[TYPE THE COMPANY NAME]

ASSIGNMENT
FINANCIAL MANAGEMENT ACCOUNTING-I

MOUMITA DEY
SECTION C ROLL NO _FC13146

12/23/2013

[Type the abstract of the document here. The abstract is typically a short summary of the contents of the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]

INFLATION INDEXED BONDS IN India (IIBS)

What are IIBS? Inflation-indexed bonds (also known as inflation-linked bonds are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780.The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981. As of 2008, governmentissued inflation-linked bonds comprise over $1.5 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds with privately issued inflation-linked bonds constituting a small portion of the marks. Inflation-indexed bonds pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate. The relationship between coupon payments, breakeven inflation and real interest rates is given by the Fisher equation. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both. 1 Inflation Indexed Bonds (IIBs) were issued in the name of Capital Indexed Bonds (CIBs) during 1997, the new product of IIBs is different from earlier CIBs in the following ways.

The CIBs issued in 1997 provided inflation protection only to principal and not to interest payment. New product of IIBs will provide inflation protection to both principal and interest payments. IIBS provides protection to both principal and interest rates.

2.

Inflation component on principal will not be paid with interest but the same would be adjusted in the principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the face, whichever is higher, would be paid. Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation. An example of cash flows on IIBs is furnished below.

Example 1 (for illustration purpose)

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Year I 0 1 2 3 4 5 6 7 8 9 10

Period II 28-May-13 28-May-14 28-May-15 28-May-16 28-May-17 28-May-18 28-May-19 28-May-20 28-May-21 28-May-22 28-May-23

Real Coupon III 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

Inflation Index IV 100 106 111.8 117.4 123.3 128.2 135 138.5 142.8 150.3 160.2

Inflation Coupon Principal Index Ratio adjusted Payments Repayment principal Vti =(IVti/IVt0) VI=(FV*V) VII=(VI*III) VIII 1.00 100.0 1.06 106.0 1.59 1.12 111.8 1.68 1.17 117.4 1.76 1.23 123.3 1.85 1.28 128.2 1.92 1.35 135.0 2.03 1.39 138.5 2.08 1.43 142.8 2.14 1.50 150.3 2.25 1.60 160.2 2.40 160.2

Example 2 (For illustration purpose)

0 1 2 3 4 5 6 7 8 9 10

28-May-13 28-May-14 28-May-15 28-May-16 28-May-17 28-May-18 28-May-19 28-May-20 28-May-21 28-May-22 28-May-23

1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

100.0 106.0 111.0 104.0 98.0 99.0 105.5 110.2 106.5 104.2 99.2

1.00 1.06 1.11 1.04 0.98 0.99 1.06 1.10 1.07 1.04 0.99

100 106 111 104 98 99 105.5 110.2 106.5 104.2 99.2

1.50 1.59 1.67 1.56 1.47 1.49 1.58 1.65 1.60 1.56 1.49

100

3.

capital protection is provided. Capital protection will be provided by paying higher of the adjusted principal and face value (FV) at redemption.

If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital will get protected.

\
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4.

WPI instead of CPI is used for inflation measurement. The consumer price index (CPI) reflects the inflation people at large face and therefore, globally CPI or Retail Price Index (RPI) is used for inflation target by the Central Banks as well as for providing inflation protection in IIBs.

In India, all India CPI is being released since January 2011 and it will take some time in stabilizing. Monetary policy has also been continuing to target WPI for its price stability objective. In view of above, it has been decided to consider WPI for inflation protection in IIBs. The formula for calculating index ratio.

5.

Index ratio (IR) will be calculated by dividing the reference WPI on the settlement date with the reference WPI on the issue date. The formula for the same is as under:

6. Final WPI be used with a lag of four months.

Final monthly WPI will be used as reference WPI for 1st day of the calendar month. The reference WPI for intermittent days, i.e. dates between 1st days of the two consecutive months will be computed through interpolation. For interpolation, two months final WPI should be available throughout the month. As final WPI is available with a lag of about two and half months (e.g. final WPI February 2013 will be released in mid-May 2013), two months final WPI could be available only with a lag of four months. In view of above, the four months lag has been chosen for final WPI to be considered as reference WPI for 1st day of the calendar month. For example, December 2012 final WPI will be taken as reference WPI for 1st of May 2013 and January 2013 final WPI will be taken as reference WPI for 1st of June 2013.

7. The formula for interpolation of daily reference WPI.

For calculating the index ratio for a specific date, daily reference WPI values would be linearly interpolated using Ref WPI for the first day of the calendar month and the first day of the following calendar month. The formula for computing the reference WPI for a particular day is as under:

[Ref WPIM = Ref WPI for the first day of the calendar month in which Date falls, Ref WPIM+1 = Ref WPI for the first day of the calendar month following the
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settlement date, D = Number of days in month (e.g. 31 days in August), and t= settlement date (e.g. August 6)]

An example of daily reference WPI computed through interpolation is furnished below. Date 1-May-13 2-May-13 3-May-13 4-May-13 5-May-13 6-May-13 7-May-13 8-May-13 9-May-13 10-May-13 11-May-13 12-May-13 13-May-13 14-May-13 15-May-13 16-May-13 17-May-13 18-May-13 19-May-13 20-May-13 21-May-13 22-May-13 23-May-13 24-May-13 25-May-13 26-May-13 27-May-13 28-May-13 29-May-13 30-May-13 31-May-13 1-June-13 Ref WPI (Given) 168.8 T-1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 170.3 D 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 Ref WPI (Interpolation) 168.85 168.90 168.95 168.99 169.04 169.09 169.14 169.19 169.24 169.28 169.33 169.38 169.43 169.48 169.53 169.57 169.62 169.67 169.72 169.77 169.82 169.86 169.91 169.96 170.01 170.06 170.11 170.15 170.20 170.25

8. If there is a revision in the base year of WPI series, how will the revised series be used for indexation?

WPI series is being revised after every 10 or more years (e.g. base year revision in WPI series took place in 1981-82, 1993-94 and 2004-05).

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Any revision in the base year would be tackled by splicing the base years so that a consistent WPI series with the same base year is available for indexation purpose since the issue date of the bond.

9. The tax treatment of interest payment and capital gains accrual due to inflation.

Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds.

10. The non-competitive bidding and participation of retail investors in the same?

A non-competitive scheme has been devised for participation of such investors in the auction. Under this scheme, investors are required to indicate the amount of their bids and not the price at which they want to subscribe. Allocation to such investors is made at the weighted average price emerged in the competitive bidding. Presently in auction, up to 5 per cent of the notified amount is reserved for noncompetitive bidding, while up to 20 per cent of the notified amount will be earmarked for such bidding in case of IIBs to encourage retail participation. The retail investors will be able to participate in non-competitive bidding through primary dealers (PD) and banks. They can open a gilt account with PDs and banks or demat account for such participation. SOME QURRRIES REGARDING IIBS

1. Whether foreign institutional investors (FIIs) will be allowed to invest in IIBs?

IIBs would be Government securities (G-Sec) and the different classes of investors eligible to invest in G-Secs would also be eligible to invest in IIBs. FIIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in G-Secs (currently USD 25 billion).

2. Whether IIBs will be traded in the secondary market?

As IIBs are G-Sec, they can be tradable in the secondary market like other GSecs. Investors will be able to trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges.

3. Whether investors will be able to participate in the primary auction of IIBs through web-based platform?

Not as of now. The work on web-based platform for primary auction is, however, underway and as and when the same is completed, investors will be able use the same for participating in the primary auction of G-Secs including IIBs.

4. Whether IIBs will be eligible for short-sale and repo transactions?

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IIBs would be a G-Sec and therefore, would be eligible for short-sale and repo transactions.

5. Whether IIBs will be eligible for statutory liquidity ratio (SLR)?

IIBs would be a G-Sec and issued as part of the approved Government market borrowing programme. Therefore, IIBs would automatically get SLR status.

6. What will be the settlement cycle for IIBs?

Settlement cycle of IIBs will be T+1, like fixed rate conventional bonds.

7. What will be the day count for IIBs?

Like other G-Secs, the day count for IIBs would 30/360.

8. Whether issuance of this instrument will be within the Govt market borrowing programme?

Yes, issuance of IIBs would be within the Govt market borrowing programme of about Rs. 579,000 crore for 2013-14.

9. What will be the maturity of IIBs?

To begin with, IIBs will be issued for 10 years. As it is advisable to issue IIBs at various maturity points to have benchmarks and cater to diverse market demands, more maturity points may be explored subsequently.

10. What will be the frequency of coupon payment on IIBs?

Like other G-Secs, coupon on IIBs would be paid on half yearly basis. Fixed coupon rate would be paid on the adjusted principal.

11. What will be the frequency of issuance of IIBs?

As indicated in the press release issued by Reserve Bank of India on May 15, 2013, IIBs would be launched on June 4, 2013 and the same would be issued on the last Tuesday of each month during 2013-14. This would also include the last Tuesday of June 2013.

12. Auction of IIBs would be yield based or price based? As is the case with fixed rate conventional bonds, IIBs would be issued through yield based auction and subsequent reissues will be through price based auction.

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Investors would be required to bid for real yield in case of IIBs as against nominal yield in case of fixed rate G-Sec.

13. Whether IIBs will be underwritten by primary dealers (PDs)?

Like fixed rate G-Secs, IIBs would be underwritten by the primary dealers.

14. What is going to be the issuance size of IIBs for each tranche?

As indicated in our press release dated May 15, 2013, size of the each tranche would be Rs. 1,000-2,000 crore.

15. Will there be exclusive series of IIBs for retail investors?

Exclusive series for retail investors would be launched in the second half of the current fiscal year (around October 2013).

16. Whether product structure of the retail series of IIBs would be same as series of IIBs of all investors?

Product structure of the series of IIBs for retail investors is yet to be finalised. It will be finalised in the due course and accordingly, the same would put in the public domain.

17. What will be methodology for valuation of these bonds? Fixed Income Money Market and Derivatives Association of India (FIMMDA) will come out with valuation guidelines shortly. NIFTY OR SENSEX The CNX Nifty, also called the Nifty 50 or simply the Nifty, is National Stock Exchange of Indias benchmark index for Indian equity market. Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. . IISL is India's first specialized company focused upon the index as a core product. IISL has a marketing and licensing agreement with Standard & Poor's for co-branding equity indices. 'CNX' in its name stands for 'CRISIL NSE Index'. CNX Nifty has shaped up as a largest single financial product in India, with an ecosystem comprising: exchange traded funds (onshore and offshore), exchangetraded futures and options (at NSE in India and at SGX and CME abroad), other index funds and OTC derivatives (mostly offshore). The CNX Nifty covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio. During 2008-12, CNX Nifty 50 Index share of NSE market capitalisation fell from 65% to 29%[1] due to the rise of sectoral indices like CNX Bank, CNX IT, CNX Mid Cap, etc. The CNX Nifty 50 Index
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gives 29.70% weight age to financial services, 0.73% weight age to industrial manufacturing and nil weight age to agricultural sector.[2] The CNX Nifty index is a free float market capitalisation weighted index. The index was initially calculated on full market capitalisation methodology. From June 26, 2009, the computation was changed to free float methodology. The base period for the CNX Nifty index is November 3, 1995, which marked the completion of one year of operations of National Stock Exchital Market Segment .The base value of the index has been set at 1000, and a base capital of Rs 2.06 trillion. The CNX Nifty Index was developed by Ajay Shah and Susan Thomas. The CNX Nifty currently consists of the following 50 major Indian companies: Kindly Note, post expiration of agreement between IISL and Standard and Poors Financial Service LLC (S&P) on 31st Jan 2013, index is addressed as CNX Nifty Index. (Formerly, S&P CNX Nifty Index) Here is the list of 50 companies that form part of CNX Nifty Index as on 1 April 2013: 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Acc Ltd Ambuja Cements Ltd. Asian Paints Ltd. Axis Bank Ltd. Bajaj Auto Ltd. Bank of Baroda Bharat Heavy Electricals Ltd. Bharat Petroleum Corporation Ltd. Bharti Airtel Ltd. Cairn India Ltd. Cipla Ltd. Coal India Ltd. DLF Ltd. Dr. Reddy's Laboratories Ltd. GAIL (India) Ltd. Grasim Industries Ltd. HCL Technologies Ltd. HDFC Bank Ltd. Hero MotoCorp Ltd. Hindalco Industries Ltd. Hindustan Unilever Ltd. Housing Development Finance Corporation Ltd. I T C Ltd. ICICI Bank Ltd. Infosys Ltd.

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26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Infrastructure Development Finance Co. Ltd. Jaiprakash Associates Ltd. Jindal Steel & Power Ltd. Kotak Mahindra Bank Ltd. Larsen & Toubro Ltd. Lupin Ltd. Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd. NTPC Ltd. Oil & Natural Gas Corporation Ltd. Power Grid Corporation of India Ltd. Punjab National Bank Ranbaxy Laboratories Ltd. Reliance Industries Ltd. Wipro Ltd. Sesa Goa Ltd. NMDC State Bank of India Sun Pharmaceutical Industries Ltd. Tata Consultancy Services Ltd. Tata Motors Ltd. Tata Power Co. Ltd. Tata Steel Ltd. UltraTech Cement Ltd. Indusind Bank

On the following dates, the CNX NIFTY index suffered major single-day falls (of 150 or more points) 16 August 2013 --- 234.45 Points(because of rupee depreciation) 27 August 2013 --- 189.05 Points 03 Sep Aug 2013 --- 209.30 Points In 1991, New Delhi kick-started the economic reforms process owing mainly the serious balance of payments crisis it was facing. to

1997 Asian Financial Cricis - Investors deserted emerging Asian shares, including an overheated Hong Kong stock market. Crashes occur in Thailand, Indonesia, South
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Korea, Philippines, and elsewhere, reaching a climax in the October 27, 1997 minicrash.

BSE SENSEX

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply the SENSEX, is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The 30 component companies which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy. Published since 1 January 1986, the S&P BSE SENSEX is regarded as the pulse of the domestic stock markets in India. The base value of the S&P BSE SENSEX is taken as 100 on 1 April 1979, and its base year as 197879. On 25 July 2001 BSE launched DOLLEX-30, a dollar-linked version of S&P BSE SENSEX. As of 21 April 2011, the market capitalisation of S&P BSE SENSEX was about 29733 billion (US$455 billion) (47.68% of market capitalisation of BSE), while its free-float market capitalisation was 15690 billion (US$240 billion). During 2008-12, Sensex 30 Index share of BSE market capitalisation fell from 49% to 25%. due to the rise of sectoral indices like BSE PSU, Bankex, BSE-Teck, etc. The term Sensex was coined by Deepak Mohoni a stock market analyst. Sensex reached at all time intraday high 21483.74 on 9 Dec 2013 when BJP won in 3 states in assembly election. The BSE Sensex currently consists of the following 30 major Indian companies as of 17 February 2012.

Housing DevelopmentFinance Corporation

500010

2 3 4

Cipla Bharat Heavy Electricals State Bank Of India

Pharmaceuticals Electrical equipment Banking

500087 500103 500112

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5 6 7

HDFC Bank Hero Motocorp Infosys

Banking Automotive Information Technology

500180 500182 500209

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
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Oil and Natural Gas Oil and gas Corporatio Reliance Industries Tata Power Hindalco Industries Tata Steel Larsen & Toubro Mahindra & Mahindra Tata Motors Hindustan Unilever ITC Sterlite Industries Wipro Oil and gas Power

500312 500325 500400

Metals and Mining 500440 Steel Conglomerate Automotive Automotive Consumer goods Conglomerate 500470 500510 500520 500570 500696 500875

Metals and Mining 500900 Information Technology 507685 524715 532155 532174 532286

Sun Pharmaceutical Pharmaceuticals GAIL ICICI Bank Oil and gas Banking

Jindal Steel & Power Steel and power Bharti Airtel Maruti Suzuki

Telecommunication 532454 Automotive 532500

26 27 28 29 30

Tata Consultancy Services NTPC DLF Bajaj Auto Coal India

Information Technology Power Real estate Automotive

532540 532555 532868 532977

Metals and Mining 533278

Calculation
The BSE constantly reviews and modifies its composition to be sure it reflects current market conditions. The index is calculated based on a free float capitalisation method, a variation of the market capitalisation method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading. As per free float capitalisation methodology, the level of index at any point of time reflects the free float market value of 30 component stocks relative to a base period. The market capitalisation of a company is determined by multiplying the price of its stock by the number of shares issued by of corporate actions, replacement of scrips, etc. The index has increased by over ten times from June 1990 to the present. Using information from April 1979 onwards, the long-run rate of return on the S&P BSE SENSEX works out to be 18.6% per annum, which translates to roughly 9% per annum.

DERIVATIVES MARKET

The derivatives market is the financial market for derivatives , financial instruments like futures contracts or options, which are derived from other forms of assets . The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both. What is a DERIVATIVE?

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A derivative is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying". Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages). Derivatives include a variety of financial contracts, including futures, forwards, swaps, options, and variations of these such as caps, floors, collars, and credit default swaps. Most derivatives are marketed through over-the-counter(off-exchange) or through an exchange such as the Chicago Mercantile Exchange; while most insurance contracts have developed into a separate industry Derivatives are a contract between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount under which payments are to be made between the parties. The most common underlying assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, which adds another layer of complexity to proper valuation. The components of a firm's capital structure, e.g. bonds and stock, can also be considered derivatives, more precisely options, with the underlying being the firm's assets, but this is unusual outside of technical contexts. There are two groups of derivative contracts: the privately traded over-thecounter(OTC) derivatives such as swaps that do not go through an exchange or other intermediary, and exchange-traded derivatives(ETD) that are traded through specialized derivatives exchanges or other exchanges. Derivatives are more common in the modern era, but their origins trace back several centuries. One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century. Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives,, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-thecounter); and their pay-off profile. Derivatives may broadly be categorized as "lock" or "option" products. Lock products (such as swaps, futures, or forwards) obligate the contractual parties to the terms over the life of the contract. Option products (such as interest rate caps) provide the buyer the right, but not the obligation to enter the contract under the terms specified. Derivatives can be used either for risk management (i.e. to "hedge" by providing offsetting compensation in case of an undesired event, a kind of "insurance") or for speculation (i.e. making a financial "bet"). This distinction is important because the former is a prudent aspect of operations and financial management for many firms across many industries; the latter offers managers and investors a risky opportunity to increase profit, which may not be properly disclosed to stakeholders. Along with many other financial products and services, derivatives reform is an element of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010. The Act delegated many rule-making details of regulatory oversight to the Commodity Futures
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Trading Commission and those details are not finalized nor fully implemented as of late 2012.

Usage
Derivatives are used for the following: Hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out

Create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)

Obtain exposure to the underlying where it is not possible to trade in the underlying (e.g. weather derivatives)

Provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative

Speculate and make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level)

Switch asset allocations between different asset classes without disturbing the underlining assets, as part of transition management

Avoid paying taxes. For example, an equity swap allows an investor to receive steady payments, e.g. based on LIBOR rate, while avoiding paying capital gains tax and keeping the stock

Derivatives markets are markets that are based upon another market, which is known as the underlying market. Derivatives markets can be based upon almost any underlying market, including individual stock markets (e.g. the stock of company XYZ),
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stock indices (e.g. the Nasdaq 100 stock index), and currency markets (i.e. the forex markets).

Types of Derivatives Markets

Derivatives markets take many different forms, some of which are traded in the usual manner (i.e. the same as their underlying market), but some of which are traded quite differently (i.e. not the same as their underlying market). The following are the most often traded types of derivatives markets:

Futures Markets Options Markets Warrants Markets Contract For Difference (CFD) Markets Spread Betting

Trading Derivatives Markets Of the above types of derivatives markets, futures markets and contract for difference markets are traded in the same manner as their underlying markets, but options markets and warrants markets are traded differently from their underlying markets. For example, futures markets are traded by making a long trade when the market is expected to move upwards, and a short trade when the market is expected to move downwards, whereas options markets can be traded by making either a long trade or a short trade when the market is expected to move upwards. Spread betting is different from both groups of derivatives markets because it is classified as gambling rather than trading, and therefore can be traded in several different forms (e.g. spread betting, binary betting, etc.).

Differences Between Derivatives Markets

A single underlying market usually has several different derivatives markets, which provides several choices for trading a particular market. For example, the FTSE 100 stock index can be traded via futures markets, options markets, warrants markets, contract for difference markets, and spread betting markets. The different derivatives markets for a single underlying market usually have different tick sizes, tick values, and margin requirements, which allows a single underlying market to be traded using a variety of different trading configurations (e.g. different amounts of risk, different amounts of trading capital, etc.).

Futures markets
Futures exchanges, such as Euronext.liffe and the Chicago Mercantile Exchange ,trade in standardized derivative contracts. These are options contracts and futures contracts on a whole range of underlying products. The members of the exchange hold positions
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in these contracts with the exchange, who acts as central counterparty When one party goes long (buys a futures contract), another goes short (sells). When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another. The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. (source: Bank for International Settlements (BIS): . That figure grew to $81 trillion by the end of March 2008

Over-the-counter markets
Tailor-made derivatives, not traded on a futures exchange are traded on over-thecounter markets, also known as the OTC market. These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, accumulators etc. The total notional amount of all the outstanding positions at the end of June 2004 stood at $220 trillion. (source: BIS: ). By the end of 2007 this figure had risen to $596 trillion and in 2009 it stood at $615 trillion.

PERPETUAL BOND IN India

Perpetual bond, which is also known as a Perpetual or just a Prep, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt. Issuers pay coupons on Perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity. Examples of perpetual bonds are consols issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital, and help the banks fulfil their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issuea call protection period.

Perpetual bonds are valued using the formula: on a bond and

where is Annual Coupon Interest

is an expected yield for maximum term available.

Panel to help local lenders with ways of raising long-term capital

The government has formed a committee with representatives from India's top insurer and a few state-owned banks to suggest ways of raising long-term capital for local lenders to meet new international rules on capital for banks.The mandate of the committee is to recommend steps to raise perpetual or long-dated bonds which do not
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have any fixed maturity, and will be issued by Indian banks in line with the new Basel rules which kick in from 2014. Indian banks have virtually stopped issuing perpetual bonds as investors are disinclined to invest in such long-maturity bonds, given the credit and interest rate risks involved. Besides, the pool of investors for such bonds is limited in India as insurance firms such as Life Insurance Corporation (LIC) or pension funds, that have deep pockets, are barred from investing in such bonds even though they are keen to do so. The committee, which will be headed by LIC's executive director, treasury, will have members from the State Bank of India, PNB, Andhra Bank and Indian Overseas Bank. The new rules state that perpetual bonds raised by banks will be classified as core or tier I capital only if there's a clause which ensures that in case the bank incurs a loss, it would be free to convert such bonds into equity. "LIC and banks will deliberate on the structure of perpetual bonds. Banks will help LIC understand the features of perpetual bonds and LIC will then take it up with the regulator IRDA for modification," said a senior banker on condition of anonymity. According to Reserve Bank of India, banks will need an additional capital of about 5 lakh crore to meet Basel III norms, of which non-equity capital will be to the tune of 3,25 lakh crore while equity capital will be 1,75 lakh crore.

Banks allowed to float perpetual bonds abroad

The Reserve Bank of India has allowed banks to float perpetual bonds in international financial markets. The move, announced , may give commercial banks an additional route to shore up their capital base. Public sector banks today have very little headroom left for equity offering without taking the government's stake below 51%. Perpetual bonds are a cross between debt and equity. They are similar to bonds as they offer a fixed rate of return at the same time they are similar to equity since they do not have any maturity period. Perpetual bonds in existence today include those in the UK issued by the British treasury to fund Napoleonic wars in the 19th Century. The Reserve Bank of India has given a go-ahead for banks to issue hybrid capital instruments denominated in foreign currencies. As per the new guidelines issued by the central bank, the amount raised by a bank through innovative perpetual debt instruments will no longer attract reserve requirements. The central bank has also allowed banks to raise funds through perpetual debt instruments in foreign currencies without seeking its prior approval, subject to certain conditions. Thus, banks can raise up to 15% of the total tier-I capital in the form of perpetual debt.

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Of this, banks can raise 49% through foreign currency. Banks can raise up to 25% of the unimpaired tier-I capital through the issue of upper tier-II instruments denominated in foreign currency. According to the central bank, investments made by foreign institutional investors (FIIs) in these instruments raised in India will not be included within the limit specified for FII investments in corporate debt instruments, which is currently capped at $1.5bn. However, investment by FIIs in upper tier-II instruments would be subject to a separate ceiling of $500m. Capital funds raised through the issue of these two instruments in foreign currency would be in addition to the existing limit for foreign currency borrowings by banks, said the central bank. Against the backdrop of increasing interest rates, the market for perpetual debt instruments in India is still at a nascent stage. With banks having to comply to Basel-II requirements by the end of this financial year, there will be an increasing need to raise capital. Insurance companies haven't shown much appetite for perpetual debt instruments as the returns are not commensurate with the risk levels. Public sector banks, especially those in which the government ownership is close to 51%, will be the ones to tap this route for raising capital. Others like UTI Bank have already approached the RBI for permission to raise capital through this route.

MUTUAL FUNDS
A mutual fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies. Most mutual funds are "open-ended," meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered a type of mutual fund. In the United States, mutual funds must be registered with the Securities and Exchange Commission, overseen by a board of directors (or board of trustees if organized as a trust rather than a corporation or partnership) and managed by a registered investment adviser. Mutual funds, like other registered investment companies, are also subject to an extensive and detailed regulatory regime set forth in the Investment Company Act of 1940. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances, most notably in retirement planning. There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closedend. The most common type, the open-end fund, must be willing to buy back shares from investors every business day. Exchange-traded funds (or "ETFs" for short) are
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open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity. Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively managed. Investors in a mutual fund pay the funds expenses, which reduce the fund's returns/performance. There is controversy about the level of these expenses. A single mutual fund may give investors a choice of different combinations of expenses (which may include sales commissions or loads) by offering several different types of share classes.

The first mutual funds were established in Europe. One researcher credits a Dutch merchant with creating the first mutual fund in 1774. The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in 1868. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange. Mutual funds were introduced into the United States in the 1890s. They became popular during the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio. The first open-end mutual fund with redeemable shares was established on March 21, 1924. This fund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However, closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929, open-end funds accounted for only 5% of the industry's $27 billion in total assets. After the stock market crash of 1929, Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. The Securities Act of 1933requires that all investments sold to the public, including mutual funds, be registered with the Securities and Exchange Commission and that they provide prospective investors with a prospectus that discloses essential facts about the investment. The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds, while the Investment Company Act of 1940 governs their structure. When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow again. By 1970, there were approximately 360 funds with $48 billion in assets. The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. The first retail index fund, First Index Investment Trust, was formed in 1976 by The Vanguard Group, headed by John
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Bogle; it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011. Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a bull market for both stocks and bonds, new product introductions (including tax-exempt bond, sector, international and target date funds) and wider distribution of fund shares. Among the new distribution channels were retirement plans. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans, specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs), all of which surged in popularity in the 1980s. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008. In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholders. Some fund management companies allowed favored investors to engage in late trading, which is illegal, or market timing, which is a practice prohibited by fund policy. The scandal was initially discovered by then-New York State Attorney General Eliot Spitzer and resulted in significantly increased regulation of the industry. At the end of 2011, there were over 14,000 mutual funds in the United States with combined assets of $13 trillion, according to the Investment Company Institute (ICI), a trade association of investment companies in the United States. The ICI reports that worldwide mutual fund assets were $23.8 trillion on the same date. Mutual funds play an important role in U.S. household finances and retirement planning. At the end of 2011, funds accounted for 23% of household financial assets. Their role in retirement planning is particularly significant. Roughly half of assets in 401(k) plans and individual retirement accounts were invested in mutual funds.

There are 3 principal types of mutual funds in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange; they have gained in popularity recently. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type. Open-end funds

Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. There is no legal limit on the number of shares that can be issued.

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Open-end funds are the most common type of mutual fund. At the end of 2011, there were 7,581 open-end mutual funds in the United States with combined assets of $11.6 trillion. Closed-end funds Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate. At the end of 2011, there were 634 closed-end funds in the United States with combined assets of $239 billion. Unit investment trusts Unit investment trusts or UITs issue shares to the public only once, when they are created. UITs generally have a limited life span, established at creation. Investors can redeem shares directly with the fund at any time (as with an open-end fund) or wait to redeem upon termination of the trust. Less commonly, they can sell their shares in the open market. Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change. At the end of 2011, there were 6,022 UITs in the United States with combined assets of $60 billion. Exchange-traded funds A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-end investment company, though ETFs may also be structured as unit investment trusts, partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note). ETFs combine characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open-end funds, investors normally receive a price that is close to net asset value. To keep the market price close to net asset value, ETFs issue and redeem large blocks of their shares with institutional investors.

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