...investment avenues in Capital Market with special reference to Derivatives. by Dr. K. RAVICHANDRAN, READER, Bharathidasan Institute of Management, (School of Excellence of Bharathidasan University), Tiruchirapalli. Introduction: In India, generally all capital market investment avenues are perceived to be risky by the investors. But the younger generation investors are willing to invest in capital market instruments and that too very highly in Derivatives segment. Even though the knowledge to the investors in the Derivative segment is not adequate, they tend to take decisions with the help of the brokers or through their friends and were trying to invest in this market. This study was undertaken to find out the awareness level of various capital market instruments and also to find out their risk preference in various segments. Need for the study: To educate investors who are risk averse for trade in derivatives Awareness about the various uses of derivatives can help investors to reduce the risk and minimize the losses REVIEW OF LITERATURE “Investment property portfolio management and financial derivatives” by Patrick McAllister, John R. Mansfield. His study on Derivatives has been an expanding and controversial feature of the financial markets since the late 1980s. They are used by a wide range of manufacturers and investors to manage risk. This paper analyses the role and potential of financial derivatives investment property portfolio management. The limitations...
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...Assignment Derivatives Market in Asian Countries 2 An Overview The purpose of this report is to examine the following; to discuss the derivatives markets in Asian economies whilst simultaneously discussing the benefits and risks posed by these markets to their financial systems. In conclusion, I will propose a set of specific policy actions/recommendations aimed at reducing these risks. Growth in emerging markets has been due to several factors including privatizations, participation of foreign institutional investors, increase in the domestic investor base, and increased IPOs. In a nutshell, economies are taking steps to lowers the cost of capital to spur economic activities by fast-tracking financial market development. If those points stated were considered the first generation, emerging markets now find that they need to focus on the second-generation capital market development issues. These can be stated as: developing financial intermediaries that have professionals with financial sector skills; enhancing domestic institutional investor base with financial sector skills, enhancing domestic institutional investor base in addition to foreign investors, providing self-regulatory organization and developing mechanisms for investor protection (Fratzscher 2006). Derivative Products in Asia There are five main derivatives products that are traded in Asian markets; foreign exchange products, interest rate derivatives, equity derivatives, commodity derivatives, credit derivatives...
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...technology (IT) equipment has grown rapidly, from $104 million in 1960 to more than $10 billion in 1994. These investments in “hard” technologies (computer hardware, software, telecommunications equipment, etc.) have been accompanied by increases in "soft" technologies, for example, complex financial innovations that were infeasible on a large scale without IT hardware. These developments, together with deregulation, are creating new competitors, new financial markets and instruments, and a new role for commercial banks as providers of financial services. This study documents how changes in information technology have affected the role of banks in financial markets and have influenced changes in the structure and performance of the U.S. banking industry. The analysis also covers new, fast-growing financial innovations linked to IT investment e.g., asset securitization and derivatives. IT’s effect on the banking industry has been positive. Increased competition has caused banks to lose traditional customers, but IT enabled the banks to offer new products, expand into nontraditional areas, operate more efficiently, and minimize risk. The aggregate economy is better off because of a more efficient financial industry and because of the increased quality and value of banking services. IT has been central to the evolution of the market for securitized instruments. Mortgagebacked securities have experienced phenomenal growth over the past 25 years....
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...Working Paper Series WP/13/04 South African Capital Markets: An Overview Shakill Hassan October 2013 South African Reserve Bank Working Papers are written by staff members of the South African Reserve Bank and on occasion by consultants under the auspices of the Bank. The papers deal with topical issues and describe preliminary research findings, and develop new analytical or empirical approaches in their analyses. They are solely intended to elicit comments and stimulate debate. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the South African Reserve Bank or South African Reserve Bank policy. While every precaution is taken to ensure the accuracy of information, the South African Reserve Bank shall not be liable to any person for inaccurate information, omissions or opinions contained herein. South African Reserve Bank Working Papers are externally refereed. Information on South African Reserve Bank Working Papers can be found at http://www.resbank.co.za/Research/ResearchPapers/WorkingPapers/Pages/WorkingPapers-Home.aspx Enquiries Head: Research Department South African Reserve Bank P O Box 427 Pretoria 0001 Tel. no.: +27 12 313-3911 0861 12 SARB (0861 12 7272) © South African Reserve Bank All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without fully acknowledging the author(s) and this Working Paper as the source...
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...Financial Institutions Center Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry by J. David Cummins Richard D. Phillips Stephen D. Smith 98-19 THE WHARTON FINANCIAL INSTITUTIONS CENTER The Wharton Financial Institutions Center provides a multi-disciplinary research approach to the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us know of your interest. Anthony M. Santomero Director The Working Paper Series is made possible by a generous grant from the Alfred P. Sloan Foundation Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry By J. David Cummins Wharton School, University...
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...Financial Institutions, Instruments and Markets—7th edition Instructor’s Resource Manual Christopher Viney and Peter Phillips Chapter 1 A modern financial system Learning objective 1.1: explain the functions of a modern financial system • The introduction of money and the development of local markets to trade goods were the genesis of the financial system of today. • Money is a medium of exchange that facilitates transactions for goods and services. • With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities). • A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. • A financial system encourages accumulated savings which are then available for investment within an economy. • Financial instruments incorporate attributes of risk, return (yield), liquidity and time–pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. • By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. Learning objective 1.2: categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks,...
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...Chapter 1 A modern financial system: an overview The introduction of money and the development of local markets to trade goods were the genesis of the financial system of today. Money is a medium of exchange that facilitates transactions for goods and services. With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities). A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. Importantly, a financial system encourages accumulated savings which are then available for investment within an economy. Financial assets, or financial instruments, incorporate attributes of risk, return (yield), liquidity and time-pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. A range of different financial institutions has evolved to meet the needs of financial market participants and to support economic growth. Chapters 2 and 3 examine the major types of financial institutions. At this stage the institutions are categorised by the nature of their principal activities. Depository institutions, such as commercial banks, building...
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...Issues and Concerns of Commodity Derivative Markets in India: An Agenda for Research Nilanjan Ghosh 1. Introduction Commodity derivative markets have traditionally been a contentious issue at various policy forums across the world, particularly with the imbroglio created by allegations from various corners that they encourage excessive speculation and are therefore responsible for the recent commodity price escalation. While this suspicion of excessive speculation in the commodity markets has always been there among policymakers in developing nations like India, it has become more widespread since 2008 in the wake of worldwide inflationary pressures on food and energy. The sudden deflation in the value of various assets underlying different derivatives, which includes commodity derivatives, in the wake of the global meltdown has provoked greater apprehension about the economic utility of futures markets. The suspicion has reached such a high that even the U.S., the biggest proponent of market forces with the most active commodity exchanges in the world, is considering new modes of regulation, and is also investigating the role of commodity derivative trading in the steep rise in prices of wheat, rice, and crude oil. On the other hand, ever since commodity derivative trading was allowed in India in the new millennium, there has always been a hue and cry against such markets, with the alleged notion of excessive “speculation”, though there has rarely been any evidence for it. Rather...
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...Definition of financial system A financial system can be defined at the global, regional or firm specific level. The firm's financial system is the set of implemented procedures that track the financial activities of the company. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. The global financial system is basically a broader regional system that encompasses all financial institutions, borrowers and lenders within the global economy. The financial system in Sri Lanka comprises the major financial institutions, namely the Central Bank of Sri Lanka, Licensed Commercial Banks (LCBs), Licensed Specialized Banks (LSBs), Licensed Finance Companies (LFCs), Specialized Leasing Companies (SLCs), Primary Dealers (PDs), Pension and Provident Funds, Insurance Companies, Rural Banks, Stock Brokers, Securities Market Intermediaries, Unit Trusts and Thrift and Credit Co-operative Societies; the major financial markets, such as the Foreign Exchange Market, Money Market, Capital Market and the informal financial market; and the financial infrastructure which is the legal framework related to the financial system and the payment and settlement. The nature of the financial institutions The banking sector in Sri Lanka, which comprises LCBs and LSBs, dominates the financial system and accounted for 58 per cent of the total assets of the financial system as at end December 2013. Banks play a central role within the financial system, as...
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...Opportunities and Challenges for Mutual Fund in India : Vision 2020 1 Sarish* ABSTRACT In this paper, I have undertaken a study on mutual funds. The mutual fund sectors are one of the fastest growing sectors in Indian Economy and have awesome potential for sustained future growth. Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of recordkeeping—as well as strict government regulation and full disclosure. The Mutual Funds originated in UK and thereafter they crossed the border to reach other destinations. The concept of MF was indianized only in the later part of the twentieth century in the year 1964 with its roots embedded into Unit Trust of India (UTI). Since its inception in 1964 there were only 25cr assets under management like a sapling but it has grown into a big banyan tree with assets of Rs. 481749cr under assets management companies till March 2010. But presently it has increases up to 700538cr at the end of March 2011. Now, booming stock markets & innovative marketing strategies of mutual fund companies in India are influencing the retail investors to invest their surplus funds with different schemes of mutual fund companies with or without complete understanding of Mutual Funds (MF). This paper focuses on the analysis of the mutual funds, its benefits, and drawbacks and I have made a detailed summary...
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...and James Aitken © 2009 International Monetary Fund WP/09/173 IMF Working Paper Monetary and Capital Markets Department Counterparty Risk, Impact on Collateral Flows and Role for Central Counterparties Prepared by Manmohan Singh and James Aitken 1 Authorized for distribution by Inci Ötker-Robe August 2009 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks―Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants...
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...financing needs, including the underwriting of securities, on their merger and acquisition activities, or on their restructuring. Securities and capital markets divisions Clients are usually * Institutional investors, corporates or public entities, not private clients; * Mutual funds asset managers; * Pension Fund asset managers; * The insurance companies; * Private Banks; * Hedge Funds; * The treasury departments of large banks or large companies. Capital markets divisions * Equity division: equity research, equity sales, equity trading on cash, flow derivatives and structured products * FIRC or FICC (Fixed Income, currencies and derivatives): * Fixed income cash products, interest and credit derivatives, structured products; * FX: all currency transactions, from plain vanilla spot currency trades to sophisticated derivatives; * Commodities. Investment banking divisions * M&A (Mergers and acquisitions); * Advising on and underwriting securities issues; * Advising on restructurings. Clients are usually government/public bodies, corporates (quoted and...
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...Week 2: Introduction to the Financial System 1.1 Functions of a financial market * Markets are the process that facilitates the exchange of things of values. These things of value are often categorised as real assets, such as a house or a car, and financial assets, such as a loan to buy a house or car. These could take place in a non-formal market place, non-market exchanges can be very time consuming. * It brings opposite parties together. If not, those with needs must go everywhere to find the items themselves e.g. milk at farms. This enables double coincidence of wants that is necessary before an exchange can take place * Money acts as a medium of exchange and solves the divisibility problem. (e.g. bag of potatoes might be worth half of the left rump, but a person would not just take off a rump from a living cow and directly exchange). Other roles include store of value (saving of individuals’ surplus earning). The funds saved by surplus units- those savers with current excess funds- can be put to use by those whose current demand for goods and services is greater than their current available funds. (Deficit units) * Financial institutions and markets facilitate financial transactions between the providers of funds and the users of funds. * Financial assets are represented by financial instrument that states how much has been borrowed, and when and how much is to be repaid by the borrower. E.g. money invested in a term deposit with a bank, the bank...
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...Case Study on PepsiCo’s Use of Financial Derivatives 1. Introduction 1.1 PepsiCo’s History The Pepsi-Cola Company was incorporated in 1919 by Caleb Bradham, the inventor of the Pepsi-Cola soft drink. PepsiCo became a multinational beverage and snack food company in 1965 when Pepsi-Cola merged with Frito-Lay. Since the 1965 merger PepsiCo has expanded its operations by acquiring Quaker-Oats, Tropicana, and Gatorade brands. With sales of $66.86 billion in 2014 and with products sold in over 200 countries, PepsiCo is one of the leading food and beverage companies in the world (PepsiCo, 2014). 1.2 PepsiCo’s Industry The beverage and snack food industries are both in the mature stage in their life cycles, and companies in these industries largely depend on product innovation, brand recognition, and low prices to remain competitive. Like all companies PepsiCo faces risk of increases in operating expenses and decreases in net income due to market risk. Companies in PepsiCo’s industry have been forced to expand its product offerings into healthy foods and drinks due to an insurgent health and wellness in American culture. 1.3 PepsiCo’s Competitors PepsiCo’s top competitors consist of The Coca-Cola Company, Dr Pepper Snapple Group, and Nestle; additionally, because PepsiCo is a multinational company it must also compete with countless local snack and beverage companies across the globe. Coca-Cola has been viewed as PepsiCo’s main rival for around 100 years, and the competition...
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...Financial Markets Lecture 6 Overview Futures, Options, Swaps Financial Derivatives Commodity Derivatives 1 Derivatives – Overview • Financial instrument or security whose payoffs depend on another instrument or security • Price of instrument a derivative of underlying security – Farmer who sows a crop in June, faces uncertainty over the price received at harvest time in September – Merchant/ consumer faces a price in September as well – Farmer, merchant negotiate on a price in June for settlement in September • Chicago Board of Trade 1848 • Yodoya rice futures in 1650 • Forwards, Futures, Options, Swaps 2 Derivatives - Definitions • Forwards – involves a contract initiated at one time, performance in accordance with the terms of the contract occurs at a subsequent future time • Futures – type of forward contract with standardized and closely specified contract terms – – – – Traded in organized exchange Standardized, specific quantity, delivery date, mechanism Performance guaranteed by clearinghouse Margins – good faith deposit with the exchange • Option – the right to purchase underlying good at a specific price until a specific date – Calls and Puts • Swaps – Agreement between two or more parties to exchange sequence of cash flows over a period in the future 3 Derivatives - Applications • Price risk elimination • Speculation • Market completeness • Information efficiency • Trading efficiency 4 Derivatives - Markets • Commodity Derivatives:...
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