Other key feature is that the borrowings are unsecured and the interest rates are very volatile depending on the demand and supply of the short term surplus/ defeciency amongst the interbank players. The average daily turnover in the call money market is around Rs. 12000-13000 cr every day and the market is active between 9.30 to 2.30 every working day and 9.30to 12.30 every Saturday

Banker's Acceptance
It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.

Euro Dollars
The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds.

CHAPTER 3
To study the defects of the money market instruments

DEFECTS OF MONEY MARKET

Existence of unorgainsed money market Absence of integration Diversity in the many interest rates Seasonal shortage of funds Absence of well organised banking system Absence of a wide money market Existence of unorganised money market The organised money market developed and is organised in modern lines. It consist of modern and advanced financial institution like RBI, commercial banks and co-operative banks. As against this, the unorganised money market is the traditional market doing business on traditional lines. It comprises indigenous banks, moneylenders, merchants, etc. the indigenous bankers follow their own rules and practices of financing and banking. They are not subject to the regulation and control of the Reserve bank of India. As the result of this dichotomy, it is extremely difficult for the RBI to have an effective control on the money market. absence of integration

The organised banking system and the indigenous bankers have not been having any contact and interaction with each other. At one time, each section of the money market such as the SBI and its subsidiaries, the other commercial banks confined themselves to a particular class of business with no contact with each other. However in recent years, things have improved because of the efforts of the RBI in adopting uniform rules and regulation. Diversity in the many interest rates Many rates of interest exist for the funds of same duration. Also there is disparity in the interest rates charged by different institution. For example call rates, lending rates of commercial banks, hindi rates differ widely from 1% to 12%. The basic reason for the existence of too many different rates of interest is the immobility of funds from one section of the money market to another section. Seasonal shortage of funds During the busy season from November to June, there is heavy demand for short term funds for financing the movement of crops, seasonal activities like sugar in particular and for financing the higher tempo of economic activities in general. This result in shortage of funds and subsequently shooting up of the interest rate. But in the slack season from July to October, an opposite situation emerges when demand for funds and the rate of interest go sown considerably. Absence of well- organised banking system Until recently, there were a few big banks in the country and they were by and large concentrated in the large towns and a few important mandi towns. The

country lacked a well- developed branch- banking network. The rural and semi-urban parts of the country did not have much of the banking facilities. However, things have started changing since 1969 after the nationalisation of the banks. Absence of wide money market Bill market forms a very small proportion of the bankfinance in India as compared to western countries. Such a market has not fully kept a large amount of cash credit as the main form of borrowing from banks rather than rediscounting bills of exchange, defective and improper hundis, the practice of cash transactions, etc.

CHAPTER 4
To study the reforms of the money market

REFORMS/ SUGGESTION TO IMPROVE MONEY MARKET

Relaxation of interest rate regulation New treasury bills Discount and finance house of India Ltd. Introduction of new credit instruments Mutual funds extended to Pvt. Sector Relaxation of interest rate regulation

Since 1988, interest rate regulation have been relaxed. In Nov. 1991 the Narshimam Committee Report recommendation was accepted. Interest rates were further deregulated and banking and financial institution were told to adopt market related rates of interest. In the 2001 Union Budget, interest rates were lowered so that lending would become cheaper and in keeping with the world interest rates. New treasury bills Apart from 90 days treasury bills, the RBI introduced 182 days treasury bills and sold it through auctions. In 1992, treasury bills of varying maturities up to 364 days were introduced. These long dated paper are for superior to assets and investments which cannot be easily liquidated without incurring heavy losses. Discount and finance house of India Ltd. The D.F.H. established in 1992 fills the long standing need of discount house in India which will buy bills and other short term paper from banks and financial institutions. It has enabled banks to invest their idle funds for the short periods in bill. The bank can sell short term securities to D.F.H.I. and get funds without disturbing their investments. The D.F.H.I. is has been able to contribute to the overall stability of the money market. Introduction of new credit instruments The banks and DFHI is have been permitted to raise short term credit through Certificates of Deposits (CDs). Longaries whose net worth is 5 crores and whose shares are listed in the Stock Exchange are permitted to introduce commercial papers of 3-6 months in order to raise credit. Banks are permitted to

borrow from other banks through Inter Bank Participation credit can be availed by a bank for 91180 days. Mutual funds extended to Pvt. Sector Earlier only UTI was permitted to operate the mutual funds scheme, however, today even the Pvt. Sector are permitted to float mutual funds schemes, e.g., Tatas & Birlas, Kottaris from the Pvt. Sector have established good will amongst the investors. Moreover , even banks like SBI, Indian Bank, Canara Bank have entered the field of mutual funds.

CHAPTER 5
To study the capital market and its instruments

CAPITAL MARKET
A capital market is a market where both government and companies raise long term funds to trade securities on the bond and the stock market. It consists of both the primary market where new issues are distributed among investors, and the secondary markets where already existent securities are traded. In the capital market, mortgages, bonds, equities and other such investment funds are traded. The capital market also facilitates the procedure whereby investors with excess funds can channel them to investors in deficit. The capital market provides both overnight and long term funds and uses financial instruments with long maturity periods. The following financial instruments are traded in this market:

Foreign exchange instruments Equity instruments Insurance instruments Credit market instruments Derivative instruments Hybrid instruments

Foreign Exchange Instruments

The principal foreign exchange instruments may be classified as follows, roughly in order of importance: Bank drafts, not drawn under letter of credit. Mail transfers. Commercial or trade drafts and drafts drawn under letters of credit.

Travellers checks and letters of credit. Postal money orders. Express orders and bank post remittances. Bank Drafts For whatever the reason to pay for goods, for securities, and so on Americans frequently need to remit to foreigners under conditions which make money orders generally undesirable. The amount may be large, or the remitter may wish to send the remittance in his own mail. In all these cases the ordinary bank draft is a most convenient form of remittance. In this country, in purely domestic trade, we have become so accustomed to making payments by personal check that we may forget that in general the personal check is not used in foreign trade. It is true that in trade with Canada, Cuba, and Mexico, payments are sometimes made by dollar checks drawn by the buyer (i.e., debtor) on his own bank account, just as in domestic trade. Usually, however, the importer, or anyone else, wishing to remit to a foreigner by check obtains from his bank a "bank draft" drawn by it on one of its correspondents or branches abroad. Here, again, it should be noticed that an American bank cannot sell a foreign-currency draft to its customer unless: (1) It has a correspondent bank or branch in that foreign country; and (2) it makes arrangement to reimburse the correspondent for the drawing.

It may, of course, have an adequate deposit in that bank already; but if it does not, it must purchase exchange in order to avoid an "open" or "uncovered" position in the foreign currency involved. The bank check reproduced is a "demand" draft. That is, it is payable "at sight" (i.e., on presentation) in London, and it will be sold to the buyer (or remitter) at the current market rate In contrast, equity instruments generally represent ownership interests entitled to dividend payments, when declared, but with no specific right to a return on capital. Within each of these two general categories, there are a wide variety of rights, privileges, and limitations that may be established by the issuing company. EQUITY INSTRUMENTS Common stock is the most basic form of equity instrument. It represents an ownership interest in a corporation, including an interest in earnings, that translate into declared dividends, as well as an interest in assets distributed upon dissolution. Common stock may be voting or non-voting and may be divided into classes with special voting privileges assigned to each class. However, common stock is typically entitled to full voting rights, i.e., the right to cast a vote in the election of directors of the corporation. Holders of common stock have the greatest opportunity to share in a company's profitability because of the unlimited potential for dividends, appreciation in the value of their common stock, and

realization of liquidation proceeds. However, common stock holders also bear the greatest risk of loss because they are generally subordinate to all other creditors and preferred stock holders. There are several advantages to a company that issues common stock -- there is no obligation to repay the amount invested, there is no obligation to pay dividends (thereby enabling earnings to be reinvested in the business as necessary), there is a right bestowed upon investors to share in the growth of the corporation, and investors are allowed the opportunity to influence management through their right to vote for directors. Several disadvantages in issuing common voting stock include -- a dilution of management's interest in the corporation's growth, an increase in the voting power of non-management stockholders, and investors must bear the maximum risk of losing their investment. Preferred stock is another form of equity instrument. It represents a hybrid in the sense that it is an equity interest with certain features resembling debt. Preferred stock has preference rights over common stock with respect to dividends and liquidation proceeds. In other words, it has priority when dividend payments and liquidating distributions are made. If desired, dividends can accrue at a preestablished rate and can be paid on a cumulative basis when cash flow permits. Also, preferred stock may be voting or non-voting or entitled to certain redemption rights. Several advantages to issuing preferred stock include -- no dilution of management's interest in corporate

growth or in voting power (if non-voting preferred stock is issued), and predictable dividend payments and preferences upon liquidation (for which investors may pay a premium). Disadvantages include -- a subordination of dividends to be paid on common stock and limitations on the use of corporate funds to the extent that preestablished dividend payments must be made. DERIVATIVE INSTRUMENTS A derivative instrument (or simply derivative) is a financial instrument which derives its value from the value of some other financial instrument or variable. For example, a stock option is a derivative because it derives its value from the value of a stock. An interest rate swap is a derivative because it derives its value from one or more interest rate indices. The value(s) from which a derivative derives its value is called its underlier(s). HYBRID INSTRUMENT The term hybrid instrument is not precisely defined. Generally, it is used to refer to financial instruments that blend characteristics of debt and equity markets. Convertible bonds are an example. They are debt instruments that have an imbedded option allowing the holder to exchange them for shares of the issuing corporation's stock. For this reason, their market prices tend to be influenced by both interest rates as well as the issuer's stock price. Another example would be a structured note linked to some equity index. These take many forms. Typical would be a five

year note. It is a debt instrument issued by a corporation or sovereign, but instead of paying interest, it returns the greater of The following are some of the main capital market regulatory authorities:

U.S. Securities and Exchange Commission Securities and Exchange Board of India Australian Securities and Investments Commission Authority of Financial Markets (France) Canadian Securities Administrators Securities and Exchange Surveillance Commission (Japan)

The stock market forms a major portion of the capital market

Capital Market Assumptions

Asset allocation is one of the most important decisions related to investment in the capital market. There are a number of risk factors related to these investments, and because of this appropriate capital market analyses are necessary. There are firms which provide capital market investment solutions to investors, each making their own risk and return calculations, or capital market assumptions. These assumptions are followed strictly when making suggestions to the clients regarding the asset allocation. Many companies also provide their clients with their capital market assumptions so that the clients can evaluate their own investment decisions. Of course, capital market assumptions cannot be permanent and thus need to be changed from time to time. The market prices of different investment instruments change very rapidly, and with this rapid

change the level of risk also changes. Different consultation companies use different techniques to get their perfect capital market assumptions. However, most companies concentrate on valuations because they can provide the most accurate capital market assumptions for the future. Other factors useful in making capital market assumptions are the ratio between the price and earning of the particular asset, the dividend yield, the interest rates, and the growth rate of the assets. Apart from the internal factors of the capital market, there are also macroeconomic trends that are related to making capital market assumptions. These include the level of inflation, changes in the Gross Domestic Product (GDP), and increases or decreases in the unemployment rate. International external factors related to the capital market which play a major role in shaping capital market assumptions too include taxation, foreign denominations, and decisions of national regulators.

Role of Capital Market

The primary role of the capital market is to raise longterm funds for governments, banks, and corporations while providing a platform for the trading of securities. This fundraising is regulated by the performance of the stock and bond markets within the capital market. The member organizations of the capital market may issue stocks and bonds in order to raise funds. Investors can then invest in the capital market by purchasing those stocks and bonds.

The capital market, however, is not without risk. It is important for investors to understand market trends before fully investing in the capital market. To that end, there are various market indices available to investors that reflect the present performance of the market. Regulation of the Capital Market Every capital market in the world is monitored by financial regulators and their respective governance organization. The purpose of such regulation is to protect investors from fraud and deception. Financial regulatory bodies are also charged with minimizing financial losses, issuing licenses to financial service providers, and enforcing applicable laws. The Capital Markets Influence on International Trade Capital market investment is no longer confined to the boundaries of a single nation. Todays corporations and individuals are able, under some regulation, to invest in the capital market of any country in the world. Investment in foreign capital markets has caused substantial enhancement to the business of international trade. The Primary and Secondary Markets The capital market is also dependent on two submarkets the primary market and the secondary market. The primary market deals with newly issued securities and is responsible for generating new longterm capital. The secondary market handles the trading of previously-issued securities, and must remain highly liquid in nature because most of the securities are sold by investors. A capital market with high liquidity and high transparency is predicated upon a secondary market with the same qualities.

Capital Market Conditions

The capital market conditions are influenced by the rise and fall of the stock market and bond market. Other than the financial condition of the economy, capital markets are also influenced by various other external factors. The capital market deals with the buying and selling of securities including stocks and bonds. The capital market conditions largely depend on the prices of stocks and bonds. There are various risks involved in the capital market investment that affect the capital market conditions. The capital market risks, also termed as systematic risks, can be either market driven, industry driven or business driven. The risks may affect the stock and bond prices gravely. The capital market investors always need to be aware of the various factors that affect the capital market conditions. The economists suggest that behavior of the capital market also largely depends on the whims of the investors. The investors may temporarily pull the stock prices resulting over-reaction in the financial market. The excessive optimism, or also known as euphoria, may thus pull up the stock price unduly high. On the other hand, excessive pessimism may also drive the stock price to the lowest. In order to improve the liquidity and transaction feasibility, the capital markets undergo innovations and experiments. The major contribution of the capital markets to the financial markets is to raise the capital. The corporations, companies, banks and governments issue stocks and bonds in order to raise funds. The

capital market plays the base market for this. The conditions of capital market influence the overall condition of the financial market. While the fluctuation of stocks and bonds prices affect the conditions in capital market, the vise versa is also true. Depending on the condition of the capital market, the trading trends of the stock markets and bond markets may also vary. The capital markets may be either primary market or secondary market. On one hand when the primary market deals with the newly issued securities, the secondary market trades the securities that have already been issued. The overall market trend of issuing the securities also affects the capital market conditions heavily.

Capital Market Reform

Capital market reform enables the capital markets to embrace new ideas and techniques affecting the capital market. Capital market liberalization is one such capital market reform that is adopted by various countries to strengthen their economy. A capital market is a place that handles the buying and selling of the securities. This is the ideal place where both the governments and companies can raise their funds. The capital markets of all the countries have undergone a number of reforms in the history. Economic theories are made and implemented to reform the functionalities of the capital market. The prime objective behind all the policies and reforms was obviously to strengthen the capital market of a particular country as much as possible. It has been always a big question to the economists

whether to allow or not to allow the foreign investments in the country. Packaged with both advantages and disadvantages, the liberalization of the capital markets has always been controversial. In the 1980s and 1990s when the US Treasury and International Monetary Fund (IMF) tried to push worldwide capital-market liberalization, there had been enormous opposition. Economists were not in the support of free and unfettered markets.

Capital Market Regulations

Regulations are an absolute necessity in the face of the growing importance of capital markets throughout the world. The development of a market economy is dependent on the development of the capital market. The regulation of a capital market involves the regulation of securities; these rules enable the capital market to function more efficiently and impartially. A well regulated market has the potential to encourage additional investors to partake, and contribute in, furthering the development of the economy. The chief capital market regulatory authorities worldwide are as follows: U.S. Securities and Exchange Commission Canadian Securities Administrators, Canada Australian Securities and Investments Commission Securities and Exchange Commission, Pakistan Securities and Exchange Board of India Securities and Exchange Commission, Bangladesh Securities and Exchange Surveillance Commission

Securities and Futures Commission, Hong Kong

Financial Supervision Authority, Finland Financial Supervision Commission, Bulgaria Financial Services Authority, UK Comision Nacional del Mercado de Valores, Spain Authority of Financial Markets

The United States Securities and Exchange Commission (SEC), established in 1934, has the responsibility of regulating and controlling the securities industry/stock market, and enforcing the federal securities laws. Public companies have to keep in compliance with the statutory requirements by submitting quarterly and annual reports to the SEC; companies involved in fraudulent activities are brought to task. These submitted reports are essential, as investors require them in order to make crucial decisions before investing in the capital market. The Canadian Securities Administrators (CSA) is responsible for the development of the Canadian Securities Regulatory System and regulates the capital market of Canada, protecting investors from fraudulent and nefarious activities. The CSA looks to establish a just, clear and dependable capital market system.

FINDINGS
The main important factor is to provide the better services and good quality of products to deal the different kinds of the customer.

The major role of RBI and SEBI in the monetary policy, financial market, capital market and other markets.

There is a limited market in India for long- term bills also. This market has come into being with the introduction of the Bills Rediscounting Scheme by the IOBI, SIOBI etc. For the purpose of rediscounting bills arising out of the sale of machinery on deferred payment basis.

 Flexible of interest rates

Lack of security

Concentration of economic power

Lack of introduction of instruments

Lack of financial institution

CONCLUSION
A financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs. The money market is a vibrant market, affecting our everyday lives. As the short-term market for money, money changes hands in a short time frame and the players in the market have to be alert to changes, up to date with news and innovative with strategies and products. The RBI has still a long way to go before it can be called an autonomous central bank, the signing of agreements between the Bank and the GOI is only a

beginning in the process of attaining autonomy. Banks have a special place in the Indian financial system, and it is not in the interest of the effectiveness of monetary policy to allow their role to be undermined. It has wide powers to issue rules, regulations, and guidelines in respect of both the primary and secondary securities markets, a wide variety of intermediaries operating in these, market, viz.., brokers, merchant bankers, underwriters, bankers to issues etc., and their certain financial institutions such as mutual funds.

BIBLIOGRAPHY
BOOKS Financial Institutions and market (L.M Bhole) Financial market Operations Instruments Of Monetary And Credit Controls WEBSITES

www.eagertrader.com www.rbi.org.in www.capitalmarket.com www.financialmarket.com MAGZINES Economic times Times of India Hindustan times