Financial Products

Finance is the lifeblood of any business Financial services is the backbone of any economy Financial Institutions are providers of Financial Services Through different Financial Products

Prof. Madhu Iyengar

4/12/2012

Unitedworld-PGPM

Structure
Session 7 Hedge Funds Debates/Discussions Case Study 3 Quiz 4 Session 6 Internals -1 Session 4-5 Case Study -2 Debates/Discussions Equity Quasi Equity Products Along with a Work shop on equity market and research Quiz 3 Session 8,9,10 Bond Markets Case Study 4 Quiz 5 Session 11 12 13 Microfinance Debates/Discussions Case Study 4 Quiz 7 Session 14 15 16 Mutual Funds Guest Lecture Presentations Case Study 4 Quiz 6

Financial Products
Session 17-18 Presentations Credit Cards Quiz 8 Session 19-20 Presentations Housing Finance Quiz 9 Session 1-2 Overview, Financial Markets , Debates/Discussions/ Class Assignment-1/ Case Study 1 Quiz 1 Unitedworld-PGPM Session 21-22 Presentations-Provident Funds, Post Office Savings Schemes Quiz 9 2

Session 3-4 Financial Markets (Contd)Retail Financial Services Debates/Discussions Case Discussion -1 Assignment-2 4/12/2012 Quiz 2

An Overview

Service Industry Diverse in nature (Primary, secondary, tertiary) Financial Service Industry- BFSI Financial Services industry largest in the world Cynosure of all eyes

4/12/2012

Unitedworld-PGPM

Need of Financial Services

Financial Markets

Individuals Investing
4/12/2012 Unitedworld-PGPM

Corporates & Governments Financing

4

Functions

Include : Money Management Portfolio Management Stock Broking Custodial Services Equipment Leasing Retail Financing Credit Card Services Credit Rating Services Factoring Services

4/12/2012

Unitedworld-PGPM

Direct and Indirect Financing

Two competing alternative methods exist: direct and indirect financing. In direct financing the ultimate funds supplier purchases a claim from the corporate who needs funds .In this case, we rely on primary markets to initially price the issue and then secondary markets to update the prices, monitor any contractual conditions and provide liquidity. In indirect financing, the corporate/person who needs funds obtains financing from a financial intermediary. The intermediary and the borrower negotiate the terms and cost. The intermediary obtains funds by offering different claims to fund suppliers.

4/12/2012

Unitedworld-PGPM

Why Financial Institutions?

For an economy to achieve its potential growth rate, mechanisms must exist to effectively allocate capital (a scarce resource) to the best possible use accounting for the riskiness of the opportunities available. Markets and institutions have been created to facilitate transfers of funds from economic agents with surplus funds to economic agents in need of funds. Act as mobilisers and depositories of savings Act as purveyors of credit

4/12/2012

Unitedworld-PGPM

Transformation Functions of Financial Intermediaries

Liability-Asset Transformation Size-Transformation Risk-Transformation Maturity-Transformation

4/12/2012

Unitedworld-PGPM

Financial Sector & Economic Development

4/12/2012

Unitedworld-PGPM

Financial & Economic Development

For an efficient development of an economy, financial development is mandatory. What are the indicators of growth of an economy? Some indicators of Financial Development: 1. Finance Ratio- (PI + SI) /National Income 2. Finance Interrelations Ratio- FA/PA 3. New Issue Ratio- PI/PA ( Also called Finance disintermediation Ratio)

4. Intermediary Ratio-SI/PI
PI- Primary Issues SI- Secondary Issues PA-Physical Assets (Gross Domestic Capital Formation)
4/12/2012 Unitedworld-PGPM 10

Cautionary view : Financial system in development

Little investment in financial market is based genuine long-term expectations. ( Keynes) Financial markets hardly conform to a model of perfect competition The casino effect of the financial market Crowed behavior of the market: growing deviation from equilibrium prices (boom & bust) Investor behavior: trade on noise rather than fundamentals Real growth can not be bought with money alone (Chandler)
Unitedworld-PGPM 11

4/12/2012

Classification of Financial Markets

Primary Markets

Funds are raised-by users (corporates & governments) by issue of fin. instruments

(stocks & bonds)

Secondary Markets Markets where financial instruments are traded among investors NSE,BSE etc

4/12/2012

Unitedworld-PGPM

12

Money Market and Capital Market

Money Markets-trading of debt securities-short maturity period(less than a year)-Treasury bills, commercial paper etc-no specific location

Capital Markets-Trading of stocks & bonds-long

term needs of users of funds-suppliers are households-more fluctuations in prices-basically secondary markets

4/12/2012

Unitedworld-PGPM

13

Forex Markets

FX- markets deal in trading one currency for another -e.g. dollar for euro

Cash Market Tom Market Spot FX markets deal in trading currencies at the current exchange rate

Forward FX markets deal in exchange of currencies at a specified date in the future and at a specified exchange rate

4/12/2012

Unitedworld-PGPM

14

Institutions that perform the essential function of transferring funds from those with surplus funds to those with shortages of funds.

Eg. banks, insurance companies, mutual funds

4/12/2012

Unitedworld-PGPM

15

Flow of funds from investors to users directly without the help of intermediary

Eg: A private limited company issues shares to a

person who pays cash to the company

4/12/2012

Unitedworld-PGPM

16

Users of funds receive funds from suppliers in exchange of fin. claims-equities & bonds-via FIs who play the role of brokers

Users of funds receive funds from suppliers in

exchange of fin. claims like deposits & insurance policies via FIs who play the role of Asset transformers

4/12/2012

Unitedworld-PGPM

17

Economic and Social Services of Financial Institutions

Impact of Monetary policies

Credit Allocation to specific sectors

4/12/2012

Unitedworld-PGPM

18

Credit risk-claims not met Foreign Exchange Risk-exchange rates Country risk Interest rate risk

Market risk
Liquidity Risk Off-Balance-Sheet Risk

Technology Risk
Operational Risk Insolvency Risk
Unitedworld-PGPM 19

4/12/2012

Class Discussion-1 ( Class participation)

The black money in Indian economy has a mindboggling figure; can you believe that it is estimated as 50-60% of our GNP (Gross National Product)? How is the figure estimated?

4/12/2012

Unitedworld-PGPM

20

News Clippings:

Rs 30,000 crore black money recovered by CBDT( Wednesday, 18 May 2011) $1.4 Trillion Indias Black Money Stashed in Swiss Banks ( 6th June 2011) India topping the list with almost $1500 Billion black money in swiss banks, followed by Russia $470 Billion, UK $390 Billion, Ukraine $100 Billion and China with $96 Billion.(3rd July 2011) An amount which is 13 times larger than the nations foreign debt.
Unitedworld-PGPM 21

4/12/2012

Some Positives :

Unearthing Indian black money in Switzerland : The Government of India had signed a Protocol with the Government of Switzerland in August 2010 for the purpose of amending the Tax Treaty Government of India to access the accounts maintained in the Swiss banks by the Indian tax evaders The Government of India took note about the money kept by the Indian tax evaders in Swiss Banks, which is estimated at around $462 billion. The effort of the government is to bring the money back to India and also to collect due taxes which might have been evaded.

4/12/2012

Unitedworld-PGPM

22

Assignment-1 ( 10 marks)

Identify a specific scenario where direct financing would be beneficial for both the funds suppliers and those in need of funds. Identify a second specific scenario where indirect financing would be beneficial for both. To be submitted by 20th July 2011 positively .

4/12/2012

Unitedworld-PGPM

23

Case Study for next session

The Greek crisis- Financial Debt Crisis Identify causes Role of EU and IMF Financial Product and the banks responsible for the crisis Governments approach Will Greece rip the global economy like Lehman? A debate Class to be divided into groups- for and against

4/12/2012

Unitedworld-PGPM

24

Q&A
Any Queries?

4/12/2012

Unitedworld-PGPM

25