Explain the role of "Insurance" being the financial intermediary.

 Insurance companies pool risk by collecting premiums from a large group of people who
want to protect themselves and/or their loved ones against a particular loss, such as a fire,
car accident, illness, lawsuit, disability or death.
 Insurance helps individuals and companies manage risk and preserve wealth.
 By insuring a large number of people, insurance companies can operate profitably and at
the same time pay for claims that may arise. Insurance companies use statistical analysis
to project what their actual losses will be within a given class. They know that not all
insured individuals will suffer losses at the same time or at all.

Explain in brief features of Financial Instruments

 They mobilise savings and channel them into the hands of investors who need more funds
than they have on hand.
 FIs encourage saving and investment which are essential for promoting economic growth.
 FIs also help the non-financial business sector by financing it through loan’s, mortgages,
purchase of bonds, shares, etc. Thus they facilitate investment in plant, equipment and
inventories.
 FIs possess greater resources than individuals to bear and spread risks among different
borrowers. This is because of their large size, diversification of their portfolios and
economies of scale in portfolio management.
 FIs provide portfolio management and syndication services.

Briefly explain the Role of Stock Exchange in the Economy?

Stock exchange apart from being hub of primary and secondary market, they have very
important role to play in the economy of the country. Some of them are listed below.

 Raising capital for businesses

Exchanges help companies to capitalize by selling shares to the investing public.

 Mobilizing savings for investment

They help public to mobilize their savings to invest in high yielding economic sectors, which
results in higher yield, both to the individual and to the national economy.

 Facilitating company growth

They help companies to expand and grow by acquisition or fusion.
 Profit sharing
They help both casual and professional stock investors, to get their share in the wealth of
profitable businesses.

 Corporate governance
Stock exchanges impose stringent rules to get listed in them. So listed public companies have
better management records than privately held companies.

 Creating investment opportunities for small investors

Small investors can also participate in the growth of large companies, by buying a small number
of shares.

 Government capital raising for development projects

They help government to rise fund for developmental activities through the issue of bonds. An
investor who buys them will be lending money to the government, which is more secure, and
sometimes enjoys tax benefits also.

 Barometer of the economy

They maintain the stock indexes which are the indicators of the general trend in the
economy.They also regulate the stock price fluctuations.

Stock markets provide an economic boost through creation of liquidity. Stock markets allow
investors to put their savings to work earning returns. But unlike with loans, stocks give
investors an ownership interest in the company. And unlike with a loan, stocks can be sold
quickly if investors need to take out their money so they can use it for other purposes. For
companies, the stock market allows them to raise capital quickly through stock issues. Unlike
with loans, capital raised through the stock market doesn’t have to be paid back by some set date.

Explain the concept of Mutual Funds.

A mutual fund is an investment vehicle made up of a pool of money collected from many
investors for the purpose of investing in securities such as stocks, bonds, money
market instruments and other assets. Mutual funds are operated by professional money managers,
who allocate the fund's investments and attempt to produce capital gains and/or income for the
fund's investors. A mutual fund's portfolio is structured and maintained to match the investment
objectives stated in its prospectus.

It is a trust that collects money from a number of investors who share a common investment
objective and invests the same in equities, bonds, money market instruments and/or other
securities. And the income / gains generated from this collective investment is distributed
proportionately amongst the investors after deducting applicable expenses and levies, by
calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large
number of investors is what makes up a Mutual Fund. Mutual funds are ideal for investors who
either lack large sums for investment, or for those who neither have the inclination nor the time
to research the market, yet want to grow their wealth. The money collected in mutual funds is
invested by professional fund managers in line with the scheme’s stated objective. In return, the
fund house charges a small fee which is deducted from the investment.

Explain in brief the Role of SEBI being one of the "Regulatory Institutions" in India.

The Securities and Exchange Board of India’s stated objective is “to protect the interests of
investors in securities and to promote the development of, and to regulate the securities market
and for matters connected therewith or incidental thereto.” According to its charter, it is expected
to be responsible to three main groups: the issuers of securities, investors, and market
intermediaries. The body has somewhat nebulous powers, as it drafts regulations and statutes in
its legislative capacity, passes rulings and orders in its judicial capacity, and conducts
investigation and enforcement actions in its executive capacity.

The primary function of Sebi is to regulate affairs of the securities market such as stock
exchanges. It registers and regulates function of intermediaries which are associated with the
capital market. These include stockbrokers, sub-brokers, merchant bankers, bankers and
registrars to issues, underwriters, share transfer agents, portfolio managers, investment advisors,
depositories, custodians of securities and foreign institutional investors (FIIs). Organisations
such as rating agencies, which are not intermediaries, but are related to the capital market, are
also regulated by Sebi.

Sebi prohibits fraudulent and unfair trade practices such as insider trading. Its board has the
authority to seek any information from companies and intermediaries, which can be used to
conduct enquiries.

It also conducts research to help it to regulate and develop the securities market.

 SEBI make efforts to educate investors so that they are able to make choices between
the offerings of different companies and choose the most profitable securities.
 SEBI has issued guidelines to investigate cases of fraud and insider trading. Adding to
this the provisions for fine and Imprisonment.
SEBI encourages both growth and development of the security market and act as a watchdog.

Explain in brief features of Financial Instruments:

Financial instruments are monetary contracts between parties. They can be created, traded,
modified and settled. They can be cash (currency), evidence of an ownership interest in an entity
(share), or a contractual right to receive or deliver cash (bond).

Financial instruments can be real or virtual documents representing a legal agreement involving
any kind of monetary value. Equity-based financial instruments represent ownership of an asset.
Debt-based financial instruments represent a loan made by an investor to the owner of
the asset. Foreign exchange instruments comprise a third, unique type of financial instrument.
Different subcategories of each instrument type exist, such as preferred share equity and
common share equity.

Explain in brief participants in Indian Money Market

Money Market is a market segment where financial institutions and governments manage their
short-term cash needs.The money market is a fixed income market which means it deals in
financial instruments which pay a fixed rate on the investment. This is the opposite of the capital
markets where there is no fixed return on investments.

The key participants of the money market are as follows:

Central Government & State Government: The Central Government is an issuer of

Government of India Securities (G-Secs) and Treasury Bills (T-bills). These instruments are
issued to finance the government as well as for managing the Government’s cash flow. G-sec
bonds are issued by the RBI, on behalf of the Government, so as to finance the latter’s budget
requirements, deficits and public sector development programmes. These bonds are issued
throughout the financial year. T-bills are short-term debt obligations of the Central Government.
These are discounted instruments. These may form part of the budgetary borrowing or be issued
for managing the Government’s cash flow.

Public Sector Undertakings: Public Sector Undertakings (PSUs) issue bonds which are
medium to long-term coupon bearing debt securities. These bonds are issued to finance the
working capital requirements and long-term projects of public sector undertakings. PSUs can
also issue Commercial Paper to finance their working capital requirements.

Scheduled Commercial Banks (SCBs): Banks issue Certificate of Deposit (CDs) which are
unsecured, negotiable instruments. SCBs also participate in the overnight (call) and term
markets. They can participate both as lenders and borrowers in the call and term markets. These
banks use these funds in their day-to-day and short-term liquidity management. Banks participate
in PSU bond market as investors of surplus funds and the foreign exchange market and deriva-
tive market as well.

Private Sector Companies: Private Sector Companies issue commercial papers (CPs) and
corporate debentures. They are issued when corporations want to raise their short-term capital
directly from the market instead of borrowing from banks.

Provident Funds: Provident funds have short term and long term surplus funds. They invest
their funds in debt instruments according to their internal guidelines as to how much they can
invest in each instrument category.

General Insurance Companies: General insurance companies (GICs) have to maintain certain
funds which have to be invested in approved investments. They participate in the G-Sec, Bond
and short term money market as lenders. It is seen that generally they do not access funds from
these markets.

Life Insurance Companies: Life Insurance Companies (LICs) invest their funds in G-Sec,
Bond or short term money markets. They have certain pre-determined thresholds as to how much
they can invest in each category of instruments.

Mutual Funds: Mutual funds invest their funds in money market and debt instruments. The
proportion of the funds invested in any instrument can vary according to the approved
investment pattern declared in each scheme.

Non-banking Finance Companies: Non-banking Finance Companies (NBFCs) invest their

funds in debt instruments to fulfill certain regulatory mandates as well as to park their surplus
funds. NBFCs are required to invest 15% of their net worth in bonds which fulfill the SLR
requirement.
 Primary Dealers (PDs): The organization of Primary Dealers was conceived and permitted by
the Reserve Bank of India (RBI) in 1995. These are institutional entities registered with the RBI.

Explain in brief - Types of Foreign Exchange Transactions

The Foreign Exchange Transactions refers to the sale and purchase of foreign currencies.
Simply, the foreign exchange transaction is an agreement of exchange of currencies of one
country for another at an agreed exchange rate on a definite date.

1. Spot Transaction: The spot transaction is when the buyer and seller of different currencies settle
their payments within the two days of the deal. It is the fastest way to exchange the currencies.
Here, the currencies are exchanged over a two-day period, which means no contract is signed
between the countries. The exchange rate at which the currencies are exchanged is called
the Spot Exchange Rate. This rate is often the prevailing exchange rate. The market in which
the spot sale and purchase of currencies is facilitated is called as a Spot Market.

2. Forward Transaction: A forward transaction is a future transaction where the buyer and seller
enter into an agreement of sale and purchase of currency after 90 days of the deal at a fixed
exchange rate on a definite date in the future. The rate at which the currency is exchanged is
called a Forward Exchange Rate. The market in which the deals for the sale and purchase of
currency at some future date is made is called a Forward Market.

3. Future Transaction: While a forward contract is tailor made for the client be his international
bank, a future contract has standardized features the contract size and maturity dates are
standardized. Futures cab traded only on an organized exchange and they are traded
competitively. Margins are not required in respect of a forward contract but margins are required
of all participants in the futures market an initial margin must be deposited into a collateral
account to establish a futures position.

4. Swap Transactions: The Swap Transactions involve a simultaneous borrowing and

lending of two different currencies between two investors. Here one investor borrows the
currency and lends another currency to the second investor. The obligation to repay the
currencies is used as collateral, and the amount is repaid at a forward rate. The swap contracts
 allow the investors to utilize the funds in the currency held by him/her to pay off the obligations
denominated in a different currency without suffering a foreign exchange risk.

4. Option Transactions: The foreign exchange option gives an investor the right, but not the
obligation to exchange the currency in one denomination to another at an agreed exchange rate
on a pre-defined date. An option to buy the currency is called as a Call Option, while the option
to sell the currency is called as a Put Option.

Thus, the Foreign exchange transaction involves the conversion of a currency of one country into
the currency of another country for the settlement of payments.

Distinguish between Money Market & Capital Market

MONEY MARKET CAPITAL MARKET

Money Market is the place where lending Capital Market is the place where lending and
and borrowing of short-term funds takes borrowing of medium-term and long-term
place. funds take place.
Deals With
Money Market deals with promissory notes, Capital Market deals with Equity shares,
bills of exchange, commercial paper, treasury debentures, bonds, and preference shares etc.
bills, call money etc.
Contains
The Money Market contains banks, financial The Capital Market contains stockbrokers,
institutions, financial companies, chit funds, mutual funds, underwriters and individual
etc. investors, etc.
Maturity Period
The instruments which are traded in money The instruments which are traded in capital
market normally have a maximum time market have a longer time frame or no
frame of 1 year or less. maturity period.
Risk Factor
The risk factor in trading with money market The risk factor in trading with capital market
instruments is very low because of shorter instruments is high because of longer duration
duration and can be easily converted into and cannot be easily converted into cash.
cash.
Divided Into
The Money Market is divided into two The capital Market is divided into two
segments called Organised and Un-Organised segments called Primary Market and
sector. Secondary Market.
Activities
The activities carried on in Money Market is The activities carried on in Capital Market is
regulated by Reserve Bank Of India (RBI). regulated by Securities Exchange Board of
India (SEBI).
Returns
 The expected returns from Money Market The returns expected are very high because of
instruments is less. higher durations.

Explain the Role of Investment Banking in India

Investment banking is the process of raising capital for businesses through publicfloatation and
private placement of securities. The investment banking industry plays an important
intermediation function in all market economies. This paper discusses the role of investment
banking in India. The regulatory framework for initial public offering, competition within the
India. An investment banking industry and capabilities of an ideal Investment Banker are also
discussed.

Role of Investment banking in India:

 It helps companies and governments and their agencies to raise money by issuing and
selling securities in the primary market.
 They assist public and private corporations in raising funds in the capital markets both
equity and debt, as well as in providing strategic advisory services for expansion
acquisitions, mergers and other types of financial transactions.
 Investment banking is much wider term than merchant banking as it implies significant
fund based exposure to the capital market.
 Internationally, investment banking have progressed both in fund based & fee based
segments of industry.

Securities Exchange Board of India

The Securities and Exchange Board of India’s stated objective is “to protect the interests of
investors in securities and to promote the development of, and to regulate the securities market
and for matters connected therewith or incidental thereto.” SEBI is expected to be responsible to
three main groups: the issuers of securities, investors, and market intermediaries. The body has
somewhat nebulous powers, as it drafts regulations and statutes in its legislative capacity, passes
rulings and orders in its judicial capacity, and conducts investigation and enforcement actions in
its executive capacity.

 The primary function of Sebi is to regulate affairs of the securities market such as stock
exchanges.
  It registers and regulates function of intermediaries which are associated with the capital
market. These include stockbrokers, sub-brokers, merchant bankers, bankers and
registrars to issues, underwriters, share transfer agents, portfolio managers, investment
advisors, depositories, custodians of securities and foreign institutional investors (FIIs).
 Organisations such as rating agencies, which are not intermediaries, but are related to the
capital market, are also regulated by Sebi.
 Sebi prohibits fraudulent and unfair trade practices such as insider trading. Its board has
the authority to seek any information from companies and intermediaries, which can be
used to conduct enquiries.
 It also conducts research to help it to regulate and develop the securities market.

 SEBI make efforts to educate investors so that they are able to make choices between the
offerings of different companies and choose the most profitable securities.
 SEBI has issued guidelines to investigate cases of fraud and insider trading. Adding to
this the provisions for fine and Imprisonment.
 SEBI encourages both growth and development of the security market and act as a
watchdog.

Financial Institutions

The Financial Institutions in India mainly comprises of the Central Bank which is better known
as the Reserve Bank of India, the commercial banks, the credit rating agencies, the securities and
exchange board of India, insurance companies and the specialized financial institutions in India.

Reserve Bank of India:

The Reserve Bank of India was established in the year 1935 with a view to organize the financial
frame work and facilitate fiscal stability in India. The bank acts as the regulatory authority with
regard to the functioning of the various commercial bank and the other financial institutions in
India. The bank formulates different rates and policies for the overall improvement of the
banking sector. It issue currency notes and offers aids to the central and institutions governments.

Commercial Banks in India:

The commercial banks in India are categorized into foreign banks, private banks and the public
sector banks. The commercial banks indulge in varied activities such as acceptance of deposits,
acting as trustees, offering loans for the different purposes and are even allowed to collect taxes
on behalf of the institutions and central government.

Credit Rating Agencies in India:

The credit rating agencies in India were mainly formed to assess the condition of the financial
sector and to find out avenues for more improvement. The credit rating agencies offer various
services as operation up gradation, rating different sectors, research about various companies,
etc.

Securities and Exchange Board of India:

The securities and exchange board of India, also referred to as SEBI was founded in the year
1992 in order to protect the interests of the investors and to facilitate the functioning of the
market intermediaries. They supervise market conditions, register institutions and indulge in risk
management.

Insurance Companies in India:

The insurance companies offer protection against losses. They deal in life insurance, marine
insurance, and vehicle insurance and so on. The insurance companies collect the little saving of
the investors and then reinvest those savings in the market. The insurance companies are
collaborating with different foreign insurance companies after the liberalization process. This
step has been incorporated to expand the Indian Insurance market and make it competitive.

Specialized Financial Institutions in India:

The specialized financial institutions in India are government undertakings that were set up to
provide assistance to the different sectors and thereby cause overall development of the Indian
economy.

SET II

Explain the various Components of Indian Financial System

The following are the four main components of Indian Financial system

1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.

Financial institutions:
Financial institutions are the intermediaries who facilitates smooth functioning of the financial
system by making investors and borrowers meet. They mobilize savings of the surplus units and
allocate them in productive activities promising a better rate of return. Financial institutions also
provide services to entities seeking advises on various issues ranging from restructuring to
diversification plans. They provide whole range of services to the entities who want to raise
funds from the markets elsewhere. Financial institutions act as financial intermediaries because
they act as middlemen between savers and borrowers. Were these financial institutions may be of
Banking or Non-Banking institutions.

Financial Markets:

Finance is a prerequisite for modern business and financial institutions play a vital role in
economic system. It's through financial markets the financial system of an economy works. The
main functions of financial markets are:

1. to facilitate creation and allocation of credit and liquidity;

2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience

Financial Instruments

Another important constituent of financial system is financial instruments. They represent a

claim against the future income and wealth of others. It will be a claim against a person or an
institutions, for the payment of the some of the money at a specified future date.

Financial Services:

Efficiency of emerging financial system largely depends upon the quality and variety of financial
services provided by financial intermediaries. The term financial services can be defined as
"activites, benefits and satisfaction connected with sale of money, that offers to users and
customers, financial related value.

Explain the role of "Commercial Banks" being the financial intermediary.

 Commercial banks play several roles as financial intermediaries. First, they repackage the
deposits received from investors into loans that are provided to firms. In this way, small
deposits by individual investors can be consolidated and channeled in the form of large
 loans to firms. Individual investors would have difficulty achieving this by themselves
because they do not have adequate information about the firms that need funds.
 Commercial banks employ credit analysts who have the ability to assess the
creditworthiness of firms that wish to borrow funds. Investors who deposit funds in
commercial banks are not normally capable of performing this task and would prefer that
the bank play this role.
 Commercial banks have so much money to lend that they can diversify loans across
several borrowers. In this way, the commercial banks increase their ability to absorb
individual defaulted loans by reducing the risk that a substantial portion of the loan
portfolio will default. As the lenders, they accept the risk of default. Many individual
investors would not be able to absorb the loss of their own deposited funds, so they prefer
to let the bank serve in this capacity.
 Some commercial banks also serve as financial intermediaries by placing the securities
that are issued by firms. Such banks may facilitate the flow of funds to firms by finding
investors who are willing to purchase the debt securities issued by the firms. Thus they
enable firms to obtain borrowed funds even though they do not provide the funds
themselves.

Explain in brief the Role of PFRDA being one of the "Regulatory Institutions" in India.

Pension Fund Regulatory and Development Authority (PFRDA) was established by Government
of India on 23rdAugust, 2003. The Government has, through an executive order dated
10th October 2003, mandated PFRDA to act as a regulator for the pension sector. The mandate of
PFRDA is development and regulation of pension sector in India.

Functions of Pension Fund Regulatory and Development Authority:

 Promote pension scheme in the country by fostering mandatory as well as voluntary pension
schemes in order to serve the old age income needs of retired personnel
 National Pension System, both tier 1 and tier 2 are under the purview of PFRDA and are
dictated by the same
 PFRDA performs the function of appointing various intermediate agencies like Pension Fund
Managers, Central Record Keeping Agency (CRA) etc.
 Educating the general public and stakeholders about the importance of pension.
 Training of intermediaries that perform the task of popularizing and educating people about
the importance of pension.
 Addressing grievances related to various pension schemes in the country.
 Addressing and resolving disputes between various intermediaries like banks and between
customers and intermediaries.
Explain the concept of Derivatives and name the 3 types of traders in Derivatives
market.

A derivative is a financial security with a value that is reliant upon or derived from an underlying
asset or group of assets. The derivative itself is a contract between two or more parties based
upon the asset or assets. Its price is determined by fluctuations in the underlying asset. The most
common underlying assets include stocks, bonds, commodities, currencies, interest rates and
market indexes. The derivatives market is similar to any other financial market and has following
three broad categories of participants:

Hedgers:
These are investors with a present or anticipated exposure to the underlying asset which is
subject to price risks. Hedgers use the derivatives markets primarily for price risk management
of assets and portfolios. A hedger is someone who faces risk associated with price movement of
an asset and who uses derivatives as a means of reducing that risk. A hedger is a trader who
enters the futures market to reduce a pre-existing risk.

Speculators:
These are individuals who take a view on the future direction of the markets. They take a view
whether prices would rise or fall in future and accordingly buy or sell futures and options to try
and make a profit from the future price movements of the underlying asset. Speculators wish to
take a position in the market by betting on the future price movements of an asset. Futures and
options contracts can increase both the potential gains and losses in a speculative venture.
Speculators are important to derivatives markets as they facilitate hedging provide liquidity
ensure accurate pricing, and help to maintain price stability. It is the speculators who keep the
market going because they bear risks which no one else is willing to bear.

Arbitrageurs:
They take positions in financial markets to earn riskless profits. The arbitrageurs take short and
long positions in the same or different contracts at the same time to create a position which can
generate a riskless profit.

Explain different financial products?

Securities and investments created to provide buyers and sellers with short term or long term
financial gains are known as financial products.

The number of financial products and services in India has increased multifold. It requires a lot
of patience and skill to pick up the best suited option from this huge list of financial products
available with us. Here are some of them:
Mutual Funds:
A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests it in stocks, bonds, short-term money market
instruments, and/or other securities. By investing in Mutual Funds, one can have benefit of
diversification. Since they are managed by professionals, one need not track the markets
regularly. It is regulated by SEBI, so the investor interests are also protected. It also offers
flexibility of choosing the products from various categories like Equity, Gold, Debt and Money
Markets. Most schemes being open ended, they also offer liquidity. One can invest in Mutual
Funds either in Lump-sum (at one go) or through Systematic Manner (SIP).
NPS:
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme
designed to enable the subscribers to make optimum decisions regarding their future through
systematic savings during their working life. NPS seeks to inculcate the habit of saving for
retirement amongst the citizens.
Corporate Fixed Deposits:
There are various companies which offer Fixed Deposits and the rates on offer are generally
higher than the rates offered by Banks. These instruments can be considered based on their
rating, interest rates and the cash flows. The corporate fixed deposits are available for various
tenures with Interest being paid Monthly, Quarterly, Half Yearly, Annually or at Maturity.
Investors looking at regular cash flows and interested in fixed rate of interest can invest in these
deposits.
Capital Gain Bonds:
Capital gain bonds are another type of bonds available, where any person can avail exemption in
respect of long-term capital gains (arising from the sale of long term capital asset other than
equity shares and securities) if the capital gain is invested in Capital Gain bonds u/s 54EC. The
exemption will be the amount of capital gain or the amount of investment made, whichever is
less. Interest rate offered on these bonds is around 6% per annum.

Explain in brief features of Financial Instruments