• The Chicago Board of Trade (CBOT),

established in 1848, is the world's

oldest futures and options exchange. More

than 50 different options and futures

contracts are traded by over 3,600 CBOT

members.

• On 12 July 2007, the CBOT merged with

the Chicago Mercantile Exchange (CME) to

form the CME Group

Let’s start

with the

positive

energy…

To begin with, let’s have a

quick look about what we

covered in the previous

class.

Inter-bank call money market

• Call money market, or inter-bank call money market, is a

segment of the money market where scheduled commercial

banks lend or borrow on call (i.e., overnight) or at short notice

(i.e., for periods upto 14 days) to manage the day-to-day

surpluses and deficits in their cash-flows.

• The money that is lent for one day in this market is known as

"call money" and, if it exceeds one day, is referred to as "notice

money.“

• Call money is a method by which banks lend to each other to be

able to maintain the cash reserve ratio

• The interest rate paid on call money is known as the call rate.

Inter-bank call money market

• Earlier, banks used to extend working capital loans to corporates

while term-lending institutions like the Industrial Development

Bank of India (IDBI), Industrial Finance Corporation of India

(IFCI), and the Industrial Credit and Investment Corporation of

India (ICICI) provided long-term loans

Inter-bank call money market

• Location: Primarily in Mumbai, but with sub-markets in Delhi,

Kolkata, Chennai and Ahmedabad.

• Duration:

• An overnight deals, known as call money.

• Notice money was also transacted side by side with call money

with a maximum period of 14 days

• Participants:

• Those who can both borrow as well as lend in the market - RBI,

Commercial Banks, Co-operative banks and Primary Dealers

(Corporate entities having bulk lendable resources of minimum of `

5 crores per transactions have been permitted to lend in call money

through all Primary Dealers )

• Those who can only lend Financial institutions-LIC, UTI, GIC,

IDBI, NABARD, ICICI and mutual funds etc.

• Brokers are not permitted in the market.

Inter-bank call money market

• Features:

• Interest rate in the market is market driven

• Highly sensitive to the forces of demand and supply

• Within one fortnight, rates can move within range.

• Any interest rate arbitrage opportunities in the market are

being exploited by big corporates entities

Inter-Bank Term Money

• Introduction:

• This market which was exclusively for commercial banks and

co-operative banks has been opened up for select All India

Development Financial Institutions (DFI) in October, 1993.

• The DFIs are permitted to borrow from the market for a maturity

period of 3 to 6 months.

• The interest rates is market driven.

• The market is predominantly 90-days market.

Wholesale Term Money

• Wholesale term money deals are used to

• Borrow large amounts from banks and institutions, rather

than from small investors by corporations.

• Examples of wholesale term money deals include promissory

notes and private debt placements.

• These types of deals can be fixed or floating rate and are

generally not exchanged.

Retail Term Money

• Retail term money is a deposit or loan that has regular payments

over a period of time

• Such as interest only, or principal and interest.

• Some retail term money deals have other fees, such as

establishment fees that can increase the total amount of the deal.

• This increase does not generate cash flows, but it does increase

the amount of the deal.

• Mortgages, sinking funds, and hire purchases are all examples of

retail term money deals.

NSE

NSE: National Stock

Exchange

Type Stock Exchange

Location Mumbai, India

Founded 1992

Owner National Stock Exchange of India Limited

Currency Indian rupee

No. of listings 1,696

Market CapUS$ 1.47 trillion (June 2014)

Volume US$ 442 billion (June 2014)

Indexes S&P CNX Nifty

CNX Nifty Junior

S&P CNX 500

Website www.nseindia.com

Origins The National Stock Exchange of India was set up

by Government of India on the recommendation of Pherwani

Committee in 1991.

It was incorporated in November 1992 as a tax-paying company.

In April 1993, it was recognized as a stock exchange.

The Capital market (Equities) segment of the NSE started

operations in November 1994.

The Derivatives segment started in June 2000

Objectives Establishing nationwide trading facilities for all types of

securities.

Ensuring equal access to investors all-over the country.

Meeting international benchmarks and standards.

Fair price generation.

Trading schedule Trading takes place on all days of the week except

Saturdays & Sundays. The market timings are as follows:

(1) Pre-open session (Regular)

Order entry & modification Open: 09:00 hrs

Order entry & modification Close: 09:08 hrs*

*with random closure in last one minute. Pre-open order

matching starts immediately after close of pre-open order

entry.

Order Matching & Confirmation Period 9:08am - 9.12am

Buffer Period 9:12am - 9:15am

Session Timings(2) Regular trading session

Normal Market Open: 09:15 hrs

Normal Market Close: 15:30 hrs

Block deal session is held between 09:15 hrs and 09:50 hrs.

(A single trade having quantity greater than or equal to 500,000 or value greater than or equal Rs. 5 crores, executed through Block deal window)

(3) The Closing Session is held between 15.40 hrs and 16.00 hrs.

The Exchange may also extend, advance or reduce trading hours when its deems fit and necessary.

Indices

NSE has launched several stock indices, including:

• S&P CNX Nifty(Standard & Poor's CRISIL NSE

Index)

• CNX Nifty Junior

• CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

• S&P CNX 500 (= CNX 100 + 400 major players

across 72 industries)

• CNX Midcap (introduced on 18 July 2005 replacing

CNX Midcap 200)

MarketsCurrently, NSE has the following major segments of the capital

market:

• Equity

• Futures and Options

• Retail Debt Market

• Wholesale Debt Market

• Currency futures

• MUTUAL FUND

S&P CNX Nifty

The S&P CNX Nifty, also called the Nifty 50 or simply the Nifty,

is a stock market index and benchmark index for Indian equity

market.

Nifty is owned and managed by India Index Services and Products

Ltd. (IISL),

which is a joint venture between NSE and CRISIL (Credit Rating

and Information Services of India Ltd).

Nifty is trading in

1. India

2. SGX (Singapore)

3. CME (USA)

Base Date The base period for the S&P CNX Nifty index is

November 3, 1995,

The base value of the index has been set at 1000, and

a base capital of Rs 2.06 trillion.

Example: calculation

Assume nifty has only 2 stocks namely SBI and RELIANCE.

Total shares in SBI are 500 out of which 200 are held by

Government and only 300 are available for public trading.

RELIANCE has 1000 shares out of which 500 are held by

promoters and 500 are available for trading.

Assume price of SBI Stock is Rs.100 and Reliance is Rs.200.

Then "free-Floating Market Cap" of these 2 companies =

(300*100+500*200) = 30000+100000 = Rs. 130000

Assume Market Cap during the year 1994-95 was

Rs.25000

Then nifty = 130000*1000/25000 = 5200.

BSE

Oldest stock exchange in Asia

Established in 1875

Working time 9.30 am to 3.30 pm

5459 companies are listed.

Located on Dalal street, Mumbai, Maharashtra.

11th largest stock exchange in the world by market

capitalization as of 31/12/12.

World’s No.1 exchange in terms of listed members

Calculated since 1986.

Index composed of 30 stocks.

Initially based on total market capitalization.

2003 onwards free float market capitalization.

Base value for calculating SENSEX is 100 (1978-79)

Market cap US$ 1.6 trillion (October 2014)

Volume US$ 93 billion (June 2014)

Other important indices originating from the Bombay

exchange include the BSE 100, BSE 500, BSEPSU,

BSEMIDCAP, BSESMLCAP, and BSEBANKEX

BSE Hours of Operation

Beginning of the Day Session: 8:00 - 9:00

Login Session: 9:00 - 9:15

Trading Session: 9:15 - 15:30

Position Transfer Session: 15:30 - 15:50

Closing Session: 15:50 - 16:05

Option Exercise Session: 16:05 - 16:35

Margin Session: 16:35 - 16:50

Query Session: 16:50 - 17:35

End of Day Session:17:35

Market players: According to trading(Bse & Nse)

Arbitrager

Speculator

Hedger

Investor

According to invertor(Bse & Nse)

Banks

FII

Brokers

Small investor

etc

The calculation of SENSEX involves dividing the

free-float market capitalization of 30 companies in

the Index by a number called the Index Divisor.

How SENSEX is calculated?

The formula for calculating the SENSEX = (Sum of

free flow market cap of 30 benchmark stocks)*Index

Factor

where,

Index Factor = 100/Market Cap Value in 1978-79.

100 is the Index value during 1978-79.

Example:

Assume SENSEX has only 2 stocks namely SBI and

RELIANCE.

Total shares in SBI are 500 out of which 200 are held

by Government and only 300 are available for public

trading.

RELIANCE has 1000 shares out of which 500 are held

by promoters and 500 are available for trading.

Assume price of SBI Stock is Rs.100 and Reliance is

Rs.200. Then "free-Floating Market Cap" of these 2

companies =

(300*100+500*200) = 30000+100000 = Rs. 130000

Assume Market Cap during the year 1978-79 was

Rs.25000

Then SENSEX = 130000*100/25000 = 520.

Treasury Bills (TBs)……As per RBI site

• Treasury bills or T-bills, which are money market instruments,

are short term debt instruments issued by the Government of

India and are presently issued in three tenors, namely, 91 day,

182 day and 364 day.

• Treasury bills are zero coupon securities and pay no interest.

• They are issued at a discount and redeemed at the face value at

maturity.

• For example, a 91 day Treasury bill of Rs.100/- (face value)

may be issued at say Rs. 98.20, that is, at a discount of say,

Rs.1.80 and would be redeemed at the face value of Rs.100/-.

Treasury Bills (TBs) ……As per RBI site

• While 91-day T-bills are auctioned every week on

Wednesdays, 182-day and 364-day T-bills are

auctioned every alternate week on Wednesdays.

• Assumed to be risk free.

• More relevant TBs

• 91 days,

• 182 days

• 364 days

• Treasury bills are also issued under the Market Stabilization Scheme (MSS).

Treasury Bills (TBs) ……As per RBI site

• Market Stabilization Scheme (MSS) is a process under which

the bills and securities will be issued by way of auctions to be

conducted by the RBI.

• The RBI will decide and notify the amount, tenure and timing

of issuance of such treasury bills and dated securities.

• Whenever such securities are issued by the RBI for the

purpose of market stabilisation and sterilisation, a press release

at the time of issue would indicate such purpose.

Meet this researcher. He is

Calculating yield of a T-bill.

But he is very confuse

Treasury Bills (TBs)• Treasury bills are available for a minimum amount of Rs.25,000 and in

multiples of Rs. 25,000.

• In the secondary market, for 182 days a minimum amount of 25 lakhs and

thereafter in multiples of 10 lakhs)

• All the treasury Bills are highly liquid instruments available both in the

primary and secondary market

*State Government also issued treasury bills until 1950, since then it is only

the Central Government that has been selling them

TBs are issued at discount and their yields can be calculated with the help of

the following formula

Treasury Bills (TBs)

Time to Think of

the model

Treasury Bills (TBs)

This formula is simple interest because it comes

from:

P(1+ rt) = F

rt = (F/p)-1

r = [(f-p)/p]/t

Or

r = [(f-p)/p] * 365/t bill *100

Treasury Bills (TBs) example

Suppose you could buy a 91-day T-bill at an asked price of $98

per $100 face value and you could sell to the dealer at a bid price

of $97.95 per $100 face value

Calculate

1 Bond yield equivalent (assuming simple interest)

2 Discount rate calculated on the bill (ask)

3 Discount rate calculated on the bill (bid)

Sol:

BYE = [(100 – 98)/98]*365/91*100

BYE = 8.18%

Treasury Bills (TBs) example

Discount rate (ask)= [(100 – 98)/100]*365/91*100

Discount rate (ask) = 7.91%

Discount rate (bid)= [(100 – 97.95)/100]*365/91*100

Discount rate (bid) = 8.11%

The effective annual rate on this bill would annualize the B.Y.E.

of 8.18% (which uses simple interest) using the familiar formula:

= [{1+ .08186

365/91}

365

91 ]-1

where n = number of compounding periods per year.

.0844 8.44%

Government Security……As per RBI site

• A Government security is a tradable instrument issued by the

Central Government or the State Governments.

• Such securities are short term (usually called treasury bills,

with original maturities of less than one year) or long term

(usually called Government bonds or dated securities with

original maturity of one year or more).

• In India, the Central Government issues both, treasury bills

and bonds or dated securities while the State Governments

issue only bonds or dated securities, which are called the State

Development Loans (SDLs)

Government Security……As per RBI site

• Government securities are called risk-free gilt-edged

instruments.

• Dated Government securities are long term securities and carry

a fixed or floating coupon (interest rate) which is paid on the

face value, payable at fixed time periods (usually half-yearly).

The tenor of dated securities can be up to 30 years.

Government Security……As per RBI site

The nomenclature of a typical dated fixed coupon Government

security contains the following features - coupon, name of the

issuer, maturity and face value. For example, 7.49% GS 2017

would mean:

Coupon : 7.49% paid on face value

Name of Issuer : Government of India

Date of Issue : April 16, 2007

Maturity : April 16, 2017

Coupon Payment Dates : Half-yearly (October 16 and

April 16) every year

Minimum Amount of issue/ sale : Rs.10,000

Commercial Paper

• Commercial paper (CP) has its origin in the financial markets

of America and Europe.

• Commercial Paper (CP) is an unsecured money market

instrument issued in the form of a promissory note.

• Corporates, primary dealers (PDs) and the all-India financial

institutions (FIs) that have been permitted to raise short-term

resources under the umbrella limit fixed by the Reserve Bank

of India are eligible to issue CP.

• CP can be issued for maturities between a minimum of 7 days

and a maximum up to one year from the date of issue

Commercial Paper

• As a regulatory body, RBI lays down the policies and

guidelines with regard to commercial paper to maintain a

control on the operational aspects of the scheme.

• Prior approval of RBI is required before a company can

issue CP in the market

• RBI controls the broad timing of the issue to ensure

orderly fund-raising

• Every issue of CP launched by a company, including roll-

over will be treated as fresh issue and the issuing company

will be required to seek prior permission from RBI, before

each roll-over.

• RBI approval is valid for 2 weeks only

Commercial Paper

• Conditions under which the CPs can be issued are:

• The issuer company should have a minimum net worth and

fund-based working capital limit of not less than 4 cr each.

• The company should obtain a minimum rating of

P2/A2/PR2/D2

• Minimum amount of CP issued for a single investor will be

25 Lakhs in the minimum denomination of 5 Lakhs.

• The banks can neither extend any stand-by or underwriting

facility nor guarantee payment of the instrument on

maturity.

• The CPs are subject to stamp duty

• The total amount of CP proposed to be issued should be

raised within a period of two weeks from the date on

which the issuer opens the issue for subscription.

Certificate of Deposit

• Certificate of Deposit (CD) is a negotiable money market and

issued in dematerialized form

• Banks can issue CDs for maturities from 7 days to one a year

whereas eligible FIs can issue for maturities 1 year to 3 years

• All scheduled banks (except RRBs and Co-operative banks)

are eligible to issue CDs. They can be issued to individuals,

corporates, trusts, funds and associations. NRIs can also

subscribe to CDs but on non-repatriable basis only.

• The CDs can be issued for min amount of 5 lakhs to a single

investor. CDs above 5 lakhs should be in multiples of 1 lakh

• CDs issued in physical form are freely transferable by

endorsement and delivery. Procedure of transfer of dematted

CDs is similar to any other demat securities

Certificate of Deposit

• CDs are issued at discount to face value. The discount is

offered either front end or rear end.

CDs issued at front end discount

Amount of Issue – 100

Period - 6 months

Rate of discount – 20%

Discount = 100

100 × (20/100) × (6/12) = 10

Hence CD will be issued for 100 – 10 = 90.00. The effective

rate to the bank will, however, be calculated on the basis of the

following formula:

E = {[(FV –SV)/ SV] × Days or months in a year }×100

M

Certificate of Deposit

where

E = Effective Yield

FV = Face Value

SV = Sale Value

M = Period of Discount

Accordingly the Yield as per the data given in the example will

be

= 22.226%

Role of RBI in regulation of money

market

Learning

from a

example

54