A presentation

on
Fundamentals of Finance
saibaba

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Introduction to the financial

markets

Money Market
Capital market
Derivatives market
Forex market

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Capital Markets
Instruments:
Debentures(bonds issued by
corporations)
Stocks

Players:
Individuals, Financial institutions,
banks, corporations, etc.
Click here
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Features of bonds:

Face value:
If the bond is issued at discount, face
value equals the redemption value.

Coupon rate:
The rate at which the payments are given

Maturity Date:
The tenor for which the bond has to be
hold
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Types of Bonds

Zero Coupon Bonds

Perpetual bonds
Floating Rate Bonds
Bonds with embedded options

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Features of Stocks

No fixed income like coupons in

bonds.
Dividends are not compulsory
Required rate of return is high
May be issued at par or premium
Life of a stock ends when once the
company ceases to exist
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Types of stocks:

Ordinary stocks
Preferential stocks:
It has both the features of bond as well as ordinary
stocks. Dividends are constant(like coupon in debts). It
exists till the company exists(like ordinary stocks).
But they dont have voting rights. The other difference
is that when the company is winding up, the liabilities
against the preferential share holders are paid first and the
residual is shared among the ordinary share holders.
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Constituents of stock

Dividends:
The profit that is given to shareholders
as
reward for their investment.
Dividends are given on face value of
the stock and not at
which the
price you bought the share for.

Capital Appreciation:
Change in the price of stock during the
holding period
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Where should I invest?

(bonds or shares)
The return in bonds is less though fixed where as the return
in shares is high. But there is high risk involved with shares
compared to that of bonds.
Depending on the behavior of the investor (whether risk
averse or risk lover), one may invest in bonds or stocks.
It is not just the risk-return profile that plays, the tax factor
should also be considered. There used to be some rebate in
tax if we invest in bonds. Short term capital gains are taxed
in the case of stocks. There might be a transaction cost.

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Example:
GlobeOp Software Solutions Ltd. is a
one year old company.It needs 1crore
for further expansion.
It issues 1mn shares each worth Rs.10
Promoters holding: 30% I.e 3 lakh shares
Investors holding: 70% I.e 7 lakh shares

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Types of Orders
Time conditions
Good till Cancelled(GTC)
Good till Date(GTD)
Immediate or Cancel(IOC)

Price conditions
Market Price
Limit order

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Clearing and Settlement

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Sensex
Index on any day =
that days market capitalization
*Base Value
Base market capitalization
Market Capitalization=
no.of outstanding shares*price of
each share
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Derivatives
Instruments:
Options
Swaps
Futures
Forwards

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Features of an Option

An underlying asset
Option price:
The price paid for the option.Also referred to
as Option premium.
Strike price:
The price at which the underlying asset has
to be bought or sold depending on the
option.
Spot price:
The price of the underlying on the expiry
date of the option.
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Types of Options:

Call Option:
Call option gives the buyer the right to buy, but not an obligation, a
certain quantity of an underlying asset at a particular price on or
before a particular date.

Put Option:
Put option gives the buyer the right to sell, but not an obligation, a
certain quantity of an underlying asset at a particular price on or
before a particular date.
Options which can be exercised on or before the expiration date
are called American Options. Other options which can be exercised
only on the expiration date are called European Options.

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Positions in Options

Long Call
Short Call
Long Put
Short Put

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Profit & Loss in positions

Long call:
If the current position is long, it
implies that we bought the call
option.
E.g: A call option to buy 1Reliance
share @ Rs.100. The price of the
option is Rs.3
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Long Call:

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Short Call

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Swaps

Aswapisanexchangeofoneseto
f future
Cash flows foranother

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Mechanism
Any swap transaction includes two
counterparties. There is a notional
principal on which the cash
flows(interest payments) are
calculated. The payments are
calculated depending on whether it
is floating rate or fixed rate. It
further depends on the type of the
swap.
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Types of Swaps

Interest Rate Swaps

Basis Swaps
Currency Swaps

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Weather Derivatives
Weather derivatives are financial
instruments that can be used by
organizations or individuals as part of a
risk management strategy to reduce
risk associated with adverse or
unexpected weather conditions. The
difference to other derivatives is that
the underlying asset
(rain/temperature/snow) has no direct
value to price the weather derivative
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Money market
A few instruments

Bonds
Repo
Reverse Repo
Treasury bills

<<back..
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Repo:
The rate at which RBI lends to
banks against securities
Reverse Repo:
The operational rate at which banks
park short-term funds with RBI

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A few interesting
questions

In India are we really getting positive interest

for our deposits?
ABC corporation announced 100% dividend?
(is the news really positive?)
TCS public issue has been oversubscribed by 20
times. Does this have a positive impact in
analysts minds?
Who won in the battle between Osama and
Bush?
Who is your role model: Harshad Mehta or
Manmohan?

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Questions?

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Thank You

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