Professional Documents
Culture Documents
Instruments
Group 5
Ankit Saklani, 13P125
Ashima Tayal, 13P130
Jain Himanshu Hemant, 13P143
Kaushik Trilok Nihalani, 13P148
Rattanpreet Singh, 13P161
Shashank Shukla, 13P166
Financial Instrument
A financial instrument is a tradableassetof any kind; either cash, evidence of
an ownership interest in an entity, or a contractual right to receive or deliver
cash or another financial instrument.
History
of FIs
in India
Hundis
are used
A financial
instrumentthat
developed on the
Indian subcontinent for use
in trade and
credit
transactions.
as a form of
remittance
instrument to
transfer money
from place to
place, as a form
of credit
instrument or
IOU to borrow
money and as
abill of
exchange in
trade
transactions.
Financial
Instruments
Cash
Instruments
Loans
Securiti
es
Debt
Security
Derivative
Instruments
Deposits
Equity
Security
Forward
s
Futures
Options
Swaps
Derivative is a
product whose
value is derived
from the value of
one or more basic
variables, called
underlying. The
underlying asset
can be equity,
index, foreign
exchange (forex),
Derivative
Debt instrument
represents a
contract whereby
one party lends
money to another
on pre-determined
terms with regards
to rate and
periodicity of
interest, repayment
of principal amount
Debt
Equity
Equity Securities
Represent ownership in a firm and include:
Common Stock: A residual claim on firms assets. Its dividends are paid only after
interest are paid to debt holders and preferred stockholders
Preferred Stock: An equity with schedule dividends that typically do not change over
securitys life.
Warrants: Give bondholder an additional opportunity for returns when included with
bonds. Give holder a right to buy firms common share at given price over a period of
timeDebt Securities
Type of Bonds
1. Are promises to repay borrowed money
in future
2. Different type of debt securities are
bonds, notes commercial papers, bills,
certificate of deposits
3. Bonds: Promise to make a series of
interest payment in fixed amounts and
to repay principal amount in maturity.
Are generally long term
4. There are several terms related to bond:
1. Maturity: Date on which principal is
to be repaid
2. Par Value: Principal amount
3. Coupon Rate: Rate at which interest
Forward Contract
1. A forward contract is a customized contract between two parties, where settlement
takes place on a specific date in future at a price agreed today
2. Unique in terms of contract size, expiration date and the asset type and quality and
exposed to counter party risk
3. The contract price is generally not available in public domain
4. Has to be settled by delivery of the asset on expiration date
5. In case the party wishes to reverse the contract, it has to compulsorily go to the same
counter party, which being in a monopoly situation can command the price it wants
6. Created by dealers and are generally traded over the counter
7. Party that agrees to buy the asset has a long forward position and is called a long and
other party has a short forward position and is called short
Futures
1. Futures are exchange-traded contracts to sell or buy financial instruments or physical
commodities for a future delivery at an agreed price
2. They are standardized as to amount, asset characteristics and delivery time
3. Clearinghouse is the counter party too all future contracts. Each exchange has a
clearing house which guarantees that traders in futures market will honor their
obligation
4. Government regulates the future market
5. Future contracts require a margin money which is to be deposited by both long and
short
Basis
Futures
Forwards
Nature
Contract Terms
Standardized
Customised
Liquidity
More liquid
Less liquid
Margin Payments
Not required
Settlement
Squaring off
Options
1. An option contract gives its owner the right but not the legal obligation to conduct a
transaction involving an underlying asset at a predetermined future date and at a
predetermine price
2. Option give option buyer the right to decide whether the trade will eventually take place
or not
3. The seller of the option has obligation to perform if buyer exercises the option
4. Call option give buyer the right to buy a given quantity of the underlying asset, at a
given price on or before a given future date
5. Puts give the buyer the right to sell a given quantity of the underlying asset at a given
price on or before a given date
Swaps
1. Are agreements for exchange of one security for another to change the maturity
(bonds), quality of issues (stocks or bonds), or because investment objectives have
changed
2. Recently, swaps have grown to include currency and interest rate swaps
3. Interest rate swaps: These entail swapping only the interest related cash flows between
the parties in the same currency
4. Currency swaps: These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the
opposite direction
Financial Markets
A financial market is a place where buyers and sellers come together to exchange
a financial asset or a financial instrument
They play an important role in all the stages of life of an FI, i.e., issuance, pretrade, trade, post-trade and asset servicing
Examples: Stock markets, Bond Markets, Money Markets, Forex Markets
Financial
Market
Primary
Market
Secondar
y Market
Issuance
IPO
FPO
Rights
Issue
Pre Trade
Analysis
Private
Placemen
ts
Over the
Counter
Trade
Post Trade
Listed
Market
Asset
Servicing
Primary Market
Bonds are issued by RBI.
But for equity, there is a standard
process to raise money, in one of
the following ways:
IPO: A privately owned company
offers equity shares to the
investing public for the first time
Private Placements: A company
raises money by placing shares
with a few institutions only
FPO: A publicly held company
raises
additional
money
by
issuing shares to the public
Rights Issue: A publicly held
company raises money by issuing
shares to existing shareholders
only
Secondary Market
Pre Trade Analysis
Banks or NBFCs involved in trading
undertake technical analysis and
fundamental analysis of the shares
before selling/buying it so that trade is not
entirely left to market sentiment
Also, there are information dissemination
systems which provide market information,
using which traders can make buy/sell
decisions. Eg. Reuters
Trade
Listed Markets are physical forums. Eg.
BSE, follows order matching system.
Another eg. NYSE
OTC is a market without a physical
location and trade is carried out on
telephone or a trading system
Post Trade and Asset Servicing
This involves clearing and settlement of a
transaction.
ADR/GDR
Introduction
Benefits
Benefits To Issuer
Broader and more diversified investor
exposure, which may improve liquidity
Enhanced visibility for the companys
products or services in a marketplace
outside its home country
A flexible mechanism for raising capital
and a vehicle or currency for mergers
and acquisitions
Benefits to Investor
Quotes and dividend payments in U.S.
dollars
Familiar trade, clearance and
settlement procedures
Ability to acquire the underlying
securities directly upon cancellation
DR Transaction
Buying
The DR is created when an investor contacts
a broker to make an investment in a
company with a DR program in that market.
Selling
The sale can take place in the
secondary market, or the
ordinary shares held outside
the market can be released
into the home trading market
through a cross-border
transaction
The sale can take place in the
secondary market, or the
ordinary shares held outside
the market can be released
into the home trading market
through a cross-border
transaction
DR Classification
1. SPONSORED are issued by one depositary bank appointed by an issuer company under
a service contract called a deposit agreement. Sponsored DRs give an issuer input and
control over the facility, and may allow the issuer the flexibility to list on a U.S. stock
exchange, and to raise capital
2. UNSPONSORED DRs are issued by one or more depositary banks in response to market
for a particular
without
a formal
agreement
a non-U.S.
company
1. demand
SPONSORED
LEVEL Isecurity
DR Program
is the
simplest
way forwith
non-U.S.
companies
to
access U.S. capital markets. Level I DRs are traded in the U.S. through OTC Markets
with prices reported to the U.S. Financial Industry Regulatory Authority (FINRA),
which makes such information publicly available through sources such as
Bloomberg, Reuters, and OTC Markets
2. SPONSORED LEVEL II AND SPONSORED LEVEL III DRs: Companies that wish to
list their DRs on a U.S. stock exchange, to raise capital or to make a U.S. acquisition
using DRs, establish sponsored Level II or Level III DR programs. These DR programs
require SEC registration, disclosure and reporting. The companies must also meet
the listing requirements of the applicable stock exchanges. Level III DR is the term
used for a company raising capital by issuing DRs
3. PRIVATE PLACEMENT AND OFFSHORE DRs: a non-U.S. company can also
access the U.S. and other capital markets through SEC Rule 144A and/or SEC
Regulation S DR facilities without SEC registration. Rule 144A programs provide for
raising capital through the private placement of DRs with qualified institutional
There isno upper limitfor an Indian company to raise funds through ADRs / GDRs
unlisted company that has not raised funds through ADRs, can go for ADRs but
needsto be simultaneously listedonAmericanandIndian stock exchanges
Any
Any unlisted company which has already raised funds through ADRs needs to be
listed within 3 years or on making profits
.
The companies that raise funds through ADRs are banned from investing in real
estate or investing in stock markets
.
Employeesof the resident company can purchase or invest in ADRs to the extent of
US $50,000 only within a span of 5 years, without obtaining any approval by RBI,
under the ESOPs scheme
FCCB
Foreign Currency Convertible bonds-issued in currencies different from the issuing
company's domestic currency
Foreign Currency Convertible bonds-Mix between debt and equity instruments
It retain all features of aconvertible bond, making it very attractive to both the
investors and the issuers.
Investors receive the safety of guaranteed payments on the bond and are also able to
take advantage of any large price appreciation in the company's stock
Benefits to Investors
Benefits to Issuer
FCCB Regulations
FCCBs can be accessed through automatic and approval route. Major regulators
governing the FCCBs in India are Exchange Control Department of RBI and FCCB Division
in Department of Economic Affairs at Ministry of Finance.
Approval Route
1. Infrastructure or export finance
companies such as IDFC, IL&FS, Power
Finance Corporation, IRCON, Power
trading corporation and EXIM bank
2. Banks and financial institutions
which participated in the textile or
steel restructuring package
3. NBFCs to finance import of
infrastructure equipment for leasing
4. Multistate Co-operative society
engaged in manufacturing activities
Recognized Lenders
Automatic Route
Eligible Borrowers
Automatic Route
Approval Route
At least 25 percent to be held
directly by the lender but
proposed FCCB exceeds four
times the direct foreign equity
holding
Thank You