FINANCING OPTIONS

OPTION It belongs to family of derivatives It is a contract that confers the right to

its owner/holder but not obligation to buy or sell

The buyer of the option is placed in an advantageous situation as he will exercise his option only when it is profitable

In other words seller of the option is in disadvantageous position as he is under obligation to buy or sell the securities in case the buyer exercise his option

IMPORTANT TERMS ASSOCIATED WITH OPTIONS Buyer – is the one who by paying the

option premium buys the right to buy /sell securities but not the obligation to exercise his option on the seller /writer of the option

Writer of an option – is the one who receives the option premium & is there by obliged to sell/buy the securities if the buyer exercise the option on him

Option price/premium – is the price that the option buyer pays to option seller

CONTD… Expiry Date – is the date specified in the

options contract by which the option can be excercised

Strike price – The price specified in the options contract at which the buyer can exercise his right to buy or sell the securities

At the money option – is an option that would lead to zero cash flow (no profit no loss )to the holder

In the Money option- is an option that would lead to positive cash flow to the holder

Out of the money Option – is an option that would lead to negative cash flow to the holder

MULTIPLE OPTION BONDS Appealing to Different Requirements of

Investors for Income Planning

Flexibility in Tax Planning of InvestorsPayment of Interest is staggered with varied options

Became Popular and adopted for Infrastructure Bonds also

FINANCIAL ENGINEERING -MEANING Corporate finance, bank finance, and

investment finance have changed in recent years has given birth to a new discipline that has come to known as financial engineering.

Financial engineering involves the design, the development, and the implementation of innovative financial instruments and processes, and the formulation of creative's solution to problem in finance

CONTD… For many firms, their risk exposure is

unique in the sense that the risk exposure is based on an asset whose value is not easily hedged .

By combining elements of forwards, futures, options, and swaps, firms can create a financial instrument that meets the needs of the corporation that is trying to hedge its risk exposure or one that offers the institutional investor an investment opportunity with a unique payoff structure.

OFFSHORE INSTRUMENTS Offshore investment is the keeping of

money in a jurisdiction other than one's country of residence

Offshore centers are widely used and are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity.

REASONS FOR OFFSHORE INVESTMENT

Tax Advantages Investment diversification Lower levels of regulation Specialist financial services

FOREIGN DIRECT INVESTMENT Direct investment into production or

business in a country by a company of another country.

A Chinese Company building a factory and a supply chain in the US in order to tap into the American market would be an example of Chinese foreign direct investment into America.

FDI FACT SHEET

From April 2000 to June 2010 AMOUNT(In million $)

CUMULATIVE AMOUNT OF FDI INFLOWS IN INDIA 170,323

SECTOR-WISE DISTRIBUTION OF FDI EQUITY INFLOW

NAME OF INDUSTRY

GROWTH RATE% AS

ON DEC 2009POWER 3

AUTOMOBILE 5.2

METALLURGICAL

8.6

PETROLEUM 6.2

CHEMICAL 12

FINANCIAL 8.5

SOFTWARE/HARDWARE

33

TELECOM 14

REAL ESTATE 11

CONSTRUCTION

8.5

INDIA’S INVESTMENT OPPORTUNITIES Engineering & Automobiles Information Technology Banking & Financial Sector Agricultural – Short of Investment in agro processing Infrastructure – Mining, Steel, Oil & Gas, Public Transport,

Roads Jewelry & Diamond Processing Aviation Logistics & Transportation Healthcare Education

WHAT ARE CONTINGENT CONVERTIBLE BONDS bonds are hybrid capital securities that

absorb losses in accordance with their contractual terms when the capital of the issuing bank falls below a certain level

As a bail-in mechanism to infuse additional capital under adverse market conditions Transfer of risk from taxpayers to the private sector in times of distress

LEASING A lease is an agreement whereby the

lessor conveys to the lessee , in return for rent, the right to use an asset for an agreed period of time.

A financing arrangement that provides a firm with an advantage of using an asset, without owning it, may be termed as „leasing‟.

HIRE PURCHASE is the legal term for a contract, in which

a purchaser agrees to pay for goods in parts or a percentage over a number of months

FINANCIAL BENCHMARKING

Financial benchmarking involves running a financial analysis and making a comparison of the results in order to assess a firm's overall competitiveness, efficiency and productivity.

The term benchmarking refers to the process of comparing one's business practices and performance standards to other firms within one’s industry. Quality, time, and cost are the most common divisions to be measured.

CREDIT APPRAISAL IN BANKING SECTOR Credit appraisal means an

investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed.

Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future

Credit appraisal is the process of appraising the credit worthiness of the loan applicant

MEANING OF DUE DILIGENCE It is the process of carrying out an

investigative analysis of the financial, legal and operating activities of an entity in connection with a proposed transaction that would result in a significant change in the ownership or the capital structure of the entity.

AIM OF THE DUE DILIGENCE PROCESS Identify problems within the business,

particularly any issues which may give rise to unexpected liabilities in the future.

Ingredients of a successful Due Diligence Must be unbiased

Should be carried out by independent professionals.

Requires the management’s co-operation

Done with a positive attitude

A credit rating is an evaluation report of how well or bada company is performing in absolute terms in a particularmarket or industry.

Such a report makes it possible for the stakeholders tocompare a company’s credit worthiness against other companies operating in similar market or industryinternationally.

The rating exercise is considered as one of the mostessential reports, besides the External auditors’ report,which provides the stakeholders an overview of the financial standing of the commercial entity.

The report is made up of both; (a) quantitative, and (b)qualitative information.

Why the Need for a Credit Rating?(a) The financial sector especially the banking industry in most emerging economies is going through a process of change,

(b) Financial transactions have become a major economic activity in most service-based economies, thus any disruption or imbalance in its infrastructure will have a significant impact on the whole economy,

(c) A safe and sound banking industry can bring about stability within the financial markets,

(d) During the last decade, banks around the world had to respond to the emerging challenges of competition, risks and uncertainties,

Economic & Industry Risk in Asia-Pacific Banking SystemsECONOMIC RISK

Very High High

ModeratelyHigh Moderate

Moderately Low

Low

Low Australia

Moderately Low

New ZealandSingapore

Moderate Hong Kong

Malaysia

Moderately High Thailand

South KoreaTaiwan

Japan

High ChinaPhilippines India

Very High IndonesiaVietnam

IND

UST

RY R

ISK

Source: Standard & Poor’s : Asia-Pacific Banking Outlook 2005

Banks Credit Rating

The factors considered in the rating of banks or financialInstitutions are as follows:

Industry Risk Financial Risk Structure Funding & Liquidity Ownership profile Capitalization Customer base Earnings Regulation Market position Degree of diversification Management style & strategies Standards of accounting used Perceived Economic Risk Risk ManagementCredit Risk Strategy Market RiskMarket/Structural Risk Credit RiskTrading Risk Financial Flexibility