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DISSERTATIONON

FINANCIALMARKET

ANDITS

INSTRUMENTS


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CONTENTS

AcknowledgementPrefaceDeclarationObjectivesIntroductionResearch methodologyChapterization Chapter 1- Analysis of financial market

Chapter 2- Money market and its instruments Chapter 3- Defects of money market

Chapter 4- Reforms of money market Chapter 5- capital market and its instruments

Finding studyConclusionBibliography


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ACKNOWLEDGEMENT

I am extremely grateful to that entire member who

extends their co-operation and guidance for myprojects.I am thankful to Mr. Devesh Gupta for their externalsupport I would also thank my project guide Mr.Nityanand.Whose valuable advice and guidance helped me tocomplete this dissertation report.Lastly I thank to the respondent in company, parents

and relatives, for their co-operation, love and blessingand thankful to my all friends and companions whodirectly- indirectly co-operate with me in completingthis dissertation report.

ADITI GUPTAS.S.I.T.MALIGARH


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DECLARATION

I, FURQUAN KHAN, a student of MBA 4th sem SSITM,ALIGARH batch 2007-2009 and roll no. 0700770023,here by declare that dissertation report entitledROLE OF FDI IN RETAIL SECTOR, is the outcome of my own work and same has not beensubmitted to any university/ institute for the award ofany degree or professional diploma.

FURQUAN KHAN


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PREFACE

The project entitled FINANCIAL MARKET AND ITSINSTRUMENTS was under taken by me during themonth of march 2008 in fulfilment of requirement ofMBA 4th sem.

The information used in the project is based on theprimary as well as secondary data, it able to me learnabout the marketing skills, environment, contributingto highly satisfactory performance of the bank.Similarly, secondary data used in this project havetaken from the journals and bank websites.Due care, has been taken to present that material, sogathered in a scientific & systematic mannerAnd in this projects to mentioned the all activity of thefinancial market and its instruments and mentionedthe defects and reforms of the money market in theRBI.


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OBJECTIVES

OBJECTIVES

To analysis the financial

To analysis the moneymarket and its

To study the causes of

money market

To analysis the reforms ofthe money market

To study the capitalmarket and its


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INTRODUCTIONOF

FINANCIAL MARKET


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HISTORY OF FINANCIAL MARKET

Here we look at the historical and empirical evidencesurrounding financial markets and assets. The firstpart surveys the innovations regarding financial

instruments and the trading process in financialmarkets. The second part surveys the history ofinvestment returns on financial assets. Threequestions are addressed in particular:

What return can investors expect to earn wheninvesting in various types of financial assets?

What are the risk characteristics of these returns?

Are returns and risk characteristics linked?An interesting issue is the historic relationshipbetween the risk and return on various instruments. Ifinvestors are risk averse we expect to find theydemand compensation for holding risky portfolios. Thiswill be discussed in relation to the so called equitypremium puzzle.

A HISTORY OF FINANCIAL INNOVATION


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Many early civilisations made use of loan agreementsbetween individuals, and in the old Babylonia andAssyria there were at least two banking firms inexistence several thousand years BC Equities andbonds were developed during the sixteenth century.Convertible securities also have a long history. Incontinental Europe in the sixteenth century thereexisted equity issues that could be converted intodebt if certain regulations were broken. Similarly,preferred stock has been in use for a long time.Exchange trading of financial securities also has asurprisingly long history. Equity was traded in Antwerpand Amsterdam in the 1600s. Moreover, options andfutures (called time bargains at the time) were tradedon the Amsterdam Bourse after it was opened in 1611.Many of the European stock markets experiencedmajor stock market bubbles in the eighteenth century.A famous example is the South Sea Bubble (1720)where the price of the South Sea Company rose from131% of par in February to 950% by June 23, then fellback to 200% by December. This bubble led to the socalled Bubble Act which made it illegal to form acompany without a charter or to pursue any line ofbusiness other than the one specified in the charter.

RECENT FINANCIAL INNOVATION

The 1960s witnessed a number of innovations driven

by regulatoryConstraints. The Eurobond market emerged wherenon-US companies could borrow in US $. At the timeforeign borrowers were excluded from the US markets.Similarly, currency swaps were developed during thisperiod to circumvent UK exchange controls. The 1970switnessed the introduction of floating-rate instruments(bonds with coupons tied to a floating rate such as the

LIBOR rate in London), and the trading of financial


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futures, such as futures on foreign currency, futureson interest rates, and futures on stock market indices.Often, the innovation of new securities is initiallydriven to circumvent regulatory constraints or toexploit market demand for new types of claims. Oncethey become established, however, the investors findthey have other, broader, advantages that make thema useful addition to the financial system. Below youcan find a few case studies of new innovations.

Case study 1: Floating rate debt

Floating-rate notes were first issued in 1970, and itwas an instrument that was linked to a floatingreference rate the London Interbank Offered Rate(LIBOR). These instruments came in during a periodwhere inflation risk became a serious threat, so thenominal rate would fluctuate dramatically. Allowingloan rates to vary in accordance with thesefluctuations was a natural response. In the mid-1970sthe market for floating rate debt started growingsignificantly, and these instruments were fairly widelyused in the early 1980s. Most floating-rate debt isissued in the European market, and these instrumentshave never been particularly popular in the US. A spin-off innovation is floating-rate preferred stock apreferred stock in which the dividend yield is linked tothe variations in the reference rate.

Case study 2: Zero-coupon bonds

These bonds were first issued in the 1960s, but theydid not become popular until the 1980s. The use ofthese instruments was aided by an anomaly in the UStax system, which allowed for deduction of thediscount on bonds relative to their par value. This rule

ignored the compounding of interest, and leads to


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significant tax-savings when the interest rates arehigh or the security has long maturity. Although thetax-loophole was closed fairly quickly, the bonds weredesirable to investors because they were very simpleinvestment tools. For a bond that has interim couponpayments the investor would have to reinvest thesecoupon payments and there may be considerable risktied to these reinvestment strategies. A zero-couponbond has no reinvestment risk.

Case study 3: Poison pill securities

The popularity of corporate acquisitions and mergershas promoted the emergence of a number of anti-takeover techniques. Some of these have taken theform of financial innovations. One of the earliest wasthe so called preferred stock plans. With these, thetarget company (the one that the bidding companyseeks to acquire) issues a dividend of convertiblepreferred stock to its shareholders which grants

certain rights if the bidding company buys a largeposition in the target firm. These rights might be inthe form that the stockholders can require theacquiring firm to redeem the preferred stock at thehighest price paid for common stock in the past year.If the takeover actually goes through, the highestprice will almost certainly be the takeover price, andthe acquiring company must, therefore, issue a

number of new stock at the takeover price inexchange for the old preferred stock already issued.

This will, obviously, dilute the gains of the takeover tothe acquiring party and reduce the likelihood of atakeover.Another poison pill security is the so called flip-overplan. This consists of the issue of a common stockdividend consisting of a special right. This right

enables the holder to purchase common stock at an


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exercise price well above the current market price.Normally, nobody would exercise these rights as theexercise price is high compared to the current marketprice. However, in the event of a merger, they flip-over and give the right to purchase common stock atan exercise price well below the current market price.Again, this makes takeovers costly as the biddersprofits from the takeover are heavily diluted by theexercise of the flip-over plans.

Case study 4: Swaps

The first swaps emerged in the 1960s and werecurrency swaps, and they emerged like many otherinnovations on the back of regulation. In this case, aUK based multinational company might have a surplusof funds in the UK that it wished to invest in a USsubsidiary but was prevented due to UK exchangecontrols. A counter party in the US with the oppositeproblem, a surplus of US funds but a need to invest ina UK subsidiary, could often be identified. Sinceregulation prevented a straight transfer within eachcompany, the companies could circumvent the rulesby simply using parallel loans the US firm promisedto lend dollars to the UK subsidiary against the UK firmpromising to lend pounds to the US subsidiary. Amajor problem with these arrangements soonemerged, however, which was that there was aconsiderable amount of counterparty risk involved. Acompany might have entered into the agreement fullysolvent but might experience problems in the interimperiod before expiry. If one party defaulted, would theother party still be obliged to fulfil their part of thearrangement? This deficiency could be overcome bythe swap agreement, where in principle thecompanies deposited money with each other and paidthe interim interest payments to each other according


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to the prevailing interest rates in the two currencies,and finally the principal amount is cleared at the endof the agreement. The interim payments are normallynetted out using the prevailing exchange rate, sothere is only one payment made.

The swap agreement has also been modified toagreements involving swapping cash flows ofadjustable (floating) rate loans and cash flows of fixedrate loans. Principal payments are in this case notmade in the same way as currency swaps these arealso netted out so that the swap agreement effectivelyconsists of a series of single payments.

Case study 5: Futures trading

The standardised financial futures contracts are arelatively recentinnovation, in contrast to the older, forward styleagreements that have existed since the emergence ofa financial system. An important feature of thiscontract is the way it is traded, which makes it easyfor investors to enter and exit existing futuresagreements in between the start of the contract andthe maturity date of the contract. More importantly,however, is that futures trading allow investors to shiftlarge amounts of risk with very little investment.Futures trades are, therefore, highly levered. Forexample, margin trading of equity typically involves amargin of 50%, so even if the investor can borrow hestill needs to finance half the investment cost (andfurther margin calls if the stock price goes down). Withfutures positions, investors normally maintain marginsless than 10% of the face value of the futurescontract. The futures contract is marked to marketeach day, so the investor can unwind his position (sellif the original transaction was a buy and vice versa)


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and his account is settled with no further cash flowstaking place

Investment returns in equity and bondmarkets

What returns have investors historically made in thebond and equity markets around the world? We haveabout a hundred years of data on stock marketreturns, and the brief answer globally is that thecountries most devastated by World War II had thelowest long-run cumulative returns - Italy, Belgium,Germany and Japan. The countries that experiencedthe least damage, in contrast, have the highest longrun cumulative returns - Australia, Canada, and theUS. However, the real returns (corrected for inflation)are pretty much similar across all countries.A major theoretical prediction from pricing models isthat the expected or average return on assets islinked to the risk of holding these assets. Again, theoverall empirical evidence supports this prediction.Looking, for instance, to the US experience from 1926to 2002, we find the following.Asset type Geometric average Arithmeticaverage returnSmall-company stocks 11.64% 17.74%Large-company stocks 10.01% 12.04%Long-term treasury bonds 5.38% 5.68%US T-bills 3.78% 3.82%Inflation 3.05% 3.14%

The equity premium puzzle

The return on equity is greater than the return on

bonds because the risk is smaller. What has beenfound, however, is that the difference (the so called


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equity premium) appears to be bigger than should beexpected. The following example from US stock andbond markets is compelling. A person who invested$1000 in Treasury bills on December 31, 1925 andkept it in safe US Treasury bills until December 31,1995 would have an investment in 1995 worth$12,720. If the money were invested in the stockmarket the corresponding number is $842,000 (66times the amount for T-bills). Considering that theequity investment would have survived two largestock market crashes (one in 1929 and another one in1987), the difference is strikingly large.How should we compare a risky investment with a riskfree one? One way to do this is by assuming a riskaverse investor holds both risk free T-bills and riskyequities in his portfolio (for a review of utility theoryand risk aversion). The premium on the equity is thencompensation for his risk aversion. The greater thepremium is, the greater the risk aversion of theinvestor must be. Using historical data, we cantherefore make inferences about the risk aversion ofinvestors. Risk aversion is measured by the riskAversion coefficient, formally derived from the utilityfunction by the relationship. This is a fairly reasonablenumber, but asset returns are not normal so wecannot use this simple model to estimate the impliedrisk aversion coefficient. This is the motivation forMehra and Prescotts study. They fit a rigoroustheoretical model to data on the return on stockmarket investments and government bonds. Themodel generates the risk aversion coefficient of arepresentative investor. Can the equity premiumpuzzle be resolved? Mehra and Prescott might havesampled data that were special in two senses. First, itmight have been too short so there is a possibility that

the period was in some sense too special to makesafe inferences about the implied risk aversion


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coefficient. Their work has been extended to includedata all the way back to 1802. The main finding of thisexercise is that the real returns of short-term fixedincome have fallen dramatically over time. The realexcess return on equity would, therefore, on averagebe about one percentage point lower than thatreported by Mehra and Prescott. This will of coursereduce the magnitude of the risk aversion coefficientbut it is doubtful that the puzzle would be completelyresolved.

The second way the data might have been special isthat the time series are too long. This might lead tosurvivorship bias in the data. When collecting massesof data we inevitably sample those data-series thathave survived for a long time. The long-surviving dataseries would also tend to be healthier and showaverage returns that are higher than the perceivedexpected returns at historical points in time. Investorsmight reasonably worry about the risk of a crisis orcatastrophe that can wipe out the entire marketovernight. And indeed, of the 36 stock exchanges thatoperated at the early 1900s, more than one-halfexperienced significant interruptions or wereabolished outright up to the current time. Hence, theequity premium might include some bias if estimatedby long time series of data. Again, survivorship biasmight be a source of some errors in the estimation ofthe risk aversion coefficient but it is unclear how muchit contributes.


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INTRODUCTION OF FINANCIAL MARKET

What are the financial markets? If you are confused,there is a good reason. Thats because financialmarkets go by many terms, including capital markets,Wall Street, even the markets. Some experts evensimply refer to it as the stock market, even thoughthey are referring to stocks, bonds and commodities.Quite simply, that is what the financial markets are -any type of financial transaction that you can think ofthat helps businesses grow and investors makemoney. Here is an overview of the financial markets,from the simple to the complex.

Stock and stock investing

Stocks are shares of ownership of a public corporationwhich are sold to investors to allow the companies toraise a lot of cash at once. The investors profit whenthe companies increase their earnings which keepsthe U.S. economy growing. It is easy to buy stocks, buttakes a lot of knowledge to buy stocks in the rightcompany.


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What Are the Components of the StockMarket?

To a lot of people, the Dow is the stock market.However, the Dow, which is the nickname for the Dow

Jones Industrial Average, is just one componentamong many. There is also the Dow JonesTransportation Average and the Dow Jones UtilitiesAverage. The stocks that make up these averages aretraded on the worlds exchanges, two of which includethe New York Stock Exchange and the NASDAQ.

What Are Mutual Funds?

Mutual funds give you the ability to buy a lot of stocksat once. In a way this makes them an easier tool toinvest in than individual stocks. By reducing stockmarket volatility, they have also had a calming effecton the U.S. economy. Despite their benefits, you stillneed to learn how to select a good mutual fund.

What Is the Bond Market?

Generally, when stocks go up, bonds go down.However, there are many different types of bonds,including Treasury Bonds, corporate bonds, and

municipal bonds. Bonds also provide some of theliquidity that helps keep the U.S. economy lubricated.Their most important effect is on mortgage interestrates.

What Are Commodities?

The most important commodity to the U.S. economy isoil, and its price is determined in the commodities

futures market. What are futures? They are a way to


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pay for something today that is delivered tomorrow,which helps to remove some of the volatility in theU.S. economy. However, futures also increase thetraders leverage by allowing him to borrow themoney to purchase the commodity. This can have ahuge impact on the stock market, and the U.S.economy, if the trader guesses wrong.

What Are Hedge Funds?

Recently, hedge funds have increased in popularitydue to their supposed higher returns for high-end

investors. Since hedge funds invest heavily in futures,some have argued they have decreased the volatilityof the stock market and therefore the U.S. economy.However, in 1997 the worlds largest hedge fund atthe time, Long Term Capital Management, practicallybrought down the U.S. economy.

BASIC TERMS

An asset is anything of durable value, that is,anything that acts as a means to store value overtime. Real assets are assets in physical form (e.g.,land, equipment, houses,...), including "human

capital" assets embodied in people (natural abilities,


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learned skills, knowledge,..). Financial assets areclaims against real assets, either directly (e.g., stockshare equity claims) or indirectly (e.g., moneyholdings, or claims to future income streams thatoriginate ultimately from real assets). Securities arefinancial assets exchanged in auction and over-the-counter markets (see below) whose distribution issubject to legal requirements and restrictions (e.g.,information disclosure requirements).

Lenders are people who have available funds inexcess of their desired expenditures that they areattempting to loan out, and borrowers are people whohave a shortage of funds relative to their desiredexpenditures who are seeking to obtain loans.Borrowers attempt to obtain funds from lenders byselling to lenders newly issued claims against theborrowers' real assets, i.e., by selling the lendersnewly issued financial assets.

A financial marketis a market in which financialassets are traded. In addition to enabling exchange ofpreviously issued financial assets, financial marketsfacilitate borrowing and lending by facilitating the saleby newly issued financial assets. Examples of financialmarkets include the New York Stock Exchange (resaleof previously issued stock shares), the U.S.government bond market (resale of previously issued

bonds), and the U.S. Treasury bills auction (sales ofnewly issued T-bills). A financial institution is aninstitution whose primary source of profits is throughfinancial asset transactions. Examples of suchfinancial institutions include discount brokers (e.g.,Charles Schwab and Associates), banks, insurancecompanies, and complex multi-function financialinstitutions such as Merrill Lynch.


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MEANING OF FINANCIAL MARKET

A financial market is a mechanism that allowspeople to easily buy and sell (trade) financialsecurities (such as stocks and bonds), commodities(such as precious metals or agricultural goods), andother fungible items of value at low transaction costsand at prices that reflect the efficient-markethypothesis. Financial markets have evolved

significantly over several hundred years and areundergoing constant innovation to improve liquidity.Both general markets (where many commodities aretraded) and specialized markets (where only onecommodity is traded) exist. Markets work by placingmany interested buyers and sellers in one "place",thus making it easier for them to find each other. Aneconomy which relies primarily on interactions

between buyers and sellers to allocate resources isknown as a market economy in contrast either to acommand economy or to a non-market economy suchas a gift economy.

In finance, financial markets facilitate

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets)

and are used to match those who wantcapital tothose who have it. Typically a borrower issues areceipt to the lender promising to pay back thecapital. These receipts are securities which may befreely bought or sold. In return for lending money tothe borrower, the lender will expect somecompensation in the form of interest or dividends.
http://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Fungiblehttp://en.wikipedia.org/wiki/Transaction_costhttp://en.wikipedia.org/wiki/Efficient-market_hypothesishttp://en.wikipedia.org/wiki/Efficient-market_hypothesishttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Command_economyhttp://en.wikipedia.org/wiki/Market_economicshttp://en.wikipedia.org/wiki/Gift_economyhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Fungiblehttp://en.wikipedia.org/wiki/Transaction_costhttp://en.wikipedia.org/wiki/Efficient-market_hypothesishttp://en.wikipedia.org/wiki/Efficient-market_hypothesishttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Command_economyhttp://en.wikipedia.org/wiki/Market_economicshttp://en.wikipedia.org/wiki/Gift_economy


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DEFINITION OF FINANCIAL MARKET

A financial market is a process that allows people toeasily buy and sell financial securities, commodities

and other fungible items of value at low transactioncosts and at prices that reflect efficient markets.

FUNCTIONS OF FINANCIAL MARKET

Efficiency

Liquidity

RiskSharing

Information

aggregation and

coordinationnn

Pricedetermin

ation

Borrowing and

Lending

FUNCTIONS

OF

FINANCIAL

MARKET


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Borrowing and Lending: Financial markets

permit the transfer of funds (purchasing power)from one agent to another for either investment orconsumption purposes.

Price Determination: Financial marketsprovide vehicles by which prices are set both fornewly issued financial assets and for the existingstock of financial assets.

Information Aggregation andCoordination: Financial markets act as collectorsand aggregators of information about financial assetvalues and the flow of funds from lenders toborrowers.

Risk Sharing: Financial markets allow a transferof risk from those who undertake investments tothose who provide funds for those investments.

Liquidity: Financial markets provide the holdersof financial assets with a chance to resell orliquidate these assets.

Efficiency: Financial markets reduce transactioncosts and information costs.

MAJOR PLAYERS IN FINANCIAL MARKET

By definition, financial institutions are institutionsthat participate in financial markets, i.e., in thecreation and/or exchange of financial assets. Atpresent in the United States, financial institutionscan be roughly classified into the following four

categories: "brokers;" "dealers;" "investmentbankers;" and "financial intermediaries."


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Brokers:

A brokeris a commissioned agent of a buyer (or seller)who facilitates trade by locating a seller (or buyer) tocomplete the desired transaction. A broker does not

take a position in the assets he or she trades -- that is,the broker does not maintain inventories in theseassets. The profits of brokers are determined by thecommissions they charge to the users of their services(the buyers, the sellers, or both). Examples of brokersinclude real estate brokers and stock brokers.

Diagrammatic Illustration of a Stock Broker:

Payment ----------------- Payment------------>| |------------->

Stock | | StockBuyer | Stock Broker | Seller


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Dealers:

Like brokers, dealers facilitate trade by matchingbuyers with sellers of assets; they do not engage in

asset transformation. Unlike brokers, however, adealer can and does "take positions" (i.e., maintaininventories) in the assets he or she trades that permitthe dealer to sell out of inventory rather than alwayshaving to locate sellers to match every offer to buy.Also, unlike brokers, dealers do not receive salescommissions. Rather, dealers make profits by buyingassets at relatively low prices and reselling them atrelatively high prices (buy low - sell high). The price atwhich a dealer offers to sell an asset (the "askedprice") minus the price at which a dealer offers to buyan asset (the "bid price") is called the bid-ask spreadand represents the dealer's profit margin on the assetexchange. Real-world examples of dealers include cardealers, dealers in U.S. government bonds, andNASDAQ stock dealers.

Diagrammatic Illustration of a Bond Dealer:

Payment ----------------- Payment------------>| |------------->

Bond | Dealer | BondBuyer | | Seller


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Advice: Advising corporations on whether theyshould issue bonds or stock, and, for bond issues,on the particular types of payment schedulesthese securities should offer;

Underwriting: Guaranteeing corporations a priceon the securities they offer, either individually orby having several different investment banksform a syndicate to underwrite the issue jointly;

Sales Assistance: Assisting in the sale of thesesecurities to the public.

Financial Intermediaries:

Unlike brokers, dealers, and investment banks,financial intermediaries are financial institutions thatengage in financial asset transformation. That is,financial intermediaries purchase one kind of financialasset from borrowers -- generally some kind of long-term loan contract whose terms are adapted to thespecific circumstances of the borrower (e.g., a

mortgage) -- and sell a different kind of financial assetto savers, generally some kind of relatively liquidclaim against the financial intermediary (e.g., adeposit account). In addition, unlike brokers anddealers, financial intermediaries typically holdfinancial assets as part of an investment portfoliorather than as an inventory for resale. In addition tomaking profits on their investment portfolios, financial

intermediaries make profits by charging relatively highinterest rates to borrowers and paying relatively lowinterest rates to savers.

Types of financial intermediaries include:

Depository Institutions (commercial banks, savingsand loan associations, mutual savings banks, credit

unions); Contractual Savings Institutions (lifeinsurance companies, fire and casualty insurance


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companies, pension funds, government retirementfunds); and Investment Intermediaries (financecompanies, stock and bond mutual funds, moneymarket mutual funds).

Diagrammatic Example of a FinancialIntermediary: A Commercial Bank

Lending by B Borrowing by B

Deposited------- Funds ------- funds -------

| | | H |------- Loan ------- deposit -------

Contracts accounts

Loan contracts Deposit accountsIssued by F to B issued by B to HAre liabilities of F are liabilities of B

And assets of B and assets of H

NOTE: F=Firms, B=Commercial Bank, andH=Households

Important Caution: These four types of financialinstitutions are simplified idealized classifications, andmany actual financial institutions in the fast-changing

financial landscape today engage in activities thatoverlap two or more of these classifications, or even tosome extent fall outside these classifications. A primeexample is Merrill Lynch, which simultaneously acts asa broker, a dealer (taking positions in certain stocksand bonds it sells), a financial intermediary (e.g.,through its provision of mutual funds and CMAcheckable deposit accounts), and an investment

banker.


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What Types of Financial Market Structures Exist?

The costs of collecting and aggregatinginformation determine, to a large extent, the

types of financial market structures that emerge.These structures take four basic forms:

Auction markets conducted throughbrokers; Over-the-counter (OTC) marketsconducted through dealers; Organized Exchanges, such as the

New York Stock Exchange, which combineauction and OTC market features.Specifically, organized exchanges permitbuyers and sellers to trade with each other ina centralized location, like an auction.However, securities are traded on the floor ofthe exchange with the help ofspecialisttraders who combine broker and dealer

functions. The specialists broker trades butalso stand ready to buy and sell stocks frompersonal inventories if buy and sell orders donot match up. Intermediation financial marketsconducted through financial intermediaries;

Financial markets taking the first three forms are

generally referred to as securities markets. Somefinancial markets combine features from morethan one of these categories, so the categoriesconstitute only rough guidelines.

Auction Markets:

An auction marketis some form of centralized

facility (or clearing house) by which buyers andsellers, through their commissioned agents


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(brokers), execute trades in an open andcompetitive bidding process. The "centralizedfacility" is not necessarily a place where buyersand sellers physically meet. Rather, it is anyinstitution that provides buyers and sellers with acentralized access to the bidding process. All ofthe needed information about offers to buy (bid

prices) and offers to sell (asked prices) iscentralized in one location which is readilyaccessible to all would-be buyers and sellers, e.g.,through a computer network. No privateexchanges between individual buyers and sellersare made outside of the centralized facility.

An auction market is typically a public market inthe sense that it open to all agents who wish toparticipate. Auction markets can either be callmarkets -- such as art auctions -- for which bidand asked prices are all posted at one time, orcontinuous markets -- such as stock exchanges

and real estate markets -- for which bid and askedprices can be posted at any time the market isopen and exchanges take place on a continualbasis. Experimental economists have devoted atremendous amount of attention in recent yearsto auction markets.

Many auction markets trade in relatively

homogeneous assets (e.g., Treasury bills, notes,and bonds) to cut down on information costs.Alternatively, some auction markets (e.g., insecond-hand jewellery, furniture, paintings etc.)allow would-be buyers to inspect the goods to besold prior to the opening of the actual biddingprocess. This inspection can take the form of awarehouse tour, a catalogue issued with pictures

and descriptions of items to be sold, or (in


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televised auctions) a time during which assets aresimply displayed one by one to viewers prior tobidding.

Auction markets depend on participation for anyone type of asset not being too "thin." The costsof collecting information about any one type ofasset are sunk costs independent of the volumeof trading in that asset. Consequently, auctionmarkets depend on volume to spread these costsover a wide number of participants.

Over-the-Counter Markets:

An over-the-counter markethas no centralizedmechanism or facility for trading. Instead, themarket is a public market consisting of a numberof dealers spread across a region, a country, orindeed the world, who make the marketin sometype of asset. That is, the dealers themselves post

bid and asked prices for this asset and then standready to buy or sell units of this asset withanyone who chooses to trade at these postedprices. The dealers provide customers moreflexibility in trading than brokers, because dealerscan offset imbalances in the demand and supplyof assets by trading out of their own accounts.Many well-known common stocks are traded over-

the-counter in the United States through NASDAQ(National Association of Secures Dealers'Automated Quotation System).

Intermediation Financial Markets:

An intermediation financial marketis a financialmarket in which financial intermediaries helptransfer funds from savers to borrowers byissuing certain types of financial assets to savers


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and receiving other types of financial assets fromborrowers. The financial assets issued to saversare claims against the financial intermediaries,hence liabilities of the financial intermediaries,whereas the financial assets received fromborrowers are claims against the borrowers,hence assets of the financial intermediaries.

Asymmetric Information in FinancialMarkets

Asymmetric information in a market for goods,

services, or assets refers to differences("asymmetries") between the informationavailable to buyers and the information availableto sellers. For example, in markets for financialassets, asymmetric information may arisebetween lenders (buyers of financial assets) andborrowers (sellers of financial assets).

Problems arising in markets due to asymmetricinformation are typically divided into two basictypes: "adverse selection;" and "moral hazard."

This section explains these two types ofproblems, using financial markets for concreteillustration.

1. Adverse Selection

Adverse selection is a problem that arises for abuyer of goods, services, or assets when thebuyer has difficulty assessing the quality of theseitems in advance of purchase.

Consequently, adverse selection is a problem that

arises because of different ("asymmetric")


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information between a buyer and a seller beforeany purchase agreement takes place.

An Illustration of Adverse Selection in Loan

Markets:

In the context of a loan market, an adverseselection problem arises if the contractual termsthat a lender sets in advance in an attempt toprotect himself against the consequences ofinadvertently lending to high risk borrowers havethe perverse effect of encouraging high risk

borrowers to self-select into the lender's loanapplicant pool while at the same timeencouraging low risk borrowers to self-select outof this pool. In this case, the lender's pool of loanapplicants is adversely affected in the sense thatthe average quality of borrowers in the pooldecreases.

Moral Hazard

Moral hazard is said to exist in a market if, afterthe signing of a purchase agreement between thebuyer and seller of a good, service, or asset:

the seller changes his or her behaviourin such a way that the probabilities (riskcalculations) used by the buyer to determine

the terms of the purchase agreement are nolonger accurate; The buyer is only imperfectly able tomonitor (observe) this change in the seller'sbehaviour.

For example, a moral hazard problem arises if,after a lender purchases a loan contract from a

borrower, the borrower increases the risks


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originally associated with the loan contract byinvesting his borrowed funds in more riskyprojects than he originally reported to the lender.

CLASSIFICATION OF FINANCIALMARKET

The capital market is the market for the issueand trade of long-term securities.

The money market is that of short-termsecurities.

The timing difference between the closing ofthe transaction and the delivering of thegoods or settlement of the transaction

The difference in certainty that the otherparty will honour the transaction.


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ORGANISATION STRUCTURE OF FINANCIALMARKET

The key functions of the Financial Markets Departmentare:

Secretary

Market research

Assit. Head

Market operation

Deputy Governor

Executive general

manager market

Head of department

Senior deputy head

Market operation

division

Deputy Head

Secretary

Treasury

operation

division

Treasury

division

Reserves

management

and

correspondent

bankingAsst head

Deputy Head

Credit risk

And

compliance

Asst. head

Deputy Head

Trade

settlement

Asst. head

Management

support

Asst. head


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Implementing the Reserve Banks monetarypolicy decisions. This entails refinancing thebanks' liquidity requirements through repurchasetransactions and other facilities such as theaveraging of cash reserves or marginal lending,as well as managing liquidity in the moneymarket through open-market operations such asdebentures, longer-term reverse repurchasetransactions and foreign currency swaps.

Participating in the spot and forward foreignexchange markets to service the foreign

exchange needs of the Reserve Bank and itsclients.

Acting as funding agent of the government byconducting bond and Treasury bills auctions,participating in the formulation of debtmanagement strategies, conducting surveillanceover primary dealers in the bond market andmanaging the investment portfolio of the

Corporation for Public Deposits (CPD). Facilitating the effective functioning of the

domestic financial markets through itsparticipation in these markets.

Managing the Reserve Banks gold and foreignexchange reserves.

Maintaining correspondent banking relationshipsby interacting with the Banks counterparties,

both domestic and foreign, to assist the ReserveBank in achieving its goals. An important aspectof this function is the negotiation andadministration of foreign loans or credit lines,which the Bank may draw down from time to timeto augment its foreign exchange reserves.

Providing market information and analyses toassist the Governors in their decision-making.


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Providing custody and settlement services to thegovernment and the banks.

Managing the risk inherent in gold, foreign

exchange, refinancing and government fundingactivities

TYPES OF FINANCIAL MARKET

Equity marketMoney marketCapital marketForeign exchange market

EQUITY MARKET

Equity market is a system through which companyshares are traded. The equity market offers investorsan opportunity to participate in a company's successthrough an increase in its stock price. With enhancedopportunity, however, the equity market usuallycarries greater risk than debt markets. The U.S. equitymarket focuses on the New York Stock Exchange, withits large trading floor and system of specialists. Theother major component of the U.S. equity market isthe NASDAQ, a computerized system ofbrokers/dealers with no physical trading space. The


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U.S. equity market also comprises trading on theAmerican Stock Exchange, regional stock exchanges,so-called ECNs.

MONEY MARKET

The money market is the global financial market forshort-term borrowing and lending. It provides short-term liquidity funding for the global financial system.

The money market is where short-term obligationssuch as Treasury bills, commercial paper and bankers'acceptances are bought and sold. The money marketconsists of financial institutions and dealers in moneyor credit who wish to either borrow or lend.Participants borrow and lend for short periods of time,typically up to thirteen months. Money market tradesin short-term financial instruments commonly called"paper." This contrasts with the capital market forlonger-term funding, which is supplied by bonds andequity. In the United States, federal, state and localgovernments all issue paper to meet funding needs.States and local governments issue municipal paper,while the US Treasury issues Treasury bills to fund theUS public debt.

CAPITAL MARKET

The capital market is the market for securities,where companies and governments can raiselongterm funds. It is a market in which money is lentfor periods longer than a year. The capital marketincludes the stock market and the bond market.Financial regulators, such as the U.S. Securities andExchange Commission (SEC), oversee the capital

markets in their designated countries to ensure thatinvestors are protected against fraud. The capital


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markets consist of the primary market and thesecondary market. The primary markets are wherenew stock and bonds issues are sold (underwriting) toinvestors. The secondary markets are where existingsecurities are sold and bought from one investor orspeculator to another, usually on an exchange (e.g.the New York Stock Exchange).

FOREIGN EXCHANGE MARKET

The foreign exchange (currency, forex or FX)market is where currency trading takes place. FXtransactions typically involve one party purchasing aquantity of one currency in exchange for paying aquantity of another. The FX market is one of thelargest and most liquid financial markets in the world,and includes trading between large banks, centralbanks, currency speculators, corporations,governments, and other institutions. The averagedaily volume in the global forex and related markets iscontinuously growing. Traditional turnover wasreported to be over US$ 3.2 trillion in April 2007 bythe Bank for International Settlement. Since then, themarket has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41%between 2007 and 2008.


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RESEARCH METHODOLOGY

SOURCES OF DATA


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PRIMARY DATA

A primary source which is the initial material that iscollected during the research process. Primary data is

the data that the researcher is collecting themselvesusing methods such as surveys, direct observations,interviews, as well as logs(objective data sources).Primary data is a reliable way to collect data becausethe researcher will know where it came from and howit was collected and analyzed since they did itthemselves.

SECONDARY DATASecondary sources on the other hand are sources thatare based upon the data that was collected from theprimary source. Secondary sources take the role ofanalyzing, explaining, and combining the informationfrom the primary source with additional information.

In this project we use the secondary data as well as

primary data it able to me learn about the financialmarket and market condition and we collect the datathrough the journals, books and the companywebsites.

RESEARCH

PRIMARY DATA SECONDARY DATA


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CHAPTERIZATION

CHAPTER 1

To analysis the financial market


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FINANCIAL MARKET ANALYSIS

Financial Market Analysis deals with theperformance of a particular financial market(s). Theperformance of a financial market depends upon theperformance of the total number of securities that aretraded in that market. On a given day when themarket closes with the prices of most of its securities

on the higher side, then it could be said to haveperformed well. This is reflected in a market indicatorcalled Index which tracks the performance of some ofthe more popular and steady securities that aretraded in that particular financial market.

Some of the most famous securities market indexes ofthe world are:

Footsie London financial market Dow Jones New York financial market Hang Seng Hong Kong financial market BSE Sensex Mumbai financial market Nikkei Tokyo financial market Nifty Indian national financial market

The financial market index has becomeparticularly important in todays market economy,which is integrating very fast on a global scale.

Traders do not confine trading in securities to justone or two markets in the country of their originbut invest in a large number of markets acrossthe globe. With more and more investmentcompanies developing global dimensions financial

markets around the world are integrating on ascale never imagined before.


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As a result, analysis of the financial markets hasbecome one of the main activities covering a verylarge number of factors both within the market andoutside it. For instance, when the government of thecountry where the market is located, announces a newpolicy measure aimed at deregulating a particularlystifling part of an industry segment, it may have apositive impact on the financial market. Financialmarket analysts cannot anticipate such factors andtherefore the impact of these factors do not comeunder the main purview of financial market analysis.However, most analysts do set aside some space forthe impact of extraneous factors on the market andthey do so in equal measure for both positive as wellas negative factors.

Financial market analysis has become a highlyspecialized activity confined to select groups ofexperts known as technical analysts. In most casesthey are professionally trained in financial analysisand are reasonably familiar with the tools used toanalyze a particular market. In certain other casesthey are economists or veteran investors with aspecial interest in financial market analysis andmarket economics. The numbers of factors thatdirectly or indirectly impact the financial markets areincreasing rapidly with more analysts digging deeperinto the circumstances that influence financial marketbehaviour. On the other hand, the integration ofinformation technology in market analysis isincreasingly meeting the challenge posed by thecomplexities of financial market analysis.

Some of the most important types of analysis affectingfinancial markets are:

Fundamental Analysis


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Securities Market Analysis Securities Market Technical Analysis Index Momentum Analysis Securities Momentum Analysis Securities Chart Analysis Market Analysis Market Trend Indicators

FUNDAMENTAL ANALYSIS-

A method of evaluating a security by attemptingto measure its intrinsic value by examining

related economic, financial and other qualitativeand quantitative factors. Fundamental analystsattempt to study everything that can affectthe security's value, including macroeconomicfactors (like the overall economy and industryconditions) and individually specific factors(like the financial condition and management ofcompanies).The end goal of performing

fundamental analysis is to produce a value thatan investor can compare with the security'scurrent price in hopes of figuring out what sort ofposition to take with that security (under priced =buy, overpriced = sell or short). Fundamentalanalysis is about using real data to evaluate asecurity's value. Although most analysts usefundamental analysis to value stocks, this method

of valuation can be used for just about any typeof security.

SECURITIES MARKET ANALYSIS-

The market grew by approximately 15%Commoditisation is affecting the more establishedsectors of the security market, and this process

will accelerate as a result of increasing pressure fromthe big IT infrastructure vendors. Commoditisation will


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be slow to blanket the entire security market becauseof the many product types within it, and the multitudeof approaches to delivering security. The dynamicnature of the threat environment and businesssecurity needs means that the industry will have toremain dynamic in developing its offerings, and thiswill help to stave off the dead hand of commoditisation. the growth in revenues for managedsecurity services was around 25% per year. It wasnotable that the range of services grew, for example,to include vulnerability analysis servicesfor merchants to satisfy the requirements of thepayment card industry. However, this sub-sector stillaccounts for only a small proportion of securityspending. In future, the development of cloud basedservices in the service provider network will open upnew opportunities, particularly in the SME sector.

SECURITIES MARKET TECHNICAL ANALYSIS

A technical analyst doesn't look at income statements,balance sheets, company policies, or anythingfundamental about the company. Technical analysislooks at the actual history of trading and the price of asecurity or index. This is usually done in the form of achart. The financial product can be a stock, future oran index,. The technical analyst believes thatsecurities move in trends. And these trends continue

until something happens to change the trend. Withtrends, patterns and levels are detectable. Sometimesthe analysis is wrong. However, in the overwhelmingmajority of instances, it's extremely accurate.

Technical analysis is stock market research of priceaction over time and charts are what an analyst workswith as their primary record of price action. Behindevery price is an investor who had a reason for buyingor selling. Traders generally act alone but often their


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weight of numbers has a direct influence on shortterm prices. Researching the stock market with chartsand technical indicators is the study of groupbehaviour and sentiment. It is done with science andart. We use science because we use mathematicalformula, computers and statistics. Charting is thestudy of price action of a market itself as opposed tothe study of the goods in which a market deals.

Technical analysis is simply a different means of usingstock market research to arrive at the sameinvestment objectives.

INDEX MOMENTUM ANALYSIS

This indicator is interpreted in the same manner asthe RSI where readings below 30 are deemed to beoversold and levels over 70 are deemed to beoverbought. The number of time periods used in thedynamic momentum index decreases as volatility inthe underlying asset increases, making this indicator

more responsive to changing prices than the RSI.

SECURITIES MOMENTUM ANALYSIS

The Enhanced Quotes are designed to cut throughthe clutter of fundamental and technical informationand provide Investors with a meaningful and preciseview into key indicators for publicly traded companies,

c/wAAT

short termAnalysis

andMomentum

Indicators.


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RECENT SITUATION IN FINANCIALMARKET

The last two days the stock market has recoveredsome lost ground. On Friday, it recovered because ofthe Fed action to reduce the discount rate. Much wassaid about this but what does it really mean? It meansthat banks can borrow money from the Fed at areasonable market rate that hopefully allows them toinvest and earn a profit. This helps with liquidity. It

does not, however, address the most fundamentalissues facing the market, unless it results in an overallreduction in interest rates along the yield curve.

Let me explain this. The basic problem with the"subprime" crisis is that liberal lending standards haveresulted in large pools of assets that investors of allsorts have purchased at relatively low spreads over

the market interest rates. This means that there is alow risk premium built into those investments. If infact, the underlying mortgages have higher thanexpected default rates, higher foreclosure rates, andhigher loss rates, the investors are not fairlycompensated and the investments in those bonds arenot worth what was paid for them. While we cannotpredict the future, it appears that this will in fact be

the case. Mortgage default rates are increasing, realestate values are decreasing, and the likely result isthat more losses will accrue on those portfolios andthe bonds will be worth less than full value.

Now let's say that you are a Hedge fund. If youpurchased a lot of these bonds and in order toincrease the return on the equity put into your Hedge

fund, you leveraged those bonds by borrowing againstthem, then the value of your assets may be less


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relative to the debt you owe against them. Then thevalue of the equity investments in your fund canrapidly decline or become zero.

So what would a Hedge fund manager or any otherholder of the bonds want to do? Sell them. Theproblem is that the market now perceives the risk tobe a lot higher and so requires a higher return. Thatmeans they have to buy the bonds at a lower price.Consequently, the current holder of the bonds willhave to write them off at a loss.

While the Fed has provided liquidity to the holders ofthese investments, allowing them to hold onto themlonger rather than fire selling them, this does notaffect the value of the actual investment in the longrun.

So until the market establishes a new value for allthese mortgage backed investments, we will not know

the extent of losses that various players will incur.Only know this, there will be a steady stream of lossannouncements coming out of the financial sector. Wehave not even begun to see these.

So how do you invest? Good question. The value ofstocks have fallen appreciably. So it may be time tobuy for the long term. On the other hand, the market

might react negatively to these earningsannouncements and stock values may suffer. Theoverall economy is strong. The folks losing money arethe ones that should lose money. They provided fundsto a mortgage market without adequate riskprotection. Their losses will be someone else's gain.

My suggestion is that you expect more negativereactions in the stock market for certain firms. Thiswill create some stock price volatility. Yet, in the long


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run, the economy will produce positive returns formost firms including financial firms. Virtually all firmshave been punished in the declining market, yet somewill not be that adversely affected. Pick yourinvestments. Know if you can stay in for the long runor not. Evaluate the balance sheets of the companiesyou have invested in to see what their potential lossexposure is, and reallocate or not based on yourfindings.

Neither over nor under estimate what the Fed can do.If it can lower all interest rates, the value of bonds will

increase and losses will be minimized. But the Fed canonly control short term interest rates and the policiesit pursues can have additional affects on the value ofthe dollar and future inflation, which can turn longterm interest rates the opposite direction, reducingthe value of long term bonds.

CHAPTER -2


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To analysis the money market and its

instruments

WHAT IS MONEY MARKET

The money market is a mechanism that deals withthe lending and borrowing of short term funds. TheIndia Money Market has come of age in the past twodecades. In order to study the money market of India

in detail, we at first need to understand theparameters around which the money market in Indiarevolves.

The slice of the financial market where instrumentswith high liquidity and very short maturities are tradedis called money market. This is a generic definition.Who uses money market? The players who indulge

in short term from several days to less than a year. It


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is mainly used for borrowing and lending over thisshort term. Due to the highly liquid nature of thesecurities and short maturities, money market isperceived as a safe place to lock in money.

The participants in the financial market perceive a thinline, differentiating between the capital market andthe money market. In money market, there isborrowing and lending for periods of a year or less.Capital market refers to stock markets where thecommon stocks are traded, and bond markets wherebonds are issued and traded. This is in sharp contrastto money markets which provide short term debtfinancing and investment.The major purpose offinancial markets is to transfer funds from lenders toborrowers Financial market participants commonlydistinguish between the "capital market" and the"money market," with the latter term generallyreferring to borrowing and lending for periods of ayear or less. The United States money market is veryefficient in that it enables large sums of money to betransferred quickly and at a low cost from oneeconomic unit (business, government, bank, etc.) toanother for relatively short periods of time. The needfor a money market arises because receipts ofeconomic units do not coincide with theirexpenditures. These units can hold money balancesthat is, transactions balances in the form of currency,demand deposits, or NOW accountsto insure thatplanned expenditures can be maintainedindependently of cash receipts. Holding thesebalances, however, involves a cost in the form offoregone interest. minimize this cost, economic unitsusually seek to hold the minimum money balancesrequired for day-today transactions. They supplement

these balances with holdings of money marketinstruments that can be


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Converted to cash quickly and at a relatively low costand that have low price risk due to their shortmaturities. Economic units can also meet their short-term cash demands by maintaining access to themoney market and raising funds there when required.

The money market encompasses a group of short-term credit market instruments, futures marketinstruments, and the Federal Reserve's discountwindow.

MAJOR PLAYERS IN MONEY MARKET

Commercial banks

Governments

Corporation

Government-sponsored enterprise

Money market mutual funds

Future market exchange

Brokers and dealers

The federal reserve

How can I participate in the MoneyMarkets

Due to the large denominations that are traded in themoney markets, it is nearly impossible for most

individual investors to directly access this marketwithout using an intermediary. Individuals can enterinto the money market through money market mutualfunds by opening a money market account at abanking institution or even with a brokeragecompany. It is like setting up a checking accountwhich earns more interest than a traditional bankaccount would. You can write checks against it; add

funds and withdraws funds on demand.


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The performance of the Indian Money Market isheavily dependent on real interest rate that is theinterest rate that is inflation adjusted. Though themoney market is free from interest rate ceilings,structural barriers and other institutional factors canbe held responsible for creating distortions in IndiaMoney Market. Apart from the call market rates, theother interest rates in the Indian Money Market usuallydo not change in the short run.

It is due to this disparity between the opposite forcesthat is prevalent in the money market in India that awell defined income path cannot be traced.

Owing to the deregulation of the interest rate in theearly nineties following the economic reforms laiddown by the then finance minister Dr. ManmohanSingh, studies concerning the behavior of interest ratewas restricted. However the liquidity of the marketmakes its a good subject for empirical research.

The Indian Money Market involves a wide range ofinstruments. Here, maturities range from one day to ayear, issued by banks and corporates of various sizes.

The money market is also closely linked with theForeign Exchange Market through the process ofcovered interest arbitrage in which the forwardpremium acts as a bridge between domestic andforeign interest rates.

To analyze the interest rates that characterizethe Indian Money Market, the followingelements need to be covered:

The term structure of interest rate. The difference between domestic and

international interest rates


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The market structure differences between theauction markets that clear continuously and the.customer markets.

The credit speed between instruments involvingsimilar maturity but diverse risk factor.

MONEY MARKET UPDATES

G-sec Market: The benchmark 10-year security6.05% GOI 2019 opened at Rs93.50 implying a yield of7.08% higher than previous close of 7.02%. The G-secmarket is expected to trade on a bearish note tracking

announcement of Auction Calendar on Thursday.RBI announced that Government would borrowRs2,41,000 crore in the first half of FY 2009-10. RBIalso announced it would purchase securities worthRs80,000 crore under Open Market Operations in thefirst half of FY 2009-10. The G-sec yields are likely tobe rangebound between 7.00% - 7.20%.

Money market:

The Call rate and CBLO rate opened at 5.20% higherthan previous days high of 5.00%. The Money Marketrates are expected to harden tracking concerns overliquidity in the system ahead of the huge borrowingprogram.

Swap Market:

The 5Y OIS swap rate opened at 5.67% higher thanprevious close of 5.59%. The OIS swap rates areexpected to harden tracking the movement in G-secyields.

Forex Market:


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The INR opened at Rs50.88 against the USD,depreciating from yesterdays closing level of Rs50.60.Rupee is expected to trade in the range of 50.65 51.00.

MONEY MARKET SCHEME

Money market schemes invest in short-term (maturingwithin one year) interest bearing debt instrumentsThese securities are highly liquid and provide safetyofinvestment, thus making money market schemes

the safest investment option when compared withother mutual fund schemes. However, even moneymarket schemes are exposed to the interest rate risk.

The typical investment options for these funds includeTreasury Bills (issued by governments), Commercialpapers (issued by companies) and Certificates ofDeposit (issued by banks).

MONEY MARKET OPERATION

MONEY MARKETS @

Volume Wtd.Avg.Rate Range

(One Leg)

A. Overnight Segment

(I+II+III)

73,915.24 4.09 2.10-4.75

I. Call Money 14,468.96 4.23 2.10-4.30II. CBLO 36,198.70 3.93 3.85-4.18

III. Market Repo 23,247.58 4.26 3.95-4.75

B. Notice and Term

Money Segment

I. Notice Money 0.20 3.40 3.40-3.40

II. Term Money 180.00 - 6.80-9.10

RBI OPERATIONS

Amount Outstanding Rate

C. Standing Liquidity Facility Availed from RBI 6,437.08 5.50
http://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.htmlhttp://www.appuonline.com/mf/scheme/money-market.html


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of which

Special Refinance Facility* 4,946.55

D. Liquidity Adjustment Facility

(i) Repo (1 Day) 0.00 5.50

(14/15 days)# 920.00 5.50

(1/ 2/ 3 month[s])^1,040.00 5.50

(ii) Reverse Repo (1 Day) 49,225.00 4.00

RESERVE POSITION @

E. Scheduled Commercial Bank's Cumulative

Cash Balances with RBI as on

17/01/2009 219,219.45

18/01/2009 438,438.90

for the fortnight ending 30-01-2009

@ Based on provisional Reserve Bank of India / Clearing Corporation of India Limited Data

- Not Applicable / No Transaction,

# under special term repo facility

^ under forex swap facility

*Under Section 17(3B) of the RBI Act 1934

MONEY MARKET FUTURE

Money market future share futures contracts based onshort-term interest rates. Futures contracts forfinancial instruments are a relatively recentinnovation. Although futures markets have existedover 100years in the United States, futures trading

was limited to contracts for agricultural and othercommodities before 1972. The introduction of foreigncurrency futures that year by the newly formedInternational Monetary Market (IMM) division of theChicago Mercantile Exchange (CME) marked theadvent of trading infinancial futures.Four different futures contracts based on money

market interest rates are actively traded at present


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date, the IMM has been the site of the most activetrading in money market futures. The three-monthU.S.

Treasury bill contract, introduced by the IMM in 1976,was the first futures contract based on short-terminterest rates. Three-month Eurodollar time depositfutures, now one of the most actively traded of allfutures contracts, started trading in 1981. Morerecently, both the CBT and the IMM introduced futurescontracts based on one-month interest rates. The CBTlisted its 30-day interest rate futures contract in 1989,while the Chicago Mercantile Exchange introduced aone-month LIBOR futures contract in 1990.

Futures ContractsFutures contracts traditionally have beencharacterized as exchange-traded, standardizedagreements to buy or sell some underlying item on aspecified future date. For example, the buyer of a

Treasury bill futures contractwho is said to take on a"long" futures positioncommits to purchase a 13-week Treasury bill with a face value of $1 million onsome specified future date at a price negotiated at thetime of the futures transaction; the sellerwho is saidto take on a "short" positionagrees to deliver thespecified bill in accordance with the terms of thecontract. In contrast, a "cash" or "spot" market

transaction simultaneously prices and transfersphysical ownership of the item being soldThe adventof cash-settled futures contracts such as Eurodollarfutures has rendered this traditional definition overlyrestrictive, however, because actual delivery nevertakes place with cash-settled contracts. Instead, thebuyer and seller exchange payments based onchanges in the price of a specified underlying

item or the returns to an underlying security. Forexample, parties to an IMM Eurodollar contract


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exchange payments based on changes in marketinterest rates for three-month Eurodollar depositsthe underlying deposits are neither "bought" nor"sold" on the contract maturity date. A more generaldefinition of a futures contract, therefore, is astandardized, transferable agreement that providesfor the exchange of cash flows based on changes inthe market price of some commodity or returns to aspecified security. Futures contracts trade onorganized exchanges that determine standardizedspecifications for traded contracts. All futurescontracts for a given item specify the same deliveryrequirements and one of a limited number ofdesignated contract maturity dates, called settlementdates. Each futures exchange has an affiliatedclearinghouse that records all transactions andensures that all buy and sell trades match. Theclearing organization also assures the financialintegrity of contractstraded on the exchange by guaranteeing contractperformance and supervising the process of deliveryfor contracts held to maturity.

Futures Exchanges

In addition to providing a physical facility wheretrading takes place, a futures exchange determines

the specifications of traded contracts and regulatestrading practices. There are 13 futures exchanges inthe United States at present. The principal exchangesare in Chicago and New York. Each futures exchangeis a corporate entity owned by its members. The rightto conduct transactions on the floor of a futuresexchange is limited to exchange members, althoughtrading privileges can be leased to non members.

Members have voting rights that give them a voice inthe management of the exchange. Memberships, or


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"seats," can be bought and sold: futures exchangesroutinely make public the most recent selling andcurrent offer price for a seat on the exchange. Tradingtakes place in designated areas, known as "pits," onthe floor of the futures exchange through a system ofopen outcry in which traders announce bids to buyand offers to sell contracts. Traders on the floor of theexchangecan be grouped into two broad categories:floor brokers and floor traders. Floor brokers, alsoknown as commission brokers, execute orders for off-exchange customers and other members. Some floorbrokers are employees of commission firms, known asFutures Commission Merchants, while others areindependent operators who contract to execute tradesfor brokerage firms.

Futures Commission Merchants

A Futures Commission Merchant (FCM) handles orders

to buy or sellfutures contracts from off-exchange customers. AllFCMs must be licensed by the Commodity Futures

Trading Commission (CFTC), which is the governmentagency responsible for regulating futures markets. AnFCM can be a person or a firm. Some FCMs areexchange members employing their own floor brokers.FCMs that are not exchange members must make

arrangements with a member to execute customerorders on their behalf.

Role of the Exchange Clearinghouse

Each futures exchange has an affiliated exchangeclearinghousewhose purpose is to match and record all trades and

to guarantee contract performance. In most cases the


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exchange clearinghouse is an independentlyincorporated organization, but it can also be adepartment of the exchange. The Board of TradeClearing Corporation, the CBT's clearinghouse, is aseparate corporationaffiliated with the exchange, while the CME ClearingHouse Division is a department of the exchange.Clearing member firms act as intermediaries betweentraders on the floor of the exchange and theclearinghouse. They assist in recording transactionsand assume responsibility for contract performance onthe part of floor traders and commission merchantswho are their customers. Although clearing memberfirms are all members of the exchange, not allexchange members are clearing members. Alltransactionstaking place on the floor of the exchange must besettled through a clearing member. Brokers or floortraders not directly affiliated with a clearing membermust make arrangements with one to act as adesignated clearing agent. The clearinghouse requireseach clearing member firm to guarantee contractperformance for all of its customers. If a clearingmember's customer defaultson an outstanding futurescommitment, the clearinghouse holds the clearingmember responsible for any resulting losses.

Margin RequirementsMargin deposits on futures contracts are oftenmistakenly compared to stock margins. Despite thesimilarity in terminology, however, futures marginsdiffer fundamentally from stock margins. Stock marginrefers to a down payment on the purchase of anequity security on credit, and so represents fundssurrendered to gain physical possession of a security.

In contrast, a margin deposit on a


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futures contract is a performance bond posted toensure that traders honor their contractualobligations, and not a down payment on a credittransaction. The value of a futures contract is zero toboth the buyer and the seller at the time it isnegotiated, so a futures transaction involves noexchange of money at the outset. The practice ofcollecting margin deposits dates back to the earlydays of trading in time contracts, as the precursors offutures contracts were then called. Before theinstitution of margin requirements, traders adverselyaffected by price movements frequently defaulted ontheir contractual obligations, often simplydisappearing as the delivery date on their contractsdrew near. In response to these events, futuresexchanges instituted a system of marginrequirements, and also began requiring traders torecognize any gains or losses on their outstandingfutures commitments at the end of each tradingsession through a daily settlement procedure knownas "marking to market."


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ROLEOF

RESERVE BANK OF INDIA(RBI)

HISTORY OF RESERVE BANK OF INDIA


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The Reserve Bank of India is the central bank of thecountry. Central banks are a relatively recentinnovation and most central banks, as we know themtoday, were established around the early twentiethcentury.

The Reserve Bank of India was set up on the basis ofthe recommendations of the Hilton YoungCommission. The Reserve Bank of India Act, 1934 (II of1934) provides the statutory basis of the functioningof the Bank, which commenced operations on April 1,1935.

The Reserve Bank of India was set up on the basis ofthe recommendations of the Royal Commission onIndian Currency and Finance also known as the Hilton-

Young Commission.

HILTON YOUNG COMMISSION
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FIRST CENTRAL BOARD OF DIRECTOR

The Reserve Bank of India was set up as a Share Holders' Bank. TheShare Issue of the Bank offered in March, 1935 was the largest shareissue in India at the time. The matter was further compounded by theconditions and restrictions imposed under the Act. These conditionsrelated to qualifications of the shareholders, the geographical

distribution and allotment of shares (to avoid concentration of sharesand to ensure that those holding the shares were fit and proper. Tosimplify matters, Share Certificate Forms of the different registers wereprinted in different colours. Despite the intricate and gigantic nature ofthe task, it was carried out with great 'accuracy and dispatch'.


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SHARE CERTIFICATES

A message sent by the Viceroy to the Governor, OsborneSmith when the Reserve Bank of India commenced its

operations on 1st April, 1935Message

OSBORNE SMITH GOVERNOR RESERVE BANK CALCUTTA. FOLLOWINGHAS BEEN RECEIVED FROM SECRETARY FOR YOU. BEGINS, AS RESERVEBANK COMMENCES OPERATIONS TODAY I TAKE OPPORTUNITY TOCONVEY YOU AND YOUR COLLEAGUES ON THE BOARD MY MOST GOODWISHES AND TO EXPRESS MY CONFIDENCE THAT THIS GREATUNDERTAKING WILL CONTRIBUTE LARGELY TO THE ECONOMIC WELLBEING OF INDIA AND OF ITS PEOPLE. PRIVATE SECRETARY VICEROY

TELEGRAM


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RBI COMMENCEMENT

The Reserve Bank of India was nationalised with effect from1st January, 1949 on the basis of the Reserve Bank of India(Transfer to Public Ownership) Act, 1948. All shares in thecapital of the Bank were deemed transferred to the CentralGovernment on payment of a suitable compensation. Theimage is a newspaper clipping giving the views of GovernorCD Deshmukh, prior to nationalisation.

RBI NATIONALISATION


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RBI HISTORY

The Bank was constituted to

Regulate the issue of banknotes

Maintain reserves with a view to securingmonetary stability and

To operate the credit and currency system of thecountry to its advantage.

The Bank began its operations by taking over from theGovernment the functions so far being performed bythe Controller of Currency and from the Imperial Bank

of India, the management of Government accountsand public debt. The existing currency offices atCalcutta, Bombay, Madras, Rangoon, Karachi, Lahoreand Cawnpore (Kanpur) became branches of the IssueDepartment. Offices of the Banking Department wereestablished in Calcutta, Bombay, Madras, Delhi andRangoon.

Burma (Myanmar) seceded from the Indian Union in1937 but the Reserve Bank continued to act as the
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Central Bank for Burma till Japanese Occupation ofBurma and later upto April, 1947. After the partition ofIndia, the Reserve Bank served as the central bank ofPakistan upto June 1948 when the State Bank ofPakistan commenced operations. The Bank, which wasoriginally set up as a shareholder's bank, wasnationalised in 1949.

An interesting feature of the Reserve Bank of Indiawas that at its very inception, the Bank was seen asplaying a special role in the context of development,especially Agriculture. When India commenced its plan

endeavours, the development role of the Bank cameinto focus, especially in the sixties when the ReserveBank, in many ways, pioneered the concept andpractise of using finance to catalyse development. TheBank was also instrumental in institutionaldevelopment and helped set up insitutions like theDeposit Insurance and Credit Guarantee Corporationof India, the Unit Trust of India, the Industrial

Development Bank of India, the National Bank ofAgriculture and Rural Development, the Discount andFinance House of India etc. to build the financialinfrastructure of the country.

With liberalisation, the Bank's focus has shifted backto core central banking functions like Monetary Policy,Bank Supervision and Regulation, and Overseeing the

Payments System and onto developing the financialmarkets.

ESTABLISHEMENT

Reserve Bank of India was established on April 1, 1935in accordance with the provisions of the Reserve Bankof India Act, 1934. The Central Office of the Reserve

Bank was initially established in Calcutta but waspermanently moved to Mumbai in 1937. The Central


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Office is where the Governor sits and where policiesare formulated. Though originally privately owned,since nationalisation in 1949, the Reserve Bank is fullyowned by the Government of India.

PREAMBLE

The Preamble of the Reserve Bank of India describesthe basic functions of the Reserve Bank as to regulatethe issue of Bank Notes and keeping of reserves with aview to securing monetary stability in India andgenerally to operate the currency and credit system of

the country to its advantage.

CENTRAL BOARD

The Reserve Bank's affairs are governed by a centralboard of directors. The board is appointed by theGovernment of India in keeping with the Reserve Bankof India Act.

Appointed/nominated for a period of four years Constitution:

o Official Directors Full-time : Governor and not more than

four Deputy Governorso Non-Official Directors

Nominated by Government: tenDirectors from various fields and onegovernment Official

Others: four Directors - one each fromfour local boards

LOCAL BOARDS

One each for the four regions of the country inMumbai, Calcutta, Chennai and New Delhi

Membership consist of five members each


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appointed by the Central Government for a term of four years

Function:To advise the Central Board on local

matters and to represent territorial and economicinterests of local cooperative and indigenous banks; toperform such other functions as delegated by CentralBoard from time to time

FINANCIAL SUPERVISION

The Reserve Bank of India performs this function

under the guidance of the Board for FinancialSupervision (BFS). The Board was constituted inNovember 1994 as a committee of the Central Boardof Directors of the Reserve Bank of India.

Objectives

Primary objective of BFS is to undertake consolidatedsupervision of the financial sector comprising

commercial banks, financial institutions and non-banking finance companies.

Constitution

The Board is constituted by co-opting four Directorsfrom the Central Board as members for a term of twoyears and is chaired by the Governor. The Deputy

Governors of the Reserve Bank are ex-officiomembers. One Deputy Governor, usually, the DeputyGovernor in charge of banking regulation andsupervision, is nominated as the Vice-Chairman of theBoard.

BFS Meeting

The Board is required to meet normally once everymonth. It considers inspection reports and other


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supervisory issues placed before it by the supervisorydepartments.

BFS through the Audit Sub-Committee also aims atupgrading the quality of the statutory audit andinternal audit functions in banks and financialinstitutions. The audit sub-committee includes DeputyGovernor as the chairman and two Directors of theCentral Board as members.

The BFS oversees the functioning of Department ofBanking Supervision (DBS), Department of Non-

Banking Supervision (DNBS) and Financial InstitutionsDivision (FID) and gives directions on the regulatoryand supervisory issues.

Functions

Some of the initiatives taken by BFS include:

restructuring of the system of bank inspections introduction of off-site surveillance,

strengthening of the role of statutory auditors and

strengthening of the internal defences ofsupervised institutions.

The Audit Sub-committee of BFS has reviewed thecurrent system of concurrent audit, norms of

empanelment and appointment of statutory auditors,the quality and coverage of statutory audit reports,and the important issue of greater transparency anddisclosure in the published accounts of supervisedinstitutions.

Current Focus

supervision of financial institutions consolidated accounting


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legal issues in bank frauds divergence in assessments of non-performing

assets and supervisory rating model for banks.

LEGAL FRAMEWORK

Umbrella Acts

Reserve Bank of India Act, 1934: governs theReserve Bank functions

Banking Regulation Act, 1949: governs thefinancial sector

Acts governing specific functions

Public Debt Act, 1944/Government Securities Act(Proposed): Governs government debt market

Securities Contract (Regulation) Act, 1956:Regulates government securities market

Indian Coinage Act, 1906:Governs currency andcoins

Foreign Exchange Regulation Act, 1973/ForeignExchange Management Act, 1999: Governs tradeand foreign exchange market

Acts governing Banking Operations

Companies Act, 1956:Governs banks ascompanies
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Banking Companies (Acquisition and Transfer ofUndertakings) Act, 1970/1980: Relates tonationalisation of banks

Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

Acts governing Individual Institutions

State Bank of India Act, 1954 The Industrial Development Bank (Transfer of

Undertaking and Repeal) Act, 2003

The Industrial Finance Corporation (Transfer ofUndertaking and Repeal) Act, 1993

National Bank for Agriculture and RuralDevelopment Act

National Housing Bank Act Deposit Insurance and Credit Guarantee

Corporation Act.

MAIN FUNCTIONSMonetary Authority:

Formulates, implements and monitors themonetary policy.

Objective: maintaining price stability andensuring adequate flow of credit to productivesectors.

Regulator and supervisor of the financialsystem:

Prescribes broad parameters of bankingoperations within which the country's banking andfinancial system functions.

Objective: maintain public confidence in the

system, protect depositors' interest and providecost-effective banking services to the public.


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Manager of Foreign Exchange

Manages the Foreign Exchange Management Act,1999.

Objective: to facilitate external trade andpayment and promote orderly development andmaintenance of foreign exchange market in India.

Issuer of currency:

Issues and exchanges or destroys currency andcoins not fit for circulation.

Objective: to give the public adequate quantity ofsupplies of currency notes and coins and in goodquality.

Developmental role

Performs a wide range of promotional functions tosupport national objective

Dissertation On

Documents