New Financial

Products and Services

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Preface

Structural change in international capital market

has led to the emergence of new products and

innovative techniques of operation in capital

market.

Financial intermediaries including banks have

already started expanding their activities in the

financial services sector by offering a variety of

new products.

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Merchant Banking

Its a financial intermediary who helps to transfer

capital from those who possess it to those need it.

Merchant banking includes wide range of activities

i.e. management of customers securities, portfolio

management, project counseling and appraisal,

underwriting of shares and debentures, acting as

banker for refund orders, handling interest and

dividend warrants etc.

Merchant banker renders a host of services to

corporate and promotes industrial growth.

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Loan Syndication

Loan arranged by a bank called lead manager for aborrower who is usually a large corporate customer ora government department.

The other banks who are willing to lend can participatein the loan by contributing an amount suitable totheir own lending policies.

Since single bank cant provide huge sum of loan, anumber of banks join together and form a syndicate.

It also enables the members of the syndicate to sharethe credit risk associated with a particular loanamong themselves.

This is otherwise referred as Consortium Financing.

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Mutual Funds

This refers to fund raised by a financial service

company by pooling the savings of the public.

It is invested in a diversified portfolio with view to

spreading and minimizing risk.

The fund provides investment avenue for small

investors who cant participate in the equities of big

companies.

It ensures low risk, steady returns, high liquidity and

better capital appreciation in long run.

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Factoring

It refers to managing the process of sales

ledger by financial service company.

Its an arrangement under which financial

intermediary assumes credit risk in the

collection of book debts for its clients.

A factor provides credit information, collects

debts, monitors sales ledgers, and provides

finance against debts.

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Forfaiting

Its a technique by which forfaitor (Financing

Agency) discounts an export bill and pay

ready cash to the exporter who can concentrate

on the export front without bothering about the

collection of export bills.

The exporter is protected against the risk of

non-payment of debts by the importers.

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Securitisation

Its a process by which a financial companyconverts its ill-liquid, non-negotiable and highvalue financial assets into securities of smallvalue which are made tradable and transferable.

It is best suited for housing finance companieswhose loans are always long-term in nature andtheir money is locked up for a considerable period.

In such cases, securitisation would help thefinancial institution to raise cash against suchassets by means of issuing securities of smallvalues to the public.

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Derivative Security

Its a security whose value depends on the valueof other basic variables backing the security.

A derivative security is basically used as riskmanagement tool and it is resorted to cover therisks due to price fluctuations by the investmentsmanager.

It helps to break the risks into various componentssuch as credit risk, interest rates risk, exchangerates risk and so on.

In India some forms of derivatives are in operationnamely forwards in forex market

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Letter of Credit (LOC) An innovative funding mechanism for the import of

goods and services on deferred payment terms.

LOC is an arrangement of a financing institution /bank of one country with another institution / bank/ agent to support the export of goods andservices so as to enable the importers to import ondeferred payment terms.

This is backed by a guarantee furnished by theinstitution / bank in the importing country.

This helps the exporter to get paymentimmediately as soon as the goods are shipped.

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Infrastructure Bond

It is a kind of debt instrument issued with a view to

giving tax shelter to investors.

The resources raised through this bond will be used

for promoting investment in the field of certain

infrastructure industries.

Tax concessions are available under sec. 88, sec.

54 EA and sec. 54 EB of Income Tax Act.

HUDCO has issued for the first time such bonds.

Its face value was Rs. 1000 each carrying an

interest rate of 15% per annum payable semi-

annually.

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Miscellaneous Yankee Bonds If bonds are raised in USA, they are

called as Yankee Bonds and if they raised in Japan

they are called as Samurai Bond.

Floating Rate Notes (FRNs) These are debt

instrument which facilitate the periodic interest rate

adjustment.

Loyalty Coupons These are entitlements to the

holder of debt for two to three years to exchange into

equity shares at discount prices.

Global Depository Receipt Its a dollar denominated

instrument traded in a stock exchange in Europe or

the USA.

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New Products in the FOREX Market1. Forward Contract In a forward transaction the

delivery of foreign currency takes place at a specified

future date for a specified price.

Obligation is there to honour this contract at any cost

else penalty will be levied i.e. genuine business.

It is having a fixed or flexible maturity features i.e. 30th.

Sept08 or 1-30th. Sept08.

These are traded over the counter (OTCEI) or simply

be a signed contract between two parties.

Forwards transact only when purchased and on the

settlement date.

In the case of physical delivery, the forward contract

specifies to whom to make the delivery

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Options Buyer of the option has a right to buy or sell a

fixed amount of currency against another currency

at a fixed rate on a future date according to his

option.

There is no obligation to buy or sell, but it is

completely left to his option.

Options are of two types, namely 1. Call Options

(Option to buy) 2. Put options (Option to sell)

Option trading leads to speculations and legal

restrictions are imposed in India.

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Futures Its a legal contract where there is an agreement to buy

or sell a stated quantity of foreign exchange at a future

date at an agreed price on a stated stock exchange.

The future date is called the delivery date or final

settlement date. The pre-set price is called the futures

price. The price of the underlying asset on the delivery

date is called the settlement price.

Futures are rebalanced, or "marked to market," every

day to the daily spot price of a forward with the same

agreed-upon delivery price and underlying asset.

The counterparty for delivery on a futures contract is

chosen by the clearing house.

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SWAPS Transaction wherein a financial intermediary buys and

sells a specified foreign currency simultaneously for

different maturity dates.

It results into simultaneous buying and selling of same

foreign currency of the same value for the different

maturities to eliminate risk.

It is also used to enter into arbitrage operations i.e.

arbitrage is the practice of taking advantage of a price

differential between two or more markets.