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A m i t G u p t a ( 1 2 P 0 0 6 ) A v n i s h C h a w l a ( 1 2 P 0 1 5 ) H a r s h i t D i x i t ( 1 2 P 0 1 9 ) P a r a g G u p t a ( 1 2 P 0 3 3 )

S u c h i t J u n e j a ( 1 2 P 0 5 3 )

Financial Instruments

Definition

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another

entity

Or Simply

Financial instruments can be thought of as easily tradeable

packages of capital, each having their own unique characteristics and structure.

Categorization By Asset Class

Instruments

Equity Based

Debt Based

Short Term

(< 1 Year)

Long Term

(>1 Year)

Foreign Exchange

LONG TERM DEBT (>1 YEAR)

Financial Instruments

Bonds

A bond is a formal contract to repay borrowed money with interest at fixed intervals

GOI bonds maturity ranges from of 1-30 years.

Most Government bonds are issued as fixed rate bonds (coupon rate is fixed for the entire life of the bond)

Trade Date Trade Time Nomenclature of

Security

Amount (Face value in

Rs.Crore)

Price per Rs.100

nominal

Indicative YTM

08-02-2013 16:57:05 9.15% GOVT.STOCK

2024 25 108.25 8.0487

08-02-2013 16:54:56 9.15% GOVT.STOCK

2024 25 108.30 8.0424

08-02-2013 16:31:39 8.99% M.P. GS 2022 10 101.95 8.6732

08-02-2013 16:54:50 9.15% GOVT.STOCK

2024 25 108.30 8.0424

08-02-2013 16:47:25 9.15% GOVT.STOCK

2024 40 108.29 8.0437

08-02-2013 16:53:45 8.20% GOVT.STOCK

2025 25 102.04 7.9387

08-02-2013 16:49:56 8.33% GOVT.STOCK

2026 13 103.18 7.9390

08-02-2013 16:55:41 8.28% GOVT.STOCK

2032 2 102.20 8.0518

08-02-2013 16:42:12 10.25% G. S. 2021 50 113.18 8.0400

08-02-2013 16:54:45 8.20% GOVT.STOCK

2025 25 102.04 7.9387

Bonds (Options

and Futures)

A bond future is a contractual obligation for the contract holder to purchase or sell a bond on a specified date at a predetermined price

A bond option gives you the right but not an obligation to buy or sell a bond at a certain price on or before the option expiry date

Interest Rate

Swaps

An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount

Principal Amount is notional and is not actually exchanged between the counterparties

Can be customized in a number of ways like fixed for fixed, fixed for floating etc.

Interest Rate

Caps and Floors

They are used to hedge the risk associated with floating interest rates

The create the maximum (cap) or minimum (floor) rate at the cost of a premium

Interest rate caps are used by borrowers

Interest rate floors are used by lenders

Both cap and floor can be employed simultaneously to create a collar

SHORT TERM DEBT (

Commercial Paper in

India

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

Issued by large corporates (For India; networth > Rs 4 crores), primary dealers (PDs) and the All-India Financial Institutions (FIs)

Can be issued for maturities between 7 days to 1year from the date of issue.

T Bills

Treasury bills or T-bill are short term debt instruments issued by the Government of India

T Bills are issued in three tenors, namely, 91 day, 182 day and 364 day.

The Reserve Bank of India announces the issue details of T-bills through a press release every week.

Certificates Of

Deposits

Introduced in July 1989

Can be issued scheduled commercial banks (except RRBs) and All India Financial Institutions

Maturity is a min of 7 days and max of 12 months (in case of FIs minimum 1 year and maximum 3 years)

Issued in a multiple of 1 lakh

STIR (Short Term

Interest Rates)

Futures

A short-term interest rate (STIR) future is a futures contract that derives its value from the interest rate at maturation

Common short-term interest rate futures are Eurodollar, Euribor, Euroyen, Short Sterling and Euroswiss, which are calculated on LIBOR at settlement

EQUITY

Financial Instruments

Stocks, Stock

Options and

Futures

The capital stock of an incorporated business constitutes the equity stake of its owners or simply the part of company you own

Stock options and futures are similar to Bond options and futures

Mutual funds

A mutual fund is nothing more than a collection of stocks and/or bonds

It is good because of professional management, diversification, and liquidity

Disadvantages include cost to companies

Can be either Equity Funds (stocks) , Fixed Income Funds (bonds) or Money Market Funds (T Bills)

FOREIGN EXCHANGE

Financial Instruments

Spot/ Futures

Forex And

Options

FX spot is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date.

The standard settlement timeframe for foreign exchange spot transactions is T + 2 days

Futures Forex: Contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future

ForEx Options: Gives the owner the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date

Currency Swaps

Currency Swaps: A currency swap involves two parties that exchange a notional principal with one another in order to gain exposure to a desired currency

Following the initial notional exchange, periodic cash flows are exchanged in the appropriate currency

Outright Forwards

And Forex Swaps

Outright Forwards: A contract with locked in currency exchange rates and specified date

ForEx Swaps: A simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward)