Professional Documents
Culture Documents
Barter transaction
Prior to the advent of money, barter was the only
means of trade.
AT&T Sevtelecom
Telecom company Currency Telecom company
USA & Apatite Russia
seller buyer
Apatite Helm AG
Trading Firm
Currency Germany
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Buyer & Seller
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Money
&
Markets
Exchange your
Could not
Consume all the goods for other
put away goods
goods you have goods and then
for later use
consume them
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Physical
Goods MARKETS
Assets
Financial
Assets
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Economic Units
transacting in
financial markets
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Income = Expenditure
funds
SBU DBU
claim
e.g. e.g.
•household •government
sector
•business
entities
•nation as a
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BALANCE OF TRADE
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funds
SBU DBU
claim
debt instrument
equity shares 17
funds
SBU DBU
debt instrument
or IOU
•Pay interest
at periodic
intervals
•Repay
principal at 18
maturity
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Equity Claims
funds
SBU DBU
Ownership or
equity shares
•Claim on profits
•Assets
remaining after
debtors have
been paid 19
funds
SBU DBU
claim
ASSET LIABILITY 20
Assets Liabilities
FUNDS CLAIMS
or
DEBT or borrowed capital
or
EQUITY or owners capital
Assets Liabilities
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Types of
debt
instruments
Long term
debt
instruments
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Bond Debenture
Firms also issue debt In the U.S a debenture is a
securities for which specific bond for which no assets of
assets are designated as the firm have been specified
collateral. as collateral.
Secured debt Unsecured debt
Note: In India the terms bonds and debentures are used interchangeably and thus 25
could refer to secured as well as unsecured debt Services
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Debt notes issued by the U.S. Dept of Treasury
long term
T-bonds time to maturity
10 – 30 years
medium term
T-notes time to maturity
1 – 10 years
short term
T-bills time to maturity
13, 26, 52 weeks
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e.g. e.g.
Treasury Bond bank loans
bank time deposits
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Municipal 2,018.60
U.S. Treasury 3,943.60
Mortgage Related 5,472.50
Corporate 4,704.50
Federal Agencies 2,745.10
Money Market 2,872.10
Asset-Backed 1,827.80
TOTAL 23,584.20
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shares
dividends
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Interest 0 20,000
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PRESENT FUTURE
No money Goods are
changes delivered
hands and money
is paid
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price delivery
fixed at of asset
outset pre specified time period
PRESENT FUTURE
1 Nov 2003 15 Dec 2003
Vijay agrees to buy 100
kg of rice from Ajay on 15
Dec 2003 at Rs 14 per
kg. No money/assets
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change hands
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Example (Cont…)
The contract is negotiated individually between Ajay and Vijay
Such contracts are called OTC (Over-the-Counter) or customized
contracts
No money changes hand on 1 Nov 2003
The actual transaction will take place only on 15 Dec 2003
The terms are set on 1 Nov 2003
Both the parties have an obligation to perform
Ajay is obligated to deliver the rice on 15 Dec 2003
Vijay is obligated to accept the rice and pay the money on 15 Dec
2003
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Call Put
Option Option
•Gives the buyer the right •Gives the buyer the right
•To buy an underlying •To sell an underlying
asset asset
•On or before a pre •On or before a pre
specified date specified date 51
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Interest
Currency
rate
swaps
swaps
Notional Principal
principal denominated in
two different
currencies 59
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Periodic
payments
Mortgagor Mortgagee
borrower lender
Can take
over
property 66
Returns
Time
Riskiness
pattern
Liquidity
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Time
Riskiness
pattern
Liquidity
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Returns
•May not
pay
dividends Time
Riskiness
pattern
•Capital
appreciation
may be
less/losses Liquidity
•Firm may
go into
bankruptcy
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Returns
•Cash flows
from bonds
Time are
Riskiness
pattern
predictable
•Cash flows
from
Liquidity dividends
can be
volatile
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L Time
O Riskiness
W pattern
Liquidity
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They may not require regular The key issue is the availability
cash flows immediately of predictable periodic cash
flows from the asset
More inclined towards risk Risk averse
Would of course demand Would be content with lower
adequate compensation by way returns
of higher expected returns 76
Markets
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Ravi applies for 1000 shares and Six months later Ravi sells these
is allotted 200 shares at a price shares on the National Stock
of Rs 850 Exchange for Rs 1250 per share
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Brokers
Market
Intermediary
Investment
Dealers
Bankers
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counterparties.
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paper etc.
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devolvement.
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LENDER
individual
Corporate
borrower
family
Commercial
bank
Non – corporate
Financial borrowers
claims
Financial 108
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I. Market
Intermediary
Pension Mutual
funds funds
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LENDER
individual
Corporate
borrower
family
Commonwealth
Bank
5% pa
4% pa
Telstra etc.
Financial
claims
Financial 113
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Time to maturity at the time of issue Markets for medium to long term
is one year or less instruments
Money market instruments by Capital market securities include
definition have to be debt instruments both long and medium term debt as
well as equities
Money markets are used to adjust Capital markets channelize funds
temporary liquidity imbalances. In from those who wish to save to those
practice, for any company, inflows who seek to make long term
and outflows at any point in time will productive investments
rarely match
Money markets help firms to borrow Capital markets are where
short term and also to deploy surplus companies source funds for their long
funds on a short term basis term investment needs
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The NASDAQ
The Stockholm Stock Exchange
The Toronto Stock Exchange
The Deutsche Borse
The National Stock Exchange
The Chicago Mercantile Exchange
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Benefits of listing:
1. Trading of listed shares is easier and the company will
attract a broader class of shareholders
2. Listing gives the company enhanced visibility
3. It becomes easier for the company to raise capital
Once approval is granted a company has to
pay the prescribed listing fees
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AMEX
NASDAQ
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REDIBook
Archipelago
Bloomberg Tradebook
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futures exchanges.
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Those who trade on their own Those that arrange trades for
account others
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position’
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Who is a specialist?
An exchange member who is a market maker in one or
more securities
The person on the exchange floor who the other
members approach when they wish to transact or leave
an order
A specialist is assigned securities by the exchange and
is expected to maintain a fair and orderly market
A specialist is also known as an Assigned Dealer
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If there is a discrepancy:
It will be reported to the traders
The traders will then try and resolve the problem
Trades with discrepancies are called DKs (Don’t Knows)
In the futures markets they are called Out Trades 158
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What is a Depository?
It is a centralized location in which security certificates are
placed and stored for later transfer
Such transfers usually take place by book entry rather
than by physical movement
E.g.The largest depository in the world is the
Depository Trust Company (DTC), which holds
nearly 20 trillion dollars in assets
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Who is a custodian?
It is an organization, typically a commercial bank, that
holds in custody and safekeeping assets belonging to
its customers.
For a fee, the institution will collect dividends, interest,
and proceeds from security sales and will disburse
funds according to the clients’ instructions.
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traders.
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What is arbitrage?
Arbitrage may be described as the existence of the
potential to make riskless profits by transacting in
multiple markets.
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Equilibrium isServices
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Arbitrage & Market Imperfections
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Arab countries
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country
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Japan: Japan:
Issuer = American company
Issuer = Japanese
Principal = 10 billion
company
Currency of issue = Yen
Principal = 10 billion
Currency of Japan = Yen
Currency of issue = Yen
Currency of Japan = Yen
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3. They are issued in ‘bearer’ form and offer favourable tax status
by assuring anonymity
The name and address of the holder are not mentioned on the
bond certificates.
In practice this has facilitated tax evasion and tax avoidance
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similar to Eurobonds
They are short term money market instruments with 1 to
6 months to maturity.
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Equity
markets have been slow to globalize as
compared to debt markets
Of late the process has accelerated due to:
Worldwide deregulation of capital markets
Rapid developments in telecommunications
Greater awareness of the benefits of international
portfolio diversification
Growing investor sophistication
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Receipts.
Global American
Depository Depository
Receipts Receipts
(GDRs) (ADRs)
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of securities
issuer’s country
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India India
Domestic Custodial
shares Bank
Wipro SBI
Depository
ADRs
Bank
USA USA
JP Morgan 214
Bank
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ADRs (cont…)
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India USA
Domestic
ADRs USA
shares
1 ADRs =
Rs. 30 / share 60c /share 10 domestic
shares
$6 /share
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Less attractive from the standpoint Required to ensure that there are
of an American investor no arbitrage opportunities between
the U.S and the home market
USA India
Domestic
ADRs
shares
Overvalued Buy in India
hence shortsell Convert to ADRs
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1 ADR =
Domestic
10 domestic
shares
shares
$210 / ADR Rs.1000 /share
Domestic
ADRs
shares
Undervalued Sell in India
hence buy
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Convert
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Tarheel shares
Consultancy Services
Arbitrageur – Infosys ADR undervalued
1 ADR =
Domestic
10 domestic
shares
shares
$190 / ADR Rs.1000 /share
Profit = $10
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Levels of
ADRs
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globalization:
The pace of innovations in financial products and
services
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To quote Dembroski:
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