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7/25/2019 Fin Basic
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A presentationA presentation
ononFundamentals of FinanceFundamentals of Finance
saibabasaibaba
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Introduction to the nancialIntroduction to the nancial
marketsmarkets
Money MarketMoney Market
Capital marketCapital market
Derivatives marketDerivatives market Forex marketForex market
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Capital MarketsCapital Markets
Instruments:Instruments:
Debenturesbonds issued byDebenturesbonds issued by
corporations!corporations!
"tocks"tocks
#layers:#layers:
Individuals$ Financial institutions$Individuals$ Financial institutions$
banks$ corporations$ etc%banks$ corporations$ etc%
Click here&Click here&
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Features of bonds:Features of bonds:
Face value:Face value:
If the bond is issued at discount$ faceIf the bond is issued at discount$ facevalue e'uals the redemption value%value e'uals the redemption value%
Coupon rate:Coupon rate:
(he rate at )hich the payments are *iven(he rate at )hich the payments are *iven
Maturity Date:Maturity Date:
(he tenor for )hich the bond has to be(he tenor for )hich the bond has to beholdhold
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(ypes of +onds(ypes of +onds
,ero Coupon +onds,ero Coupon +onds
#erpetual bonds#erpetual bonds
Floatin* -ate +ondsFloatin* -ate +onds +onds )ith embedded options+onds )ith embedded options
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Features of "tocksFeatures of "tocks
.o xed income like coupons in.o xed income like coupons in
bonds%bonds%
Dividends are not compulsoryDividends are not compulsory -e'uired rate of return is hi*h-e'uired rate of return is hi*h
May be issued at par or premiumMay be issued at par or premium
/ife of a stock ends )hen once the/ife of a stock ends )hen once thecompany ceases to existcompany ceases to exist
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(ypes of stocks:(ypes of stocks:
0rdinary stocks0rdinary stocks #referential stocks:#referential stocks:
It has both the features of bond as well as ordinaryIt has both the features of bond as well as ordinary
stocks. Diidends are constant!like cou"on in debts#. Itstocks. Diidends are constant!like cou"on in debts#. Ite$ists till the co%"any e$ists!like ordinary stocks#.e$ists till the co%"any e$ists!like ordinary stocks#.
&ut they don't hae otin( ri(hts. )he other difference&ut they don't hae otin( ri(hts. )he other differenceis that when the co%"any is windin( u"* the liabilitiesis that when the co%"any is windin( u"* the liabilitiesa(ainst the "referential share holders are "aid first and thea(ainst the "referential share holders are "aid first and theresidual is shared a%on( the ordinary share holders.residual is shared a%on( the ordinary share holders.
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Constituents of stockConstituents of stock
Dividends:Dividends:
(he prot that is *iven to shareholders(he prot that is *iven to shareholdersasas re)ard for their investment%re)ard for their investment%
Dividends areDividends are *iven on face value of*iven on face value ofthe stock and not atthe stock and not at )hich the)hich theprice you bou*ht the share for%price you bou*ht the share for%
Capital Appreciation:Capital Appreciation:
Chan*e in the price of stock durin* theChan*e in the price of stock durin* theholdin* periodholdin* period
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1here should I invest21here should I invest2
bonds or shares!bonds or shares!)he return in bonds is less thou(h fi$ed where as the return)he return in bonds is less thou(h fi$ed where as the returnin shares is hi(h. &ut there is hi(h risk inoled with sharesin shares is hi(h. &ut there is hi(h risk inoled with sharesco%"ared to that of bonds.co%"ared to that of bonds.
De"endin( on the behaior of the inestor !whether riskDe"endin( on the behaior of the inestor !whether riskaerse or risk loer#* one %ay inest in bonds or stocks.aerse or risk loer#* one %ay inest in bonds or stocks.
It is not -ust the riskreturn "rofile that "lays* the ta$ factorIt is not -ust the riskreturn "rofile that "lays* the ta$ factor
should also be considered. )here used to be so%e rebate inshould also be considered. )here used to be so%e rebate inta$ if we inest in bonds. hort ter% ca"ital (ains are ta$edta$ if we inest in bonds. hort ter% ca"ital (ains are ta$edin the case of stocks. )here %i(ht be a transaction cost.in the case of stocks. )here %i(ht be a transaction cost.
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3xample:3xample:
4lobe0p "oft)are "olutions /td% is a4lobe0p "oft)are "olutions /td% is a
one year old company%It needs 5croreone year old company%It needs 5crore
for further expansion%for further expansion%
It issues 5mn shares each )orth -s%56It issues 5mn shares each )orth -s%56
#romoters holdin*: 768 I%e 7 lakh shares#romoters holdin*: 768 I%e 7 lakh shares
Investors holdin*: 968 I%e 9 lakh sharesInvestors holdin*: 968 I%e 9 lakh shares
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(ypes of 0rders(ypes of 0rders
(ime conditions(ime conditions 4ood till Cancelled4(C!4ood till Cancelled4(C!
4ood till Date4(D!4ood till Date4(D!
Immediate or CancelI0C!Immediate or CancelI0C!
#rice conditions#rice conditions Market #riceMarket #rice
/imit order/imit order
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Clearin* and "ettlementClearin* and "ettlement
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"ensex"ensex
Index on any day Index on any day
that day;s market capitalialue
+ase market capitali
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DerivativesDerivatives
Instruments:Instruments:
0ptions0ptions
")aps")aps
FuturesFutures
For)ardsFor)ards
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Features of an 0ptionFeatures of an 0ption
An underlyin* assetAn underlyin* asset 0ption price:0ption price:
(he price paid for the option%Also referred to(he price paid for the option%Also referred to
as 0ption premium%as 0ption premium% "trike price:"trike price:
(he price at )hich the underlyin* asset has(he price at )hich the underlyin* asset hasto be bou*ht or sold dependin* on theto be bou*ht or sold dependin* on theoption%option%
"pot price:"pot price:
(he price of the underlyin* on the expiry(he price of the underlyin* on the expirydate of the option%date of the option%
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(ypes of 0ptions:(ypes of 0ptions:
Call 0ption:Call 0ption:all o"tion (ies the buyer the ri(ht to buy* but not an obli(ation* aall o"tion (ies the buyer the ri(ht to buy* but not an obli(ation* acertain uantity of an underlyin( asset at a "articular "rice on orcertain uantity of an underlyin( asset at a "articular "rice on orbefore a "articular date.before a "articular date.
#ut 0ption:#ut 0ption:
ut o"tion (ies the buyer the ri(ht to sell* but not an obli(ation* aut o"tion (ies the buyer the ri(ht to sell* but not an obli(ation* acertain uantity of an underlyin( asset at a "articular "rice on orcertain uantity of an underlyin( asset at a "articular "rice on orbefore a "articular date.before a "articular date.
"tions which can be e$ercised on or before the e$"iration date"tions which can be e$ercised on or before the e$"iration date
are called %erican "tions. ther o"tions which can be e$ercisedare called %erican "tions. ther o"tions which can be e$ercised
only on the e$"iration date are called uro"ean "tions.only on the e$"iration date are called uro"ean "tions.
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#ositions in 0ptions#ositions in 0ptions
/on* Call/on* Call
"hort Call"hort Call
/on* #ut/on* #ut "hort #ut"hort #ut
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#rot ? /oss in positions#rot ? /oss in positions
/on* call:/on* call:
If the current position is lon*$ itIf the current position is lon*$ it
implies that )e bou*ht the callimplies that )e bou*ht the calloption%option%
3%*: A call option to buy 5-eliance3%*: A call option to buy 5-elianceshare @ -s%566% (he price of theshare @ -s%566% (he price of the
option is -s%7option is -s%7
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/on* Call:/on* Call:
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"hort Call"hort Call
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")aps")aps
A s)ap is an exchan*e of one set oA s)ap is an exchan*e of one set of futuref future
Cash Bo)s for anotherCash Bo)s for another
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MechanismMechanism
Any s)ap transaction includes t)oAny s)ap transaction includes t)o
counterparties% (here is a notionalcounterparties% (here is a notional
principal on )hich the cashprincipal on )hich the cash
Bo)sinterest payments! areBo)sinterest payments! arecalculated% (he payments arecalculated% (he payments are
calculated dependin* on )hether itcalculated dependin* on )hether it
is Boatin* rate or xed rate% Itis Boatin* rate or xed rate% Itfurther depends on the type of thefurther depends on the type of the
s)ap%s)ap%
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(ypes of ")aps(ypes of ")aps
Interest -ate ")apsInterest -ate ")aps
+asis ")aps+asis ")aps
Currency ")apsCurrency ")aps
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Weather DerivativesWeather Derivatives
Weather derivativesWeather derivativesare nancialare nancial
instruments that can be used byinstruments that can be used by
or*ani
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Money marketMoney market
A fe) instruments&A fe) instruments&
+onds+onds -epo-epo -everse -epo-everse -epo (reasury bills(reasury bills
EEback%%EEback%%
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-epo:-epo:
(he rate at )hich -+I lends to(he rate at )hich -+I lends tobanks a*ainst securitiesbanks a*ainst securities
-everse -epo:-everse -epo:(he operational rate at )hich banks(he operational rate at )hich banks
park shortterm funds )ith -+Ipark shortterm funds )ith -+I
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A fe) interestin*A fe) interestin*
'uestions&'uestions& In India are )e really *ettin* positive interestIn India are )e really *ettin* positive interest
for our deposits2for our deposits2
A+C corporation announced 5668 dividend2A+C corporation announced 5668 dividend2
is the ne)s really positive2!is the ne)s really positive2!
(C" public issue has been oversubscribed by G6(C" public issue has been oversubscribed by G6
times% Does this have a positive impact intimes% Does this have a positive impact in
analysts; minds2analysts; minds2
1ho )on in the battle bet)een 0sama and1ho )on in the battle bet)een 0sama and
+ush2+ush2
1ho is your role model: Harshad Mehta or1ho is your role model: Harshad Mehta or
Manmohan2Manmohan2
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uestions2uestions2
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(hank Jou(hank Jou