detailed unit of money market for BBS final year Students of Finance Stream. subject Financial market and services

1. • The Chicago Board of Trade (CBOT),
established in 1848, is the world's
oldest futures and options exchange. More
than 50 different options and futures
contracts are traded by over 3,600 CBOT
members.
• On 12 July 2007, the CBOT merged with
the Chicago Mercantile Exchange (CME) to
form the CME Group

2. Let’s start
with the
positive
energy…

3. To begin with, let’s have a
quick look about what we
covered in the previous
class.

5. Inter-bank call money market
• Call money market, or inter-bank call money market, is a
segment of the money market where scheduled commercial
banks lend or borrow on call (i.e., overnight) or at short notice
(i.e., for periods upto 14 days) to manage the day-to-day
surpluses and deficits in their cash-flows.
• The money that is lent for one day in this market is known as
"call money" and, if it exceeds one day, is referred to as "notice
money.“
• Call money is a method by which banks lend to each other to be
able to maintain the cash reserve ratio
• The interest rate paid on call money is known as the call rate.

6. Inter-bank call money market
• Earlier, banks used to extend working capital loans to corporates
while term-lending institutions like the Industrial Development
Bank of India (IDBI), Industrial Finance Corporation of India
(IFCI), and the Industrial Credit and Investment Corporation of
India (ICICI) provided long-term loans

7. Inter-bank call money market
• Location: Primarily in Mumbai, but with sub-markets in Delhi,
Kolkata, Chennai and Ahmedabad.
• Duration:
• An overnight deals, known as call money.
• Notice money was also transacted side by side with call money
with a maximum period of 14 days
• Participants:
• Those who can both borrow as well as lend in the market - RBI,
Commercial Banks, Co-operative banks and Primary Dealers
(Corporate entities having bulk lendable resources of minimum of `
5 crores per transactions have been permitted to lend in call money
through all Primary Dealers )
• Those who can only lend Financial institutions-LIC, UTI, GIC,
IDBI, NABARD, ICICI and mutual funds etc.
• Brokers are not permitted in the market.

8. Inter-bank call money market
• Features:
• Interest rate in the market is market driven
• Highly sensitive to the forces of demand and supply
• Within one fortnight, rates can move within range.
• Any interest rate arbitrage opportunities in the market are
being exploited by big corporates entities

9. Inter-Bank Term Money
• Introduction:
• This market which was exclusively for commercial banks and
co-operative banks has been opened up for select All India
Development Financial Institutions (DFI) in October, 1993.
• The DFIs are permitted to borrow from the market for a maturity
period of 3 to 6 months.
• The interest rates is market driven.
• The market is predominantly 90-days market.

10. Wholesale Term Money
• Wholesale term money deals are used to
• Borrow large amounts from banks and institutions, rather
than from small investors by corporations.
• Examples of wholesale term money deals include promissory
notes and private debt placements.
• These types of deals can be fixed or floating rate and are
generally not exchanged.

11. Retail Term Money
• Retail term money is a deposit or loan that has regular payments
over a period of time
• Such as interest only, or principal and interest.
• Some retail term money deals have other fees, such as
establishment fees that can increase the total amount of the deal.
• This increase does not generate cash flows, but it does increase
the amount of the deal.
• Mortgages, sinking funds, and hire purchases are all examples of
retail term money deals.

12. NSE

13. NSE: National Stock
Exchange
Type Stock Exchange
Location Mumbai, India
Founded 1992
Owner National Stock Exchange of India Limited
Currency Indian rupee
No. of listings 1,696
Market Cap
US$ 1.47 trillion (June 2014)
Volume US$ 442 billion (June 2014)
Indexes S&P CNX Nifty
CNX Nifty Junior
S&P CNX 500
Website www.nseindia.com

14. Origins
 The National Stock Exchange of India was set up
by Government of India on the recommendation of Pherwani
Committee in 1991.
 It was incorporated in November 1992 as a tax-paying company.
 In April 1993, it was recognized as a stock exchange.
 The Capital market (Equities) segment of the NSE started
operations in November 1994.
 The Derivatives segment started in June 2000

15. Objectives
 Establishing nationwide trading facilities for all types of
securities.
 Ensuring equal access to investors all-over the country.
 Meeting international benchmarks and standards.
 Fair price generation.

16. Trading schedule
 Trading takes place on all days of the week except
Saturdays & Sundays. The market timings are as follows:
(1) Pre-open session (Regular)
Order entry & modification Open: 09:00 hrs
Order entry & modification Close: 09:08 hrs*
 *with random closure in last one minute. Pre-open order
matching starts immediately after close of pre-open order
entry.
Order Matching & Confirmation Period 9:08am - 9.12am
Buffer Period 9:12am - 9:15am

17. Session Timings
(2) Regular trading session
Normal Market Open: 09:15 hrs
Normal Market Close: 15:30 hrs
 Block deal session is held between 09:15 hrs and 09:50 hrs.
(A single trade having quantity greater than or equal to 500,000
or value greater than or equal Rs. 5 crores, executed through
Block deal window)
(3) The Closing Session is held between 15.40 hrs and 16.00
hrs.
 The Exchange may also extend, advance or reduce trading
hours when its deems fit and necessary.

18. Indices
NSE has launched several stock indices, including:
• S&P CNX Nifty(Standard & Poor's CRISIL NSE
Index)
• CNX Nifty Junior
• CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)
• S&P CNX 500 (= CNX 100 + 400 major players
across 72 industries)
• CNX Midcap (introduced on 18 July 2005 replacing
CNX Midcap 200)

19. Markets
Currently, NSE has the following major segments of the capital
market:
• Equity
• Futures and Options
• Retail Debt Market
• Wholesale Debt Market
• Currency futures
• MUTUAL FUND

20. S&P CNX Nifty
 The S&P CNX Nifty, also called the Nifty 50 or simply the Nifty,
is a stock market index and benchmark index for Indian equity
market.
 Nifty is owned and managed by India Index Services and Products
Ltd. (IISL),
 which is a joint venture between NSE and CRISIL (Credit Rating
and Information Services of India Ltd).
 Nifty is trading in
1. India
2. SGX (Singapore)
3. CME (USA)

21. Base Date
 The base period for the S&P CNX Nifty index is
November 3, 1995,
 The base value of the index has been set at 1000, and
a base capital of Rs 2.06 trillion.

22. Example: calculation
 Assume nifty has only 2 stocks namely SBI and RELIANCE.
 Total shares in SBI are 500 out of which 200 are held by
Government and only 300 are available for public trading.
 RELIANCE has 1000 shares out of which 500 are held by
promoters and 500 are available for trading.
 Assume price of SBI Stock is Rs.100 and Reliance is Rs.200.
Then "free-Floating Market Cap" of these 2 companies =

23. (300*100+500*200) = 30000+100000 = Rs. 130000
Assume Market Cap during the year 1994-95 was
Rs.25000
Then nifty = 130000*1000/25000 = 5200.

24. BSE

25.  Oldest stock exchange in Asia
 Established in 1875
 Working time 9.30 am to 3.30 pm
 5459 companies are listed.
 Located on Dalal street, Mumbai, Maharashtra.
 11th largest stock exchange in the world by market
capitalization as of 31/12/12.
 World’s No.1 exchange in terms of listed members

26.  Calculated since 1986.
 Index composed of 30 stocks.
 Initially based on total market capitalization.
 2003 onwards free float market capitalization.
 Base value for calculating SENSEX is 100 (1978-79)
Market cap US$ 1.6 trillion (October 2014)
Volume US$ 93 billion (June 2014)

27.  Other important indices originating from the Bombay
exchange include the BSE 100, BSE 500, BSEPSU,
BSEMIDCAP, BSESMLCAP, and BSEBANKEX

28. BSE Hours of Operation
 Beginning of the Day Session: 8:00 - 9:00
 Login Session: 9:00 - 9:15
 Trading Session: 9:15 - 15:30
 Position Transfer Session: 15:30 - 15:50
 Closing Session: 15:50 - 16:05
 Option Exercise Session: 16:05 - 16:35
 Margin Session: 16:35 - 16:50
 Query Session: 16:50 - 17:35
 End of Day Session:17:35

29.  Market players: According to trading(Bse & Nse)
 Arbitrager
 Speculator
 Hedger
 Investor
 According to invertor(Bse & Nse)
 Banks
 FII
 Brokers
 Small investor
 etc

30.  The calculation of SENSEX involves dividing the
free-float market capitalization of 30 companies in
the Index by a number called the Index Divisor.

31. How SENSEX is calculated?
The formula for calculating the SENSEX = (Sum of
free flow market cap of 30 benchmark stocks)*Index
Factor
where,
Index Factor = 100/Market Cap Value in 1978-79.
100 is the Index value during 1978-79.

32. Example:
 Assume SENSEX has only 2 stocks namely SBI and
RELIANCE.
 Total shares in SBI are 500 out of which 200 are held
by Government and only 300 are available for public
trading.
 RELIANCE has 1000 shares out of which 500 are held
by promoters and 500 are available for trading.
 Assume price of SBI Stock is Rs.100 and Reliance is
Rs.200. Then "free-Floating Market Cap" of these 2
companies =

33. (300*100+500*200) = 30000+100000 = Rs. 130000
Assume Market Cap during the year 1978-79 was
Rs.25000
Then SENSEX = 130000*100/25000 = 520.

34. Treasury Bills (TBs)……As per RBI site
• Treasury bills or T-bills, which are money market instruments,
are short term debt instruments issued by the Government of
India and are presently issued in three tenors, namely, 91 day,
182 day and 364 day.
• Treasury bills are zero coupon securities and pay no interest.
• They are issued at a discount and redeemed at the face value at
maturity.
• For example, a 91 day Treasury bill of Rs.100/- (face value)
may be issued at say Rs. 98.20, that is, at a discount of say,
Rs.1.80 and would be redeemed at the face value of Rs.100/-.

35. Treasury Bills (TBs) ……As per RBI site
• While 91-day T-bills are auctioned every week on
Wednesdays, 182-day and 364-day T-bills are
auctioned every alternate week on Wednesdays.
• Assumed to be risk free.
• More relevant TBs
• 91 days,
• 182 days
• 364 days
• Treasury bills are also issued under the Market
Stabilization Scheme (MSS).

36. Treasury Bills (TBs) ……As per RBI site
• Market Stabilization Scheme (MSS) is a process under which
the bills and securities will be issued by way of auctions to be
conducted by the RBI.
• The RBI will decide and notify the amount, tenure and timing
of issuance of such treasury bills and dated securities.
• Whenever such securities are issued by the RBI for the
purpose of market stabilisation and sterilisation, a press release
at the time of issue would indicate such purpose.

37. Meet this researcher. He is
Calculating yield of a T-bill.
But he is very confuse

38. Treasury Bills (TBs)
• Treasury bills are available for a minimum amount of Rs.25,000 and in
multiples of Rs. 25,000.
• In the secondary market, for 182 days a minimum amount of 25 lakhs and
thereafter in multiples of 10 lakhs)
• All the treasury Bills are highly liquid instruments available both in the
primary and secondary market
*State Government also issued treasury bills until 1950, since then it is only
the Central Government that has been selling them
TBs are issued at discount and their yields can be calculated with the help of
the following formula

39. Treasury Bills (TBs)
Time to Think of
the model

40. Treasury Bills (TBs)
This formula is simple interest because it comes
from:
P(1+ rt) = F
rt = (F/p)-1
r = [(f-p)/p]/t
Or
r = [(f-p)/p] * 365/t bill *100

41. Treasury Bills (TBs) example
Suppose you could buy a 91-day T-bill at an asked price of $98
per $100 face value and you could sell to the dealer at a bid price
of $97.95 per $100 face value
Calculate
1 Bond yield equivalent (assuming simple interest)
2 Discount rate calculated on the bill (ask)
3 Discount rate calculated on the bill (bid)
Sol:
BYE = [(100 – 98)/98]*365/91*100
BYE = 8.18%

42. Treasury Bills (TBs) example
Discount rate (ask)= [(100 – 98)/100]*365/91*100
Discount rate (ask) = 7.91%
Discount rate (bid)= [(100 – 97.95)/100]*365/91*100
Discount rate (bid) = 8.11%
The effective annual rate on this bill would annualize the B.Y.E.
of 8.18% (which uses simple interest) using the familiar formula:
= [{1+
.08186
365/91
}
365
91 ]-1
where n = number of compounding periods per year.
.0844 8.44%

43. Government Security……As per RBI site
• A Government security is a tradable instrument issued by the
Central Government or the State Governments.
• Such securities are short term (usually called treasury bills,
with original maturities of less than one year) or long term
(usually called Government bonds or dated securities with
original maturity of one year or more).
• In India, the Central Government issues both, treasury bills
and bonds or dated securities while the State Governments
issue only bonds or dated securities, which are called the State
Development Loans (SDLs)

44. Government Security……As per RBI site
• Government securities are called risk-free gilt-edged
instruments.
• Dated Government securities are long term securities and carry
a fixed or floating coupon (interest rate) which is paid on the
face value, payable at fixed time periods (usually half-yearly).
The tenor of dated securities can be up to 30 years.

45. Government Security……As per RBI site
The nomenclature of a typical dated fixed coupon Government
security contains the following features - coupon, name of the
issuer, maturity and face value. For example, 7.49% GS 2017
would mean:
Coupon : 7.49% paid on face value
Name of Issuer : Government of India
Date of Issue : April 16, 2007
Maturity : April 16, 2017
Coupon Payment Dates : Half-yearly (October 16 and
April 16) every year
Minimum Amount of issue/ sale : Rs.10,000

46. Commercial Paper
• Commercial paper (CP) has its origin in the financial markets
of America and Europe.
• Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note.
• Corporates, primary dealers (PDs) and the all-India financial
institutions (FIs) that have been permitted to raise short-term
resources under the umbrella limit fixed by the Reserve Bank
of India are eligible to issue CP.
• CP can be issued for maturities between a minimum of 7 days
and a maximum up to one year from the date of issue

47. Commercial Paper
• As a regulatory body, RBI lays down the policies and
guidelines with regard to commercial paper to maintain a
control on the operational aspects of the scheme.
• Prior approval of RBI is required before a company can
issue CP in the market
• RBI controls the broad timing of the issue to ensure
orderly fund-raising
• Every issue of CP launched by a company, including roll-
over will be treated as fresh issue and the issuing company
will be required to seek prior permission from RBI, before
each roll-over.
• RBI approval is valid for 2 weeks only

48. Commercial Paper
• Conditions under which the CPs can be issued are:
• The issuer company should have a minimum net worth and
fund-based working capital limit of not less than 4 cr each.
• The company should obtain a minimum rating of
P2/A2/PR2/D2
• Minimum amount of CP issued for a single investor will be
25 Lakhs in the minimum denomination of 5 Lakhs.
• The banks can neither extend any stand-by or underwriting
facility nor guarantee payment of the instrument on
maturity.
• The CPs are subject to stamp duty
• The total amount of CP proposed to be issued should be
raised within a period of two weeks from the date on
which the issuer opens the issue for subscription.

49. Certificate of Deposit
• Certificate of Deposit (CD) is a negotiable money market and
issued in dematerialized form
• Banks can issue CDs for maturities from 7 days to one a year
whereas eligible FIs can issue for maturities 1 year to 3 years
• All scheduled banks (except RRBs and Co-operative banks)
are eligible to issue CDs. They can be issued to individuals,
corporates, trusts, funds and associations. NRIs can also
subscribe to CDs but on non-repatriable basis only.
• The CDs can be issued for min amount of 5 lakhs to a single
investor. CDs above 5 lakhs should be in multiples of 1 lakh
• CDs issued in physical form are freely transferable by
endorsement and delivery. Procedure of transfer of dematted
CDs is similar to any other demat securities

50. Certificate of Deposit
• CDs are issued at discount to face value. The discount is
offered either front end or rear end.
CDs issued at front end discount
Amount of Issue – 100
Period - 6 months
Rate of discount – 20%
Discount = 100
100 × (20/100) × (6/12) = 10
Hence CD will be issued for 100 – 10 = 90.00. The effective
rate to the bank will, however, be calculated on the basis of the
following formula:
E = {[(FV –SV)/ SV] × Days or months in a year }×100
M

51. Certificate of Deposit
where
E = Effective Yield
FV = Face Value
SV = Sale Value
M = Period of Discount
Accordingly the Yield as per the data given in the example will
be
= 22.226%

52. Role of RBI in regulation of money
market

53. Learning
from a
example

54. 54