Defined as the products and services offered by institutions for the facilitation of various financial transactions and other

related activities in the world of finance

Loans Insurance Credit cards Investment opportunities Money management Providing information on the stock market and other issues like market trends

Facilitating transactions Mobilizing savings Allocating capital funds Monitoring managers Transforming risk

Customer-Specific Intangibility Simultaneous performance Tendency to Perish Market Dynamics

Economic growth Promotion of savings Capital formation Provision of liquidity Financial intermediation Contribution to GNP Creation of employment opportunity

Classification

Capital market intermediaries

Money market intermediaries

Financial services cover a wide range of activities. They can be broadly classified into two, namely : i. Traditional. Activities ii. Modern activities.

Fund based activities and Non-fund based activities.

Fund based activities :That include money transfer

Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary market activities). Dealing in secondary market activities. Participating in money market instruments like commercial Papers, certificate of deposits, treasury bills, discounting of bills etc. Involving in equipment leasing, hire purchase, venture capital, seed capital, Dealing in foreign exchange market activities.

For example 1. Managing the capital issue 2. Making arrangements for the placement of capital and debt instruments with investment institutions 3. Arrangement of funds from financial institutions for the clients project cost or his working capital requirements.

Low profitability Keen competition Economic liberalization Improved communication technology Customer service Global impact Investors awareness

Lack of qualified personnel Lack of investor awareness Lack of transparency Lack of specialization Lack of recent data Lack of efficient risk management system

Merchant banking

Merchant Banking is a combination of Banking and consultancy services. Financial intermediary who helps to transfer capital from those who possess it to those need it.

Project counseling Loan syndication Issue management Underwriting issue Portfolio management

The process of involving several different lenders in providing various portions of a loan. Loan arranged by a bank called lead manager for a borrower who is usually a large corporate customer or a government department

The Leasing Environment

A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time.

Largest group of leased equipment involves:

Information technology, Transportation (trucks, aircraft, rail),

Construction and
Agriculture.
LO 1 Explain the nature, economic substance, and advantages of lease transactions.

This refers to fund raised by a financial service company by pooling the savings of the public. It is invested in a diversified portfolio with view to spreading and minimizing risk. The fund provides investment avenue for small investors who cant participate in the equities of big companies. It ensures low risk, steady returns, high liquidity and better capital appreciation in long run.

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Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client.

PROCESS OF FACTORING

CLIENT

CUSTOMER

FACTOR

Its a technique by which forfaitor (Financing Agency) discounts an export bill and pay ready cash to the exporter who can concentrate on the export front without bothering about the collection of export bills.
The exporter is protected against the risk of nonpayment of debts by the importers.

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Money provided by investors to startup firms and small businesses with perceived longterm growth potential. It typically entails high risk for the investor, but it has the potential for above-average returns.

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying assets. Those assets can be These underlying assets are of various categories like
Stocks(Equity) Agri Commodities including grains,

coffee beans, etc. Precious metals like gold and silver. Foreign exchange rate Bonds Short-term debt securities such as Tbills

Types of derivatives

Derivatives

Futures
Index Futures

Forwards

Swaps

Options

Stock Futures

Put

Call

A Forward Contract is an agreement to buy or sell an asset on a specified date for a specified price. On the expiration date, the contract has to be settled by delivery of the asset.

Futures Contract

Salient Features Obligation to buy or sell Stated quantity At a specific price Stated date (Expiration Date) Marked to Market on a daily basis

 An Options contract confers the right but not the obligation

to buy (call option) or sell (put option) a specified underlying

instrument or asset at a specified price the Strike or Exercised price up until or an specified future date the Expiry date. The Price is called Premium and is paid by buyer of the option to the seller or writer of the option. Types of option
Call Option Put option