Financial Management I

2. Overview of Financial Markets

suresh.suralkar@gmail.com, Phone: 40434399

 Course Content - Syllabus


Sr Title ICMR Ch. PC Ch. IMP Ch.




1 Introduction to Financial Management 1* 1 1



2 Overview of Financial Markets 2* 2 -



3 Sources of Long-Term Finance 10* 17 20, 21



4 Raising Long-term Finance - 18* 20, 21, 23



5 Introduction to Risk and Return 4* 8, 9 4, 5



6 Time Value of Money 3* 6 2



7 Valuation of Securities 5* 7 3


8 Cost of Capital 11* 14 9



9 Basics of Capital Expenditure Decisions 18* 11 8



10 Analysis of Project Cash Flows - 12* 10, 11



11 Risk Analysis and Optimal Capital - 13* 12



*Book preference
Expenditure Decision
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  Books


1. Financial Management, ICMR Book, Chapter 2

2. Financial Management, Prasanna Chandra, 7th Edition,

Chapter 2

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 Syllabus – Overview of Financial Markets


1. Financial Markets
2. Functions and Classifications of Financial Markets
3. Money Market
4. Forex Market
5. Government Securities Market
6. Capital Market
7. Derivatives Market
8. International Capital Markets
9. Participants
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  Financial System
1.


• Financial System is a broader term. It includes various financial

institutions, financial markets, regulations and laws, practices,
analysts, money managers, transactions, claims and liabilities.
•
Funds Financial Institutions: Funds
Commercial Banks
Deposits/Shares Insurance Companies Loans
Mutual Funds
Provident Funds
NBFCs…

Suppliers of Funds: Demands of Funds:

Individuals Individuals
Businesses Businesses
Governments Governments

Funds
Financial Markets:
Funds
Money Market
Securities Capital Market… Securities
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  Financial System


 Functions performed by a financial system are

• Savings Function: Savings - financial system -

development
• Liquidity Function: convert investments to money

• Payment Function: Cheques, credit cards, ATM, online

• Risk Function: Protection against life, health, income by

insurance, hedge
• Policy Function: Govt policies for welfare like lower
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  1. Financial Markets
1.


Financial Markets include



• Money Market
• Forex Market
• Government Securities Market
• Capital Market
• Derivatives Market
• International Capital Markets

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 2. Functions and Classifications of Financial
Markets
1.


Functions of Financial Markets



• Price Discovery

• Liquidity to financial assets

• Reduce the transaction costs

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  Classifications of Financial Markets


 Debt Market
• Nature of Claim
 Equity Market
 Money Market
• Maturity of Claim
 Capital Market
 Primary Market
• Seasoning of Claim
 Secondary Market
 Cash or Spot Market
• Timing of Delivery
 Forward or Futures Market
 Exchange-traded Market
• Organizational Structure
 Over-the-counter Market
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  3. Money Market
1.


• Money market is for short-term borrowing and lending.

• It provides short-term liquidity to the financial system.
• Money Markets are interbank and inter-corporate.
• In Money Market, mostly debt instruments are traded
such as Treasury Bills, Commercial Papers, Banks’
Acceptance, Certificate of Deposits, Repurchase
Agreements etc.
• Money Market include Call Money Market, Treasury
Bills Market, CP & CD Market etc.
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  3. Money Market
1.


• Central, State and Local Governments issue papers to

meet funding needs.
• Money Markets trade in short-term financial
instruments called as paper. It is not like long-term
instruments such as equity and bonds.
• Money Market instruments are benchmarked to the
LIBOR or MIBOR/MIBID (offer/bid rates).
• Arbitrage opportunities exists to buy higher yield long-
term papers, while selling short-term cheaper papers.
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  4. Forex Market
1.


• Foreign Exchange Market deal in foreign currencies e.g

$, ₤, €, ¥ etc.
• Volume is around $4 t/day. Therefore it has high
liquidity.
• NSE started trading in Forex in year 2008.
• Participants in Forex market include exporters,
importers, commercial banks, central banks and
brokers.
• Forex quotations have two rates: bid and offer rates.
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  5. Government Securities Market
1.


• This includes bonds and treasury bills issued by the

Central Government, State Government and local self
government like municipal authorities and companies
wholly owned by the government, for the purpose of
raising funds from the public.
• These securities are referred as ‘gilt-edged’ or risk-free
or safest as repayments are totally secured.
• Govt. securities are issued for maturities from 91 days to
31 years.
• Govt. securities market consists of primary and
secondary markets.
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  6. Capital Market
1.
• BSE and NSE are the capital markets or stock markets
in India.
• BSE started in 1887 and NSE in 1993. NSE is electronic
exchange since inception. BSE started electronic
trading since 1995.
• Capital markets provide resources for industries and
businesses for long term needs.
• It brings together savers, entrepreneurs and outlet for
investment.
• It include primary market (IPO and FPO) and
secondary market (buy/sell securities).
• SEBI is a regulator.
• Issues: Public issue, rights issue, bonus issue.
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  Functions of Capital Market


Functions of Primary Markets



1. To bring the savers and users together resulting in

transfer of funds from one to the other
Functions of Secondary Markets


1. Investor should be able to sell his stocks at most

competitive price

2. They should provide liquidity

3. Transaction costs should be minimum for the investor

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  Stocks Trading Procedure


 Trading and Settlement Procedure of stocks:



1. Place an order with a broker or online

2. Broker communicate the order to stock exchange
3. Order stays in a queue and gets executed when it enters
system within buy/sell limit specified
4. You can see number of buyers and sellers
5. Shares bought or sold are recorded in Demat accounts of
respective owners.

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  7. Derivatives Market
1.


• Derivatives are the derived products from another

products such as underlying securities or assets.
• Price of derivatives depends on underlying, risk and
time value.
• Derivatives are: Futures, Forward, Options and Swaps.
• Futures and Forward: Obligations.
• Options: Right but not obligations.
• Futures and options are exchange traded. Forward are
OTC.
• Functions of derivatives: Hedging, Speculation and
Arbitrage.
•
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 Size of Market ($ trillion) Size of the Derivatives Markets

OTC

Exchange

Source: Bank for International Settlements. Chart shows total principal

amounts for OTC market and value of underlying assets for exchange market.
18
  American vs. European Options


• An American option can be exercised at any time

during its life.

• A European option can be exercised only at

maturity.

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 Types of Traders in Derivatives

•Hedgers

•Speculators

•Arbitrageurs

Some of the largest trading losses in derivatives have

occurred because individuals who had a mandate to be
hedgers or arbitrageurs switched to being speculators for
example Barings Bank.

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  8. International Capital Markets
1.


• Origin can be traced back to 1960s, when Europeans

wished to invest in dollar-dominated bonds, to hold
their assets overseas for avoiding taxes and protecting
themselves against depreciating domestic currencies.
• These markets include GDRs , ADRs and Eurobonds.
• Many Indian companies has raised finance overseas
such as Infosys, ICICI Bank, Reliance, L&T etc.
• 1970s onwards there is substantial growth in ICMs for
raising capital overseas.
•
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 9. Participants of the Financial System
1.


 They include
• Financial Institutions: IDBI, IFCI, ICICI, IIBI, Exim
Bank, SFCs, SIDCs
• Insurance Companies: LIC, GIC etc.
• Investment Institutions: UTI, Mutual Funds,
Commercial Banks, NBFCs, Housing Finance
Companies, Foreign Institutional Investors


 *****

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