Financial Instruments

By : Akshay anand FM 2, Sem - 3

Major Financial Instruments

Equity Shares Preference Shares Debentures Treasury bills Commercial Paper Certificate of Deposits Commercial bills Derivatives Mutual funds Government securities

Treasury bills
It is issued by RBI on behalf of GOI to raise short-term

finance. Most important segment of money market. They are negotiable securities. They are issued at discount. They are negotiable securities. No default risk On-tap bill, ad hoc bill, auctioned bill Multiple price / uniform price auction

Commercial paper
It is issued by corporate, primary dealers and FI at

discount. Minimum rating is required to issue CPs. It can be issued from 7 days to 1 year. It is issued in the multiple of Rs. 5 lakhs. It can be issued as a promissory note or in the demat form. Underwriting is not permitted in CPs. It is also issued at a discount as T-bill.

Commercial bills
Types of bills Demand bill Usance bill Clean bill Documentary bill Inland bill Foreign bill Bill Market in India has remained under-developed.

Certificate of Deposit
CDs are short-term bearer instruments issued banks

and DFIs. Differences between CDs and FDs. Minimum amount of CD is Rs. 1 lakh and multiple of Rs. 1 lakh thereafter. Banks can issue CD from 7 days to 1 year. CDs can be issued at discount. Physical CDs are freely transferable by endorsement and delivery

Certificate of Deposit
Banks / FIs can not grant loan against CDs. Investor can hold CDs in physical form or demat form. Security aspect of CDs. Repayment on maturity.

Derivatives
Derivatives means the value of which is derived from

the underlying asset. Underlying asset can be equity, foreign exchange, interest bearing financial asset, commodities. It is a tool for financial risk management. There are four major types of derivatives: forward, future, option and swaps.

Forward
It is the simplest and oldest type of derivative. It is a contract between two parties to buy and sell an

asset at future date at agreed price. Each contract is custom design. They are bilateral contracts so they are exposed to counter party risk.

Futures
It is designed to remove the disadvantage of forward

contracts. A future contract is a standardised contract which is traded in the future exchanges. There can be financial future or commodity future. Clearing house acts as an intermediary in the future contracts.

Option
It is an agreement in which a buyer has a right ( not

obligation) to buy or sell an asset at a set price. The buyer pays the premium to seller for having the option. There are two types of option : Call option and Put option. Options are generally European or American.

Swaps
It is a derivative where two parties exchange on stream

of cash flow against another. There are mainly interest rate swaps and currency swaps.