Financial Management I

2. Overview of Financial Markets

Dr. Suresh suresh.suralkar@gmail.com Phone: 40434399, 25783850

Course Content - Syllabus

Sr Title ICMR Ch. PC Ch. IMP Ch.

1 Introduction to Financial Management

2 Overview of Financial Markets 3 Sources of Long-Term Finance 4 Raising Long-term Finance

1*
2*

1
2

1
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5 Introduction to Risk and Return

6 Time Value of Money 7 Valuation of Securities 8 Cost of Capital 9 Basics of Capital Expenditure Decisions 10 Analysis of Project Cash Flows and Optimal Capital 11 Risk AnalysisDecision Expenditure

*Book preference

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Overview of Financial Markets

Reference Books 1. Financial Management, ICMR Book, Chapter 2 2. Financial Management, Prasanna Chandra, 7th Edition,

Chapter 2

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Syllabus Overview of Financial Markets

1. Financial Markets 2. Functions and Classifications of Financial Markets 3. Money Market 4. Forex Market

5. Government Securities Market

6. Capital Market

7. Derivatives Market
8. International Capital Markets 9. Participants
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Financial System
Financial System is a broader term. It includes various financial institutions, financial markets, regulations and laws, practices, analysts, money managers, transactions, claims and liabilities.
Financial Institutions: Commercial Banks Deposits/Shares Insurance Companies Mutual Funds Provident Funds NBFCs
Funds Funds Loans

Suppliers of Funds: Individuals Businesses Governments

Funds

Demands of Funds: Individuals Businesses Governments

Financial Markets: Funds Money Market Securities Capital Market Securities

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1. Financial Markets
Financial Markets include

Money Market
Forex Market

Government Securities Market

Capital Market

Derivatives Market
International Capital Markets
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2. Functions and Classifications of Financial Markets

Functions of Financial Markets Price Discovery Liquidity to financial assets Reduce the transaction costs

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Classifications of Financial Markets

Nature of Claim Maturity of Claim Seasoning of Claim Debt Market Equity Market

Money Market
Capital Market Primary Market Secondary Market Cash or Spot Market Forward or Futures Market Exchange-traded Market

Timing of Delivery
Organizational Structure

Over-the-counter Market 8 / 21

3. Money Market
Money market is for short-term borrowing and lending. It provides short-term liquidity to the financial system. Money Markets are interbank and inter-corporate. In Money Market, mostly debt instruments are traded such as Treasury Bills, Commercial Papers, Banks Acceptance, Certificate of Deposits, Repurchase

Agreements etc.
Money Market include Call Money Market, Treasury Bills Market, CP & CD Market etc.
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3. Money Market
Central, State and Local Governments issue papers to meet funding needs. Money Markets trade in short-term financial instruments called as paper. It is not like long-term instruments such as equity and bonds. Money Market instruments are benchmarked to the

LIBOR or MIBOR/MIBID (offer/bid rates).

Arbitrage opportunities exists to buy higher yield long-

term papers, while selling short-term cheaper papers. 10 / 21

4. Forex Market
Foreign Exchange Market deal in foreign currencies e.g $, , , etc. Daily volume is around $4 t. Therefore it has high liquidity.

NSE started trading in Forex recently.

Participants in Forex market include exporters,

importers, commercial banks, central banks and

brokers. Forex quotations have two rates: bid and offer rates.
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5. Government Securities Market

This includes bonds and treasury bills issued by the Central Government, State Government and local self

government like municipal authorities and companies

wholly owned by the government, for the purpose of raising funds from the public. These securities are referred as gilt-edged or risk-free or safest as repayments are totally secured. Govt. securities are issued for maturities from 91 days to 31 years. Govt. securities market consists of primary and

secondary markets.

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6. Capital Market
BSE and NSE are the capital markets or stock markets in India. BSE started in 1887 and NSE in 1993. BSE started electronic trading since 1995. Capital markets provide resources for industries and businesses for long term needs. It brings together savers, entrepreneurs and outlet for investment. It include primary market (IPO and FPO) and secondary market (buy/sell securities). SEBI is a regulator. Issues: Public issue, rights issue, bonus issue.
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Functions of Capital Market

Functions of Primary Markets 1. To bring the savers and users together resulting in transfer of funds from one to the other Functions of Secondary Markets 1. Investor should be able to sell his stocks at most competitive price 2. They should provide liquidity 3. Transaction costs should be minimum for the investor
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Stocks Trading Procedure

Trading and Settlement Procedure of stocks:

1. Place an order with a broker or online

2. Broker communicate the order to stock exchange

3. Order stays in a queue and gets executed when it enters

system within buy/sell limit specified 4. You can see number of buyers and sellers 5. Shares bought or sold are recorded in demat accounts of respective owners.
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7. Derivatives Market
Derivatives are the derived products from another products such as underlying securities or assets. Price of derivatives depends on underlying, risk and time value. Derivatives are: Futures, Forward, Options and Swaps. Futures and Forward: Obligations. Options: Right but not obligations. Futures and options are exchange traded. Forward are OTC. Functions of derivatives: Hedging, Speculation and Arbitrage.
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Size of OTC and Exchange-Traded Markets

(Figure 1.1, Page 3 of Hull)
Size of Market ($ trillion)

OTC

Exchange

Source: Bank for International Settlements. Chart shows total principal amounts for OTC market and value of underlying assets for exchange market
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American vs. European Options

An American option can be exercised at any time during its life.

A European option can be exercised only at maturity.

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Types of Traders in Derivatives

Hedgers
Speculators Arbitrageurs Some of the largest trading losses in derivatives have occurred because individuals who had a mandate to be hedgers or arbitrageurs switched to being speculators for example Barings Bank.
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8. International Capital Markets

Origin can be traced back to 1960s, when Europeans wished to invest in dollar-dominated bonds, to hold their assets overseas for avoiding taxes and protecting themselves against depreciating domestic currencies.

These markets include GDRs , ADRs and Eurobonds.

Many Indian companies has raised finance overseas such

as Infosys, ICICI Bank, Reliance, L&T etc.

1970s onwards there is substantial growth in ICMs for raising capital overseas.
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9. Participants of the Financial System

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

Companies, Foreign Institutional Investors

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