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Financial Management I
2. Overview of Financial Markets
Dr. Suresh
Phone: 40434399, 25783850
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Course Content - Syllabus
*Book reference
Sr Title ICMR Ch. PC Ch. IMP Ch.
1 Introduction to Financial Management 1* 1 1
2 Overview of Financial Markets 2* 2 -
3 Sources of Long-Term Finance
4 Raising Long-term Finance
5 Introduction to Risk and Return6 Time Value of Money
7 Valuation of Securities
8 Cost of Capital
9 Basics of Capital ExpenditureDecisions
10 Analysis of Project Cash Flows
11 Risk Analysis and Optimal Capital
Expenditure Decision2 / 21
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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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SyllabusOverview 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 BanksInsurance Companies
Mutual FundsProvident Funds
NBFCs
Suppliers of Funds:
IndividualsBusinessesGovernments
Demands of Funds:
IndividualsBusinessesGovernments
Financial Markets:Money MarketCapital Market
Funds
Deposits/Shares Loans
Funds
Funds
Securities
Funds
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 FinancialMarkets
Functions of Financial Markets
Price Discovery
Liquidity to financial assets
Reduce the transaction costs
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Classifications of Financial Markets
Debt Market
Nature of Claim Equity Market
Money Market Maturity of Claim
Capital Market
Primary Market Seasoning of Claim
Secondary Market
Cash or Spot Market Timing of DeliveryForward or Futures Market
Exchange-traded Market
Organizational Structure Over-the-counter Market
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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 tomeet 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 theLIBOR or MIBOR/MIBID (offer/bid rates).
Arbitrage opportunities exists to buy higher yield long-
term papers, while selling short-term cheaper papers.
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4. Forex Market
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.
C
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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 andbusinesses 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 exchange3. 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
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7 D i i M k
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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 areOTC.
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)
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Source: Bank for International Settlements. Chart shows total principal
amounts for OTC market and value of underlying assets for exchange market
OTC
Exchange
Sizeof
Market($trillion)
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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.
8 I t ti l C it l M k t
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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.
9 P ti i t f th Fi i l S t
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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 FinanceCompanies, Foreign Institutional Investors
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