Financial Markets

1. Financial Markets
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2. What is financial market?
It is a platform and a method of exchanging
one asset (usually cash) for another asset
(financial asset).
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3. Market Relationship
1. Physical assets vs. financial assets
2. Spot versus future markets
3. Money versus capital markets
4. Primary versus secondary markets
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4. 1. Physical Vs Financial assets
• The products which are traded (bought and sold)
in the physical form like commodities, metals,
automobiles, machinery, durables etc are known
as physical assets.
• Financial assets are those which have value on
recorded documents signed between two parties
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5. 2. Spot Vs Future Market
• Every derivative instrument has an underlying
asset which is financial or physical in nature.
• Future prices are determined based on the spot
prices.
• Equity futures are linked with equity prices.
• Gold futures are linked with gold prices.
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6. 3. Money vs capital markets
• Money Market is for short term and capital
market is for long term.
• Money market is all about liquidity and capital
market is for investments and funding
• Money market is regulated by RBI and capital
market is regulated by SEBI.
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7. 4. Primary vs. Secondary Market
• Primary Market
– New issue (IPO or seasoned)
– Key factor: issuer receives the proceeds from the
sale.
• Secondary Market
– Existing owner sells to another party.
– Issuing firm doesn’t receive proceeds and is not
directly involved.
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8. How are secondary markets
organized?
• By “location”
– Physical location exchanges
– Computer/telephone networks
• By the way that orders from buyers and
sellers are matched
– Open outcry auction
– Dealers (i.e., market makers)
– Electronic communications networks (ECNs)
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9. Over the Counter (OTC) Markets
• In the old days, securities were kept in a safe behind the
counter, and passed “over the counter” when they were
sold.
• Now the OTC market is the equivalent of a computer
bulletin board (e.g., Nasdaq Pink Sheets), which allows
potential buyers and sellers to post an offer.
– No dealers
– Very poor liquidity
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TYPES OF FINANCIAL MARKETSTYPES OF FINANCIAL MARKETS
 Capital MarketsCapital Markets
 Money MarketMoney Market
 Forex MarketForex Market
 Derivatives MarketDerivatives Market
 International Financial MarketsInternational Financial Markets
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Capital Markets
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NEED FOR LONG TERM CAPITAL
 Government Needs
 Companies Needs
 Individuals Needs
 Foreign Sector Needs
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NEED FOR LONG TERM CAPITAL
Government Needs
 Fiscal Deficit
 Public Expenditure
 External payments
 Infrastructure
 Unforeseen Contingencies
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NEED FOR LONG TERM CAPITAL
Companies Needs
 New business
 Capacity Expansion
 Export business
 Working capital
 Automation or Computerization
 Meeting the legal standard or norms like pollution
free
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NEED FOR LONG TERM CAPITAL
Individuals Needs
 Housing
 Short Term Credit
 Long Term Credit
 Individual Business
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NEED FOR LONG TERM CAPITAL
Foreign Sector Needs
 Individuals
 Companies
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FUNCTIONS OF CAPITAL MARKET
 Transfer of capital resources from those with idle resources to
others having productive need.
 Provide channel for reallocation of savings to investments.
 The securities market provide demand for and supply of various
financial securities with liquidity.
 The market provides a match between the demand for and supply of
capital in terms of liquidity, maturity, risk and cost of capital.
 Provide pricing mechanism.
 It provides variety of services through different intermediaries.
 Ensures safety and security through a regulatory system.
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Participants in Capital Market
Lenders or Investors
 Retail Individuals
 Non Institutional Investors
 Institutional Investors
 Mutual funds
 Pension funds
 Insurance Companies
 Foreign Institutional Investors
Borrowers
 Individuals
 Companies
 Government
Intermediaries
 Individuals
 Institutions
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CONSTITUENTS OF CAPITAL MARKETS
 Instruments
 Investors
 Intermediaries
 Regulators
 Technology
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20. Capital Markets
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Government
Corporations
Institutions
Investors and Traders
Secondary Market
money
securities
YX
Stocks and Bonds
Money
Primary Market
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CAPITAL MARKETS &
ECONOMIC DEVELOPMENT
 Capital formation
 Capital markets fulfill long term capital needs
 The role of capital markets is important for a country’s
economic development
 The growing size of capital market indicates more
wealth accumulation in the economy
 Three sector’s participation is more important in terms
of source as well as need
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TYPES OF CAPITAL MARKETS
Based on Instruments
 Equity Market
 Debt Market
 Corporate or Industrial Securities
 Government Securities Market
 Term Loan Market
 Market For Mortgages
 Market For Financial Guarantees
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TYPES OF CAPITAL MARKETS
Based on the nature of transactions
Primary market :
 Public Issues: IPO, Seasoned Issue or Follow on Public Offer(FPO)
 Private Placement: Negotiated Sale, competitive bid, bought out deal to
QIB, FIIs, Mutual Funds
Secondary market :
 National: NSE, BSE, MCX SX
 Regional: HSE, MSE, BGSE
Third market : Over The Counter (OTC) market
Fourth market: Direct exchange between investors without using
services of a broker.
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24. Primary Market
 When a corporation issues securities, cash flows
from investors to the firm.
 Usually an underwriter is involved.
 New issue (IPO or seasoned).
 Key factor: issuer receives the proceeds from the
sale.
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25. Secondary Market
 Involve the sale of “used” securities from one
investor to another.
 Securities may be exchange traded or trade over-
the-counter in a dealer market.
 Existing owner sells to another party.
 Issuing firm doesn’t receive proceeds and is not
directly involved.
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Types of Secondary Markets
1. Based on price discovery.
2. Based on size and location.
3. Based on factors influencing.
4. Based on method of trading.

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Types of Secondary Markets
1. Based on price discovery
Call markets : Small markets and big markets for opening the
price
Continuous markets: Auction process with bid – ask quotes

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Types of Secondary Markets
2. Based on size and location
National Stock exchanges : NSE, BSE, MCX SX
Regional Stock exchanges: HSE, MSE, BGSE
Over the counter (OTC) market : OTCEI

29. Over the Counter (OTC) Markets
 In the old days, securities were kept in a safe behind the counter,
and passed “over the counter” when they were sold.
 Now the OTC market is the equivalent of a computer bulletin board
(e.g., NADAQ Pink Sheets), which allows potential buyers and
sellers to post an offer.
 No dealers
 Very poor liquidity
 Over the counter exchange of India (OTCEI) is the first stock
exchange in India to use screen based trading even before NSE in
1990.
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Types of Secondary Markets
3. Based on factors influencing
Price / Quote driven market : Stock prices are determined from bid and
ask quotations made by the brokers or dealers also known as market
makers and specialists.
Ex: 7 Specialist firms in NYSE and 300 Market makers in NASDAQ.
Order driven: Buyers and sellers quote their price independently for either
buy or sell.
Ex: NSE, BSE, TSE
Dealer market: Dealers trade on principal or proper account. They keep
an inventory of the stock and place bid and ask “advertisements,” which are
prices at which they are willing to buy and sell. Computerized quotation
system keeps track of bid and ask prices, but does not automatically match
buyers and sellers.
Ex: NASDAQ National Market, NASDAQ Small Cap Market, London
SEAQ, German Neuer Markt.

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Types of Secondary Markets
4. Based on Method of Trading
A. Auction Markets / Floor trading markets.
 Based on the open outcry of the floor traders.
 Participants have a seat on the exchange, meet face-to-
face, and place orders for themselves or for their clients.
 NYSE is the largest auction markets for stocks.
 NYSE is a modified auction, with a “specialist.”
B. Online trading markets: NASDAQ, BSE, NSE

32. Types of orders in equity markets
Instructions on how a transaction is to be completed
1.Market Order – Transact as quickly as possible at current price.
2.Limit Order – Transact only if specific situation occurs. For example,
buy if price drops to Rs 50 or below during the next two hours.
3.Stop Loss Order: It is the price set in advance in case of market
crash. Ex : Buy if price drops to Rs 50 or < 50 any time in the trading
day.
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33. Electronic Communications Networks (ECNs)
 Computerized system matches orders from buyers
and sellers and automatically executes transaction.
 Eliminates dealers’ functions in order matching.
 Low cost to transaction.
 Examples: Instinet (US, stocks, owned by NASDAQ);
Archipelago (US, stocks, owned by NYSE); Eurex
(Swiss-German, futures contracts); SETS (London,
stocks).
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34. S S N Raju Indukoori
Equity Market Indices
1. Price weighted index: Size of the price.
Ex: DJIA
2. Market value / capitalization / cap / weighted
index : Market value times the Qty of shares
outstanding of a company
Ex: Nifty, Sensex
3. Un weighted price indicator series
Ex: S&P 500 Equal Weighted Index (EWI)

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Characters of a well functioning market
1. Information Dissemination: Timely and accurate.
2. Liquidity: Marketability, price continuity
3. Internal efficiency: Low transaction costs
4. External Efficiency:

36. Debt Market

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TYPES OF DEBT MARKET
 G – Sec Market
 Corporate Securities Market
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FEATURES OF DEBT MARKET
 Important sectors are, Govt, Corporate and
DFIs
 Dominated by G-Sec
 In significant debt derivatives market
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G – Sec Market
 Biggest in terms of Size, Volume and
turnover in debt market
 Also known as Gilt Market or Gilt Edged
Securities Market
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G – Sec Investors
1. RBI
2. Banks: Commercial and development banks
3. Insurance companies
4. Primary Dealers
5. Individuals: Resident Indians and NRIs
6. Institutional Investors: FIIs, insurance funds, provident
funds, pension funds and mutual funds
7. Corporates
8. Association and Trusts
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CORPORATE SECTOR BONDS
 Private corporate debt
 PSU debt
 Debt instruments issued by Development
Financial Institutions (DFI)
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MONEY MARKET
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Money Markets
It is the market for short term debt and other
monetary obligations like liquidity and short
term funding. The major participants are
1)Banks
2)Financial Institutions
3)Government
4)Central bank

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Types of Money Markets
1) Call money market
2) Rep Market
3) Treasury Bill Market
4) Commercial paper market
5) Certificate of deposits market
6) Bills Discounting market

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1. Call Money Market
• It is inter-bank lending and borrowing for a
short period.
• Transaction is initiated and ended to the tenure
but also done on a call, hence the name.
• Interest charged on the call money is called as
‘call rate’.
• It is not securitized.
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2. Repo Market
• ‘Repo’ stands for repurchase agreement.
• Government securities are sold with an agreement to
buy it back after a specified period.
• Sold by RBI to Banks, financial Institutions and
companies
• Reverse Repos are bought by RBI in the market from
Financial institutions, banks and companies
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3. Treasury Bill Market
• Treasury bill or T Bill is issued by Government
of India (GOI) to Reserve Bank of India (RBI)
for different tenures to meet its short term
funds requirement.
• 91 days, 182 days and 364 days are the
tenures currently available.
• RBI further discounts them and sells to banks,
institutional investors, DFHL, financial
institutions, state governments and dealers in
the secondary markets.
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4. Commercial paper market
• Issued by Companies for their working capital
Requirements
• Issued to banks, companies, Institutions
• Secondary market is inactive
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5. Certificate of deposits market
• Issued by Banks for their working capital
Requirements
• Issued to banks, companies, Institutions
• Secondary market is inactive
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6. Bills Discounting Market
• This is the market for companies to meet their
working capital requirements
• Companies raise funds from the banks or
discounting houses against the bills or
receivables at discount.
• Discount rate is the cost of borrowing to the firm.
• This market is inactive in India as there are more
options from the banks to meet their short-term
funding requirements.
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FOREX MARKET
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Nature of foreign exchange market
• Omni present electronic market.
• Geographical dispersal with global presence.
• Transfer of purchasing power.
• Presence of Intermediaries.
• Provision for credit.
• No specific timing and open for 24 hours.
• Under RBI Surveillance
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54. MarketsMarkets
 3 Tier Market3 Tier Market
 Tier ITier I : RBI – Banks or Dealers: RBI – Banks or Dealers
 Tier IITier II : Inter bank market: Inter bank market
 Tier IITier II : Banks - Retail: Banks - Retail
 Based on transactionsBased on transactions
 Spot transactionSpot transaction
 Forward transactionForward transaction
 Swap transactionSwap transaction
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55. QUOTESQUOTES
The Quote systemThe Quote system is both both Bid and Ask. Popularis both both Bid and Ask. Popular
nnomenclature isomenclature is Bought ‘One Yours’ and sold Sold ‘One Mine’Bought ‘One Yours’ and sold Sold ‘One Mine’
American and European QuotesAmerican and European Quotes
Direct and Indirect QuotesDirect and Indirect Quotes
Inverse QuoteInverse Quote
Synthetic QuoteSynthetic Quote

56. QUOTESQUOTES
 American QuoteAmerican Quote: Number of units of US: Number of units of US
Dollar for one unit of any other currencyDollar for one unit of any other currency
 European QuoteEuropean Quote: Number of units of any: Number of units of any
other currency for one unit of US Dollarother currency for one unit of US Dollar

57. QUOTESQUOTES
 Direct QuoteDirect Quote: Number of domestic currency: Number of domestic currency
units for one unit of foreign currencyunits for one unit of foreign currency
Ex: Re/$: 42.35/ 42.39 or 42.35/39Ex: Re/$: 42.35/ 42.39 or 42.35/39
 Indirect QuoteIndirect Quote: Number of foreign currency: Number of foreign currency
units for one unit of domestic currencyunits for one unit of domestic currency
Ex:Ex: $/Re$/Re : 0.02359 / 0.02361: 0.02359 / 0.02361
OrOr
$/Re 100$/Re 100 : 2.3590 / 2.3613: 2.3590 / 2.3613

58. Inverse QuoteInverse Quote
For every quote (x/y) between two currencies,For every quote (x/y) between two currencies,
there exists and inverse quote (y/x) wherethere exists and inverse quote (y/x) where
currency x is being bought and sold, with itscurrency x is being bought and sold, with its
price expressed in terms of currency.price expressed in terms of currency.

59. Inverse QuoteInverse Quote
(x/y) bid(x/y) bid == 1/ (y/x) ask1/ (y/x) ask
(x/y) ask(x/y) ask == 1/ (y/x) bid1/ (y/x) bid

60. Inverse Quote ExampleInverse Quote Example
($/Re) bid($/Re) bid == 1/ (Re/$) ask1/ (Re/$) ask
($/Re) ask($/Re) ask == 1/ (Re/$) bid1/ (Re/$) bid
Ex:Ex:
Normal Quote $/ReNormal Quote $/Re == 42.4525 / 42.757542.4525 / 42.7575
Inverse Quote Re/$Inverse Quote Re/$ == 0.023388/ 0.0235570.023388/ 0.023557
Inverse Quote Re/$ 100Inverse Quote Re/$ 100 == 2.3388 / 2.35572.3388 / 2.3557

61. Cross or Synthetic RateCross or Synthetic Rate
It is the exchange rate between two currencies derivedIt is the exchange rate between two currencies derived
from two other quotes.from two other quotes.
Ex :Ex : Re / $Re / $ 42.030042.0300
Re /fRe /f 82.351482.3514
Cross or Synthetic Rate for $/f isCross or Synthetic Rate for $/f is
82.3514 / 42.0300 =82.3514 / 42.0300 = 1.95931.9593
Cross or Synthetic Rate for f/$ isCross or Synthetic Rate for f/$ is
42.0300 / 82.3514 =42.0300 / 82.3514 = 0.51040.5104

62. Cross or Synthetic QuotesCross or Synthetic Quotes
Ex :Ex : Re / $Re / $ 42.0300 / 42.035042.0300 / 42.0350
Re /fRe /f 82.3514 / 82.353582.3514 / 82.3535
Based on the above quotes the cross or synthetic quote forBased on the above quotes the cross or synthetic quote for
Number of US Dollars for one Sterling Pound is as followsNumber of US Dollars for one Sterling Pound is as follows
Synthetic QuoteSynthetic Quote
== (Re/f) ask/ (Re/$)ask(Re/f) ask/ (Re/$)ask // (Re/f) bid / (Re/$)bid(Re/f) bid / (Re/$)bid
$/f$/f == 1.9592 / 1.95931.9592 / 1.9593

63. Ex :Ex : Re / $Re / $ 42.0300 / 42.035042.0300 / 42.0350
Re /fRe /f 82.3514 / 82.353582.3514 / 82.3535
Based on the above quotes the cross or synthetic quote for Number ofBased on the above quotes the cross or synthetic quote for Number of
Sterling Pounds for on unit of US Dollar is as followsSterling Pounds for on unit of US Dollar is as follows
Synthetic QuoteSynthetic Quote
== 1/Re/f Ask / 1/ Re/f Bid1/Re/f Ask / 1/ Re/f Bid
f/$f/$ 0.51037 / 0.510420.51037 / 0.51042
oror
f/$ 10:f/$ 10: 5.1037 / 5.10425.1037 / 5.1042

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DERIVATIVES MARKETDERIVATIVES MARKET
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DERIVATIVES MARKET
1. Stock derivatives
2. Index derivatives
3. Commodities Market
4. Forex Market
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DERIVATIVES MARKET
1. Futures market
2. Forward market
3. Options market
4. Swap market
5. Credit derivatives market
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67. Raju IndukooriRaju Indukoori
International FinancialInternational Financial
MarketsMarkets
1.1. International Money Market:International Money Market: LIBORLIBOR
2.2. International Forex MarketInternational Forex Market
3.3. International Commodity Market.International Commodity Market.
4.4. International Capital MarketInternational Capital Market
5.5. International Debt Market:International Debt Market:
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68. S S N Raju IndukooriS S N Raju Indukoori
International Debt MarketInternational Debt Market
 Euro Bond MarketEuro Bond Market
– Euro Euro/DollarEuro Euro/Dollar
– Euro/PoundEuro/Pound
– Euro/YenEuro/Yen
 Foreign Bond MarketForeign Bond Market
– YankeesYankees
– SamuraiSamurai
– Bull DogBull Dog
– ShibosaiShibosai

69. S S N Raju IndukooriS S N Raju Indukoori
International Capital MarketsInternational Capital Markets
 American Stock marketsAmerican Stock markets
– NYSENYSE
– NASDAQNASDAQ
 European stock marketsEuropean stock markets
– LSELSE
– FrankfurtFrankfurt
 Asian Stock marketsAsian Stock markets
– Hong KongHong Kong
– Tokyo Stock ExchangeTokyo Stock Exchange
– Bombay Stock ExchangeBombay Stock Exchange

70. Raju IndukooriRaju Indukoori
Any QuestionsAny Questions
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71. Raju IndukooriRaju Indukoori
Post Session ActivityPost Session Activity
1.1. Find out types of financial markets, instruments traded,Find out types of financial markets, instruments traded,
leading institutions, participants and regulators in India.leading institutions, participants and regulators in India.
2.2. Which financial market in India has more turnover? SpecifyWhich financial market in India has more turnover? Specify
you criteriayou criteria
3.3. Find out top 10 following markets in the worldFind out top 10 following markets in the world
1.1. EquityEquity
2.2. DebtDebt
3.3. DerivativeDerivative
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72. Raju IndukooriRaju Indukoori
Thank YouThank You
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