banking & capital markets

7/31/2019 Banking & Capital Markets

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Banking & Capital Markets


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Banking Sector in IndiaTYPES OF BANKS

Commercial Banks

Co-operative Banks

Commercial Banks can be classified into 3 groups:Public sector Banks (Central Bank of India, Corporation Bank, Dena Bank,Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Punjab & Sind

Bank etc.)

Regional Rural Banks (Initially, five RRBs were set up on October 2, 1975which were sponsored by Syndicate Bank, State Bank of India, Punjab National

Bank, United Commercial Bank and United Bank of India. Capital share being 50%

by the central government, 15% by the state government and 35% by thescheduled bank.)

Private sector Banks (ICICI Bank, IDBI Bank, Axis bank; Foreign

banks operating in India: HSBC Bank, CITI Bank, ABN-AMRO Bank,

STANDARD CHARTED Bank)


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Banking

Co-operative BanksThe Co operative banks in India started functioning almost 100years ago. Theyare setup to provide easy loans to farmers or other persons to set up his

business. They are non profitable banks. Cooperative banks in India finance

rural areas under: Farming, Cattle, Milk, Hatchery, Personal finance.

Some example of co-operative banks in :

IDBI BANK(INDUSTRIAL DEVELOPMENT BANK OF INDIA)

IFCI BANK(INDUSTRIAL FINANCE COOPERATION OF INDIA)

APEX BANK


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A Glimpse of Banking SectorPhase-1

General bank of India 1786(first bank)

Reserve bank of India 1935

Slow growth and periodic failure

The Banking Company Act 1949

People mostly saved in postal deposits

Phase-2

Nationalization of imperial bank of India and formation of sate bankof India(1955)

Nationalization of SBI and Subsidiaries(1960)

Insurance cover extended to deposits

Creation of credit guarantee corporation

Creation of regional rural banks


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A Glimpse of Banking Sector

Phase-3

Entry of Foreign Banks

Phone Banking and Net-Banking

Shelter from external macroeconomic shock

System become more convenient and swift


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EquityMarket

DebtMarket

DerivativesMarket

ForexMarket

Capital Markets


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CAPITAL MARKET

A market in which individuals and institutions trade financial

securities.

Organizations/institutions in the public and private sectors also

often sell securities on the capital markets in order to raise

funds.

Thus, this type of market is composed of both the primary and

secondary markets.


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Primary Markets

A market that issues new securities on anexchange.

Companies, governments and other groups

obtain financing through debt or equity basedsecurities.

Primary markets are facilitated byunderwriting groups, which consist of

investment banks that will set a beginningprice range for a given security and thenoversee its sale directly to investors.


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Secondary Markets

A market where investors purchase securities or assetsfrom other investors, rather than from issuing companiesthemselves.

The national exchanges - such NSE and BSE are secondary

markets. A newly issued IPO will be considered aprimarymarket

trade when the shares are first purchased by investorsdirectly from the underwriting investment bank;

After that any shares traded will be on the secondary

market, between investors themselves. In the primarymarket prices are often set beforehand,

whereas in the secondary market only basic forces likesupply and demand determine the price of the security..


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TradingMechanism

Settlementcycle

MarketIndexes

MarketRegulation

Capital Market Constituents


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The BSE & NSE

Most of the trading in the Indian stock market takes placeon its two stock exchanges: The Bombay Stock Exchange (BSE)

The National Stock Exchange (NSE).

The BSE has been in existence since 1875. The NSE, was founded in 1992 and started trading in 1994.

Almost all the significant firms of India are listed on boththe exchanges.

Both exchanges compete for the order flow that leads to

reduced costs, market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two

stock exchanges within a very tight range.


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Trading Mechanism

Trading at both the exchanges takes place through an open

electronic limit order book in which order matching is done by thetrading computer.

There are no market makers and the entire process is order-driven,

This means that market orders placed by investors areautomatically matched with the best limit orders.

As a result, buyers and sellers remain anonymous.

The advantage of an order driven market is that it brings moretransparency by displaying all buy and sell orders in the tradingsystem.

There is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers,many of which provide online trading facility to retail customers

Institutional investors can also take advantage of the direct marketaccess (DMA) option; they use trading terminals provided bybrokers for placing orders directly into the stock market tradingsystem


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Settlement Cycle and Trading Hours

Equity spot markets follow T+2 rolling settlement. This means that any trade taking place on

Monday gets settled by Wednesday. Delivery of shares must be made in

dematerialized form. Each exchange has its own clearing house, which

assumes all settlement risk by serving as a centralcounterparty.

All trading on stock exchanges takes placebetween 9:15 am and 3:30pm Indian StandardTime from Monday through Friday.


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Market Regulation

The overall responsibility of development,regulation and supervision of the stock marketrests with the Securities & Exchange Board ofIndia (SEBI)

SEBI was formed in 1992 as an independentauthority.

Since then, SEBI has consistently tried to laydown market rules in line with the best market

practices. It enjoys vast powers of imposing penalties onmarket participants in case of a breach.


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Over The Counter

A security traded in some context other than on a formal exchange. The phrase "over-the-counter" can be used to refer to stocks, debt

securities and other financial instrument that trade via a dealernetwork as opposed to on a centralized exchange.

In general, the reason for which a stock is traded over-the-counteris usually because the company is small, making it unable to meet

exchange listing requirements. Also known as "unlisted stock", these securities are traded by

broker-dealers who negotiate directly with one another overcomputer networks and by phone.

Instruments such as bonds do not trade on a formal exchange and

are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making

markets for specific issues. If an investor wants to buy or sell abond, he or she must call the bank that makes the market in thatbond and asks for quotes


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Risk Tolerance


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Investment options

Life Insurance

Post Office Schemes

Equity Shares

Mutual Funds Company Deposits

Bank Deposits

Real Estate Gold and Silver


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EQUITY MARKET

The market in which shares are issued and traded, either

through exchanges or over-the-counter markets.

Also known as the stock market, it is one of the most vitalareas of a market economy because it gives companies access

to capital and investors a slice of ownership in a company

with the potential to realize gains based on its future

performance.


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Equity Shares

Capital Appreciation

Bonus Shares

Annual Dividend

Right Shares Can be pledged as a security

Easy liquidity


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Indian Stock MarketThe National Stock Exchange is India's largestfinancial market. Established in 1992, the NSEhas developed into a sophisticated, electronicmarket, which ranks third in the world fortransacted volume. The NSE conducts

transactions in the wholesale debt, equity andderivative markets.

Bombay Stock Exchange (BSE) is the first andlargest securities market in India and wasestablished in 1875 as the Native Share and

Stock Brokers' Association. Based in Mumbai,India, the BSE lists over 6,000 companies and isone of the largest exchanges in the world.


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SENSEX

An abbreviation of the Bombay Exchange Sensitive Index (Sensex) -the benchmark index of the Bombay Stock Exchange (BSE).

It is composed of 30 of the largest and most actively-traded stockson the BSE.

The index is calculated based on a free-float capitalization method

when weighting the effect of a company on the index. This is a variation of the market cap method, but instead of using a

company's outstanding shares it uses its float, or shares that arereadily available for trading.

The free-float method, therefore, does not include restrictedstocks, such as those held by company insiders that can't be readilysold.


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Calculation of Sensex

To find the free-float capitalization of a company, first findits market cap (number of outstanding shares x share price)then multiply its free-float factor.

The free-float factor is determined by the percentage offloated shares to outstanding.

For example, if a company has a float of 10 million sharesand outstanding shares of 12 million, the percent of float tooutstanding is 83%.

A company with an 83% free float falls in the 80-85% free-

float factor, or 0.85, Multiplied by its market cap

e.g: $120 million (12 million shares x .$10/share) x 0.85

= $102 million free-float capitalization.


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NIFTY

A stock index endorsed by Standard & Poor's andcomposed of 50 of the largest and most liquidstocks found on the (NSE) of India.

The S&P CNX Nifty is computed using a float-

adjusted, market capitalization weightedmethodology, wherein the level of the indexreflects the total market value of all the stocks inthe index relative to a particular base period.

The methodology also takes into accountconstituent changes in the index and corporateactions such as stock splits, rights issuance, etc.,without affecting the index value.


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BOND MARKET

The environment in which the issuance and trading of debtsecurities occurs.

The bond market primarily includes government-issued

securities and corporate debt securities, and facilitates thetransfer of capital from savers to the issuers or organizations

requiring capital for government projects, business expansions

and ongoing operations.


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Bond marketA Market where fixed incomesecurities of various types andfeatures are traded.

Participants: Central and state government

Corporates

Banks

Mutual funds

FIIs

Types of Instruments Traded in Debt


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Types of Instruments Traded in Debt

Market

Market segment Issuer Instruments

Government Securities Central Zero coupon bonds, Coupon bearing bonds,

floating rate bonds, STRIPS

State Coupon bearing bonds, floating rate bonds

Public sector bonds Government

agencies/statutory

bodies

Government guaranteed bonds, debentures

PSU PSU bondstaxable/taxfree, debentures,

commercial paper

Private Sector bonds Corporates Debentures, Commercial paper, secured

premium notes, Zero coupon bonds, Couponbearing bonds, floating rate bonds

Banks Certificate of deposit, debentures, bonds

Financial institutions Certificate of deposit, bonds


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Risk associated with debt securities

and trading in debt securities

Risks

Default/Credit Risk

Interest RateRisk

Re-investment

Risk

Counter-partyRisk

Price Risk


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Debt Market Instruments

Floating rate Bonds: bonds wherein the interest rate is notfixed and is linked to a benchmark rate

Zero Interest bonds: carry no periodic interest paymentsand are sold at a huge discount to face value

Government bonds: In general, fixed-income securities areclassified according to the length of time before maturity.

These are the three main categories:Bills - debt securities maturing in less than one year.Notes - debt securities maturing in one to 10 years.

Bonds - debt securities maturing in more than 10years.


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STRIPS: Separate Trading of Registered Interest andPrincipal Securities Treasury STRIPS are fixed-income securities sold at a

significant discount to face value and offer no interestpayments because they mature at par.

Certificate of deposit: A savings certificate entitling the bearer to receive interest.

A CD bears a maturity date, a specified fixed interest rateand can be issued in any denomination.

CDs are generally issued by commercial bank The term of a CD generally ranges from one month to five

years.


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Debentures: A type of debt instrument that is not secured by physical asset or

collateral.

Debentures are backed only by thegeneral creditworthiness and reputation of the issuer.

Both corporations and governments frequently issue this type of bondin order to secure capital

Commercial paper: An unsecured, short-term debt instrument issued by a corporation,

typically for the financing of accounts receivable, inventories

and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270

days.

The debt is usually issued at a discount, reflecting prevailing marketinterest rates.


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DERIVATIVE

A security whose price is dependent upon or derived from oneor more underlying assets.

The derivative itself is merely a contract between two or more

parties. Its value is determined by fluctuations in theunderlying asset.

The most common underlying assets include: stocks,

bonds, commodities, currencies, interest rates and marketindexes.


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What do derivatives do?

Derivatives attempt either to minimize the

loss arising from adverse price movements of

the underlying asset

Or maximize the profits arising out of

favorable price fluctuation.


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Types of Derivatives

(UA: Underlying Asset)

Based on the underlying assets derivatives are

classified into.Financial Derivatives (UA: Fin asset)

Commodity Derivatives (UA: gold etc)Index Derivative (BSE sensex)


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FOREX

The market in which currencies are traded.

The forex market is the largest, most liquid market in the world

with an average traded value that exceeds $1.9 trillion per day

and includes all of the currencies in the world.


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Features

There is no central marketplace for foreignexchange

Currency trading is conducted

electronically OTC, which means that alltransactions occur via computer networksbetween traders around the world, ratherthan on one centralized exchange

Open 24/7 Extremely active any time of the day, with

price quotes changing constantly.


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Spot Market and the Forwards and

Futures Markets

Spot market is where currencies are boughtand sold according to the current price

That price, determined by supply and

demand, is a reflection of: current interest rates, economic performance, sentiment towards ongoing political situations

(local/ international), Perception of the future performance of onecurrency against another.


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Forwards & Futures

Forwards and Futures markets do not trade actual currencies.

They deal in contracts that represent: Claims to a certain currency type

A specific price per unit and

A future date for settlement.

Forward contracts are bought and sold OTC between two parties,who determine the terms of the agreement between themselves.

Futures contracts Have specific details, including the number of units being traded,

delivery and settlement dates, and minimum price increments that

cannot be customized. The exchange acts as a counterpart to the trader, providing clearance

and settlement.


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Reading a Forex quote

When a currency is quoted, it is done in relationto another currency, so that the value of one isreflected through the value of another

The exchange rate between the U.S. dollar (USD)and Japanese yen (JPY)

1 USD=83.5 JPY

The currency to the left of the slash isthe base currency, while the currency on the rightis called the quote currency

USD/JPY=83.5


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Direct Currency Quote vs. Indirect

Currency Quote

Direct currency quote: A currency pair in

which the domestic currency is the base

currency; 1INR=0.0221USD

Indirect currency quote: A currency pair where

the domestic currency is the quoted currency.

1USD=45.998INR USD/INR=45.998

INR/USD=0.0221


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Cross Currency

When a currency quote is given without the

U.S. dollar as one of its components, this is

called a cross currency.

The most common cross currency pairs arethe EUR/GBP, EUR/CHF and EUR/JPY.


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Bid and Ask

When you are trading a currency pair there isa bid price (buy) and an ask price (sell).

When buying a currency pair (long), the ask

price refers to the amount of quoted currencythat has to be paid in order to buy one unit ofthe base currency.

When selling a currency pair (short), the bid

price refers to the amount the market will payfor the quoted currency in relation to the basecurrency. USD/CAD = 1.2000/05

Bid = 1.2000

Ask= 1.2005


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Currency Quote Overview

USD/CAD = 1.2232/37

Base CurrencyCurrency to the left

(USD)

Quote CurrencyCurrency to the right

(CAD)

Bid Price 1.2232Price for which the market maker will buy the

base currency. Bid is always smaller than

ask.

Ask Price 1.2237Price for which the market maker will sell the

base currency.


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