INDIAN FINANCIAL SYSTEM The financial system is a broader term which brings under its fold the financial

markets and financial institutions which supports the system. INDIAN FINANCIAL SYSTEM FINANCIAL SERVICES INSTRUMENTS FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL

FINANCIAL MARKETS: A Market is a place where buyers and sellers come together to exchange something. Financial Markets are where financial Instruments/products are exchanged. A Financial Market is known by type of product traded in it.

Different Financial Markets: Financial Market

Capital Market Equity Market Deb Market Money Market

Primary Market Secondary Market Derivatives Market

Derivatives:
In the Financial Marketplace, some instruments are regarded as Fundamentals, while others are regarded as Derivatives.

Financial Marketplace Derivatives Fundamentals

Futures Forwards Options Swaps Stocks Bonds etc.

PRODUCTS OF DERIVATIVES: Forwards: It is an agreement between two parties that call for the
delivery of an asset on a specified future date at a price i.e. negotiated at the time of entering into contract.

Futures: It is a contract that calls for the delivery of an asset on a specified

future date at a price i.e. fixed at the outside.

Options: It is a contract which gives the right to the buyer to transact

on/before a future date at a price i.e. fixed at the outset. It imposes an obligation on the seller.

Swaps: It is a contractual agreement between two parties to exchange

specified cash flows at predetermined points in time.

FORWARD CONTRACTS: A Forward Contract is an agreement to buy or sell an asset on a specified date for a specified price. Salient Features: They are bilateral Contracts and hence exposed to counter party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. 2

On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged.

Currency Forwards:

Currency forward contracts are widely used by companies to manage foreign exchange risks.

Equity Forward Contracts:

Currency forward contracts Commodity are widely used by Forwards: Commodity forward is a companies contract with the to manage foreign underlying asset in the exchange form of commodities such as oil, metal, corn, and risks .
others.

Type s

Through equity forward, the value of transactions that will occur in the future was set at this time, so as to overcome the risk.

Bond Forwards:

Bond forward is almost similar to the equity forward, except that the bonds have a maturity date, so that forward contracts must expiration before the due date.

LIMITATIONS:
* COUNTER PARTY RISK *ILLIQUIDITY CENTRALISATION OF TRADING *LACK OF

TYPES OF FUTURES
COMMODITY FUTURES FINANCIAL FUTURES

STOCK INDEX STOCK

INTEREST RATE

CURRENCY

FUTURES FUTURES

FUTURES

FUTURES

LIMITATIONS: It is subjected to margin calls. Quantity and initial exposures in future contracts are very high. When volatility is high, required more margin money to secure future contracts.

Trading of Futures
Sell Future Contract Payment

Future Seller
Payment Contract

Clearing House

Future Buyer
Buy Future

SPECULATORS- Willing to take on risk in pursuit of profit. Participants: HEDGERS- Transfer risk by taking a position in the Derivatives Market. ARBITRAGEUS- Simultaneously purchase of securities in one market at a lower price and sale thereof in other market at a higher price.