FINANCIAL MARKETS

1. CAPITAL MARKET INNOVATION AND AN
INTRODUCTION TO DERIVATIVES
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2. Capital Market is a market for
securitiese (debt or equity) where business enterprises
and government can raise long term funds.
It include stock market and bond
market. It also classifieds as Primary market and
Secondary market.
Capital Market

3. FINANCIAL INNOVATION
“Design of any new Financial Product” is known as Financial Innovation.
It include Process Innovation & Product Innovation And institutional
innovations ..
Process Innovation means existing product is produced or service
provided more efficiently than that of current existing product.
Eg: New portfolio strategies , New method for pricing securities & distributing
securities, New procedure for executing and clearing trades.
Product Innovation means introduction of new product or service
that doesn’t currently exist in the market. Product Innovation are introduced to
respond better to changes in market demands .
Eg: New type of borrowing instruments, New Derivative instruments.
Institutional innovations it relates to changes in business structure
,establishment of new type of intermediaries ,changes in legal and supervisory
framework ..
FINANCIAL INNOVATION IN CAPITAL MARKET

4. Reason or Motivation for Financial Innovation
 Increased volatility of interest rates , Inflation , Equity prices and
exchange rates.
 Changing global pattern of financial wealth.
 Deregulation of financial service sector .
 Incentives to get around existing regulation and tax laws.
 Financial intermediary competition.
 Advance in computer and telecommunication technologies.
 Greater sophistication and educational training among professional
participants.

5. Advantages of Financial Innovation
 Saving is encouraged.
 Introduction of new borrowing instrument facilitate capital
formation.
 Helps to have closer international links among capital
market and financial institutions.
 Increase capacity of financial intermediaries and end users
of financial market.
 Increase overall economic welfare.

6. DERIVATIVES
“ A Security whose price is dependent upon or derived from
one or more underlying assets like stocks, commodities,
currencies, interest rates and market index".
According to the International Swaps and Derivative
Association , more than 90% of global corporations use
derivatives for hedging risks in interest rates ,foreign
exchange and equities. Major participants ;
• Hedgers
• Speculators
• Arbitragers,
Trade in the derivative market.

7. DERIVATIVE MARKETS
Commodity
derivative
market
Equity
derivative
market
Interest
rate
derivative
market
Currency
derivative
market

8. 1. Commodity Derivatives
This market add value to the economy, and an efficient
commodity future market will enable participation from the entire
commodity value chain, including processors and farmers and marketers ,
importers& exporters, producer & the government .
.
Two major exchange that handle commodity derivative trade
in India are National Commodity and Derivative Exchange Ltd(NCDEX)
and Multi Commodity Exchange of India (MCX). Major products are;
• Bullion products--56%
• Metal products--16%
• Agro products--12%
• energy products--16%
• Weather carbon credits.

9. 1/16/2015
(i) Share of different commodity exchanges to the total volume traded of
commodities
exchange
Value of
trade (in
Cr.)
%share
MCX,
Mumbai
15597095.
47
86.05%
NCDEX,
Mumbai
1810210.1
9.99%
NMCX,
Ahmadabad
268350.95
1.48%
ICEX,
Mumbai 258105.67
1.42%
ACE,
Ahmadabad 138654.61
0.76%
Others 53687.0
0.30%

10. 2.Equity Derivatives
Introduced in India from June 2000 in BSE and NSE. here a
class of derivatives whose value is at least partly derived from one or
more underlying equity securities.Derivative instrument available in
Indian equity market are Futures and Option.
3.Interest Rate Derivatives
To manage interest rate risks Derivative instruments like FRA
IR and interest rate futures were introduced.
4.Currency Derivatives
Fluctuation in exchange rate affect business performance .
currency future also known asFX future is a future contract to exchange
one currency for another at a specified date in the future at a price that is
fixed on the purrchase date .FRA , options and swaps are major currency
derivatives in Indian market.

11. TYPES OF DERIVATIVES
FUTURES OPTIONS
FORWARD SWAP

12. 1/16/2015
FORWARD And FUTURE CONTRACT
A Forward contract is a customized contract between
two parties, where settlements take place on a specific date
in future at a price agreed today .
bilateral contract & exposed to counter party risk.
each contract is custom designed & hence unique in terms of
contract size , expiration date ,assets type and quality .
in case party wishes to reverse the contract , it has to
compulsorily go to the same counter party , which being in a
monopoly situations can command the price it want .
A future contract is an exchange traded contract to buy
or sell financial instrument or physical commodity for a
future delivery at an agreed price

13.  Forward and Futures
features Forward Futures
Nature Over the
counter
Traded on
organised
exchange
Contract terms Customised standardised
liquidity Less liquid More liquid
Margin
payment
Not required Requires
margin
payments
settlement At the end of
period
Follows daily
settlement
Squaring off Contract can
be reversed only
with the same
counter party
with whom it
was entered into.
Can be
reversed with
any member of
the exchange

14.  Swap contract
A derivative in which two parties agree to exchange a set of cash
flows of one paty's financial instrument for those of other party's
financial instrument . the benefit in question depends upon type of
financial instrument used.specifically two counter parties agrees to
exchange one stream of cashflow against another stream.Theey are
called the legs of swap. A notional principal amount is used to calculate
each cash flow
 Option contract
It is a financial instrument that gives the holder the right to
engage in a future transaction on an underlying security or future
contract.
The price at which sales take place is known as strike price &it is
specified at the time the parties enter into the option .it specifies a
maturity date .There are two main option;
i. call option
ii. put option

15. 1/16/2015
The buyer of a call option has the right to buy certain quantity of
underlying assets at a specified price on or before a given date in future
.he has no obligation to carry out this right .
The buyer of a put option has the right to sell certain quantity of
underlying assets at a specified price on or before a given date in future
.he however has no obligation to carry out this right .

16.  Advantages of Derivatives
 Facilitate transfer of risks
 Enable price recovery
 Providing leverage
 Buying now at a future price can be cheaper than buying at
market price in the future.
 Lower transaction cost.
 Completion of market or efficient market

17. Thank You….