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FINANCE CONCEPTS

Financestudies and addresses the ways in which individuals, businesses and organizations

raise, allocate and use monetary resources over time, taking into account the risks entailed in

their projects.

Arbitrage is the practice of taking advantage of a price difference between two or

more markets: The activity of buying at the lower price and reselling at the higher price is known

as arbitrage.

Spot Rates Spot market is a market in which goods or securities are traded for immediate

delivery. Spot in this context means immediately effective, so that spot price is the price for

immediate delivery.

Forward Rates the forward exchange market is a market in which contracts are made to

supply currencies at fixed dates in the future at fixed prices

Indian Money Market Money market is the market in which short-term funds are borrowed

and lent. The money market does not deal in cash or money, but in trade bills, promissory notes

and government papers which are drawn for short periods. These short-term bills are known as

near-money.

Instruments in the Indian Money Market comprise money at call (overnight) and short

notice (up to 14 days), term money, commercial paper (CP), certificate of deposits (CDs),

commercial bills, treasury bills and inter-corporate deposits. Of these, the call money and notice

and Treasury bills.

Indian Money Market the Indian money market is a less developed market and cannot be

compared with such advanced money markets as the New York and London money markets.

Factoring is a device by which book debts are quickly realized through outright sale of

accounts receivable to a financial intermediary called factor.The factor will purchase accountsreceivables from all parties and take over the responsibility of collecting trade dues.

IMF (International monetary fund) IMF is an agency concerned with macro-management and

demand-side management of the World economy.

IBRD (International Bank for Reconstruction and Development) is an agency concerned with

micro-management of projects that it finances in various countries. It mainly deals with the

supply-side issues of economies.

RTA (Regional Trade Arrangement) RTA is a grouping of member countries who trade freely

only amongst themselves and confront outsiders with common tariff walls.

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OptionsAn option is a contract between two parties a buyer and a seller that gives buyer

The right, but not the obligation, to purchase or sell the underlying asset at a later date

at a price agreed upon today.

{Call Right but not the obligation to buy a given quantity of underlying asset.

Put Right but not the obligation to sell a given quantity of underlying asset. }

Swaps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula.

Interest rate swaps These entail swapping only the interest related cash flows between the

parties in the same currency.

Currency swaps These entail swapping both principal and interest between the parties, withthe cash flows in one direction being in a difference currency than those in the opposite

direction.

Derivatives The derivatives market is the financial market forderivatives, financial

instruments like futures contracts or options, which are derived from other forms of assets.

The market can be divided into two, that forexchange-traded derivatives and that forover-the-

counter derivatives. The legal nature of these products is very different as well as the way they

are traded, though many market participants are active in both.

Hedging is making an investment to reduce the risk of adverse price movements in an

asset. This is done by taking a position in the futures market that is opposite to the one in the

physical market with the objective of reducing or limiting risks associated with price changes.

Speculation The process of selecting investments with higher risk in order to profit from an

anticipated price movement.

Money Market is a center in which financial institutions congregate for the purpose of

dealing impersonally in monetary assets. It is a market where short term funds are lent and

borrowed.

a) Treasury billsit represents short term borrowings of the government TBM refers to market

where TBS are bought and sold. They may be 14 day TB 91-day TB 182-day TB (they can be

discounted by Discount & Finance House of India] 364- day TB (they are popular due to high

Yield) they are sold through auction once in a fortnight.

http://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Underlying_assethttp://en.wikipedia.org/wiki/Derivative_(finance)#Exchange-traded_derivativeshttp://en.wikipedia.org/wiki/Derivative_(finance)#Over-the-counter_derivativeshttp://en.wikipedia.org/wiki/Derivative_(finance)#Over-the-counter_derivativeshttp://en.wikipedia.org/wiki/Derivative_(finance)#Over-the-counter_derivativeshttp://en.wikipedia.org/wiki/Derivative_(finance)#Over-the-counter_derivativeshttp://en.wikipedia.org/wiki/Derivative_(finance)#Exchange-traded_derivativeshttp://en.wikipedia.org/wiki/Underlying_assethttp://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Financial_market

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b) Commercial bill Banks advance money to customers against C.Bills. They are

rediscounted in money market for 90 days.

C) Inter- bank calls moneythis is done to overcome the problem of CRR.

d) Commercial paper it is a short-term unsecured instrument issued by a company in the

form of promissory note with fixed maturity ( 15 days to less than one year) they are issued at a

discount and the maturity value is equal to face value.

Capital Market It provides long term funds for fixed capital requirements of trade etc. Capital

market can be regional national and international.

WTOprovides long term funds for fixed capital requirements of trade etc. Capital market can be

regional national and international.

Repo Rate is the rate at which the RBI lends shot-term money to the banks. When the reporate increases borrowing from RBI becomes more expensive. Therefore, we can say that in

case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo

rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate is he rate at which banks park their short-term excess liquidity with the

RBI. The RBI uses this tool when it feels there is too much money floating in the banking

system. An increase in the reverse repo rate means that the RBI will borrow money from the

banks at a higher rate of interest. As a result, banks would prefer to keep their money with the

RBI.

SLR (Statutory Liquidity Ratio) Every bank is required to maintain at the close of business

every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the

form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand

and time liabilities is known as SLR.

CRR (Cash Reserve Ratio) The Reserve Bank of India (Amendment) Bill, 2006 has been

enacted and has come into force with its gazette notification. Consequent upon amendment to

sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary

stability in the country, can prescribe CRR for scheduled banks without any floor rate or ceiling

rate.

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CRR: 5.50%

SLR: 24.0%

Bank Rate: 6.0%

Repo Rate: 7.50%

Reverse Repo Rate: 6.00%

IRR (Internal Rate of return) The IRR is a discount rate where the present value of future

cash flows of an investment is equal to the cost of the investment. Its value, compared to the

cost of the capital involved, is used to determine the project's viability.

IRR is sometimes referred to as "economic rate of return (ERR)".

AnnuityA financial product sold by financial institutions that is designed to accept and grow

funds from an individual and then, upon annuitization, pay out a stream of payments to the

individual at a later point in time. Annuities are primarily used as a means of securing a steady

cash flow for an individual during their retirement years.

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