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AKNOWLEDGEMENT


We have learned tremendously from this project. The nuances of financial markets
and the basic instruments that have been used in financial markets have now
become clear to us.
Hence we would like to thank MsNital Kothari for not only giving us this topic
but also allowing us the liberty to interpret it in such a way that we could maximize
our exposure and introduce ourselves to new concepts.
We hope that the project is as beneficial to the reader as it has been to us.







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INDEX
Sr. No. TOPIC Page No
1. Introduction of Financial Markets
a) Meaning
b) Components
1

2. Capital Markets
a) Meaning
b) Classification of Capital Markets
2
Primary and Secondary Capital Markets
i. Important stock exchanges of the world with their index
ii. Top stock exchanges according to Market Capitalization
3
Equity Market
i. Meaning
ii. Trading in Equity markets
iii. Interesting Facts about Equity markets
6
Debt Market
i. Meaning
ii. Types of Debt markets on the basis of issuer
iii. Types of debt markets on the basis of Description
12
Securitization
16
3. Derivatives Market
a) Meaning
b) Classification of the derivatives
i) On the basis of the market
ii) On the basis of underlying
iii) On the basis of the relationship with the underlying asset
20
4. Money Market
a) Meaning
b) Money Market Instruments
c) Rates used in money markets
32
5. Foreign Exchange Market
a) Meaning
b) Market Participants
c) Trading Characteristics
d) Determinants of FX rate
e) Unique characteristics of Forex markets
37
6. Credit Rating Agencies
a) Meaning
b) Calculation of the rating
c) Use of the rating
d) Implication of the rating
e) Importance of credit rating agencies
f) Few important Credit rating agencies
47
7. Conclusion
52
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INTRODUCTION of FINANCIAL MARKETS
a) MEANING:
In economics, a financial market is a mechanism that allows people to 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.
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.
b) COMPONENTS:

The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
The transfer of liquidity (in the money markets)
International trade (in the currency markets)
This project aims to explain all the above markets and their
components.




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1. CAPITAL MARKETS
a) MEANING
A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is defined
as a market in which money is provided for periods longer than a year, as the
raising of short-term funds takes place on other markets (the money market).
Financial regulators oversee the capital markets in their designated jurisdictions to
ensure that investors are protected against fraud, among other duties.
Financial regulators of some countries are:
Australian Securities and Investments Commission, (Australia)
China Securities Regulatory Commission , (China)
Autorit des marchs financiers (France)
Federal Financial Supervisory Authority, (Germany)
Securities and Futures Commission, (Hong Kong)
Securities and Exchange Board of India, (India)
Financial Services Authority , (United Kingdom)
Dubai International Financial Centre, (United Arab Emirates)
Securities and Exchange Commission, (United States of America)

b) CLASSIFICATION OF CAPITAL MARKETS:

I) ON THE BASIS OF TRANSACTIONS
Capital markets may be classified as primary markets and secondary markets. In
primary markets, new stock or bond issues are sold to investors and in the
secondary markets, existing securities are sold and bought among investors.

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PRIMARY MARKETS
The primary market is that part of the capital markets that deals with the issuance
of new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is an
initial public offering (IPO). This is the market for new long term equity capital.
The primary market is the market where the securities are sold for the first time.
Therefore it is also called the new issue market (NIM).In a primary issue, the
securities are issued by the company directly to investors.The company receives
the money and issues new security certificates to the investors. The primary market
performs the crucial function of facilitating capital formation in the economy.
Methods of issuing securities in the primary market are:
Initial public offering;
Rights issue (for existing companies);
Preferential issue.
SECONDARY MARKETS

The secondary market, also called aftermarket, is the financial market where
previously issued securities and financial instruments such as stock, bonds,
options, and futures are bought and sold.
The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock
exchanges are the most visible example of liquid secondary markets - in this case,
for stocks of publicly traded companies. Exchanges such as the New York Stock
Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid
secondary market for the investors who own stocks that trade on those exchanges.
Most bonds and structured products trade over the counter, or by phoning the
bond desk of ones broker-dealer.
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Important:
The main difference between primary and secondary markets has to do with who
benefits from the sale or purchase of a corporations stock. When new stock is
issued, the company benefits from the sale and the cash flow from the sale of new
stock can be used to invest in the companys operations. When stock is bought or
sold between investors, the company does not directly benefit from the sale or
purchase because money changes hands only between the two investors.
i. The following are few of the worlds stock exchanges and their indexes.
COUNTRY STOCK EXCHANGE INDEX
United States NASDAQ NASDAQ Composite
United States New York Stock Exchange. NYSE Composite
Egypt Cairo & Alexandria Stock
Exchange
Case 30
Morocco Casablanca Stock Exchange MASI Index
Australia Australian Stock Exchange All Ordinaries
China Shanghai Stock Exchange SSE Composite
Hong Kong Hong Kong stock market Hang Seng Indexes
India Bombay Stock Exchange BSE SENSEX 30
India National Stock Exchange of India S&P CNX Nifty
Indonesia Jakarta Stock Exchange JSX Composite
Japan Tokyo Stock Exchange Nikkei 225
Malaysia Bursa Malaysia FTSE Bursa Malaysia Index
New Zealand New Zealand Stock Market NZX 50
Pakistan Karachi Stock Exchange. KSE 100
Philippines Philippine Stock Exchange PSEi Index
Singapore Singapore Exchange ST Index
South Korea Korean Stock Exchanges KOSPI
Taiwan Taiwan Stock Exchange TSEC
Canada Toronto Stock Exchange S&P/TSX Composite
Belgium Euronext Brussels BEL20
Czech
Republic
Prague Stock Exchange (PSE) PX Index
Denmark Copenhagen Stock Exchange
(KFX),
OMX Copenhagen 20
Finland Helsinki Stock Exchange OMX Helsinki 25
France Euronext Paris. Euronext Paris.
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Germany Frankfurt Stock Exchange DAX
Ireland Irish Stock Exchange ISEQ 20
Italy BorsaItaliana. S&P/MIB Index
Netherlands Euronext Amsterdam AEX Index
Poland Warsaw Stock Exchange WIG Index
Portugal Euronext Lisbon, PSI-20
Russia Moscow Interbank Currency
Exchange
MICEX Index
Russia RTS Stock Exchange RTS Index
Spain Bolsa de Madrid, IBEX 35
Sweden Stockholm Stock Exchange OMX Stockholm 30 Index
Switzerland SWX Swiss Exchange Swiss Market Index (SMI)
UK London Stock Exchange FTSE 100 Index
Israel Tel-Aviv exchange TA-25
Jordan Amman Stock Exchange (ASE) ASE Market Capitalization
Weighted Index
Oman Muscat Securities Market(MSM) MSM-30 index
Argentina Buenos Aires Stock Exchange MERVAL
Brazil Sao Paulo Stock Exchange. Bovespa Index
Mexico

theBolsa Mexicana de Valores.

Indice de Precios y
Cotizaciones (IPC)
ii. The top Stock exchanges of the world as of 31
st
December 2010
Rank Economy Stock Exchange Market
Capitalization
Trade
Value
1
United States
Europe
NYSE Euronext 15,970 19,813
2
United States
Europe
NASDAQ OMX 4,931 13,439
3 Japan Tokyo Stock Exchange 3,827 3,787
4 United Kingdom London Stock Exchange 3,613 2,741
5 China Shanghai Stock Exchange 2,717 4,496
6 Hong Kong Hong Kong Stock Exchange 2,711 1,496
7 Canada Toronto Stock Exchange 2,170 1,368
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8 India Bombay Stock Exchange 1,631 258
9 India
National Stock Exchange of
India
1,596 801
10 Brazil BM&F Bovespa 1,545 868
11 Australia
Australian Securities
Exchange
1,454 1,062
12 Germany Deutsche Brse 1,429 1,628

II) ON THE BASIS OF TYPE OF SECURITIES
There are two types of securities equity and debt. Equity is generally known as
stock or share market while the debt market is generally known as bond market.
The major difference between the two is that (capital) stockholders have an equity
stake in the company (i.e., they are owners), whereas bondholders have a creditor
stake in the company (i.e., they are lenders). Another difference is that bonds
usually have a defined term, or maturity, after which the bond is redeemed,
whereas stocks may be outstanding indefinitely.
EQUITY MARKETS

i. Meaning:
The market in which shares are issued and traded either through exchanges or
over-the-counter markets. It is one of the most vital areas of a market economy as
it provides companies with access to capital and investors with a slice of ownership
in the company and the potential of gains based on the company's future
performance.
The term equity basically means holding shares in entities which are privately
owned (not government owned). Shares or stocks held in government companies
are also called equity investment but return on these are not guaranteed by the
government unlike bonds which are risk-free.
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ii. Trading in Equity Markets:

AUCTION

Meaning:
Buyers make bids and sellers make offers in order to make transactions in a
security. On an auction market, the current price for a share in a security is the
highest price a buyer is willing to pay and the lowest price a seller is willing to
accept.
For example, if potential buyers for Security A enter bids of $50, $51, and $52, and
potential sellers enter offers of $52, $53, and $54, the current share price is $52.
Only the bid/offer for $52 is executed; others must make better bids and offers in
order to conduct transactions. The organized securities exchanges are examples of
auction markets.
Two methods can be used in dealing auction markets:
Open Outcry
Open outcry is a system of trading on an exchange in which members stand on the
trading floor and make orders to each other by crying aloud. Some open outcry
systems have developed special sign languages so they can make and fill orders
without needing to be heard over the noise on the trading floor. All exchanges were
originally open outcry, but many have gradually shifted toward electronic trading.
Open outcry retains its popularity on exchanges such as the Chicago and New
York stock exchange despite the introduction of electronic trading systems. Some
traders contend that open outcry offers better liquidity with the chance to obtain a
better price.
Electronic Trading
The act of placing buy/sell orders for financial securities and/or currencies with the
use of a brokerage's internet-based proprietary trading platforms. The use of online
trading increased dramatically in the mid- to late-'90s with the introduction of
affordable high-speed computers and internet connections.
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he use of online trades has increased the number of discount brokerages because
internet trading allows many brokers to further cut costs and part of the savings can
be passed on to customers in the form of lower commissions.
Another benefit of online trading is the improvement in the speed of which
transactions can be executed and settled, because there is no need for paper-based
documents to be copied, filed and entered into an electronic format.


DOUBLE AUCTION
Meaning:
A double auction is a process of buying and selling goods when potential buyers
submit their bids and potential sellers simultaneously submit their ask prices to an
auctioneer, and then an auctioneer chooses some price p that clears the market: all
the sellers who asked less than p sell and all buyers who bid more than p buy at
this price.
A market in which multiple buyers compete to purchase many items that are
simultaneously offered for sale. Sales are made to buyers willing to offer the
highest price by sellers who are willing to offer the lowest price.
iii. Unique and interesting facts about stock markets

I. SLANGS USED IN FINANCIAL MARKETS:
Poison pill, when a company issues more shares to prevent being
bought out by another company, thereby increasing the number of
outstanding shares to be bought by the hostile company making the
bid to establish majority.
Rocket scientist, a financial consultant at the zenith of mathematical
and computer programming skill. They are able to invent derivatives
of high complexity and construct sophisticated pricing models.
White Knight, a friendly party in a takeover bid. Used to describe a
party that buys the shares of one organization to help prevent against a
hostile takeover of that organization by another party.
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Scalper, a high volume trader who is looking for small winners. An
example is someone who trades 1,000 shares, and is only looking for
1/4 point or less.
Bearish, to believe the market will go down.
Opening Bell, when trading starts on the New York Stock Exchange
and Nasdaq each day, a bell is rung to signal the event.
Merger Monday, Mergers, or companies buying other companies,
often consummate a deal over a weekend, and then publicly announce
it on a Monday.
Bullish, to believe the market will go up.
In the red. It is another way of saying that a business is losing money.
In the past, numbers in the financial records of a company were
written in red ink to show a loss.
In the black is making money. A profit by a business is written in
black numbers.
Short Squeeze-A situation in which a lack of supply and an excess
demand for a traded stock forces the price upward.
Market Maker: A market maker is a person, brokerage, bank, or
institution that maintains a permanent firm bid and ask price on a
certain stock. This means that they are standing and prepared at any
moment to pay a particular price to buy or sell a stock.

II. RUBBER BAND EFFECT
The rubber band effect (or V rally, describing how it looks on a chart)
describes the stock market as like a rubber band, ready to bounce back from any
large losses or gains. The rubber band description has long been in use; rubber
band effect is cited in print from at least 1989.
After a large sell-off in the market, there is a tendency for the market to bounce
back right away. It is caused by computerized trading programs.

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III. DISTINCTIVE NAMES OF SCRIPTS
H shares-refers to the shares of companies incorporated in mainland China
that are traded on the Hong Kong Stock Exchange. Many companies float
their shares simultaneously on the Hong Kong market and one of the two
mainland Chinese stock exchanges.
L-Shares-refers to Chinese companies listed on the London Stock
Exchange. The listed companies are incorporated in the Cayman Islands,
Bermuda, British Virgin Islands and Jersey, but they have their main
business operations in mainland China.
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Blue chip-A phrase used to describe large, well-known companies that offer
stable earnings and consistent dividend record, for example Vodafone. FTSE
Blue-chip companies are reputed to be solid investments
Cyclical Stock-A Company whose stock price is closely in line with the
cyclical ups and downs of the general economy
Support-A charting pattern indicating buying pressure. If the stock price
declines below the support level, a technical analyst views the decline as a
sell signal.



Board Lot
A standard trading unit as defined in UMIR (Universal Market Integrity
Rules). The board lot size of a security on Toronto Stock Exchange or TSX
Venture Exchange depends on the trading price of the security, as follows:
Trading price per unit is less than $0.10 - board lot size is 1,000 units
Trading price per unit is $0.10 to $0.99 - board lot size is 500 units
Trading price per unit is $1.00 or more - board lot size is 100 units

Defensive Stock-A stock purchased from a company that has maintained a
record of stable earnings and continuous dividend payments through periods
of economic downturn.
Fill or Kill (FOK) Order-A tradable limit order marked "FOK" will trade
as much stock as possible upon entry, but will immediately cancel or kill any
unfilled volume.
Growth Stock-The shares of companies that have enjoyed better-than-
average growth over recent years and are expected to continue their climb
Income Stock-A security with a solid record of dividend payments and
which offers a dividend yield higher than the average common stock.
Junior Corporation-A young company in the early stages of operations and
growth.
Penny Stock-Low-priced speculative issues of stock selling at less than
$1.00 a share.
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Seed Stock-The shares or stock sold by a company to provide start-up
capital before carrying out an initial public offering (IPO).

Thin Market-A market that occurs when there are comparatively few bids
to buy or offers to sell, or both. The phrase may apply to a single security or
to the entire stock market. In a thin market, price fluctuations between
transactions are usually larger than when the market is liquid. A thin market
in a particular stock may reflect lack of interest in that issue, or a limited
supply of the stock.
DEBT MARKET

i. Meaning

The debt market is any market situation where the trading debt instruments take
place. Examples of debt instruments include mortgages, promissory notes, bonds,
and Certificates of Deposit. A debt market establishes a structured environment
where these types of debt can be traded with ease between interested parties.
The debt market often goes by other names, based on the types of debt instruments
that are traded. In the event that the market deals mainly with the trading of
municipal and corporate bond issues, the debt market may be known as a bond
market. If mortgages and notes are the main focus of the trading, the debt market
may be known as a credit market. When fixed rates are connected with the debt
instruments, the market may be known as a fixed income market.
ii. Types of bonds or debt instruments(on the basis of the issuer)

Corporate bond-is a bond issued by a corporation. It is a bond that a
corporation issues to raise money in order to expand its business. The term is
usually applied to longer-term debt instruments, generally with a maturity
date falling at least a year after their issue date.

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Sometimes, the term "corporate bonds" is used to include all bonds except
those issued by governments in their own currencies. Strictly speaking,
however, it only applies to those issued by corporations. The bonds of local
authorities and supranational organizations do not fit in either category

Government bond is a bond issued by a national government denominated
in the country's own currency. Government Bonds are debt investments
whereby an investor loans a certain amount of money, for a certain amount
of time, with a certain interest rate, to a company or country. Bonds issued
by national governments in foreign currencies are normally referred to as
sovereign bonds. The first ever government bond was issued by the English
government in 1693 to raise money to fund a war against France.

Government bonds are usually referred to as risk-free bonds, because the
government can raise taxes or create additional currency in order to redeem
the bond at maturity. Some counter examples do exist where a government
has defaulted on its domestic currency debt, such as Russia in 1998 (the
"ruble crisis"), though this is very rare.

Municipal bond- is a bond issued by a city or other local government, or
their agencies. Potential issuers of municipal bonds includes cities, counties,
redevelopment agencies, special-purpose districts, school districts, public
utility districts, publicly owned airports and seaports, and any other
governmental entity (or group of governments) below the state level.
Municipal bonds may be general obligations of the issuer or secured by
specified revenues.
iii. Types of bonds or debt instruments(on the basis of description)
Fixed rate bonds have a coupon that remains constant throughout the life of
the bond.

Floating rate notes (FRNs) have a variable coupon that is linked to a
reference rate of interest, such as LIBOR or Euribor. For example the
coupon may be defined as three month USD LIBOR + 0.20%. The coupon
rate is recalculated periodically, typically every one or three months.
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Zero-coupon bonds pay no regular interest. They are issued at a substantial
discount to par value, so that the interest is effectively rolled up to maturity
(and usually taxed as such). The bondholder receives the full principal
amount on the redemption date.

Inflation linked bonds, in which the principal amount and the interest
payments are indexed to inflation. The interest rate is normally lower than
for fixed rate bonds with a comparable maturity (this position briefly
reversed itself for short-term UK bonds in December 2008). However, as the
principal amount grows, the payments increase with inflation. The United
Kingdom was the first sovereign issuer to issue inflation linked Gilts in the
1980s.

Asset-backed securities are bonds whose interest and principal payments
are backed by underlying cash flows from other assets. Examples of asset-
backed securities are mortgage-backed securities (MBS's), collateralized
mortgage obligations (CMOs) and collateralized debt obligations (CDOs).

Subordinated bonds are those that have a lower priority than other bonds of
the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of
creditors. First the liquidator is paid, then government taxes, etc. The first
bond holders in line to be paid are those holding what is called senior bonds.
After they have been paid, the subordinated bond holders are paid. As a
result, the risk is higher. Therefore, subordinated bonds usually have a lower
credit rating than senior bonds. The main examples of subordinated bonds
can be found in bonds issued by banks, and asset-backed securities. The
latter are often issued in tranches. The senior tranches get paid back first, the
subordinated tranches later.

Perpetual bonds are also often called perpetuities or 'Perps'. They have no
maturity date. The most famous of these are the UK Consols, which are also
known as Treasury Annuities or Undated Treasuries. Some of these were
issued back in 1888 and still trade today, although the amounts are now
insignificant. Some ultra-long-term bonds (sometimes a bond can last
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centuries: West Shore Railroad issued a bond which matures in 2361 (i.e.
24th century) are virtually perpetuities from a financial point of view, with
the current value of principal near zero.

Bearer bond is an official certificate issued without a named holder. In
other words, the person who has the paper certificate can claim the value of
the bond. Often they are registered by a number to prevent counterfeiting,
but may be traded like cash. Bearer bonds are very risky because they can be
lost or stolen.
Registered bond is a bond whose ownership (and any subsequent
purchaser) is recorded by the issuer, or by a transfer agent. It is the
alternative to a Bearer bond. Interest payments, and the principal upon
maturity, are sent to the registered owner.

Book-entry bond is a bond that does not have a paper certificate. As
physically processing paper bonds and interest coupons became more
expensive, issuers (and banks that used to collect coupon interest for
depositors) have tried to discourage their use. Some book-entry bond issues
do not offer the option of a paper certificate, even to investors who prefer
them.

Lottery bond is a bond issued by a state, usually a European state. Interest
is paid like a traditional fixed rate bond, but the issuer will redeem randomly
selected individual bonds within the issue according to a schedule. Some of
these redemptions will be for a higher value than the face value of the bond.

War bond is a bond issued by a country to fund a war.

Serial bond is a bond that matures in installments over a period of time. In
effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity
over a 5-year interval.

Revenue bond is a special type of municipal bond distinguished by its
guarantee of repayment solely from revenues generated by a specified
revenue-generating entity associated with the purpose of the bonds. Revenue
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bonds are typically "non-recourse," meaning that in the event of default, the
bond holder has no recourse to other governmental assets or revenues.

Climate bond is a bond issued by a government or corporate entity in order
to raise finance for climate change mitigation or adaptation related projects
or programs.

Eurobond is an international bond that is denominated in a currency not
native to the country where it is issued. It can be categorized according to
the currency in which it is issued. London is one of the centers of the
Eurobond market, but Eurobonds may be traded throughout the world - for
example in Singapore or Tokyo.

Eurobonds are named after the currency they are denominated in. For
example, Euroyen and Eurodollar bonds are denominated in Japanese yen
and American dollars respectively. A Eurobond is normally a bearer bond,
payable to the bearer. It is also free of withholding tax. The bank will pay
the holder of the coupon the interest payment due. Usually, no official
records are kept.

Securitization
Securitization is the financial practice of pooling various types of contractual debt
such as residential mortgages, commercial mortgages, auto loans or credit card
debt obligations and selling said debt as bonds, pass-through securities, or
Collateralized mortgage obligation (CMOs), to various investors. The principal and
interest on the debt, underlying the security, is paid back to the various investors
regularly. Securities backed by mortgage receivables are called mortgage-backed
securities(MBS), while those backed by other types of receivables are asset-backed
securities(ABS).
The granularity of pools of securitized assets is a mitigant to the credit risk of
individual borrowers. Unlike general corporate debt, the credit quality of
securitised debt is non-stationary due to changes in volatility that are time- and
structure-dependent. If the transaction is properly structured and the pool performs
as expected, the credit risk of all tranches of structured debt improves; if
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improperly structured, the affected tranches may experience dramatic credit
deterioration and loss.
Motives for securitization
Advantages to issuer
1. Reduces funding costs: Through securitization, a company rated BB but
with AAA worthy cash flow would be able to borrow at possibly AAA rates.
This is the number one reason to securitize a cash flow and can have
tremendous impacts on borrowing costs. The difference between BB
debtand AAA debt can be multiple hundreds of basis points. For example,
Moody's downgraded Ford Motor Credit's rating in January 2002, but senior
automobile backed securities, issued by Ford Motor Credit in January 2002
and April 2002, continue to be rated AAA because of the strength of the
underlying collateral and other credit enhancements.
2. Reduces asset-liability mismatch: "Depending on the structure chosen,
securitization can offer perfect matched funding by eliminating funding
exposure in terms of both duration and pricing basis." Essentially, in most
banks and finance companies, the liability book or the funding is from
borrowings. This often comes at a high cost. Securitization allows such
banks and finance companies to create a self-funded asset book.
3. Lower capital requirements: Some firms, due to legal, regulatory, or other
reasons, have a limit or range that their leverage is allowed to be. By
securitizing some of their assets, which qualifies as a sale for accounting
purposes, these firms will be able to remove assets from their balance sheets
while maintaining the "earning power" of the assets.
4. Locking in profits: For a given block of business, the total profits have not
yet emerged and thus remain uncertain. Once the block has been securitized,
the level of profits has now been locked in for that company, thus the risk of
profit not emerging, or the benefit of super-profits, has now been passed on.
5. Transfer risks:Securitization makes it possible to transfer risks from an
entity that does not want to bear it, to one that does. Two good examples of
this are catastrophe bonds and Entertainment Securitizations. Similarly, by
securitizing a block of business (thereby locking in a degree of profits), the
company has effectively freed up its balance to go out and write more
profitable business.
6. Earnings: Securitization makes it possible to record an earnings bounce
without any real addition to the firm. When a securitization takes place,
there often is a "true sale" that takes place between the Originator (the parent
company) and the SPE. This sale has to be for the market value of the
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underlying assets for the "true sale" to stick and thus this sale is reflected on
the parent company's balance sheet, which will boost earnings for that
quarter by the amount of the sale. While not illegal in any respect, this does
distort the true earnings of the parent company.
7. Liquidity: Future cashflows may simply be balance sheet items which
currently are not available for spending, whereas once the book has been
securitized, the cash would be available for immediate spending or
investment. This also creates a reinvestment book which may well be at
better rates.

Disadvantages to issuer

1. May reduce portfolio quality: If the AAA risks, for example, are being
securitized out, this would leave a materially worse quality of residual risk.
2. Costs: Securitizations are expensive due to management and system costs,
legal fees, underwriting fees, rating fees and ongoing administration. An
allowance for unforeseen costs is usually essential in securitizations,
especially if it is an atypical
3. Size limitations: Securitizations often require large scale structuring, and
thus may not be cost-efficient for small and medium transactions.
4. Risks: Since securitization is a structured transaction, it may include par
structures as well as credit enhancements that are subject to risks of
impairment, such as prepayment, as well as credit loss, especially for
structures where there are some retained strips.
Advantages to investors
1. Opportunity to potentially earn a higher rate of return (on a risk-
adjusted basis)
2. Opportunity to invest in a specific pool of high quality assets: Due to the
stringent requirements for corporations for example to attain high ratings,
there is a dearth of highly rated entities that exist. Securitizations, however,
allow for the creation of large quantities of AAA, AA or A rated bonds, and
risk averse institutional investors, or investors that are required to invest in
only highly rated assets, have access to a larger pool of investment options.
3. Portfoliodiversification: Depending on the securitization, hedge funds as
well as other institutional investors tend to like investing in bonds created
through securitizations because they may be uncorrelated to their other
bonds and securities.
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4. Isolation of credit risk from the parent entity: Since the assets that are
securitized are isolated (at least in theory) from the assets of the originating
entity, under securitization it may be possible for the securitization to
receive a higher credit rating than the "parent," because the underlying risks
are different. For example, a small bank may be considered more risky than
the mortgage loans it makes to its customers; were the mortgage loans to
remain with the bank, the borrowers may effectively be paying higher
interest (or, just as likely, the bank would be paying higher interest to its
creditors, and hence less profitable).

Risks to investors
Liquidity risk
Credit/default: Default risk is generally accepted as a borrowers inability to meet
interest payment obligations on time. For ABS, default may occur when
maintenance obligations on the underlying collateral are not sufficiently met as
detailed in its prospectus. A key indicator of a particular securitys default risk is
its credit rating. Different tranches within the ABS are rated differently, with
senior classes of most issues receiving the highest rating, and subordinated classes
receiving correspondingly lower credit ratings.
Event risk
Prepayment/reinvestment/early amortization: The majority of revolving ABS are
subject to some degree of early amortization risk. The risk stems from specific
early amortization events or payout events that cause the security to be paid off
prematurely. Typically, payout events include insufficient payments from the
underlying borrowers, insufficient excess Fixed Income Sectors: Asset-Backed
Securities spread, a rise in the default rate on the underlying loans above a
specified level, a decrease in credit enhancements below a specific level, and
bankruptcy on the part of the sponsor or servicer.
Currency interest rate fluctuations: Like all fixed income securities, the prices of
fixed rate ABS move in response to changes in interest rates. Fluctuations in
interest rates affect floating rate ABS prices less than fixed rate securities, as the
index against which the ABS rate adjusts will reflect interest rate changes in the
economy. Furthermore, interest rate changes may affect the prepayment rates on
underlying loans that back some types of ABS, which can affect yields. Home
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equity loans tend to be the most sensitive to changes in interest rates, while auto
loans, student loans, and credit cards are generally less sensitive to interest rates.



2. Derivatives Market
a) Meaning:
A derivative instrument is a contract between two parties that specifies
conditionsin particular, dates and the resulting values of the underlying
variablesunder which payments, or payoffs, are to be made between the parties
.
Derivatives can be used for speculating purposes ("bets") or to hedge
("insurance"). For example, companies buy currency forwards in order to limit
losses due to fluctuations in the exchange rate of two currencies
b) Classification of Derivatives:

i) On the basis of the market

Exchange-traded derivative- contracts (ETD) are those derivatives
instruments that are traded via specialized derivatives exchanges or other
exchanges. A derivatives exchange is a market where individuals trade
standardized contracts that have been defined by the exchange. A derivatives
exchange acts as an intermediary to all related transactions, and takes initial
margin from both sides of the trade to act as a guarantee. The world's
largest
1
derivatives exchanges (by number of transactions) are the Korea
Exchange (which lists KOSPI Index Futures & Options), Eurex and CME
Group (made up of the 2007 merger of the Chicago Mercantile Exchange
and the Chicago Board of Trade and the 2008 acquisition of the New York
Mercantile Exchange). Generally futures and options are traded on stock
exchanges as they are easily standardized.


1
Futures and Options Week: According to figures published in F&O Week 10 October 2005.
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Over-the-counter (OTC) derivatives are contracts that are traded (and
privately negotiated) directly between two parties, without going through an
exchange or other intermediary. Products such as swaps, forward rate
agreements, and exotic options are almost always traded in this way. The
OTC derivative market is the largest market for derivatives, and is largely
unregulated with respect to disclosure of information between the parties,
since the OTC market is made up of banks and other highly sophisticated
parties, such as hedge funds.Reporting of OTC amounts are difficult because
trades can occur in private, without activity being visible on any exchange.

According to the Bank for International Settlements, the total outstanding
notional amount is US$684 trillion (as of June 2008).
2
Of this total notional
amount, 67% are interest rate contracts, 8% are credit default swaps (CDS),
9% are foreign exchange contracts, 2% are commodity contracts, 1% are
equity contracts, and 12% are other. Because OTC derivatives are not traded
on an exchange, there is no central counter-party. Therefore, they are subject
to counter-party risk, like an ordinary contract, since each counter-party
relies on the other to perform.
ii) On the basis of Underlying asset

A Foreign exchange derivative is a financial derivative where the
underlying is a particular currency and/or its exchange rate. These
instruments are used either for currency speculation and arbitrage or for
hedging foreign exchange risk.
A credit derivative is a securitized derivative whose value is derived from
the credit risk on an underlying bond, loan or any other financial asset. In
this way, the credit risk is on an entity other than the counterparties to the
transaction itself. This entity is known as the reference entity and may be a
corporate, a sovereign or any other form of legal entity which has incurred
debt. Credit derivatives are bilateral contracts between a buyer and seller
under which the seller sells protection against the credit risk of the reference
entity.

2
^ BIS survey: The Bank for International Settlements (BIS) semi-annual OTC derivatives statistics report, for end
of June 2008, shows US$683.7 billion total notional amounts outstanding of OTC derivatives with a gross market
value of US$20 trillion. See also Prior Period Regular OTC Derivatives Market Statistics.
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An equity derivative is a class of derivatives whose value is at least partly
derived from one or more underlying equity securities. Options and futures
are by far the most common equity derivatives; however there are many
other types of equity derivatives that are actively traded.
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 from other derivatives is that the underlying asset
(rain/temperature/snow) has no direct value to price the weather derivative.
Commodity derivatives are investment tools that allow investors to profit
from certain items without possessing them. This type of investing dates
back to 1848 when the Chicago Board of Trade was established. Initially,
the idea behind commodity derivatives was to provide a means of risk
protection for farmers. They could promise to sell crops in the future for a
pre-arranged price.


iii) On the basis of the Relationship between the underlying
asset and the derivative
FORWARDS
Meaning:
A forward contract or simply a forward is a non-standardized contract between two
parties to buy or sell an asset at a specified future time at a price agreed today. This
is in contrast to a spot contract which is an agreement to buy or sell an asset today.
It costs nothing to enter a forward contract. The party agreeing to buy the
underlying asset in the future assumes a long position, and the party agreeing to
sell the asset in the future assumes a short position. The price agreed upon is called
the delivery price, which is equal to the forward price at the time the contract is
entered into.
The forward price of such a contract is commonly contrasted with the spot price,
which is the price at which the asset changes hands on the spot date. The difference
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between the spot and the forward price is the forward premium or forward
discount, generally considered in the form of a profit, or loss, by the purchasing
party.
Use:Forwards, like other derivative securities, can be used to hedge risk (typically
currency or exchange rate risk), as a means of speculation, or to allow a party to
take advantage of a quality of the underlying instrument which is time-sensitive.
Example:
Suppose that Bob wants to buy a house a year from now. At the same time,
suppose that Andy currently owns a $100,000 house that he wishes to sell a year
from now. Both parties could enter into a forward contract with each other.
Suppose that they both agree on the sale price in one year's time of $104,000 . Bob,
because he is buying the underlying, is said to have entered a long forward
contract. Conversely, Andy will have the short forward contract.
At the end of one year, suppose that the current market valuation of Andy's house
is $110,000. Then, because Andy is obliged to sell to Bob for only $104,000, Bob
will make a profit of $6,000. To see why this is so, one need only to recognize that
Bob can buy from Andy for $104,000 and immediately sells to the market for
$110,000. Bob has made the difference in profit. In contrast, Andy has made a
potential loss of $6,000, and an actual profit of $4,000.
Advantage:
The forwards are traded over-the-counter hence specification can be customized
and may include mark-to-market and daily margining. A forward contract
arrangement might call for the loss party to pledge collateral or additional
collateral to better secure the party at gain.

FUTURES
Meaning:
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Afutures contract is a standardized contract between two parties to exchange a
specified asset of standardized quantity and quality for a price agreed today (the
futures price or the strike price) with delivery occurring at a specified future date,
the delivery date. The contracts are traded on a futures exchange.
The party agreeing to buy the underlying asset in the future, the "buyer" of the
contract, is said to be "long", and the party agreeing to sell the asset in the future,
the "seller" of the contract, is said to be "short". The terminology reflects the
expectations of the parties -- the buyer hopes or expects that the asset price is going
to increase, while the seller hopes or expects that it will decrease.
Underlying asset:
In many cases, the underlying asset to a futures contract may not be traditional
commodities at all that is, for financial futures the underlying asset or item can
be currencies, securities or financial instruments and intangible assets or referenced
items such as stock indexes and interest rates.
Example:
You decide to subscribe to cable TV. As the buyer, you enter into an agreement
with the cable company to receive a specific number of cable channels at a certain
price every month for the next year. This contract made with the cable company is
similar to a future, in that you have agreed to receive a product at a future date,
with the price and terms for delivery already set. You have secured your price for
now and the next year even if the price of cable rises next year. By entering into
the contract with the cable company, you have reduced your risk of higher prices.

That's how the futures market works. Except instead of a cable TV provider, a
producer of wheat may be trying to secure a selling price for next season's crop,
while a bread maker may be trying to secure a buying price to determine how
much bread can be made and at what profit. So the farmer and the bread maker
may enter into a futures contract requiring the delivery of 5,000 bushels of grain to
the buyer in June at a price of $4 per bushel. By entering into this futures contract,
the farmer and the bread maker secure a price that both parties believe will be a fair
price in June. It is this contract - and not the grain per se - that can then be bought
and sold in the futures market.
Advantage:
Only a small investment is required as only margins have to be paid and not the
whole amount. As futures are cash settled only the profit or loss will be paid. Also
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there is no counter-party risk involved due to the presence of the intermediate
exchange.
OPTIONS
Meaning:
Anoption is a derivativefinancial instrument that specifies a contract between two
parties for a future transaction on an asset at a reference price. The buyer of the
option gains the right, but not the obligation, to engage in that transaction, while
the seller incurs the corresponding obligation to fulfill the transaction. The price of
an option derives from the difference between the reference price and the value of
the underlying asset (commonly a stock, a bond, a currency or a futures contract)
plus a premium based on the time remaining until the expiration of the option.
Other types of options exist, and options can in principle be created for any type of
valuable asset.
Many options are created in standardized form and traded on an anonymous
options exchange among the general public, while other over-the-counter options
are customized ad hoc to the desires of the buyer, usually by an investment bank.
Option-Styles:
European option an option that may only be exercised on expiration.
American option an option that may be exercised on any trading day on
or before expiry.
Bermudan option an option that may be exercised only on specified
dates on or before expiration.
Barrier option any option underlying security's price must pass a certain
level or "barrier" before it can be exercised.
Exotic option any of a broad category of options that may include
complex financial structures.
Vanilla option any option that is not exotic

Call option
Meaning:
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The buyer of the call option has the right, but not the obligation to buy an agreed
quantity of a particular commodity or financial instrument (the underlying) from
the seller of the option at a certain time (the expiration date) for a certain price (the
strike price). The seller (or "writer") is obligated to sell the commodity or financial
instrument should the buyer so decide. The buyer pays a fee (called a premium) for
this right.The buyer of a call option wants the price of the underlying instrument to
rise in the future; the seller either expects that it will not, or is willing to give up
some of the upside (profit) from a price rise in return for the premium (paid
immediately) and retaining the opportunity to make a gain up to the strike price.
Example:
The current price of ABC Corp stock is $45 per share, and investor 'Chris'
expects it will go up significantly. Chris buys a call contract for 100 shares
of ABC Corp from 'Steve,' who is the call writer/seller. The strike price for
the contract is $50 per share, and Chris pays a premium up front of $5 per
share, or $500 total. If ABC Corp does not go up, and Chris does not
exercise the contract, then Chris has lost $500.
ABC Corp stock subsequently goes up to $60 per share before the contract is
expired. Chris exercises the call option by buying 100 shares of ABC from
Steve for a total of $5,000. Chris then sells the stock on the market at market
price for a total of $6,000. Chris has paid a $500 contract premium plus a
stock cost of $5,000, for a total of $5,500. He has earned back $6,000,
yielding a net profit of $500. Steve, however, did not do so well. Steve did
not already own ABC Corp stock, so when Chris exercised the contract,
Steve had to buy the stock on the open market for $6,000. Steve had already
earned the $500 premium for the contract and $5,000 from Chris on selling
the stock, so the total loss for Steve was $500.
If, however, the ABC stock price drops to $40 per share by the time the
contract expires, Chris will not exercise the option (i.e., Chris will not buy a
stock at $50 per share from Steve when he can buy it on the open market at
$40 per share). Chris loses his premium, a total of $500. Steve, however,
keeps the premium with no other out-of-pocket expenses, making a profit of
$500.
Put option
Meaning:
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A put or put option is a contract between two parties to exchange an asset, the
underlying, for a specified amount of cash, the strike, by a predetermined future
date, the expiry or maturity. One party, the buyer of the put, has the right, but not
an obligation, to sell the asset at the strike price by the future date, while the other
party, the seller, has the obligation to buy the asset at the strike price if the buyer
exercises the option.
The most obvious use of a put is as a type of insurance. In the protective put
strategy, the investor buys enough puts to cover their holdings of the underlying so
that if a drastic downward movement of the underlying's price occurs, they have
the option to sell the holdings at the strike price. Another use is for speculation: an
investor can take a short position in the underlying without trading in it directly.
Example:
Trader A" (Put Buyer) purchases a put contract to sell 100 shares of XYZ
Corp. to "Trader B"(Put Writer) for $50 per share. The current price is $55
per share, and Trader A pays a premium of $5 per share. If the price of XYZ
stock falls to $40 a share right before expiration, then Trader A can exercise
the put by buying 100 shares for $4,000 from the stock market, then selling
them to Trader B for $5,000.
Trader A's total earnings (S) can be calculated at $500. The sale of the 100
shares of stock at a strike price of $50 to Trader B = $5,000 (P). The
purchase of 100 shares of stock at $40 = $4,000(Q). The put option premium
paid to trader B for buying the contract of 100 shares at $5 per share,
excluding commissions = $500 (R). Thus S = P - (Q+R) = $5,000 -
($4,000+$500) = $500.
If, however, the share price never drops below the strike price (in this case,
$50), then Trader A would not exercise the option (because selling a stock to
Trader B at $50 would cost Trader A more than that to buy it). Trader A's
option would be worthless and he would have lost the whole investment, the
fee (premium) for the option contract, $500 ($5 per share, 100 shares per
contract). Trader A's total loss are limited to the cost of the put premium
plus the sales commission to buy it.
Naked Call
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A naked call occurs when a speculator writes (sells) a call option on a security
without ownership of that security. It is one of the riskiest options strategies
because it carries unlimited risk as opposed to a naked put where the maximum
loss occurs if the stock falls to zero. A naked call is the opposite of a covered call.
Since a naked call seller does not have the stock in case the option buyer decides to
exercise his option, he has to buy stock at the open market in order to deliver it at
the strike price. Since the share price has no limits to how far it can rise, the naked
call seller is exposed to unlimited risk.
Naked Put
A naked put (also called an uncovered put) is a put option where the option writer
(i.e., the seller) does not have a position in the underlying stock or other
instrument. This strategy is best used by investors who want to accumulate a
position in the underlying stock - but only if the price is low enough. If the investor
fails to buy the shares, then he keeps the option premium.
SWAPS
Meaning:
A swap is a derivative in which counterparties exchange certain benefits of one
party's financial instrument for those of the other party's financial instrument. The
benefits in question depend on the type of financial instruments involved.
Specifically, the two counterparties agree to exchange one stream of cash flows
against another stream. These streams are called the legs of the swap. The swap
agreement defines the dates when the cash flows are to be paid and the way they
are calculated
Usually at the time when the contract is initiated at least one of these series of cash
flows is determined by a random or uncertain variable such as an interest rate,
foreign exchange rate, equity price or commodity price.
Example:
For example, on December 31, 2006, Company A and Company B enter into a
five-year swap with the following terms:
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Company A pays Company B an amount equal to 6% per annum on a notional
principal of $20 million.
Company B pays Company A an amount equal to one-year LIBOR + 1% per
annum on a notional principal of $20 million.
For simplicity, let's assume the two parties exchange payments annually on
December 31, beginning in 2007 and concluding in 2011.
At the end of 2007, Company A will pay Company B $20,000,000 * 6% =
$1,200,000. On December 31, 2006, one-year LIBOR was 5.33%; therefore,
Company B will pay Company A $20,000,000 * (5.33% + 1%) = $1,266,000.
In a plain vanilla interest rate swap, the floating rate is usually determined at the
beginning of the settlement period. Normally, swap contracts allow for payments
to be netted against each other to avoid unnecessary payments. Here, Company B
pays $66,000, and Company A pays nothing. At no point does the principal change
hands, which is why it is referred to as a "notional" amount. The figure below
shows the cash flows between the parties, which occur annually.

Swap market
Most swaps are traded over-the-counter (OTC), "tailor-made" for the
counterparties.
Types of swaps
The five generic types of swaps, in order of their quantitative importance,
are: interest rate swaps, currency swaps, credit swaps, commodity
swaps and equity swaps. There are also many other types.
1. Interest rate swap
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The most common type of swap is a plain Vanilla interest rate swap. It is the
exchange of a fixed rate loan to a floating rate loan. The life of the swap can range
from 2 years to over 15 years. The reason for this exchange is to take benefit from
comparative advantage. Some companies may have comparative advantage in
fixed rate markets while other companies have a comparative advantage in floating
rate markets.


2. Currency swaps
A currency swap involves exchanging principal and fixed rate interest payments on
a loan in one currency for principal and fixed rate interest payments on an equal
loan in another currency. Just like interest rate swaps, the currency swaps also are
motivated by comparative advantage. Currency swaps entail swapping both
principal and interest between the parties, with the cashflows in one direction being
in a different currency than those in the opposite direction.
3. Commodity swaps
A commodity swap is an agreement whereby a floating (or market or spot) price is
exchanged for a fixed price over a specified period. The vast majority of
commodity swaps involve crude oil.
4. Equity Swap
An equity swap is a special type of total return swap, where the underlying asset is
a stock, a basket of stocks, or a stock index. Compared to actually owning the
stock, in this case you do not have to pay anything up front, but you do not have
any voting or other rights that stock holders do.
5. Credit default swaps
A credit default swap (CDS) is a swap contract in which the buyer of the CDS
makes a series of payments to the seller and, in exchange, receives a payoff if an
instrument - typically a bond or loan - goes into default (fails to pay). Less
commonly, the credit event that triggers the payoff can be a company
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undergoing restructuring, bankruptcy or even just having its credit rating
downgraded. CDS contracts have been compared with insurance, because
the buyer pays a premium and, in return, receives a sum of money if one of the
events specified in the contract occur. Unlike an actual insurance contract the
buyer is allowed to profit from the contract and may also cover an asset to which
the buyer has no direct exposure.


Example of Credit Default Swap
An investment trust owns 1 million corporation bond issued by a private
housing firm.
If there is a risk the private housing firm may default on repayments, the
investment trust may buy a CDS from a hedge fund. The CDS is worth 1
million.
The investment trust will pay an interest on this credit default swap of say
3%. This could involve payments of 30,000 a year for the duration of the
contract.
If the private housing firm doesnt default. The hedge fund gains the interest
from the investment bank and pays nothing out. It is simple profit.
If the private housing firm does default, then the hedge fund has to pay
compensation to the investment bank of 1 million the value of the credit
default swap.
Therefore the hedge fund takes on a larger risk and could end up paying
1million The higher the perceived risk of the bond, the higher the interest
rate the hedge fund will require.

There are three major components of a swap price.
Benchmark price: Swap rates are based on a series of benchmark instruments.
They may be quoted as a spread over the yield on these benchmark instruments or
on an absolute interest rate basis. In the Indian markets the common benchmarks
are MIBOR, 14, 91, 182 & 364 day T-bills, CP rates and PLR rates.
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Liquidity: Liquidity, which is function of supply and demand, plays an important
role in swaps pricing. This is also affected by the swap duration. It may be difficult
to have counterparties for long duration swaps, especially so in India.
Transaction Costs: Transaction costs include the cost of hedging a swap. Say in
case of a bank, which has a floating obligation of 91 day T. Bill. Now in order to
hedge the bank would go long on a 91 day T. Bill. For doing so the bank must
obtain funds. The transaction cost would thus involve such a difference

3. MONEY MARKET
a) MEANING:
Money market means market where money or its equivalent can be traded. Money
is synonym of liquidity. Money market consists of financial institutions and dealers
in money or credit who wish to generate liquidity. It is better known as a place
where large institutions and government manage their short term cash needs. For
generation of liquidity, short term borrowing and lending is done by these financial
institutions and dealers.
Money Market is part of financial market where instruments with high liquidity
and very short term maturities are traded. Due to highly liquid nature of securities
and their short term maturities, money market is treated as a safe place. Hence,
money market is a market where short term obligations such as treasury bills,
commercial papers and bankers acceptances are bought and sold.

b) MONEY MARKET INSTRUMENTS:
Investment in money market is done through money market instruments. Money
market instrument meets short term requirements of the borrowers and provides
liquidity to the lenders. Common Money Market Instruments are as follows:

TREASURY BILLS (T-BILLS)
Treasury Bills, one of the safest money market instruments, are short term
borrowing instruments of the Central Government of the Country issued through
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the Central Bank (RBI in India). They are zero risk instruments, and hence the
returns are not so attractive. It is available both in primary market as well as
secondary market. It is a promise to pay a said sum after a specified period. T-bills
are short-term securities that mature in one year or less from their issue date.
They are issued with three-month, six-month and one-year maturity periods. The
Central Government issues T- Bills at a price less than their face value (par value).
They are issued with a promise to pay full face value on maturity. So, when the T-
Bills mature, the government pays the holder its face value.
The difference between the purchase price and the maturity value is the interest
income earned by the purchaser of the instrument. T-Bills are issued through a
bidding process at auctions.

REPURCHASE AGREEMENTS
Repurchase transactions, called Repo or Reverse Repo are transactions or short
term loans in which two parties agree to sell and repurchase the same security.
They are usually used for overnight borrowing. Repo/Reverse Repo transactions
can be done only between the parties approved by central government of a country
and in central government approved securities viz.StateGovt Securities, T-Bills,
PSU Bonds, FI Bonds, Corporate Bonds etc.
Under repurchase agreement the seller sells specified securities with an agreement
to repurchase the same at a mutually decided future date and price. Similarly, the
buyer purchases the securities with an agreement to resell the same to the seller on
an agreed date at a predetermined price. Such a transaction is called a Repo when
viewed from the perspective of the seller of the securities and Reverse Repo when
viewed from the perspective of the buyer of the securities. Thus, whether a given
agreement is termed as a Repo or 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 aperiod 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
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counterparties independently of the coupon rate or rates of the underlying
securities and is influenced by overall money market conditions.

COMMERCIAL PAPERS
Commercial paper is a low-cost alternative to bank loans. It is a short term
unsecured promissory note issued by corporates and financial institutions at a
discounted value on face value. They are usually issued with fixed maturity
between one to 270 days and for financing of accounts receivables, inventories and
meeting short term liabilities.
Say, for example, a company has receivables of Rs 1 lacs with credit period 6
months. It will not be able to liquidate its receivables before 6 months. The
company is in need of funds. It can issue commercial papers in form of unsecured
promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after
6 months. The company has strong credit rating and finds buyers easily. The
company is able to liquidate its receivables immediately and the buyer is able to
earn interest of Rs 10K over a period of 6 months. They yield higher returns as
compared to T-Bills as they are less secure in comparison to these bills; however
chances of default are almost negligible but are not zero risk instruments.
Commercial paper being an instrument not backed by any collateral, only firms
with high quality credit ratings will find buyers easily without offering any
substantial discounts. They are issued by corporates to impart flexibility in raising
working capital resources at market determined rates. Commercial Papers are
actively traded in the secondary market since they are issued in the form of
promissory notes and are freely transferable in demat form.

DIFFERENCE BETWEEN COMMERCIAL PAPER AND
COMMERCIAL BILL
Commercial paper is a money-market security issued by large banks and
corporations. It is generally not used to finance long-term investments but rather to
purchase inventory or to manage working capital cycles more efficiently and
effectively.
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A Commercial Bill assists you to raise finance through the drawing and
discounting of negotiable bank bills. Under this facility Bank agrees to both accept
and discount a customer's bills. You can choose from an array of facilities utilizing
the latest financial market techniques to suit your individual requirements. This is
commonly used for medium and long term financing

CALL/NOTICE/TERM MONEY
The call/notice/term money market is a market for trading very short term liquid
financial assets that are readily convertible into cash at low cost. The money
market primarily facilitates lending and borrowing of funds between banks and
entities like Primary Dealers. An institution which has surplus funds may lend
them on an uncollateralized basis to an institution which is short of funds.
The period of lending may be for a period of 1 day which is known as call money
and between 2 days and 14 days which is known as notice money. Term money
refers to borrowing/lending of funds for a period exceeding 14 days. The interest
rates on such funds depends on the surplus funds available with lenders and the
demand for the same which remains volatile.

c) RATES USED IN MONEY MARKETS

LIBOR- London InterBank Offer Rate
The LIBOR is the world's most widely used benchmark for short-term interest
rates. It's important because it is the rate at which the world's most preferred
borrowers are able to borrow money. It is also the rate upon which rates for less
preferred borrowers are based.
For example, a multinational corporation with a very good credit rating may be
able to borrow money for one year at LIBOR plus four or five points. Countries
that rely on the LIBOR for a reference rate include the United States, Canada,
Switzerland and the U.K.The LIBOR is widely used as a reference rate for
financial instruments such as
forward rate agreements
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short-term-interest-rate futures contracts
interest rate swaps
inflation swaps
floating rate notes
syndicated loans
variable rate mortgages
LIBOR is used by the Swiss National Bank as their reference rate for
monetary policy.

Calculation of LIBOR
LIBOR is based on the average of interest rates that large banks in London charge
each other for unsecured loans. The rate is calculated on 10 different currencies
and with more than 15 different maturity dates, such as one day, one week, one
month, three months, six months or longer, up to a year.

To set LIBOR, Reuters gathers the various borrowing rates from the banks that sit
on each currency's banking panel. It queries each bank daily, just before 11 a.m.
London time, as to what rate it would be able to pay on a reasonable interbank
loan. Reuters sets LIBOR by calculating the average rates for each currency. This
method is substantially different from setting the prime rate.

MIBOR-Mumbai Inter-Bank Offer Rate
NSE developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and
NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market on
June 15, 1998. The success of the Overnight NSE MIBID MIBOR encouraged the
Exchange to develop a benchmark rate for the term money market. NSE launched
the 14-day NSE MIBID MIBOR on November 10, 1998 and the longer term
money market benchmark rates for 1 month and 3 months on December 1, 1998.
Further, the exchange introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all
Fridays with effect from June 6, 2008 in addition to existing overnight rate.
The MIBID/MIBOR rate is used as a bench mark rate for majority of deals struck
for
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Interest Rate Swaps
Forward Rate Agreements
Floating Rate Debentures
Term Deposits.

PRIME LENDING RATES
The Prime Interest Rate is the interest rate charged by banks to their most
creditworthy customers (usually the most prominent and stable business
customers). The rate is almost always the same amongst major banks. Adjustments
to the prime rate are made by banks at the same time; although, the prime rate does
not adjust on any regular basis. The Prime Rate is usually adjusted at the same
time and in correlation to the adjustments of the Fed Funds Rate
Calculation of Prime rate
The prime rate used to be the interest rate that U.S. banks charged to customers and
businesses considered to be of the lowest credit risk. This rate does not adjust
every day, and banks usually adjust the rate at the same time. U.S. banks calculate
the prime rate by adding approximately 3 percent to the current federal funds rate,
the rate that banks charge each other for overnight loans made between them. For
example, if the fed funds rate is 0.25 percent, prime is 3.25 percent. The Federal
Reserve, which meets via the Federal Open Market Committee, sets the federal
funds rate.
4. Foreign exchange market
a) Meaning:
The foreign exchange market (forex, FX, or currency market) is a global,
worldwide decentralized financial market for trading currencies. Financial centers
around the world function as anchors of trading between a wide range of different
types of buyers and sellers around the clock, with the exception of weekends. The
foreign exchange market determines the relative values of different currencies.
The primary purpose of the foreign exchange is to assist international trade and
investment, by allowing businesses to convert one currency to another currency.
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For example, it permits a US business to import British goods and pay Pound
Sterling, even though the business' income is in US dollars. It also supports direct
speculation in the value of currencies, and the carry trade, speculation on the
change in interest rates in two currencies.

In a typical foreign exchange transaction, a party purchases a quantity of one
currency by paying a quantity of another currency. The modern foreign exchange
market began forming during the 1970s after three decades of government
restrictions on foreign exchange transactions (the Bretton Woods system of
monetary management established the rules for commercial and financial relations
among the world's major industrial states after World War II), when countries
gradually switched to floating exchange rates from the previous exchange rate
regime, which remained fixed as per the Bretton Woods system.
b) Market participants
Unlike a stock market, the foreign exchange market is divided into levels of access.
At the top is the inter-bank market, which is made up of the largest commercial
banks and securities dealers. Within the inter-bank market, spreads, which are the
difference between the bid and ask prices, are razor sharp and not known to players
outside the inner circle. The difference between the bid and ask prices widens (for
example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go
down the levels of access. This is due to volume. If a trader can guarantee large
numbers of transactions for large amounts, they can demand a smaller difference
between the bid and ask price, which is referred to as a better spread. The levels of
access that make up the foreign exchange market are determined by the size of the
"line" (the amount of money with which they are trading).
The top-tierinterbank marketaccounts for 53% of all transactions. From there,
smaller banks, followed by large multi-national corporations (which need to hedge
risk and pay employees in different countries), large hedge funds, and even some
of the retail FX market makers. According to Galati and Melvin, Pension funds,
insurance companies, mutual funds, and other institutional investors have played
an increasingly important role in financial markets in general, and in FX markets in
particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have
grown markedly over the 20012004 period in terms of both number and overall
size. Central banks also participate in the foreign exchange market to align
currencies to their economic needs.
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Banks
The interbank market caters for both the majority of commercial turnover and large
amounts of speculative trading every day. Many large banks may trade billions of
dollars, daily. Some of this trading is undertaken on behalf of customers, but much
is conducted by proprietary desks, which are trading desks for the bank's own
account. Until recently, foreign exchange brokers did large amounts of business,
facilitating interbank trading and matching anonymous counterparts for large fees.
Today, however, much of this business has moved on to more efficient electronic
systems. The broker squawk box lets traders listen in on ongoing interbank trading
and is heard in most trading rooms, but turnover is noticeably smaller than just a
few years ago.
Commercial companies
An important part of this market comes from the financial activities of companies
seeking foreign exchange to pay for goods or services. Commercial companies
often trade fairly small amounts compared to those of banks or speculators, and
their trades often have little short term impact on market rates. Nevertheless, trade
flows are an important factor in the long-term direction of a currency's exchange
rate. Some multinational companies can have an unpredictable impact when very
large positions are covered due to exposures that are not widely known by other
market participants.
Central banks
National central banks play an important role in the foreign exchange markets.
They try to control the money supply, inflation, and/or interest rates and often have
official or unofficial target rates for their currencies. They can use their often
substantial foreign exchange reserves to stabilize the market. Nevertheless, the
effectiveness of central bank "stabilizing speculation" is doubtful because central
banks do not go bankrupt if they make large losses, like other traders would, and
there is no convincing evidence that they do make a profit trading.
Forex Fixing
Forex fixing is the daily monetary exchange rate fixed by the national bank of each
country. The idea is that central banks use the fixing time and exchange rate to
evaluate behavior of their currency. Fixing exchange rates reflects the real value of
equilibrium in the forex market. Banks, dealers and online foreign exchange
traders use fixing rates as a trend indicator.
The mere expectation or rumor of central bank intervention might be enough to
stabilize a currency, but aggressive intervention might be used several times each
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year in countries with a dirty float currency regime. Central banks do not always
achieve their objectives. The combined resources of the market can easily
overwhelm any central bank. Several scenarios of this nature were seen in the
199293 ERM collapse, and in more recent times in Southeast Asia.

Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other
words, the person or institution that bought or sold the currency has no plan to
actually take delivery of the currency in the end; rather, they were solely
speculating on the movement of that particular currency. Hedge funds have gained
a reputation for aggressive currency speculation since 1996. They control billions
of dollars of equity and may borrow billions more, and thus may overwhelm
intervention by central banks to support almost any currency, if the economic
fundamentals are in the hedge funds' favor.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of
customers such as pension funds and endowments) use the foreign exchange
market to facilitate transactions in foreign securities. For example, an investment
manager bearing an international equity portfolio needs to purchase and sell
several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency
overlay operations, which manage clients' currency exposures with the aim of
generating profits as well as limiting risk. Whilst the number of this type of
specialist firms is quite small, many have a large value of assets under
management (AUM), and hence can generate large trades.
Retail foreign exchange traders
Individual Retail speculative traders constitute a growing segment of this market
with the advent of retail forex platforms, both in size and importance. Currently,
they participate indirectly through brokers or banks. A number of the forex brokers
operate from the UK under FSA regulations where forex trading using margin is
part of the wider over-the-counter derivatives trading industry that includes CFDs
and financial spread betting.
There are two main types of retail FX brokers offering the opportunity for
speculative currency trading: brokers and dealers or market makers. Brokers serve
as an agent of the customer in the broader FX market, by seeking the best price in
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the market for a retail order and dealing on behalf of the retail customer. They
charge a commission or mark-up in addition to the price obtained in the market.
Dealers or market makers, by contrast, typically act as principal in the transaction
versus the retail customer, and quote a price they are willing to deal at.

Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international
payments to private individuals and companies. These are also known as foreign
exchange brokers but are distinct in that they do not offer speculative trading but
rather currency exchange with payments (i.e., there is usually a physical delivery
of currency to a bank account).
Money transfer/remittance companies and bureaux de change
Money transfer companies/remittance companies perform high-volume low-value
transfers generally by economic migrants back to their home country. In 2007, the
Aite Group estimated that there were $369 billion of remittances (an increase of
8% on the previous year). The four largest markets (India, China, Mexico and the
Philippines) receive $95 billion. The largest and best known provider is Western
Union with 345,000 agents globally followed by UAE Exchange
Bureau de change or currency transfer companies provide low value foreign
exchange services for travelers. These are typically located at airports and stations
or at tourist locations and allow physical notes to be exchanged from one currency
to another. They access the foreign exchange markets via banks or non bank
foreign exchange companies.

c) Determinants of FX rates
The following theories explain the fluctuations in FX rates in a floating exchange
rate regime (In a fixed exchange rate regime, FX rates are decided by its
government):
(a) International parity conditions: Relative Purchasing Power Parity,
interest rate parity, Domestic Fisher effect, International Fisher effect.
Though to some extent the above theories provide logical explanation for the
fluctuations in exchange rates, yet these theories falter as they are based on
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challengeable assumptions [e.g., free flow of goods, services and capital]
which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate): This model, however,
focuses largely on tradable goods and services, ignoring the increasing role
of global capital flows. It failed to provide any explanation for continuous
appreciation of dollar during 1980s and most part of 1990s in face of soaring
US current account deficit.
(c) Asset market model (see exchange rate): views currencies as an
important asset class for constructing investment portfolios. Assets prices
are influenced mostly by people's willingness to hold the existing quantities
of assets, which in turn depends on their expectations on the future worth of
these assets. The asset market model of exchange rate determination states
that the exchange rate between two currencies represents the price that just
balances the relative supplies of, and demand for, assets denominated in
those currencies.
None of the models developed so far succeed to explain FX rates levels and
volatility in the longer time frames. For shorter time frames (less than a few days)
algorithms can be devised to predict prices. It is understood from the above models
that many macroeconomic factors affect the exchange rates and in the end currency
prices are a result of dual forces of demand and supply. The world's currency
markets can be viewed as a huge melting pot: in a large and ever-changing mix of
current events, supply and demand factors are constantly shifting, and the price of
one currency in relation to another shifts accordingly. No other market
encompasses (and distills) as much of what is going on in the world at any given
time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced
by any single element, but rather by several. These elements generally fall into
three categories: economic factors, political conditions and market psychology.
i. Economic factors
These include: (a)economic policy, disseminated by government agencies and
central banks, (b)economic conditions, generally revealed through economic
reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending
practices) and monetary policy (the means by which a government's central
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bank influences the supply and "cost" of money, which is reflected by the
level of interest rates).
Government budget deficits or surpluses: The market usually reacts
negatively to widening government budget deficits, and positively to
narrowing budget deficits. The impact is reflected in the value of a country's
currency.
Balance of trade levels and trends: The trade flow between countries
illustrates the demand for goods and services, which in turn indicates
demand for a country's currency to conduct trade. Surpluses and deficits in
trade of goods and services reflect the competitiveness of a nation's
economy. For example, trade deficits may have a negative impact on a
nation's currency.
Inflation levels and trends: Typically a currency will lose value if there is a
high level of inflation in the country or if inflation levels are perceived to be
rising. This is because inflation erodes purchasing power, thus demand, for
that particular currency. However, a currency may sometimes strengthen
when inflation rises because of expectations that the central bank will raise
short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as GDP, employment levels,
retail sales, capacity utilization and others, detail the levels of a country's
economic growth and health. Generally, the more healthy and robust a
country's economy, the better its currency will perform, and the more
demand for it there will be.
Productivity of an economy: Increasing productivity in an economy should
positively influence the value of its currency. Its effects are more prominent
if the increase is in the traded sector.
ii. Political conditions
Internal, regional, and international political conditions and events can have a
profound effect on currency markets.
All exchange rates are susceptible to political instability and anticipations about the
new ruling party. Political upheaval and instability can have a negative impact on a
nation's economy. For example, destabilization of coalition governments in
Pakistan and Thailand can negatively affect the value of their currencies. Similarly,
in a country experiencing financial difficulties, the rise of a political faction that is
perceived to be fiscally responsible can have the opposite effect. Also, events in
one country in a region may spur positive/negative interest in a neighboring
country and, in the process, affect its currency.
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iii. Market psychology
Market psychology and trader perceptions influence the foreign exchange market
in a variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to
quality", a type of capital flight whereby investors move their assets to a
perceived "safe haven". There will be a greater demand, thus a higher price,
for currencies perceived as stronger over their relatively weaker
counterparts. The U.S. dollar, Swiss franc and gold have been traditional
safe havens during times of political or economic uncertainty.
Long-term trends: Currency markets often move in visible long-term trends.
Although currencies do not have an annual growing season like physical
commodities, business cycles do make themselves felt. Cycle analysis looks
at longer-term price trends that may rise from economic or political trends.
"Buy the rumor, sell the fact": This market truism can apply to many
currency situations. It is the tendency for the price of a currency to reflect
the impact of a particular action before it occurs and, when the anticipated
event comes to pass, react in exactly the opposite direction. This may also be
referred to as a market being "oversold" or "overbought".To buy the rumor
or sell the fact can also be an example of the cognitive bias known as
anchoring, when investors focus too much on the relevance of outside events
to currency prices.
Economic numbers: While economic numbers can certainly reflect
economic policy, some reports and numbers take on a talisman-like effect:
the number itself becomes important to market psychology and may have an
immediate impact on short-term market moves. "What to watch" can change
over time. In recent years, for example, money supply, employment, trade
balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations: As in other markets, the accumulated price
movements in a currency pair such as EUR/USD can form apparent patterns
that traders may attempt to use. Many traders study price charts in order to
identify such patterns.
Additional information:
As such, it has been referred to as the market closest to the ideal of perfect
competition, notwithstanding currency intervention by central banks. According to
the Bank for International Settlements, as of April 2010, average daily turnover in
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global foreign exchange markets is estimated at $3.98 trillion, a growth of
approximately 20% over the $3.21 trillion daily volume as of April 2007. Some
firms specializing on foreign exchange market had put the average daily turnover
in excess of US$4 trillion.
The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion Currency swaps
$207 billion in options and other products
d) The foreign exchange market is unique because of
its huge trading volume representing the largest asset class in the world
leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e. trading from
20:15 GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed
income; and
the use of leverage to enhance profit and loss margins and with respect to
account size.
d) Trading characteristics
There is no unified or centrally cleared market for the majority of FX trades, and
there is very little cross-border regulation. Due to the over-the-counter (OTC)
nature of currency markets, there are rather a number of interconnected
marketplaces, where different currencies instruments are traded. This implies that
there is not a single exchange rate but rather a number of different rates (prices),
depending on what bank or market maker is trading, and where it is. In practice the
rates are often very close, otherwise they could be exploited by arbitrageurs
instantaneously. Due to London's dominance in the market, a particular currency's
quoted price is usually the London market price. A joint venture of the Chicago
Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and
aspired but failed to the role of a central market clearing mechanism.
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The main trading center is London, but New York, Tokyo, Hong Kong and
Singapore are all important centers as well. Banks throughout the world
participate. Currency trading happens continuously throughout the day; as the
Asian trading session ends, the European session begins, followed by the North
American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well
as by expectations of changes in monetary flows caused by changes in gross
domestic product (GDP) growth, inflation (purchasing power parity theory),
interest rates (interest rate parity, Domestic Fisher effect, International Fisher
effect), budget and trade deficits or surpluses, large cross-border M&A deals and
other macroeconomic conditions. Major news is released publicly, often on
scheduled dates, so many people have access to the same news at the same time.
On the spot market, according to the 2010 Triennial Survey, the most heavily
traded bilateral currency pairs were:
EURUSD: 28%
USDJPY: 14%
GBPUSD (also called cable): 9%
Most traded currencies by value
Currency distribution of global foreign exchange market turnover
]

Rank Currency
ISO 4217 code
(Symbol)
% daily share
(April 2010)
1 United States dollar USD ($) 84.9%
2 Euro EUR () 39.1%
3 Japanese yen JPY () 19.0%
4 Pound sterling GBP () 12.9%
5 Australian dollar AUD ($) 7.6%
6 Swiss franc CHF (Fr) 6.4%
7 Canadian dollar CAD ($) 5.3%
8 Hong Kong dollar HKD ($) 2.4%
9 Swedish krona SEK (kr) 2.2%
10 New Zealand dollar NZD ($) 1.6%
11 South Korean won KRW () 1.5%
12 Singapore dollar SGD ($) 1.4%
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13 Norwegian krone NOK (kr) 1.3%
14 Mexican peso MXN ($) 1.3%
15 Indian rupee INR ( ) 0.9%
Other 12.2%
Total 200%

5. CREDIT RATING AGENCIES
a) Meaning:
A credit rating evaluates the credit worthiness of an issuer of specific types of
debt, specifically, debt issued by a business enterprise such as a corporation or a
government. It is an evaluation made by a credit rating agency of the debt issuers
likelihood of default. Credit ratings are determined by credit ratings agencies. The
credit rating represents the credit rating agency's evaluation of qualitative and
quantitative information for a company or government; including non-public
information obtained by the credit rating agencies analysts.
b) Calculation of the rating
Credit ratings are not only based on mathematical formulas. Instead, credit rating
agencies use their judgment and experience in determining what public and private
information should be considered in giving a rating to a particular company or
government.
c) Use of the credit rating
The credit rating is used by individuals and entities that purchase the bonds issued
by companies and governments to determine the likelihood that the government
will pay its bond obligations.
d) Implication of the rating
A poor credit rating indicates a credit rating agency's opinion that the company or
government has a high risk of defaulting, based on the agency's analysis of the
entity's history and analysis of long term economic prospects. A poor credit score
indicates that in the past, other individuals with similar credit reports defaulted on
loans at a high rate. The credit score does not take into account future prospects or
changed circumstances.
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For example, if an individual received a credit score of 400 on Monday because he
had a history of defaults, and then won the lottery on Tuesday, his credit score
would remain 400 on Tuesday because his credit report does not take into account
his improved future prospects.

e) IMPORTANCE OF CREDIT RATING AGENCIES

Credit rating agencies provide investors and debtors with important information
regarding the creditworthiness of an individual, corporation, agency or even a
sovereign government. The credit rating agencies help measure the quantitative
and qualitative risks of these entities and allow investors to make wiser decisions
by benefiting from the skills of professional risk assessment carried out by these
agencies. The quantitative risk analysis carried out by credit rating agencies
include comparison of certain financial ratios with chosen benchmarks and the
qualitative analysis focuses on the management character, legal, political and
economic environment in a jurisdiction.
Development of Financial Markets
Credit rating agencies help provide risk measures for various entities and make it
easier for financial market participants to assess and understand the credit risk of
the parties involved in the investing process. Individuals can get a credit score in
order to be eligible for easy access to credit cards and other loans. Institutions can
borrow money easily from banks without having to go through lengthy evaluations
from each individual lender separately. Also corporations and governments can
issue debt in the form of corporate bonds and treasuries to attract investors based
on the credit ratings.
Credit Rating Agencies Help Regulate Financial Markets
The credit ratings provided by popular rating agencies including Moodys,
Standard & Poors and Fitch, have become a benchmark for regulation of financial
markets. Legal policies require certain institutions to hold investment graded
bonds. Bonds are classified to be investment graded based on their ratings by these
agencies, any corporate bond with a rating higher than BBB is considered to be
investment graded bond.
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Enhanced Transparency in the Credit Markets
The credit rating agencies provide improved efficiency in the credit markets and
allow for more transparency in dealings. The ratings help monitor the credit
soundness of various borrowers through a set of well-defined rules

Estimation of Risk Premiums
The credit ratings provided by these agencies are used by various banks and
financial institutions in determining the risk premium they will charge on loans and
corporate bonds. A poor credit rating implies a higher risk premium with an
increase in the interest rate charged to corporations and individuals with a poor
credit rating. Issuers with a good credit rating are able to raise funds at a lower
interest rate.
Standardization of the Evaluation Process
Most credit agencies use their own methodology for determining credit ratings, but
since only a handful of popular credit rating providers exist, this adds a great deal
of standardization in the rating process. The credit ratings of different borrowers
can be easily compared using ratings provided by a credit rating company and the
applications can be easily sorted.

f) Few Important Credit Rating Agencies

S AND P CREDIT RATING AGENCY
With offices in 23 countries and a history that dates back more than 150 years,
Standard & Poors is known to investors worldwide as a leader of financial- market
intelligence.
Today Standard & Poors strives to provide investors who want to make better
informed investment decisions with market intelligence in the form of credit
ratings, indices, investment research and risk evaluations and solutions.
Most notably, we are known as an independent provider of credit ratings. In 2010
S&P issued 162,418 new and 556,872 revised ratings. Currently, we rate more
than US$32 trillion in outstanding debt.
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Standard & Poors is also widely known for maintaining one of the most widely
followed indices of large-cap American stocks: the S&P 500. In 2007, the S&P
500 celebrated its 50th anniversary.
Additionally, the S&P Global 1200 covers approximately 31 markets constituting
approximately 70% of global market capitalization. Over $1.25 trillion is directly
tied to S&P indexes, and more than $4.83 trillion is benchmarked to the S&P 500
more than any other index in the world.
Moreover, Standard & Poors independent equity research business is among the
worlds leading providers of independent investment information, offering
fundamental coverage on approximately 1,600 stocks. We are also a leader in
mutual fund information and analysis.

CRISIL
Credit Rating and Information Services of India Ltd.(CRISIL) a global analytical
company providing ratings, research, and risk and policy advisory services.
CRISIL's majority shareholder is Standard and Poor's. Standard & Poor's, a part of
The McGraw-Hill Companies, is the world's foremost provider of credit ratings.
CRISIL is the largest credit rating agency in India. CRISIL pioneered ratings in
India more than 20 years ago, and is today the undisputed business leader, with the
largest number of rated entities and rating products: CRISIL's rating experience
covers more than 41,738 entities, including 20,000 small and medium enterprises
(SMEs). As on June 30, 2011, it had more than 13,787 ratings (including over
6,800 SMEs) outstanding.
CRISIL's Global Analytical Centre (GAC) supports the Global Resource
Management initiative of Standard & Poor's (S&P). Under this initiative, GAC
provides resources to S&P to improve workflow efficiencies, handle end-to-end
analytical jobs, process information, and execute complex modelling assignments.
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MOODY CORPORATION
Moody's Analytics and Moody's Investors Service is a credit rating agency which
performs international financial research and analysis on commercial and
government entities. The company also ranks the credit-worthiness of borrowers
using a standardized ratings scale. It is one of the Big Three credit rating
agencies and has a 40% share of the world market, as does its main rival, Standard
& Poor's; Fitch Ratings has a smaller share.
Moody's was founded in 1909 by John Moody. The top institutional owner and
only shareholder holding more than 5% of all shares of Moody's is Warren
Buffett's company Berkshire Hathaway, holding a share of ~13%.

FITCH
The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in
Paris. Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group.
Dual-headquartered in New York and London with 51 offices worldwide, Fitch
Ratings positions itself as a global rating agency dedicated to providing value
beyond the rating through independent and prospective credit opinions, research
and data. Fitch Ratings was one of the three Nationally Recognized Statistical
Rating Organizations (NRSRO) designated by the U.S. Securities and Exchange
Commission in 1975, together with Moody's and Standard & Poor's. It is one of the
"Big Three credit rating agencies" (Standard & Poor's, Moody's Investor Service
and Fitch Ratings).
Fitch Ratings is the smallest of the "big three" NRSROs, covering a more limited
share of the market than S&P and Moody's, though it has grown with acquisitions
and frequently positions itself as a "tie-breaker" when the other two agencies have
ratings similar, but not equal, in scale.
In September 2011, Fitch announced the sale of Algorithmics (risk analytics
software) to IBM for $387 million.
Stephen W. Joynt is chief executive officer.
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CONCLUSION
We hope that our project was able to give you the birds eye view of financial
markets. Financial markets are an important part of the economy of a country. That
is reason that the government, industry and even the central banks of the country
keep a close watch on the happenings of the financial market. The financial market
is important from both the industrys point of view as well as the investors point
of view.
The following are the important aspects of financial markets:
Employs large amounts of professional like stock brokers, dealers,
consultants etc.
Provides capital for companies, governments and even municipalities with
enough resources to start new ventures.
Enables speculators and arbitrageurs to make better profits as well as
diversify their risks.
Supports banks as risks which banks have can be securitized and passed on.
Protects business houses form fluctuations of exchange or currency rates.
International markets enable investors to invest in different countries thereby
helping developing economies.
Offer the world a lot of capital resources thereby making it possible for
industry and business houses to run efficiently.

As the saying goes Money makes the world go
round, financial markets actually ensure that the world economy
functions productively thereby eliminating poverty and increasing standards
of living.


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www.simpletuition.com
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www.tmxmoney.com/
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www.bullbearings.co.uk
www.greekshares.com
www.wisegeek.com
www.optiontradingpedia.com
www.financialexpress.com
www.investinganswers.com
www.bseindia.com
forum.incrediblecharts.com/
www.marketoracle.co.uk
www.celebrateboston.com
business.yourdictionary.com

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