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Indian Capital Markets Since 2003, Indian capital markets have been receiving global attention, especially from

sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased Indias global competitiveness. No wonder, the global ratings agencies Moodys and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks. The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision. The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial Public Offering (IPO). The secondary market is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

The products traded in the market, viz. equities and bonds issued by the government and companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91Day T-Bills, 10-Year Notional Zero Coupon Bond, and 6% Notional 10-Year Bond. The amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. The profiles of the investors, issuers, and intermediaries.

Broad Constituents in the Indian Capital Markets Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds: Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc. Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc. Organizations include various entities such as BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).

Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT) Participants in the Securities Market SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture capital investors, mutual funds, collective investment schemes. EQUITY MARKET History of the Market With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the marketoriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets. The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a peoples market, flooded with primary issues. In the first 11 months of 2007, the new capital raised in the global public equity markets through IPOs accounted for $107 billion in 382 deals out of the total of $255 billion raised by the four BRIC countries. This was a sizeable growth from $90 billion raised in 302 deals in 2006. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks. Derivative Markets The emergence of the market for derivative products such as futures and forwards can be

traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. This instrument is used by all sections of businesses, such as corporates, SMEs, banks, financial institutions, retail investors, etc. According to the International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC) markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives, whereas in the exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk of the derivatives. What are futures contracts? Futures contracts are standardized derivative instruments. The instrument has an underlying product (tangible or intangible) and is impacted by the developments witnessed in the underlying product. The quality and quantity of the underlying asset are standardized. Futures contracts are transferable in nature. Three broad categories of participantshedgers, speculators, and arbitragerstrade in the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the business community dealing with the underlying asset to a future instrument on a regular basis. They use futures or options markets to reduce or eliminate this risk. Speculators have a particular mindset with regard to an asset and bet on future movements in the assets price. Futures and options contracts can give them an extra leverage due to margining system. Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. For example, when they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Important Distinctions Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is whether the derivative is traded on the exchange or over the counter. Exchange-traded contracts are standardized (futures). It is easy to buy and sell contracts (to reverse positions) and no negotiation is required. The OTC market is largely a direct market between two parties who know and trust each other. Most common example for OTC is the forward contract. Forward contracts are directly negotiated, tailor-made for the needs of the parties, and are often not easily reversed. Distinction between Forward and Futures Contracts: Futures Contracts Meaning: A futures contract is a contractual agreement between two parties to buy or sell a standardized quantity and quality of asset on a specific future date on a futures exchange. Forward Contracts A forward contract is a contractual agreement between two parties to buy or sell an asset at a future date for a predetermined mutually agreed price while entering into the contract. A forward contract is not traded on an exchange.

Trading place: A futures contract A forward contract is traded in an is traded on the centralized trading OTC market. platform of an exchange. Transparency in contract The contract price of a forward price: The contract price of a contract is not transparent, as it is futures contract is transparent as it not publicly disclosed. is available on the centralized trading screen of the exchange. Valuations of open position and margin requirement: In a futures contract, valuation of open position is calculated as per the official closing price on a daily basis and mark-to-market (MTM) margin requirement exists. In a forward contract, valuation of open position is not calculated on a daily basis and there is no requirement of MTM on daily basis since the settlement of contract is only on the maturity date of the contract.

Liquidity: Liquidity is the measure A forward contract is less liquid due of frequency of trades that occur in to its customized nature. a particular futures contract. A futures contract is more liquid as it is traded on the exchange. Counterparty default risk: In In forward contracts, counterparty futures contracts, the exchange risk is high due to the customized clearinghouse provides trade nature of the transaction. guarantee. Therefore, counterparty risk is almost eliminated. Regulations: A regulatory A forward contract is not regulated authority and the exchange regulate by any exchange. a futures contract. Benefits of Derivatives a. Price Risk Management: The derivative instrument is the best way to hedge risk that arises from its underlying. Suppose, A has bought 100 shares of a real estate company with a bullish view but, unfortunately, the stock starts showing bearish trends after the subprime crisis. To avoid loss, A can sell the same quantity of futures of the script for the time period he plans to stay invested in the script. This activity is called hedging. It helps in risk minimization, profit maximization, and reaching a satisfactory risk-return trade-off, with the use of a portfolio. The major beneficiaries of the futures instrument have been mutual funds and other institutional investors. b. Price Discovery: The new information disseminated in the marketplace is interpreted by the market participants and immediately reflected in spot and futures prices by triggering the trading activity in one or both the markets. This process of price adjustment is often termed as price discovery and is one of the major benefits of trading in futures. Apart from this, futures help in improving efficiency of the markets.

c. Asset Class: Derivatives, especially futures, offer an exclusive asset class for not only large investors like corporates and financial institutions but also for retail investors like high networth individuals. Equity futures offer the advantage of portfolio risk diversification for all business entities. This is due to the fact that historically it has been witnessed that there lies an inverse correlation of daily returns in equities as compared to commodities. d. High Financial Leverage: Futures offer a great opportunity to invest even with a small sum of money. It is an instrument that requires only the margin on a contract to be paid in order to commence trading. This is also called leverage buying/selling. e. Transparency: Futures instruments are highly transparent because the underlying product (equity scripts/index) are generally traded across the country or even traded globally. This reduces the chances of manipulation of prices of those scripts. Secondly, the regulatory authorities act as watchdogs regarding the day-to-day activities taking place in the securities markets, taking care of the illegal transactions. f. Predictable Pricing: Futures trading is useful for the genuine investor class because they get an idea of the price at which a stock or index would be available at a future point of time. EXCHANGE PLATFORM Domestic Exchanges Indian equities are traded on two major exchanges: Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE). Bombay Stock Exchange (BSE) BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India led to the formation of the Native Share Brokers Association in 1875, which later became Bombay Stock Exchange Limited (BSE). BSE is widely recognized due to its pivotal and pre-eminent role in the development of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screenbased order-driven trading system. The exchange opened up for foreign ownership (foreign institutional investment). Allowed Indian companies to raise capital from abroad through ADRs and GDRs. Expanded the product range (equities/derivatives/debt). Introduced the book building process and brought in transparency in IPO issuance. T+2 settlement cycle (payments and settlements). Depositories for share custody (dematerialization of shares). Internet trading (e-broking). Governance of the stock exchanges (demutualization and corporatization of stock exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE Online Trading System (BOLT). Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas, BSE Metal, BSE FMCG

National Stock Exchange (NSE) NSE was recognised as a stock exchange in April 1993 under the Securities Contracts (Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its operations in November 1994, whereas the derivative segment started in 2000. NSE introduced a fully automated trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time priority. This system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing the spreads significantly. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides complete transparency of trading operations. Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures International Exchanges Due to increasing globalization, the development at macro and micro levels in international markets is compulsorily incorporated in the performance of domestic indices and individual stock performance, directly or indirectly. Therefore, it is important to keep track of international financial markets for better perspective and intelligent investment. 1. NASDAQ (National Association of Securities Dealers Automated Quotations) NASDAQ is an American stock exchange. It is an electronic screen-based equity securities trading market in the US. It was founded in 1971 by the National Association of Securities Dealers (NASD). However, it is owned and operated by NASDAQ OMX group, the stock of which was listed on its own stock exchange in 2002. The exchange is monitored by the Securities and Exchange Commission (SEC), the regulatory authority for the securities markets in the United States. NASDAQ is the world leader in the arena of securities trading, with 3,900 companies (NASDAQ site) being listed. There are four major indices of NASDAQ that are followed closely by the investor class, internationally. i. NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs, tracking stocks and limited partnership interests listed on the NASDAQ stock market. It is estimated that the total components count of the Index is over 3,000 stocks and it includes stocks of US and non-US companies, which makes it an international index. It is highly followed in the US and is an indicator of performance of technology and growth companies. When launched in 1971, the index was set at a base value of 100 points. Over the years, it saw new highs; for instance, in July 1995, it closed above 1,000mark and in March 2000, it touched 5048.62. The decline from this peak signalled the end of the dotcom stock market bubble. The Index never reached the 2000 level afterwards. It was trading at 1316.12 on November 20, 2008. NASDAQ 100: It is an Index of 100 of the largest domestic and international non-financial companies listed on NASDAQ. The component companies weight in the index is based on their market capitalization, with certain rules




controlling the influence of the largest components. The index doesnt contain financial companies. However, it includes the companies that are incorporated outside the US. Both these aspects of NASDAQ 100 differentiate it from S&P 500 and Dow Jones Industrial Average (DJIA). The index includes companies from the industrial, technology, biotechnology, healthcare, transportation, media, and service sectors. Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles Henry Dow. He formed a financial company with Edward Jones in 1882, called Dow Jones & Co. In 1884, they formed the first index including 11 stocks (two manufacturing companies and nine railroad companies). Today, the index contains 30 blue-chip industrial companies operating in America. The Dow Jones Industrial Average is calculated through the simple average, i.e., the sum of the prices of all stocks divided by the number of stocks (30). S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard and Poor's unit in 1957 to further improve tracking of American stock market performance. In 1968, the US Department of Commerce added S&P 500 to its index of leading economic indicators. S&P 500 is intended to be consisting of the 500 largest publically-traded companies in the US by market capitalization (in contrast to the FORTUNE 500, which is the largest 500 companies in terms of sales revenue). The S&P 500 Index comprises about three-fourths of total American capitalization. 2. LSE (London Stock Exchange) The London Stock Exchange was founded in 1801 with British as well as overseas companies listed on the exchange. The LSE has four core areas: i. Equity markets: The LSE enables companies from around the world to raise capital. There are four primary markets; Main Market, Alternative Investment Market (AIM), Professional Securities Market (PSM), and Specialist Fund Market (SFM). Trading services: Highly active market for trading in a range of securities, including UK and international equities, debt, covered warrants, exchangetraded funds (ETFs), exchange-traded commodities (ETCs), REITs, fixed interest, contracts for difference (CFDs), and depositary receipts. Market data information: The LSE provides real-time prices, news, and other financial information to the global financial community. Derivatives: A major contributor to derivatives business is EDX London, created in 2003 to bring the cash, equity, and derivatives markets closer together. It combines the strength and liquidity of LSE and equity derivatives technology of NASDAQ OMX group.


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The exchange offers a range of products in derivatives segment with underlying from Russian, Nordic, and Baltic markets. Internationally, it offers products with underlying from Kazakhstan, India, Egypt, and Korea.

3. Frankfurt Stock Exchange It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Brse. The Frankfurt Stock Exchange has over 90 percent of turnover in the German market and a big share in the European market. The exchange has a few well-known trading indices of the exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX, and EuroStoxx 50. DAX is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system of the Frankfurt Stock Exchange. REGULATORY AUTHORITY There are four main legislations governing the securities market: a. The SEBI Act, 1992 establishes SEBI to protect investors and develop and regulate the securities market. b. The Companies Act, 1956 sets out the code of conduct for the corporate sector in relation to issue, allotment, and transfer of securities, and disclosures to be made in public issues. c. The Securities Contracts (Regulation) Act, 1956 provides for regulation of transactions in securities through control over stock exchanges. d. The Depositories Act, 1996 provides for electronic maintenance and transfer of ownership of demat securities. In India, the responsibility of regulating the securities market is shared by DCA (the Department of Company Affairs), DEA (the Department of Economic Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and Exchange Board of India). The DCA is now called the ministry of company affairs, which is under the ministry of finance. The ministry is primarily concerned with the administration of the Companies Act, 1956, and other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with the law. The ministry exercises supervision over the three professional bodies, namely Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of India (ICWAI), which are constituted under three separate Acts of Parliament for the proper and orderly growth of professions of chartered accountants, company secretaries, and cost accountants in the country. SEBI protects the interests of investors in securities and promotes the development of the securities market. The board helps in regulating the business of stock exchanges and any other securities market. SEBI is also responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with securities markets in any manner. The board registers the venture capitalists and collective investments like mutual funds. SEBI helps in promoting and regulating self regulatory organizations. RBI is also known as the bankers bank. The central bank has some very important objectives and functions such as: Objectives

Maintain price stability and ensure adequate flow of credit to productive sectors. Maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking services to the public. Facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India. Give the public adequate quantity of supplies of currency notes and coins in good quality.


Formulate implements and monitor the monetary policy. Prescribe broad parameters of banking operations within which the country's banking and financial system functions. Manage the Foreign Exchange Management Act, 1999. Issue new currency and coins and exchange/destroy currency and coins not fit for circulation. Perform a wide range of promotional functions to support national objectives. The DEA is the nodal agency of the Union government to formulate and monitor the country's economic policies and programmes that have a bearing on domestic and international aspects of economic management. Apart from forming the Union Budget every year, it has other important functions like: i. Formulation and monitoring of macro-economic policies, including issues relating to fiscal policy and public finance, inflation, public debt management, and the functioning of capital market, including stock exchanges. In this context, it looks at ways and means to raise internal resources through taxation, market borrowings, and mobilization of small savings. Monitoring and raising of external resources through multilateral and bilateral development assistance, sovereign borrowings abroad, foreign investments, and monitoring foreign exchange resources, including balance of payments. Production of bank notes and coins of various denominations, postal stationery, postal stamps, cadre management, career planning, and training of the Indian Economic Service (IES).


iii. Knowledge for Markets Knowledge for Markets is the flagship platform of Financial Technologies Knowledge Management Company Limited (FTKMC), a constituent of the Financial Technologies Group. FTKMC develops strategies and solutions in knowledge management across all the major asset markets and segments, including equities, commodities, currencies, bonds, debt, banking, and financial services. Its range of services includes financial education and training, consultancy, research and publications, and advisory services. A rich blend of conceptual clarity along with a focus on market practice is embedded in the programmes designed by FTKMC, leading to wider acceptance from a cross-section of professionals from policy, regulation, and market intermediation as also the investing community. Some of the initiatives on the Knowledge for Markets platform include:

Conducted over 250 training programmes across various centres in India in 2008-09, jointly with MCX Stock Exchange, for creating awareness on currency derivatives Conducted a series of nationwide programmes on commodities derivatives, jointly with the Forward Markets Commission, the regulator for the commodities markets in India, and MCX, Indias No 1 commodity exchange Coordinated in content development and panel discussions for a 52-episode television programme on financial literacy, along with Doordarshan, the largest governmentowned television channel in India Lunched a One-Year Postgraduate Diploma in Financial Markets Practice, jointly with Indira Gandhi National Open University (IGNOU), the largest open university in the world Conducted the two-week Certification programme for students and executives, Winter School in Financial Markets Practice, jointly with the National Institute of Industrial Engineering (NITIE) Organized GLOBEX 2009, the Global Financial Markets Exposure Programme for CEOs of financial firms, conducted across six major financial centres: Hong Kong, Singapore, Shanghai, Seoul, Kuala Lumpur, and Bangkok Event management of the South Asian Capital Markets Conference held in Mauritius on April 22-24, hosted by the South Asian Federation of Exchanges, an exchange industry association in the South Asia region Prepared the Financial Literacy Diary, a reference-cum-educational product that received huge response from investors and institutions, also part of financial education series for the benefit of students

FTKMC conducts a wide range of programmes, which could be customized to meet the specific requirements of various institutions. These include:

Markets in Motion: Senior Management Briefings Half-day to full-day briefings to senior and top management of corporates and banks on the emerging developments in financial regulation, compliance standards, new market segments, etc. The focus of these presentations will be two-fold: financial institutions could complement business with better compliance standards and other businesses could harness the potential and benefits of financial sector for business development. These short briefings are in the nature of interactive sessions with CEOs/senior executives of banks, financial institutions and corporates. Growth with Governance Seminars The challenge of modern-day business is evolving a right mix of growth and governance priorities. Growth with Governance seminars are of one-day or two-day duration, with interactions and presentations on governance for corporate directors and senior professionals. These seminars deal with various aspects of policy, regulation, and market practice in regard to corporate governance. Global Financial Markets Exposure Programme This programme offers an opportunity for consultations with professionals from a wide range of institutions in major financial centres on various aspects of policy, regulation, and market practices. These programmes are primarily meant for CEOs of broking houses, banks, and other intermediaries to create awareness of the scope of the markets, size and significance and extent of operations, strategy for business development, etc. Financial Literacy Programmes These special programmes are devised for first-generation investors in financial

markets, with focus on developing basic skill-sets in regard to understanding of the financial instruments, their importance and significance, risk-reward matrix, sources of information, assessment and advisory services, etc. Guide to Investing manual could be specially prepared, keeping in view the requirements of these investors. Special Schools for Students These are special schools of two-week to three-week duration, designed for students of finance, economics and marketing on the functioning of financial markets and various aspects of global and domestic financial policy, regulatory systems, market operations, visits to institutions as also simulation exercises in trading, technical analysis and other aspects of market operations. The programme is designed to cover the entire financial markets operations and students will be enriched to take up professional jobs. Executive Education Programmes FTKMC conducts a wide range of executive education programmes covering major market segments such as equities, equities derivatives, commodities, currencies, fixed income, banking, insurance and financial services, etc., on aspects such as market development, trading strategies and solutions, capital issuance, securities settlement, risk management, business development, investment strategies and solutions, investor services, regulation and compliance. Exchange Industry Education A special programme particularly designed for the professionals in the exchange industry and related institutions on various aspects of the functioning, operations, processes with particular focus on institutional and market development strategies. Special knowledge and skill-sets in exchange administration and development will be the main focus of this programme. Women in Finance A special programme for women on internet trading, understanding various financial products, risks in managing investments, investment strategies and saving for the future, budget making and allocation management, etc.

Main Forums and Platforms of FTKMC:

The Strategy Dialogue Dialogue and discussions on pertinent issues that have a bearing on domestic economics and financial markets, engaging experts and professionals Market Briefings Briefings on developments in the domestic and regional financial markets, including various market segments Special Reports/Annual Reviews Special reports and reviews on regulatory developments, market practices, and growth prospects and challenges Financial Diaries/Investor Handbooks Financial literacy diaries/investor handbooks for easy understanding and reference of various concepts and terms used in financial markets Curriculum Development and Course Material Study material for students for special programmes developed in formal education in collaboration with major universities/academic institutions in the country Designing and Setting up Infrastructure for Training and Research Can help institutions in designing infrastructure and creating capacity building in

investor awareness, financial education, certification examinations, Manuals, Primers and Guides and FAQs on a wide range of topics in financial markets Train the Trainers Programmes The Train the Trainers programmes will be designed with specific focus on creating skill-sets and expertise rather than mere awareness and education My Markets This monthly publication will carry a feature on a current topic and nuggets of information for the different constituencies in the financial markets Markets in Motion This is a weekly briefing on developments that matter in financial markets. This research-based Newsletter explains a topic of relevance in simple language that is easy to read and understand Back to top

\Commodities Market What is a market? A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. This consideration is usually money. In an Information Technology-enabled environment, buyers and sellers from different locations can transact business in an electronic marketplace. Hence the physical marketplace is not necessary for the exchange of goods or services for a consideration. Electronic trading and settlement of transactions has created a revolution in global financial and commodity markets. What is a commodity? A commodity is a product that has commercial value, which can be produced, bought, sold, and consumed. Commodities are basically the products of the primary sector of an economy. The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals, energy (crude oil, natural gas), etc., which serve as basic inputs for the secondary sector of the economy. To qualify as a commodity for futures trading, an article or a product has to meet some basic characteristics: 1. The product must not have gone through any complicated manufacturing activity, except for certain basic processing such as mining, cropping, etc. In other words, the product must be in a basic, raw, unprocessed state. There are of course some exceptions to this rule. For example, metals, which are refined from metal ores, and sugar, which is processed from sugarcane. 2. The product has to be fairly standardized, which means that there cannot be much differentiation in a product based on its quality. For example, there are different varieties of crude oil. Though these different varieties of crude oil can be treated as different commodities and traded as separate contracts, there can be a standardization of the commodities for futures contract based on the largest traded variety of crude oil. This would ensure a fair representation of the commodity for futures trading. This would also ensure adequate liquidity for the commodity futures being traded, thus ensuring price discovery mechanism. 3. A major consideration while buying the product is its price. Fundamental forces of market demand and supply for the commodity determine the commodity prices. 4. Usually, many competing sellers of the product will be there in the market. Their presence is required to ensure widespread trading activity in the physical commodity market.

5. The product should have adequate shelf life since the delivery of a commodity through a futures contract is usually deferred to a later date (also known as expiry of the futures contract). Commodity Market: A Perspective A market where commodities are traded is referred to as a commodity market. These commodities include bullion (gold, silver), non-ferrous (base) metals (copper, zinc, nickel, lead, aluminium, tin), energy (crude oil, natural gas), agricultural commodities such as soya oil, palm oil, coffee, pepper, cashew, etc. Existence of a vibrant, active, liquid, and transparent commodity market is normally considered as a sign of development of an economy. It is therefore important to have active commodity markets functioning in a country. Markets have existed for centuries worldwide for selling and buying of goods and services. The concept of market started with agricultural products and hence it is as old as the agricultural products or the business of farming itself. Traditionally, farmers used to bring their products to a central marketplace (called mandi / bazaar) in a town/village where grain merchants/ traders would also come and buy the products and transport, distribute, and sell them to other markets. In a traditional market, agricultural products would be brought and kept in the market and the potential buyers would come and see the quality of the products and negotiate with the farmers directly on the price that they would be willing to pay and the quantity that they would like to buy. Deals were struck once mutual agreement was reached on the price and the quantity to be bought/ sold. In traditional markets, shortage of a commodity in a given season would lead to increase in price for the commodity. On the other hand, oversupply of a commodity on even a single day could result in decline in pricesometimes below the cost of production. Neither farmers nor merchants were happy with this situation since they could not predict what the prices would be on a given day or in a given season. As a result, farmers often returned from the market with their products since they failed to fetch their expected price and since there were no storage facilities available close to the marketplace. It was in this context that farmers and food grain merchants in Chicago started negotiating for future supplies of grains in exchange of cash at a mutually agreeable price. This type of agreement was acceptable to both parties since the farmer would know how much he would be paid for his products, and the dealer would know his cost of procurement in advance. This effectively started the system of forward contracts, which subsequently led to futures market too. Cash Market Cash transaction results in immediate delivery of a commodity for a particular consideration between the buyer and the seller. A marketplace that facilitates cash transaction is referred to as the cash market and the transaction price is usually referred to as the cash price. Buyers and sellers meet face to face and deals are struck. These are traditional markets. Example of a cash market is a mandi where food grains are sold in bulk. Farmers would bring their products to this market and merchants/traders would immediately purchase the products, and they settle the deal in cash and take or give delivery immediately. Cash markets thus call for immediate delivery of commodities against actual payment. Forwards and Futures Markets In this case, the agreements are normally made to receive the commodities at a later date in future for a pre-determined consideration based on agreed upon terms and conditions. Forwards and Futures reduce the risks by allowing the trader to decide a price today for goods to be delivered on a particular future date. Forwards and Futures markets allow delivery at some time in the future, unlike cash markets that call for immediate delivery.

These advance sales help both buyers and sellers with long-term planning. Forward contracts laid the groundwork for futures contracts. The main difference between these two contracts is the way in which they are negotiated. For forward contracts, terms like quantity, quality, delivery date, and price are discussed in person between the buyer and the seller. Each contract is thus unique and not standardized since it takes into account the needs of a particular seller and a particular buyer only. On the other hand, in futures contracts, all terms (quantity, quality, and delivery date) are standardized. The transaction price is discovered through the interaction of supply and demand in a centralized marketplace or exchange. Forward contracts help in arranging long-term transactions between buyers and sellers but could not deal with the financial (credit) risk that occurred with unforeseen price changes resulting from crop failures, inadequate storage or bottlenecks in transportation, factors beyond human control (floods, natural calamities, etc.), or other economic factors that may result in unexpected changes, and hence counterparty default risks for parties involved. This, in turn, led to the development of futures market. As mentioned above, since futures are standardized contracts that are traded through an exchange, they can be used to minimize price risk by means of hedging techniques. Since the exchange standardizes the quality and quantity parameters and offers complete transparency by using risk management techniques (such as margining system with mark-to-market settlement on a real-time basis with daily settlement), the counterparty default risk has been greatly minimized. Brief History of the Development of Commodity Markets Global Scenario It is widely believed that the futures trade first started about approximately 6,000 years ago in China with rice as the commodity. Futures trade first started in Japan in the 17th century. In ancient Greece, Aristotle described the use of call options by Thales of Miletus on the capacity of olive oil presses. The first organized futures market was the Osaka Rice Exchange, in 1730. Organized trading in futures began in the US in the mid-19th century with maize contracts at the Chicago Board of Trade (CBOT) and a bit later, cotton contracts in New York. In the first few years of CBOT, weeks could go by without any transaction taking place and even the provision of a daily free lunch did not entice exchange members to actually come to the exchange! Trade took off only in 1856, when new management decided that the mere provision of a trading floor was not sufficient and invested in the establishment of grades and standards as well as a nation-wide price information system. CBOT preceded futures exchanges in Europe. In the 1840s, Chicago had become a commercial centre since it had good railroad and telegraph lines connecting it with the East. Around this same time, good agriculture technologies were developed in the area, which led to higher wheat production. Midwest farmers, therefore, used to come to Chicago to sell their wheat to dealers who, in turn, transported it all over the country. Farmers usually brought their wheat to Chicago hoping to sell it at a good price. The city had very limited storage facilities and hence, the farmers were often left at the mercy of the dealers. The situation changed for the better in 1848 when a central marketplace was opened where farmers and dealers could meet to deal in "cash" grainthat is, to exchange cash for immediate delivery of wheat. Farmers (sellers) and dealers (buyers) slowly started entering into contract for forward exchanges of grain for cash at some particular future date so that farmers could avoid taking the trouble of transporting and storing wheat (at very high costs) if the price was not acceptable. This system was suitable to farmers as well as dealers. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs of procurement well in advance.

Such forward contracts became common and were even used subsequently as collateral for bank loans. The contracts slowly got standardized on quantity and quality of commodities being traded. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who needed it. Also, if the farmer didn't want to deliver his wheat, he would pass on his contractual obligation to another farmer. The price of the contract would go up and down depending on what was happening in the wheat market. If the weather was bad, supply of wheat would be less and the people who had contracted to sell wheat would hold on to more valuable contracts expecting to fetch better price; if the harvest was bigger than expected, the seller's contract would become less valuable since the supply of wheat would be more. Slowly, even those individuals who had no intention of ever buying or selling wheat began trading in these contracts expecting to make some profits based on their knowledge of the situation in the market for wheat. They were called speculators. They hoped to buy (long position) contracts at low price and sell them at high price or sell (short position) the contracts in advance for high price and buy later at a low price. This is how the futures market in commodities developed in the US. The hedgers began to efficiently transfer their market risk of holding physical commodity to these speculators by trading in futures exchanges. The history of commodity markets in the US has the following landmarks:

Chicago Board of Trade (CBOT) was established in Chicago in 1848 to bring farmers and merchants together. It started active trading in futures-type of contracts in 1865. The New York Cotton Exchange was started in 1870. Chicago Mercantile Exchange was set up in 1919. A legalized option trading was started in 1934.

Indian Scenario History of trading in commodities in India goes back several centuries. But organized futures market in India emerged in 1875 when the Bombay Cotton Trade Association was established. The futures trading in oilseeds started in 1900 when Gujarati Vyapari Mandali (todays National Multi Commodity Exchange, Ahmedabad) was established. The futures trading in gold began in Mumbai in 1920. During the first half of the 20th century, there were many commodity futures exchanges, including the Calcutta Hessian Exchange Ltd. that was established in 1927. Those exchanges traded in jute, pepper, potatoes, sugar, turmeric, etc. However, Indias history of commodity futures market has been turbulent. Options were banned in cotton in 1939 by the Government of Bombay to curb widespread speculation. In mid-1940s, trading in forwards and futures became difficult as a result of price controls by the government. The Forward Contract Regulation Act was passed in 1952. This put in place the regulatory guidelines on forward trading. In late 1960s, the Government of India suspended forward trading in several commodities like jute, edible oil seeds, cotton, etc. due to fears of increase in commodity prices. However, the government offered to buy agricultural products at Minimum Support Price (MSP) to ensure that the farmer benefited. The government also managed storage, transportation, and distribution of agriculture products. These measures weakened the agricultural commodity markets in India. The government appointed four different committees (Shroff Committee in 1950, Dantwala Committee in 1966, Khusro Committee in 1979, and Kabra Committee in 1993) to go into the regulatory aspects of forward and futures trading in India. In 1996, the World Bank in association with United Nations Conference on Trade and Development (UNCTAD) conducted a study of Indian commodities markets. In the post-liberalization era of the Indian economy, it was the Kabra Committee and the World BankUNCTAD study that finally

assessed the scope for forward and futures trading in commodities markets in India and recommended steps to revitalize futures trading. There are four national-level commodity exchanges and 22 regional commodity exchanges in India. The national-level exchanges are Multi Commodity Exchange of India Limited (MCX), National Commodity and Derivatives Exchange Limited (NCDEX), National Multi Commodity Exchange of India Limited (NMCE), and Indian Commodity Exchange (ICEX). Relevance and Potential of Commodity Markets in India Majority of commodities traded on global commodity exchanges are agri-based. Commodity markets therefore are of great importance and hold a great potential in case of economies like India, where more than 65 percent of the people are dependent on agriculture. There is a huge domestic market for commodities in India since India consumes a major portion of its agricultural produce locally. Indian commodities market has an excellent growth potential and has created good opportunities for market players. India is the worlds leading producer of more than 15 agricultural commodities and is also the worlds largest consumer of edible oils and gold. It has major markets in regions of urban conglomeration (cities and towns) and nearly 7,500+ Agricultural Produce Marketing Cooperative (APMC) mandis. To add to this, there is a network of over 27,000+ haats (rural bazaars) that are seasonal marketplaces of various commodities. These marketplaces play host to a variety of commodities everyday. The commodity trade segment employs more than five million traders. The potential of the sector has been well identified by the Central government and the state governments and they have invested substantial resources to boost production of agricultural commodities. Many of these commodities would be traded in the futures markets as the food-processing industry grows at a phenomenal pace. Trends indicate that the volume in futures trading tends to be 5-7 times the size of spot trading in the country (internationally, it is much higher at 15 to 20 times). Many nationalized and private sector banks have announced plans to disburse substantial amounts to finance businesses related to commodity trading. The Government of India has initiated several measures to stimulate active trading interest in commodities. Steps like lifting the ban on futures trading in commodities, approving new exchanges, developing exchanges with modern infrastructure and systems such as online trading, and removing legal hurdles to attract more participants have increased the scope of commodities derivatives trading in India. This has boosted both the spot market and the futures market in India. The trading volumes are increasing as the list of commodities traded on national commodity exchanges also continues to expand. The volumes are likely to surge further as a result of the increased interest from the international participants in Indian commodity markets. If these international participants are allowed to participate in commodity markets (like in the case of capital markets), the growth in commodity futures can be expected to be phenomenal. It is expected that foreign institutional investors (FIIs), mutual funds, and banks may be able to participate in commodity derivatives markets in the near future. The launch of options trading in commodity exchanges is also expected after the amendments to the Forward Contract Regulation Act (1952). Commodity trading and commodity financing are going to be rapidly growing businesses in the coming years in India. With the liberalization of the Indian economy in 1991, the commodity prices (especially international commodities such as base metals and energy) have been subject to price volatility in international markets, since India is largely a net importer of such commodities. Commodity derivatives exchanges have been established with a view to minimize risks associated with such price volatility. Commodity Markets Ecosystem After studying the importance of commodity markets and trading in commodity futures, it is

essential to understand the different components of the commodity markets ecosystem. The commodity markets ecosystem includes the following components: 1. Buyers/Sellers or Consumers/Producers: Farmers, manufacturers, wholesalers, distributors, farmers co-operatives, APMC mandis, traders, state civil supplies corporations, importers, exporters, merchandisers, oil refining companies, oil producing companies, etc. 2. Logistics Companies: Storage and transport companies/operators, quality testing and certifying companies, valuers, etc. 3. Markets and Exchanges: Spot markets (mandis, bazaars, etc.) and commodity exchanges (national level and regional level) 4. Support agencies: Depositories/de-materializing agencies, central and state warehousing corporations, and private sector warehousing companies 5. Lending Agencies: Banks, financial institutions The users are the producers and consumers of different commodities. They have exposure to the physical commodities markets, exposing themselves to price risk. In turn, they depend on logistics companies for transportation of commodities, warehouses for storage, and quality testing and certification agencies for assessment and evaluation of commodity quality standards. Commodity derivatives exchanges provide a platform for hedging against price risk for these users. Benefits of Trading in Commodity Derivatives Trading in futures provides two important functions of price discovery and price risk management. It is useful to all the segments of the economy, particularly to all the constituents of the commodity market ecosystem. It is important to know how resorting to commodity trading benefits the constituents. Benefits to Investors, Producers, Consumers, Manufacturers:

Price risk management: All participants in the commodity markets ecosystem across the value chain of different commodities are exposed to price risk. These participants buy and sell commodities and the time lag between subsequent transactions result in exposure to price risk. Commodity derivatives markets enable these participants to avoid price risk by utilizing hedging techniques. Price discovery: This is the mechanism by which a fair value price is determined by the large number of participants in the commodities derivatives markets. This is the result of automation and electronic trading systems established on the commodities derivatives exchanges. High financial leverage: This is possible in commodity markets. For example, trading in gold calls for only 4% initial margin. Thus, if one gold futures contract (each gold futures contract lot size is 1 kg) is valued at Rs 900,000, the investor is expected to deposit an initial margin of only Rs 36,000 to be able to trade. If the price of gold goes up by even 2%, the investor would make a profit of Rs 18,000 on a deposit of Rs 36,000 before the expiry of the contract. This is the benefit of leveraged trading transactions. With futures contracts, the investor trades in the expectation of the price at a later date. This is possible with a margin deposit, which is usually between 5% and 10% of the value of the commodity. Correspondingly, the margins required for equity futures contracts are higher, due to higher volatility in equity markets as compared to commodities futures contracts. The reason for higher volatility in equity markets (especially in India) as compared to commodities

derivatives transactions is due to the fact that delivery is possible in commodity derivatives transactions. Commodities as an asset class for diversification of portfolio risk: Commodities have historically an inverse correlation of daily returns as compared to equities. The skewness of daily returns favours commodities, thereby indicating that in a given time period commodities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Even with a marginal distribution of funds in a portfolio to include commodities, the Sharpe ratio is greatly enhanced, thereby indicating a decrease in risk. Commodity derivatives markets are extremely transparent in the sense that the manipulation of prices of a commodity is extremely difficult due to globalization of economies, thereby providing for prices benchmarked across different countries and continents. For example, gold, silver, crude oil, etc. are international commodities, whose prices in India are indicative of the global situation. An option for high networth investors: With the rapid spread of derivatives trading in commodities, the commodities route too has become an option for high networth investors. Useful to the producer: Commodity trade is useful to the producer because he can get an idea of the price likely to prevail on a future date and therefore can decide between various competing commodities, the best that suits him. Farmers, for instance, can get assured prices, thereby enabling them to decide on the crop that they want to grow. Since there is transparency in prices, the farmer can decide when and where to sell, so as to maximize his profits. Useful for the consumer: Commodity trade is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing/financial planning and also cover his purchases by making forward contracts. Predictable pricing and transparency is an added advantage. Corporate entities can benefit by hedging their risks if they are using some of the commodities as their raw materials. They can hedge the risk even if the commodity traded does not meet their requirements of exact quality/technical specifications. Useful to exporters: Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Improved product quality: Since the contracts for commodities are standardized, it becomes essential for the producers/sellers to ensure that the quality of the commodity is as specified in the contract. The advent of commodities futures markets has also enabled defining quality standards of different commodities. Credit accessibility: Buyers and sellers can avail of the bank finances for trading in commodities. Nationalized banks and private sector banks have come forward to offer credit facilities for commodity trading.

Benefits to Indian Economy As the constituents of the commodity market ecosystem get benefited, the Indian economy is also benefited. Growth in the organized commodity markets and their constituents implies that there would be tremendous advantages and benefits accrued to the Indian economy in terms of business generation and growth in employment opportunities. As India imports bulk of raw material (especially in base metals and energy), there is scope for minimizing price

risk for international commodities. With the consumption of commodities increasing rapidly, especially in developing countries such as China and India, the prices of commodities are volatile, emphasizing the need for organized commodity derivatives exchanges. Currencies Market Introduction Currency Futures is the latest product introduced in Indian securities markets. It will lead to further maturity and deepening of the financial markets in India. Worldwide, trading in currency futures is a huge market and, given the rapid growth of economy and finance in India, it is poised to assume a significant role in the growth of Indian securities markets. The dawn of currency futures is perhaps a momentous development in the foreign exchange market of India. It represents a massive stride ahead in the continuing globalization of the country's financial markets. The currency derivatives segment will enable importers, exporters, investors, corporations, and banks to hedge their currency risks at low transaction costs and with greater transparency. Understanding the meaning of foreign exchange is important to know more about currency futures market. Foreign exchange refers to money denominated in the currency of another nation or a group of nations. Any person who exchanges money denominated in his ownnations currency for money denominated in anothernations currency acquires foreign exchange. This holds true whether the amountof the transaction is equal to a few rupees or to billions of rupees. A foreign exchange transaction is a shift of funds or short-term financial claims from one country and currency to another. Thus, within India, any money denominated in any currency other than the Indian rupee (INR) is, broadly speaking, foreign exchange. Foreign exchange can be cash, bank deposit, or a short-term negotiable financial claim denominated in a currency other than INR. Almost every nation has its own national currency or monetary unit used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for foreign exchange transactions: exchanges of one currency for another. For all such transactions there is an exchange rate. The exchange rate is a price: the number of units of one nations currency that must be surrendered in order to acquire one unit of another nations currency. There are scores of exchange rates for INR and other currencies, say the US dollar. In the spot market, there is an exchange rate for every other national currency traded in that market. A market price is determined by the interaction of buyers and sellers in that market, and a market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange market. The market participation is made up of individuals, non-financial firms, banks, official bodies, and other private institutions from all over the world that are buying and selling currencies at that particular time. What Is Foreign Exchange? Foreign exchange refers to money denominated in the currency of another nation or a group of nations. Any person who exchanges money denominated in his ownnations currency for money denominated in anothernations currency acquires foreign exchange. This holds true whether the amountof the transaction is equal to a few rupees or to billions of rupees; whether the person involvedis a tourist cashing a travellers cheque in a restaurant abroad or an investor exchanging hundreds of millions of rupees for the acquisition of a foreign company; and whether the form of moneybeing acquired is foreign currency notes,

foreign currency-denominated bank deposits, or other short-term claims denominated in foreign currency. A foreign exchange transaction is still a shift of funds or short-term financial claims from one country and currency to another. Thus, within India, any money denominated in any currency other than the Indian rupee (INR) is, broadly speaking, foreign exchange. Foreign exchange can be cash, funds available on credit cards and debit cards, travellers cheques, bank deposits, or other short-term claims. It is still foreign exchange if it is a short-term negotiable financial claim denominated in a currency other than INR. Why Do You Need Foreign Exchange? Almost every nation has its own national currency or monetary unitits rupee, its dollar, its pesoused for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for foreign exchange transactionsexchanges of one currency for another. Role of the Exchange Rate The exchange rate is a pricethe number of units of one nations currency that must be surrendered in order to acquire one unit of another nations currency. There are scores of exchange rates for INR and other currencies, say the US dollar. In the spot market, there is an exchange rate for every other national currency traded in that market, as well as for various composite currencies or constructed monetary units such as the euro or the International Monetary Funds Special Drawing Rights (SDRs). There are also various tradeweighted or effective rates designed to show a currencys movements against an average of various other currencies (for example, the US dollar index, which is a weighted index against worlds major currencies like euro, pound sterling, yen, and the Canadian dollar). Quite apart from the spot rates, there are additional exchange rates for other delivery dates in the forward markets. A market price is determined by the interaction of buyers and sellers in that market, and a market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange market. For a currency with an exchange rate that is fixed, or set by the monetary authorities, the central bank or another official body is a key participant in the market, standing ready to buy or sell the currency as necessary to maintain the authorized pegged rate or range. But in countries like the United States, which follows a complete free floating regime, the authorities do not intervene in the foreign exchange market on a continuous basis to influence the exchange rate. The market participation is made up of individuals, non-financial firms, banks, official bodies, and other private institutions from all over the world that are buying and selling US dollars at that particular time. The participants in the foreign exchange market are thus a heterogeneous group. The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years. But, whatever is the constitution of participants, and whether their motive is investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the market price at that instant. Given the diverse views, interests, and time frames of the participants, predicting the future course of exchange rates is a particularly complex and uncertain business. At the same time, since the exchange rate influences such a vast array of participants and business decisions, it is a pervasive and singularly important price in an open economy, influencing consumer prices, investment

decisions, interest rates, economic growth, the location of industry, and much else. The role of the foreign exchange market in the determination of that price is critically important. Its a 24-Hour Market During the past quarter century, the concept of a 24-hour market has become a reality. Somewhere on the planet, financial centres are open for business, and banks and other institutions are trading the dollar and other currencies every hour of the day and night, except for possible minor gaps on weekends. In financial centres around the world, business hours overlap; as some centres close, others open and begin to trade. The foreign exchange market follows the sun around the earth. Business is heavy when both the US markets and the major European markets are openthat is, when it is morning in New York and afternoon in London. In the New York market, nearly two-thirds of the days activity typically takes place in the morning hours. Activity normally becomes very slow in New York in the mid- to late afternoon, after European markets have closed and before the Tokyo, Hong Kong, and Singapore markets have opened. Given this uneven flow of business around the clock, market participants often will respond less aggressively to an exchange rate development that occurs at a relatively inactive time of day, and will wait to see whether the development is confirmed when the major markets open. Some institutions pay little attention to developments in less active markets. Nonetheless, the 24-hour market does provide a continuous real-time market assessment of the ebb and flow of influences and attitudes with respect to the traded currencies, and an opportunity for a quick judgment of unexpected events. With many traders carrying pocket monitors, it has become relatively easy to stay in touch with market developments at all times. International Markets Are Made Up of an International Network of Dealers The market consists of a limited number of major dealer institutions that are particularly active in foreign exchange, trading with customers and (more often) with each other. Most of these institutions, but not all, are commercial banks and investment banks. These institutions are geographically dispersed, located in numerous financial centres around the world. Wherever they are located, these institutions are in close communication with each other; linked to each other through telephones, computers, and other electronic means. Each nations market has its own infrastructure. For foreign exchange market operations as well as for other matters, each country enforces its own laws, banking regulations, accounting rules, and tax code, and, as noted above, it operates its own payment and settlement systems. Thus, even in a global foreign exchange market with currencies traded on essentially the same terms simultaneously in many financial centres, there are different national financial systems and infrastructures through which transactions are executed, and within which currencies are held. With access to all of the foreign exchange markets generally open to participants from all countries, and with vast amounts of market information transmitted simultaneously and almost instantly to dealers throughout the world, there is an enormous amount of cross-border foreign exchange trading among dealers as well as between dealers and their customers. At any moment, the exchange rates of major currencies tend to be virtually identical in all of the financial centres where there is active trading. Rarely are there such substantial price differences among major centres as to provide major opportunities for arbitrage. In pricing, the various financial centres that are open for business and active at any one time are effectively integrated into a single market. The Markets Most Widely Traded Currency Is the Dollar The dollar is by far the most widely traded currency. In part, the widespread use of the dollar reflects its substantial international role as investment currency in many capital markets, reserve currency held by many central banks, transaction currency in many international

commodity markets, invoice currency in many contracts, and intervention currency employed by monetary authorities in market operations to influence their own exchange rates. In addition, the widespread trading of the dollar reflects its use as a vehicle currency in foreign exchange transactions, a use that reinforces, and is reinforced by, its international role in trade and finance. For most pairs of currencies, the market practice is to trade each of the two currencies against a common third currency as a vehicle, rather than to trade the two currencies directly against each other. The vehicle currency used most often is the dollar, although very recently euro also has become an important vehicle. Thus, a trader wanting to shift funds from one currency to another, say from INR to Philippine pesos, will probably sell INR for US dollars and then sell the US dollars for pesos. Although this approach results in two transactions rather than one, it may be the preferred way, since the dollar/INR market, and the dollar/Philippine peso market are much more active and liquid and have much better information than a bilateral market for the two currencies directly against each other. By using the dollar or some other currency as a vehicle, banks and other foreign exchange market participants can limit more of their working balances to the vehicle currency, rather than holding and managing many currencies, and can concentrate their research and information sources on the vehicle. Use of a vehicle currency greatly reduces the number of exchange rates that must be dealt with in a multilateral system. In a system of 10 currencies, if one currency is selected as vehicle currency and used for all transactions, there would be a total of ninecurrency pairs or exchange rates to be dealt with (i.e., one exchange rate for the vehicle currency against each of the others), whereas if no vehicle currency were used, there would be 45exchange rates to be dealt with. In a system of 100 currencies with no vehicle currencies, potentially there would be 4,950 currency pairs or exchange rates [the formula is: n(n-1)/2]. Thus, using a vehicle currency can yield the advantages of fewer, larger, and more liquid markets with fewer currency balances, reduced informational needs, and simpler operations. The US dollar took on a major vehicle currency role with the introduction of the Bretton Woods par value system, in which most nations met their IMF exchange rate obligations by buying and selling US dollars to maintain a par value relationship for their own currency against the US dollar. The dollar was a convenient vehicle because of its central role in the exchange rate system and its widespread use as a reserve currency. The dollars vehicle currency role was also due to the presence of large and liquid dollar money and other financial markets, and, in time, the euro-dollar markets, where the dollars needed for (or resulting from) foreign exchange transactions could conveniently be borrowed (or placed). Other Major Currencies The Euro The euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the US dollar, the euro has a strong international presence and over the years has emerged as a premier currency, second only to the US dollar. The Japanese Yen The Japanese yen is the third most traded currency in the world. It has a much smaller international presence than the US dollar or the euro. The yen is very liquid around the world, practically around the clock. The British Pound Until the end of World War II, the pound was the currency of reference. The nickname cable is derived from the telegrams used to update the GBP/USD rates across the Atlantic. The currency is heavily traded against the euro and the US dollar, but it has a spotty presence against other currencies. The two-year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the British pound, as it generally had to follow the

Deutsche mark's fluctuations, but the crisis conditions that precipitated the pound's withdrawal from the ERM had a psychological effect on the currency. The Swiss Franc The Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one of the major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with Germany, and thus to the euro zone. Typically, it is believed that the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles the patterns of the euro, but lacks its liquidity. Fixed Income Market In most of the countries, the debt market is more popular than the equity market. This is due to the sophisticated bond instruments that have return-reaping assets as their underlying. In the US, for instance, the corporate bonds (like mortgage bonds) became popular in the 1980s. However, in India, equity markets are more popular than the debt markets due to the dominance of the government securities in the debt markets. Moreover, the government is borrowing at a pre-announced coupon rate targeting a captive group of investors, such as banks. This, coupled with the automatic monetization of fiscal deficit, prevented the emergence of a deep and vibrant government securities market. The bond markets exhibit a much lower volatility than equities, and all bonds are priced based on the same macroeconomic information. The bond market liquidity is normally much higher than the stock market liquidity in most of the countries. The performance of the market for debt is directly related to the interest rate movement as it is reflected in the yields of government bonds, corporate debentures, MIBOR-related commercial papers, and nonconvertible debentures. Concepts The debt market is a market where fixed income securities issued by the Central and state governments, municipal corporations, government bodies, and commercial entities like financial institutions, banks, public sector units, and public limited companies. Therefore, it is also called fixed income market. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks, and companies. Risks associated with Debt Securities The debt market instrument is not entirely risk free. Specifically, two main types of risks are involved, i.e., default risk and the interest rate risk.

Default Risk/Credit Risk arises when an issuer of a bond defaults on the interest or principal obligation. Interest Rate Risk can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market, which would affect the yield on the existing instruments. For instance, an upswing in the prevailing interest rate may lead to a situation where the investors' money is locked at lower rates. If they had waited and invested in the changed interest rate scenario, they would have earned more.

Other risks associated with trading in debt securities are more generic in nature, such as:

Counter Party Risk refers to the failure or inability of the opposite party in the contract to deliver either the promised security or the sale value at the time of settlement. Price Risk refers to the possibility of not being able to receive the expected price on any order due to an adverse movement in the prices.

Indian Debt Market The Indian debt market is composed of government bonds and corporate bonds. However, the Central government bonds are predominant and they form most liquid component of the bond market. National Stock Exchange (NSE) introduced Interest Rate Derivatives. MCX Stock Exchange (MCX-SX) is also planning to launch the same. The trading platforms for government securities are the Negotiated Dealing System and the Wholesale Debt Market (WDM) segment of NSE and BSE. In the negotiated market, the trades are normally decided by the seller and the buyer, and reported to the exchange through the broker, whereas the WDM trading system, known as NEAT (National Exchange for Automated Trading), is a fully automated screen-based trading system, which enables members across the country to trade simultaneously with enormous ease and efficiency. The instruments traded can be classified into the following segments based on the characteristics of the identity of the issuer of these securities: Market Segment Government Securities Issuer Central Government State Governments Public Bonds Sector Government Agencies Statutory Bodies Public Units Private Bonds / Instruments Zero Coupon Bonds, Coupon Bearing Bonds, Treasury Bills, STRIPS Coupon Bearing Bonds Govt. Guaranteed Bonds, Debentures

Sector PSU Bonds, Debentures, Commercial Paper Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits Certificates of Deposits, Debentures, Bonds Certificates of Deposits, Bonds

Sector Corporates

Banks Financial Institutions

Price Determination in Debt Markets The price of a bond in the markets is determined by the forces of demand and supply, as is the case in any market. The price of a bond also depends on the changes in:

Economic conditions

General money market conditions, including the state of money supply in the economy Interest rates prevalent in the market and the rates of new issues Future interest rate expectations Credit quality of the issuer

Note: There is, however, a theoretical underpinning to the determination of the price of the bond based on the measure of the yield of the security. Debt Instruments are categorized as:

Government of India dated Securities (G-Secs) are 100-rupee face-value units/ debt paper issued by the Government of India in lieu of their borrowing from the market. They are referred to as SLR securities in the Indian markets as they are eligible securities for the maintenance of the SLR ratio by the banks. Corporate debt market: The corporate debt market basically contains PSU bonds and private sector bonds. The Indian primary corporate debt market is basically a private placement market with most of the corporate bonds being privately placed among the wholesale investors, which include banks, financial Institutions, mutual funds, large corporates, and other large investors.

The following debt instruments are available in the corporate debt market:

Non-Convertible Debentures Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares) Secured Premium Notes Debentures with Warrants Deep Discount Bonds PSU Bonds/Tax-Free Bonds

Main participants in the retail debt market include mutual funds, provident funds, pension funds, private trusts, state-level and district-level co-operative banks, housing finance companies, NBFCs and RNBCs, corporate treasuries, Hindu Undivided Families (HUFs), and individual investors. Interest Rate Derivatives An interest rate futures contract is "an agreement to buy or sell a package of debt instruments at a specified future date at a price that is fixed today." The price of debt securities and, therefore, interest rate futures, is inversely proportional to the prevailing interest rate. When the interest rate goes up, the price of debt securities and interest rate futures goes down, and vice versa. Some of the assets underlying interest rate futures include US Treasuries, EuroDollar, LIBOR Swap, and Euro-Yen futures. Tenure Interest rate futures contracts can have short-term (less than one year) and long-term (more than one year) interest bearing instruments as the underlying asset. In the US, short-term interest rate futures like 90-day T-Bill and 3-month Euro-Dollar time deposits are more popular. Long-term interest rate futures include the 10-year Treasury note futures contract and the Treasury bond futures contract. Hedging with Interest Rate Futures Interest rate futures can be used to protect against an increase in interest rates as well as a decline in interest rates. By selling interest rate futures, also known as short hedging, an

investor can protect himself against an increase in interest rates; and by buying interest rate futures, also known as long hedging, an investor can protect himself against a decline in interest rates. Thus, short, medium, and long-term interest rate risks can be managed with products based on Euro-Dollar, US Treasuries, and Swaps in Europe and the US. In India, interest rate derivatives are used for hedging in the near future. Regulatory Authority The regulators of the Indian debt market are: RBI: The Reserve Bank of India is the main regulator for the money market. It controls and regulates the G-Secs market. RBI also fulfills several other important objectives such as managing the borrowing programme for the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment. RBI controls the issuance of new banking licences to banks. It controls the manner in which various scheduled banks raise money from depositors. Further, it controls the deployment of money through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on investment assets, etc. RBI also administers the interest rate policy. Earlier, it used to strictly control interest rates through a directed system of interest rates. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. Over the years, RBI has moved slowly towards a regime of market-determined controls. SEBI: The regulator for the Indian corporate debt market is the Securities and Exchange Board of India (SEBI). SEBI controls the bond market in cases where entities, especially corporates, raise money from public through public issues. It regulates the manner in which money is raised and to ensure a fair play for the retail investor. It forces the issuer to make the retail investor aware of the risks inherent in the investment and its disclosure norms. SEBI is also a regulator for the mutual funds and regulates the entry of new mutual funds in the industry. It also regulates the instruments in which these mutual funds can invest. SEBI also regulates the investments of FIIs. Banking India cannot have a healthy economy without a sound and effective banking system. The banking system should be hassle free and able to meet the new challenges posed by technology and other factors, both internal and external. In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's growth story. The government's regulation policy for banks has paid rich dividends with the nationalization of 14 major private banks in 1969. Banking today has become convenient and instant, with the account holder not having to wait for hours at the bank counter for getting a draft or for withdrawing money from his account. History of Banking in India The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases:

Early phase of Indian banks, from 1786 to 1969 Nationalization of banks and the banking sector reforms, from 1969 to 1991 New phase of Indian banking system, with the reforms after 1991

Phase 1 The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of private shareholders, mostly Europeans, was established. Allahabad Bank was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. The Reserve Bank of India came in 1935. During the first phase, the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1,100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with the Banking Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested with extensive powers for the supervision of banking in India as the Central banking authority. During those days, the general public had lesser confidence in banks. As an aftermath, deposit mobilization was slow. Moreover, the savings bank facility provided by the Postal department was comparatively safer, and funds were largely given to traders. Phase 2 The government took major initiatives in banking sector reforms after Independence. In 1955, it nationalized the Imperial Bank of India and started offering extensive banking facilities, especially in rural and semi-urban areas. The government constituted the State Bank of India to act as the principal agent of the RBI and to handle banking transactions of the Union government and state governments all over the country. Seven banks owned by the Princely states were nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector in India came under the government ownership. Phase 3 This phase has introduced many more products and facilities in the banking sector as part of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking are introduced. The entire system became more convenient and swift. Time is given importance in all money transactions. The financial system of India has shown a great deal of resilience. It is sheltered from crises triggered by external macroeconomic shocks, which other East Asian countries often suffered. This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet fully convertible capital account, and the limited foreign exchange exposure of banks and their customers. The Banking Structure in India The commercial banking structure in India consists of scheduled commercial banks and unscheduled banks. Scheduled banks constitute those banks that are included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. As on June 30, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise State Bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), cooperative banks, and regional rural banks. Before the nationalization of Indian banks, the State Bank of India (SBI) was the only nationalized bank, which was nationalized on July 1, 1955, under the SBI Act of 1955. The nationalization of seven State Bank subsidiaries took place in 1959. After the nationalization of banks in India, the branches of the public sector banks rose to

approximately 800 percent in deposits and advances took a huge jump by 11,000 percent. Nationalization Process

1955: Nationalization of State Bank of India 1959: Nationalization of SBI subsidiaries 1969: Nationalization of 14 major banks 1980: Nationalization of seven banks with deposits over Rs 200 crore

Banks in India In India, banks are segregated in different groups. Each group has its own benefits and limitations in operations. Each has its own dedicated target market. A few of them work in the rural sector only while others in both rural as well as urban. Many banks are catering in cities only. Some banks are of Indian origin and some are foreign players. Banks in India can be classified into:

Public Sector Banks Private Sector Banks Cooperative Banks Regional Rural Banks Foreign Banks

One aspect to be noted is the increasing number of foreign banks in India. The RBI has shown certain interest to involve more foreign banks. This step has paved the way for a few more foreign banks to start business in India. Reserve Bank of India (RBI) The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs 5 crore on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into fully paid shares of Rs 100 each, which was entirely owned by private shareholders in the beginning. The government held shares of nominal value of Rs 220,000. The RBI commenced operation on April 1, 1935, under the Reserve Bank of India Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted to meet the following requirements:

Regulate the issue of currency notes Maintain reserves with a view to securing monetary stability Operate the credit and currency system of the country to its advantage

Functions of the RBI The Reserve Bank of India Act of 1934 entrusts all the important functions of a central bank with the Reserve Bank of India. Bank of Issue: Under Section 22 of the Act, the Bank has the sole right to issue currency notes of all denominations. The distribution of one-rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as an agent of the government. Banker to the Government: The second important function of the RBI is to act as the governments banker, agent, and adviser. Bankers' Bank and Lender of the Last Resort: The RBI acts as the bankers' bank. Since commercial banks can always expect the RBI to come to their help in times of banking crisis, the RBI becomes not only the banker's bank but also the lender of the last resort.

Controller of Credit: The RBI is the controller of credit, i.e., it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. Custodian of Foreign Reserves: The RBI has the responsibility to maintain the official rate of exchange. Besides maintaining the rate of exchange of the rupee, the RBI has to act as the custodian of India's reserve of international currencies. Supervisory Functions: In addition to its traditional central banking functions, the RBI has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949, have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. Indian Banks Association (IBA) The Indian Banks Association (IBA) was formed on September 26, 1946, with 22 members. Today, IBA has more than 156 members, such as public sector banks, private sector banks, foreign banks having offices in India, urban co-operative banks, developmental financial institutions, federations, merchant banks, mutual funds, housing finance corporations, etc. The IBA has the following functions:

Promote sound and progressive banking principles and practices. Render assistance and to provide common services to members. Organize co-ordination and co-operation on procedural, legal, technical, administrative, and professional matters. Collect, classify, and circulate statistical and other information. Pool expertise towards common purposes such as cost reduction, increased efficiency, productivity, and improving systems, procedures, and banking practices. Project good public image of banking through publicity and public relations. Encourage sports and cultural activities among bank employees.

Banking Activities

Retail banking, dealing directly with individuals and small businesses Business banking, providing services to mid-market businesses Corporate banking, directed at large business entities Private banking, providing wealth management services to high networth individuals Investment banking, activities in the financial markets, such as "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital market activities like mergers and acquisitions Merchant banking is the private equity activity of investment banks Financial services, global financial institutions that engage in multiple activities such as banking and insurance

Back to top Financial Services The financial services domain includes three important processes of Governance, Risk Management, and Compliance. These services are offered to the various constituents of the financial markets. Financial markets can be divided into different sub-types:

Capital markets that consist of stock markets (which provide financing through the issuance of shares or common stock and enable the subsequent trading thereof) and bond markets (which provide financing through the issuance of bonds and enable the subsequent trading thereof) Commodity markets that facilitate the trading of commodities Money markets that provide short-term debt financing and investment Derivatives markets (including futures markets) that provide instruments for the management of financial risk Insurance markets that facilitate the redistribution of various risks Foreign exchange markets that facilitate the trading of foreign exchange

Governance, Risk Management, and Compliance are highly related but distinct activities that solve different problems for different sets of constituents of an organization. For the smooth and efficient management of any organization, it is very crucial to ensure that they go hand in hand. It is very important to realize that if the first (governance) is not in place, the second two (risk management and compliance) become irrelevant and probably cannot be meaningfully achieved. Governance is the responsibility of senior executive management and focuses on creating organizational transparency by defining the mechanisms an organization uses to ensure that its constituents follow established processes and policies. A proper governance strategy implements systems to monitor and record current business activity, takes steps to ensure compliance with agreed policies, and provides for corrective action in cases where the rules have been ignored or misconstrued. Risk Management is the process by which an organization sets the risk tolerance, identifies potential risks, and prioritizes the tolerance for risk, based on the organizations business objectives. Risk Management leverages internal controls to manage and mitigate risk throughout the organization. Compliance is the process that records and monitors the controlsphysical, logical, or organizationalneeded to enable compliance with legislative or industry mandates as well as internal policies.

The simple model below is one I drew at SDSU to establish a basis of understanding between business management and information systems professionals. This model identifies the most important elements which the enterprise manages and which work activities operate upon. Consequently these will be the main business features and activities that information systems need to support, and which info systems professionals will concern themselves with.

Basic Business Model

Note the main features:

Organizations . . . performing Processes . . . which use Resources . . . to deliver Products and Services . . . to Customers and other Stakeholders . . .(who directly or indirectly arrange the supply of Resources

What is Derivatives. Explain with example- accounting or product

Definition of 'Investment Banker' An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank's division that is involved with these activities. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization. In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers. Read more:

how to hedge you portfolio ? Answer Question difference betwen option and future. Answer Question An alternative to selling index futures to hedge a portfolio is to sell index calls while simultaneously buying an equal number of index puts. Doing so will lock in the value of the portfolio to guard against any adverse market movements. This strategy is also known as a protective index collar. The idea behind the index collar is to finance the purchase of the protective index puts using the premium collected from selling the index calls. However, as a result of selling the index calls, in the event that the fund manager's expectation of a falling market is wrong, his portfolio will not benefit from the rising market. Implementation To hedge a portfolio with index options, we need to first select an index with a high correlation to the portfolio we wish to protect. For instance, if the portfolio consist of mainly technology stocks, the Nasdaq Composite Indexmight be a good fit and if the portfolio is made up of mainly blue chip companies, then the Dow Jones Industrial Index could be used. After determining the index to use, we calculate how many put and call contracts to buy and sell to fully hedge the portfolio using the following formula. No. Index Options Required = Value of Holding / (Index Level x Contract Multiplier)

Example A fund manager oversees a well diversified portfolio consisting of fifty large cap U.S. stocks with a combined value of $10,000,000 in October. Worried by news about surging oil prices, the fund manager decides to hedge his holding by purchasing slightly out-of-the-money S&P 500 index puts while selling an equal number of slightly out-of-the-money S&P 500 index calls expiring in two months' time. The current level of the S&P 500 is 1500 and the DEC 1475 SPX put contract costs $20 each while the DEC 1525 SPX call contract is quoted at $25 each.

The SPX options has a contract multiplier of $100, and so the number of contracts needed to fully protect his holding is: $10000000/(1500 x $100) = 66.67 or 67 contracts. A total of 67 put options need to be purchased and 67 call options need to be written.

Total cost of the put options is: 67 x $20 x $100 = $134,000. Total premium collected for selling the call options is: 67 x $25 x $100 = $167,000. Net premium received is: $167,000 - $134,000 = $33,000. Call Option Value $0 $0 $0 $0 -$502,500 -$1,172,500 Put Option Value $1,842,500 $1,172,500 $502,500 $0 $0 $0 Net Premium Received $33,000 $33,000 $33,000 $33,000 $33,000 $33,000 Unhedged Portfolio $8,000,000 $8,666,666 $9,333,333 $10,000,000 $10,666,666 $11,333,333 Hedged Portfolio $9,875,000 $9,872,166 $9,868,833 $10,033,000 $10,197,166 $10,193,833

S&P 500 Index 1200 1300 1400 1500 1600 1700

As can be seen from the table above, should the market retreat, as represented by the declining S&P 500 index, the value of the put options rise and almost fully offset the losses taken by the portfolio. Conversely, should the market appreciate, the rise in his holding's value is capped by the rise in the value of the call options sold short. Hence, once the index collar in entered, the fund manager has effectively locked in the value of his portfolio. Note: The example does not include transaction costs in the calculations and also assumes full correlation (beta of 1.0) between the portfolio and the S&P 500 index. Ready to start trading? Open an account at and get 100 commissionfree trades + free virtual trading tool! Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money. Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code 'FREE100' during sign-up)

There are several terms which are commonly used with reference to capital market. Several such terms have already been discussed in the previous articles. Understanding of following terms (given in alphabetical order) will help the readers in better grasping the structure and trading system in the capital market in India : Arbitrage: Arbitrage refers to taking advantage of price differential in a particular security on to different stock exchanges. An investor/speculator can sell at one stock exchange and

buy the same at lower price at other stock exchange. The difference in prices is the profit of the investor/speculator. Categories of Shares at BSE: At the Mumbai Stock Exchange, the shares have been categorised in different categories such as A, B1, B2, S, T, TS and Z. Categories A , B1 and B2 depend upon the volume and turnover of different shares on the BSE. S group is called BSE Indonext, which provide a nationwide trading platform for the small and medium enterprises already listed with the BSE and regional stock exchanges. As required by SEBI, category T, referring to Trade to Trade, shares are those of which the transactions must result in the delivery. In other words, the squirring off of the transaction is not allowed. An investor buying or selling a T-group share must effect a delivery. It cannot be settled by a counter transaction. TS group is trade to trade segment of BSE Indonext. Z group refers to the companies which have failed to comply with the listing requirements and/or have failed to resolving investors complaints. Circuit Breakers: Prices of shares fluctuate regularly and sometimes there is a great volatility in the share prices. In order to check and control the excessive fluctuations in prices. SEBI has introduced a circuit breaker system wherein the trading in shares of a particular company automatically stops as soon as the prices of that share show a fluctuation beyond a prescribed limit on a particular day. The circuit breakers are also applicable to trading of all equities if the NIFTY or Sensex shows a fluctuation beyond a prescribed limit on a particular day. SEBI has provided that in case, there is a fluctuation of 10% in the index (Sensex r Nifty) on any day, the circuit breakers will apply automatically and the trading in all equity shares would halt for one hour. If the prices fluctuate another 5% after reopening, the trading will again halt to provide the market an opportunity to cool down. The circuit breakers were applied for 10% and then for another 5% downfall in the Sensex and Nifty on May 17, 2004 for the first time in India. on that day, the Sensex hit a low of 4516 (down 10.9% from the previous close), and after cooling off period of one hour, touched the low of 4283 (down another 5%), and the trading in equities was freezed for another two hours. Also, on May 22, 2006,the Sensex fell by 10.10% and the trading was halted by SEBI for one hour to let the market cool down.

Corporate Governance: Under Clause 49 of the Listing Agreement, all listed companies are required to present, in a separate section, a report on the corporate Governance (CG) of the company. The following information is to be provided in the report : A brief statement on companys philosophy or code of governance. Composition of Board of Directors. Attendance of each director at the Board or Board Committee Meeting. Number of Board Meetings held during the year.

Brief terms of reference, composition, meetings and attendance at Audit committee during the Year. Brief description, composition of remuneration to Directors. Brief description of the shareholders committee, Number of complaints pending. Details of General Body Meeting and resolutions passed there. Disclosure of Related Party Transactions, Details of non-compliance of SEBI Rules/Regulations or other statutory obligations. Means of communication of quarterly and half-yearly results. General shareholder information in respect of : Date and venue of AGM, Date of book closing and Dividend payment, stock code and market price data for each month of last financial year, Registrar, Transfer Agents and share transfer system. Dematerialisation information, outstanding ADR/GDRs, Performance of market price of share in comparison with BSE Sensex, Crisil Index, etc. Custodian: A custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client. The custodian also provides incidental services such as maintaining the accounts of securities of the client, collecting the benefits or rights accruing to the client in respect of securities. SEBI (Custodian of Securities) Regulations, 1996 provide that the net worth of a custodian must be at least Rs. 50 crores. The custodian must segregate other services from custodial services. Custodians are an integral part of the secondary market and plays an important role to the institutional investors. It is required to maintain a code of conduct as per the Regulations, 1996. Stock Holding corporation of India is an important custodian operating in Indian capital market. Delisting of shares: Shares can be traded at a stock exchange only when they are listed. The listing of shares results from the agreement, known as Listing Agreement, entered by the company with the stock exchange. As per the requirement of Listing Agreement, the company has to pay a listing fee (initial as well as annual) depending upon the paid-up capital of the company. A company may get its shares listed at more than one stock exchange. However, if the company finds that the volume/turnover of transactions of shares has gone down, it can get its shares delisted from some or all the stock exchanges. If a share is delisted from all, then its shares would not be transacted at any stock exchange. SEBI has issued SEBI (Delisting of Securities) Guidelines, 2003 in this regard. In certain cases, the stock exchange can itself delist a share which has been suspended from trading for a period of six months. Employee Stock Option: Employee stock option means an option given to employees, officers or directors of a company, which gives the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price. This option may be given in two forms : Employee Stock Option Scheme (ESOS) under which options are granted to employees. Employee Stock Purchase Scheme (ESPS) under which the shares are offered to employees as a part of public offer or otherwise. An employee who belongs to promoters group is not eligible to participate in ESOS or ESPS. The shares issued in exercise of option shall have a lock-in period as specified by the company. The option granted to an employee is not transferable to any other person. Euro Issues: When an Indian company raises funds from abroad in foreign currency, it is known as Euro-Issue. Two types of securities may be issued : Foreign Currency Convertible Bonds(FCCB) and Depository Receipt( DR). When a DR is issued and listed in US., it is known as American Depository Receipt( ADR) and when a DR is issued anywhere else, it is termed as Global Depository Receipt (GDR).

Firm Allotment of Shares: It refers to allotment of shares on a firm basis in public issues by issuing company to Indian and Multilateral Financial Institutions, Indian Mutual Funds, Foreign Institutional Investors, Overseas Corporate Bodies and Employees of the company. Foreign Institutional Investor(FII): FII means an entity established or incorporated outside India and which is authorised by SEBI to transact on Indian Stock Exchanges for investment. Initial Public Offering (IPO): When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities, or both, for the first time. IPO paves way for listing and trading of the securities. Lock-in: It indicates freeze on sale/transfer of shares. The lock-in conditions have been imposed generally on shares of promoters. Long Position: When a person buys a security, he is said to have taken a long position. Such position may be taken either with investment or speculative motives. Long positions are regulated by authorities through margin system. Market Capitalisation: Market capitalisation refers to the total market value of the equity shares of the company. It is found by multiplying the number of outstanding equity shares by the closing price of the share. MidCap: In MidCap segment, those companies are included (as per NSE classification) which have a market capitalization between Rs. 75 crores and Rs. 750 crores. NASDAQ: It stands for National Association for Securities Dealers Automated Quotation. It is a type of Over the Counter Stock Exchange Operating in U.S.A. Most of the securities traded at NASDAQ are software companies. Preferential Issue: It is an issue of securities by a listed company to a selected group of investors under Section 81 of the Companies Act, 1956, which is neither a right issue nor a public issue. Price Band: It is the spread within which investors can bid in case of book building process. Public Shareholding: Public shareholding means the shareholding in a company held by persons other than the promoter and/or acquirer. Qualified Institutional Buyers (QIB): SEBI has issued a clarification/circular on 14.8.03 which defines the term QIB to include the following : Public Financial Institutions as defined in Section 4A of the Companies Act, 1956. Scheduled Commercial Banks, Mutual Funds. State Institutional Development Corporations. Foreign Institutional Investors, Venture Capital Funds and Foreign Venture Capital Investors. Multinational and Bilateral Financial Institutions. Insurance companies registered under IRDA. Provident funds and Pension funds having minimum corpus of Rs. 25 crores Quotations: The share prices are also known as quotations. There quotations are available in electronic media (TV News Channels, Internet, etc) or in Print media (News papers). Business dailies such as Economic Times, Financial Express, Business Standard, Business Line are providing these quotations. Generally, four quotations are available for a particular share for a particular day. These are : Open rate, Highest rate, Lowest rate and closing rate for the day. Additional information in respect of Market Capitalization, Trading Volume, PriceEarnings Ratio, etc., may also be available. Red Harring Prospectus: It is a prospectus which does not have details of either the price or number of shares being offered or the amount of issue. This is used in book building issues only. Sweat Equity: Sweat Equity are the shares issued by a company under Section 79A of the Companies Act,1956 to employees or directors (i) at a discount (to the market price), or (ii)

for consideration other than cash, or (iii) for providing know-how or making available property right. Following conditions are prescribed for issue of Sweat Equity : There must be of a class of shares already issued. At least one year must have lapsed since company commenced business. The issue must be authorised by a special resolution. The shares must be issued as per SEBI (Issue of Sweat Equity) Regulations, 2002 (in case of listed companies) and as per Unlisted Companies (Issue of Sweat Equity Shares) Rules.2003 in case of unlisted companies. Valuation of intellectual property and the pricing of sweat equity shall be made as per the method given in the respective regulations. The sweat equity shares shall be locked-in for a period of three years. Voluntary Delisting: It means delisting of securities of a body corporate voluntarily by a promoter or an acquirer There's a lot of terminology associated with mutual funds that you'll need to know before you can start investing in them. These concepts are an important part of mutual fund investing; you should make sure that you understand them in full before you start to invest in mutual funds. Open-end Funds All mutual funds fall into one of two broad categories: open-end funds and closed-end funds. Most mutual funds are open-end. The reason why these funds are called "open-end" is because there is no limit to the number of new shares that they can issue. New and existing shareholders may add as much money to the fund as they want and the fund will simply issue new shares to them. Open-end funds also redeem, or buy back, shares from shareholders. In order to determine the value of a share in an open-end fund at any time, a number called the Net Asset Value (described below) is used. You purchase shares in open-end mutual funds from the mutual fund itself or one of its agents; they are not traded on exchanges. Closed-end Funds Closed-end funds behave more like stock than open-end funds; that is to say, closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end funds are not obligated to issue new shares or redeem outstanding shares. The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). Since you must take into consideration not only the fund's net asset value but also the discount or premium at which the fund is trading, closed-end funds are considered to be more suitable for experienced investors. You can purchase shares in a closed-end fund through a broker, just as you would purchase a share of stock. Net Asset Value (NAV) Open-end mutual funds price their shares in terms of a Net Asset Value (NAV) (note that you can calculate NAV for a closed-end fund too, but it will not necessarily be the price at which you buy or sell closed-end shares). NAV is calculated by adding up the market value of all the fund's underlying securities, subtracting all of the fund's liabilities, and then dividing by the number of outstanding shares in the fund. The resulting NAV per share is the price at

which shares in the fund are bought and sold (plus or minus any sales fees). Mutual funds only calculate their NAVs once per trading day, at the close of the trading session.

Public Offering Price (POP) The public offering price (POP) is the price at which shares are sold to the public. For funds that don't charge a sales commission (or "load"), the POP is simply equal to the Net Asset Value (NAV). For a load fund, the POP is equal to the NAV plus the sales charge. As with the NAV, the POP will typically change on a day to day basis. Dividends and Capital Gains Distributions Mutual funds earn money on their investments through one of two ways: dividend income and capital appreciation. In other words, a mutual fund makes money on one of the fund's assets when that asset pays the mutual fund dividends or interest, or when the mutual fund sells the asset for more than what it initially paid (if it sells the asset for less than what it initially paid, then that is called a capital loss). The federal government mandates that all mutual funds distribute these dividends and capital gains to the fund's shareholders at least Ads by Google Latest Mutual Fund NAV Most Powerful SIP Services in India Open a Free A/C Now & Win iPad 3! LIC Pension 1.45 = Pension Online Day Trading Take control of your portfolio Take a free day trading workshop Best Investment Plan Invest 25k per Year & Get Rs.33 Lac Check & Compare all Other Plans! Top India Mutual Funds Dedicated Research on India MF's. India's Top Mutual Fund Website once per year. Most mutual funds choose to distribute their investment income on a quarterly, semi-annual or annual basis. In order to determine which shareholders qualify for distribution payments, mutual funds specify a day during each distribution period that is known as the record day. If you own shares in a fund on or before the record day you qualify for a distribution. The day after the record day is known as the ex-dividend date. If you purchase shares on the ex-dividend date then the amount of the distribution is subtracted from the fund's net asset value (NAV) per share. You should be aware that if you receive distributions from a mutual fund then you must pay taxes on them, regardless of how long you have owned shares in the fund and regardless of

whether or not you received the distributions in the form of cash or in the form of new shares. In January of every year, mutual funds issue Form 1099-DIV to all of their shareholders as well as to the IRS in order to report income on distributions . Mutual Fund Family A mutual fund family is a group of mutual funds that is managed by the same company. It is usually easy to switch money between mutual funds that are part of the same family. Additionally, most fund families make monitoring multiple investments easier, and make tax time easier, by aggregating the information from the various funds for you. Share Classes Mutual funds shares are sometimes broken down into lettered "classes" that have different characteristics. Here's a brief rundown of some commonly used designations:

A: Shares that have a front-end load . B: Shares that have a back-end load. Y: Shares for institutional investors; no front-end load. Z: Shares for employees of the mutual fund. Dual-Purpose Fund

As with some stocks, certain closed-end funds distinguish between common shareholders and preferred shareholders -- these funds are called dual-purpose funds. As the name suggests, common shareholders receive all distributions from capital gains, while preferred shareholders receive all dividend and interest income. These funds have a set expiration date, at which time all preferred shares in the fund are redeemed, giving the common shareholders sole ownership of the fund. Those shareholders then decide whether to liquidate the fund and divide up the proceeds or to convert the fund into an open-end mutual fund.

A Actuals (see also Cash; Physicals; Underlying) Financial instruments that exist in one of the four main asset classes: interest rates, foreign exchange, equities or commodities. Typically, derivatives are used to hedge actual exposure or to take positions in actual markets. All or Nothings (see also Binary; Digital) An option whose payout is fixed at the inception of the option contract and for which the payout is only made if the strike price is in-the-money at expiry. If the strike price is out-ofthe-money at expiry, there is no payout made to the option holder. American Style Option

An option that can be exercised at any time from inception as opposed to a European Style option which can only be exercised at expiry. Early exercise of American options may be warranted by arbitrage. European Style option contracts can be closed out early, mimicking the early exercise property of American style options in most cases. Accreting Swap (see also Interest Rate Swap) An exchange of interest rate payments at regular intervals based upon pre-set indices and notional amounts in which the notional amounts decrease over time. Arbitrage (see also Correlation) The act of taking advantage of differences in price between markets. For example, if a stock is quoted on two different equity markets, there is the possibility of arbitrage if the quoted price (adjusted for institutional idiosyncrasies) in one market differs from the quoted price in the other. The term has been extended to refer to speculators who take positions on the correlation between two different types of instrument, assuming stability to the correlation patterns. Many funds have discovered that correlation is not as stable as it is assumed to be. Asset-Liability Management Closing out exposure to fluctuations in interest rates by matching the timing of cashflows associated with assets and liabilities. This is a technique commonly used by financial institutions and large corporations. At-the-Market (see also Market Order) A type of financial transaction in which the order to buy or sell is executed at the current prevailing market price. At-the-Money Spot An option whose strike price is equal to the current, prevailing price in the underlying cash spot market. At-the-Money Forward An option whose strike price is equal to the current, prevailing price in the underlying forward market. Average Rate Options An option whose payout at expiry is determined by the difference between its strike and a calculated average market rate where the period, frequency and source of observation for the calculation of the average market rate are specified at the inception of the contract. These options are cash settled, typically. Average Strike Options

An option whose payout at expiry is determined by the difference between the prevailing cash spot rate at expiry and its strike, deemed to be equal to a calculated average market rate where the period, frequency and source of observation for the calculation of the average market rate are specified at the inception of the contract. These options are cash settled, typically. B Backwardation (see also Contango) A term often used in commodities or futures markets to refer to markets where shorter-dated contracts trade at a higher price than longer-dated contracts. Plotting the prices of contracts against time, with time on the x-axis, shows the commodity price curve as sloping downwards as time increases. Barrier Options (see also Knock-In Options, Knock-Out Options) An option contract for which the maturity, strike price and underlying are specified at inception in addition to a trigger price. The trigger price determines whether or not the option actually exists. In the case of a knock-in option, the barrier option does not exist until the trigger is touched. For a knock-out option, the option exists until the trigger is touched. Basis (see also Index) The difference in price or yield between two different indices. Benchmarking A benchmark is a reference point. Benchmarking in financial risk management refers to the practice of comparing the performance of an individual instrument, a portfolio or an approach to risk management to a pre-determined alternative approach. Black-Scholes A closed-form solution (i.e. an equation) for valuing plain vanilla options developed by Fischer Black and Myron Scholes in 1973 for which they shared the Nobel Prize in Economics. C Call Option A call option is a financial contract giving the owner the right but not the obligation to buy a pre-set amount of the underlying financial instrument at a pre-set price with a pre-set maturity date. Cap A cap is a financial contract giving the owner the right but not the obligation to borrow a preset amount of money at a pre-set interest rate with a pre-set maturity date.

Cash Settlement Some derivatives contracts are settled at maturity (or before maturity at closeout) by an exchange of cash from the party who is out-of-the-money to the party who is in-the-money. Chooser Option An option that gives the buyer the right at the choice date (before the option's expiry) to choose if the option is to be a call or a put. Collar (see also Range Forward; Risk Reversal) A combination of options in which the holder of the contract has bought one out-of-the money option call (or put) and sold one (or more) out-of-the-money puts (or calls). Doing this locks in the minimum and maximum rates that the collar owner will use to transact in the underlying at expiry. Commodity Swap A contract in which counterparties agree to exchange payments related to indices, at least one of which (and possibly both of which) is a commodity index. Contango (see also Backwardation) A term often used in commodities or futures markets to refer to markets where shorter-dated contracts trade at a lower price than longer-dated contracts. Plotting the prices of contracts against time, with time on the x-axis, shows the commodity price curve as sloping upwards as time increases. Convexity A financial instrument is said to be convex (or to possess convexity) if the financial instrument's price increases (decreases) faster (slower) than corresponding changes in the underlying price. Correlation (see also Arbitrage) Correlation is a statistical measure describing the extent to which prices on different instruments move together over time. Correlation can be positive or negative. Instruments that move together in the same direction to the same extent have highly positive correlations. Instruments that move together in opposite direction to the same extent have highly negative correlations. Correlation between instruments is not stable. Covered Call Option Writing A technique used by investors to help fund their underlying positions, typically used in the equity markets. An individual who sells a call is said to "write" the call. If this individual sells a call on a notional amount of the underlying that he has in his inventory, then the written call is said to be "covered" (by his inventory of the underlying). If the investor does not have the underlying in inventory, the investor has sold the call "naked".

Credit Risk Credit risk is the risk of loss from a counterparty in default or from a pejorative change in the credit status of a counterparty that causes the value of their obligations to decrease. Currency Swap (see also Interest Rate Swap) An exchange of interest rate payments in different currencies on a pre-set notional amount and in reference to pre-determined interest rate indices in which the notional amounts are exchanged at inception of the contract and then re-exchanged at the termination of the contract at pre-set exchange rates. D Delta The sensitivity of the change in the financial instrument's price to changes in the price of the underlying cash index. Documentation Risk The risk of loss due to an inadequacy or other unforeseen aspect of the legal documentation behind the financial contract. Duration A weighted average of the cash flows for a fixed income instrument, expressed in terms of time. E Embedded Derivatives (see also Structured Notes) Derivative contracts that exist as part of securities. Equity Swap (see also Interest Rate Swap) A contract in which counterparties agree to exchange payments related to indices, at least one of which (and possibly both of which) is an equity index. European Style Option An option that can be exercised only at expiry as opposed to an American Style option that can be exercised at any time from inception of the contract. European Style option contracts can be closed out early, mimicking the early exercise property of American style options in most cases. Exchange Traded Contracts Financial instruments listed on exchanges such as the Chicago Board of Trade.

Exercise Price (see also Strike Price) The exercise price is the price at which a call's (put's) buyer can buy (or sell) the underlying instrument. Exotic Derivatives Any derivative contract that is not a plain vanilla contract. Examples include barrier options, average rate and average strike options, lookback options, chooser options, etc. F Floor (see also Cap; Collar) A floor is a financial contract giving the owner the right but not the obligation to lend a preset amount of money at a pre-set interest rate with a pre-set maturity date. Forward Contracts An over-the-counter obligation to buy or sell a financial instrument or to make a payment at some point in the future, the details of which were settled privately between the two counterparties. Forward contracts generally are arranged to have zero mark-to-market value at inception, although they may be off-market. Examples include forward foreign exchange contracts in which one party is obligated to buy foreign exchange from another party at a fixed rate for delivery on a pre-set date. Off-market forward contracts are used often in structured combinations, with the value on the forward contract offsetting the value of the other instrument(s). Forward or Delayed Start Swap (see also Interest Rate Swap) Any swap contract with a start that is later than the standard terms. This means that calculation of the cash flows does not begin straightaway but at some pre-determined start date. Forward Rate Agreements (FRAs) (see also Interest Rate Swap) A forward rate agreement is a cash-settled obligation on interest rates for a pre-set period on a pre-set interest rate index with a forward start date. A 3x6 FRA on US dollar LIBOR (the London Interbank Offered Rate) is a contract between two parties obliging one to pay the other the difference between the FRA rate and the actual LIBOR rate observed for that period. An Interest Rate Swap is a strip of FRAs. Futures Contracts An exchange-traded obligation to buy or sell a financial instrument or to make a payment at one of the exchange's fixed delivery dates, the details of which are transparent publicly on the trading floor and for which contract settlement takes place through the exchange's clearinghouse. G

Gamma (see also Delta) Gamma (or convexity) is the degree of curvature in the financial contract's price curve with respect to its underlying price. It is the rate of change of the delta with respect to changes in the underlying price. Positive gamma is favourable. Negative gamma is damaging in a sufficiently volatile market. The price of having positive gamma (or owning gamma) is time decay. Only instruments with time value have gamma. H Hedge A transaction that offsets an exposure to fluctuations in financial prices of some other contract or business risk. It may consist of cash instruments or derivatives. Historical Volatility A measure of the actual volatility (a statistical measure of dispersion) observed in the marketplace. Hybrid Security Any security that includes more than one component. For example, a hybrid security might be a fixed income note that includes a foreign exchange option or a commodity price option. I Implied Volatility Option pricing models rely upon an assumption of future volatility as well as the spot price, interest rates, the expiry date, the delivery date, the strike, etc. If we are given simultaneously all of the parameters necessary for determining the option price except for volatility and the option price in the marketplace, we can back out mathematically the volatility corresponding to that price and those parameters. This is the implied volatility. In-The-Money Spot (see also Intrinsic Value; At-The-Money; Out-of-The-Money) An option with positive intrinsic value with respect to the prevailing market spot rate. If the option were to mature immediately, the option holder would exercise it in order to capture its economic value. For a call price to have intrinsic value, the strike must be less than the spot price. For a put price to have intrinsic value, the strike must be greater than the spot price. In-The-Money-Forward (see also Intrinsic Value; At-The-Money; Out-of-The-Money) An option with positive intrinsic value with respect to the prevailing market forward rate. If the option were to mature immediately, the option holder would exercise it in order to capture its economic value. For a call price to have intrinsic value, the strike must be less than the spot price. For a put price to have intrinsic value, the strike must be greater than the spot price.

Index-Amortizing Swaps (see also Interest Rate Swaps; Accreting Swaps) An interest rate swap in which the notional amount for the purposes of calculating cash flows decreases over the life of the contract in a pre-specified manner. Interest Rate Swap (see also Forward Rate Agreements; Index-Amortizing Swaps; Accreting Swaps) An exchange of cash flows based upon different interest rate indices denominated in the same currency on a pre-set notional amount with a pre-determined schedule of payments and calculations. Usually, one counterparty will received fixed flows in exchange for making floating payments. International Swaps Dealers' Association (ISDA) Agreements (see also Legal Risk) In order to minimize the legal risks of transacting with one another, counterparties will establish master legal agreements and sidebar product schedules to govern formally all derivatives transactions into which they may enter with one another. Intrinsic Value The economic value of a financial contract, as distinct from the contract's time value. One way to think of the intrinsic value of the financial contract is to calculate its value if it were a forward contract with the same delivery date. If the contract is an option, its intrinsic value cannot be less than zero. K Knock-in Option (see also Knock-Out Option; Trigger Price) An option the existence of which is conditional upon a pre-set trigger price trading before the option's designated maturity. If the trigger is not touched before maturity, then the option is deemed not to exist. Knock-out Option An option the existence of which is conditional upon a pre-set trigger price trading before the option's designated maturity. The option is deemed to exist unless the trigger price is touched before maturity. L Legal Risk (see also International Swap Dealers' Association Agreements) The general potential for loss due to the legal and regulatory interpretation of contracts relating to financial market transactions. LIBOR London Interbank Offer Rate The rate of interest paid on offshore funds in the Eurodollar markets.

Liquidity Risk The risk that a financial market entity will not be able to find a price (or a price within a reasonable tolerance in terms of the deviation from prevailing or expected prices) for one or more of its financial contracts in the secondary market. Consider the case of a counterparty who buys a complex option on European interest rates. He is exposed to liquidity risk because of the possibility that he cannot find anyone to make him a price in the secondary market and because of the possibility that the price he obtains is very much against him and the theoretical price for the product. Look-Back Options An option which gives the owner the right to buy (sell) at the lowest (highest) price that traded in the underlying from the inception of the contract to its maturity, i.e. the most favourable price that traded over the lifetime of the contract. M Margin A credit-enhancement provision to master agreements and individual transactions in which one counterparty agrees to post a deposit of cash or other liquid financial instruments with the entity selling it a financial instrument that places some obligation on the entity posting the margin. Mark to Market Accounting A method of accounting most suited for financial instruments in which contracts are revalued at regular intervals using prevailing market prices. This is known as taking a "snapshot" of the market. Market Risk The exposure to potential loss from fluctuations in market prices (as opposed to changes in credit status). Market-Maker A participant in the financial markets who guarantees to make simultaneously a bid and an offer for a financial contract with a pre-set bid/offer spread (or a schedule of spreads corresponding to different market conditions) up to a pre-determined maximum contract amount.. N Naked Option Writing The act of selling options without having any offsetting exposure in the underlying cash instrument.

Netting When there are cash flows in two directions between two counterparties, they can be consolidated into one net payment from one counterparty to the other thereby reducing the settlement risk involved. O OCC The Office of the Comptroller of the Currency (US). OSFI Office of the Superintendent of Financial Institutions (Canada). Open Interest Exchanges are required to post the number of outstanding long and short positions in their listed contracts. This constitutes the open interest in each contract. Operational Risk The potential for loss attributable to procedural errors or failures in internal control. Option The right but not the obligation to buy (sell) some underlying cash instrument at a predetermined rate on a pre-determined expiration date in a pre-set notional amount. Out-of-The-Money Spot (see also At-The-Money; In-The-Money) An option with no intrinsic value with respect to the prevailing market spot rate. If the option were to mature immediately, the option holder would let it expire. For a call price to have intrinsic value, the strike must be less than the spot price. For a put price to have intrinsic value, the strike must be greater than the spot price. Out-of-The-Money-Forward (see also At-The-Money; In-The-Money) An option with no intrinsic value with respect to the prevailing market forward rate. If the option were to mature immediately, the option holder would let it expire. For a call price to have intrinsic value, the strike must be less than the spot price. For a put price to have intrinsic value, the strike must be greater than the spot price. Over-the-Counter Any transaction that takes place between two counterparties and does not involve an exchange is said to be an over-the-counter transaction. P

Path-Dependent Options (see also Knock-In Options; Knock-Out Options; Average Rate Options; Average Strike Options; Lookback Options) Any option whose value depends on the path taken by the underlying cash instrument. Potential Exposure An assessment of the future positive intrinsic value in all of the contracts outstanding with an individual counterparty who may choose (or may be unable) to make their obligated payments. Premium The cost associated with a derivative contract, referring to the combination of intrinsic value and time value. It usually applies to options contracts. However, it also applies to off-market forward contracts. Put Option (see also Call Option) A put option is a financial contract giving the owner the right but not the obligation to sell a pre-set amount of the underlying financial instrument at a pre-set price with a pre-set maturity date. Put-Call Parity Theorem A long position in a put combined with a long position in the underlying forward instrument, both of which have the same delivery date has the same behavioral properties as a long position in a call for the same delivery date. This can be varied for short positions, etc. Q Quanto Option An option the payout for which is denominated in an index other than the underlying cash instrument. R Regulatory Risk The potential for loss stemming from changes in the regulatory environment pertaining to derivatives and financial contracts, the utility of these instruments for different counterparties, etc. Rho The sensitivity of a financial contract's value to small changes in interest rates. RiskMetrics (see also Value-at-Risk)

A parametric methodology for calculating Value-at-Risk using data conditioned by JP Morgan's spinoff company RiskMetrics that is most useful for assessing portfolios with linear risks. S Settlement Risk The risk of non-payment of an obligation by a counterparty to a transaction, exacerbated by mismatches in payment timings. Speculation Taking positions in financial instruments without having an underlying exposure that offsets the positions taken. Spot The price in the cash market for delivery using the standard market convention. In the foreign exchange market, spot is delivered for value two days from the transaction date or for the next day in the case of the Canadian dollar exchanged against the US dollar. Spread The difference in price or yield between two assets that differ by type of financial instrument, maturity, strike or some other factor. A credit spread is the difference in yield between a corporate bond and the corresponding government bond. A yield curve spread is the spread between two government bonds of differing maturity. Standard Deviation (see also Volatility; Implied Volatility) In finance, a statistical measure of dispersion of a time series around its mean; the expected value of the difference between the time series and its mean; the square root of the variance of the time series. Stress Testing The act of simulating different financial market conditions for their potential effects on a portfolio of financial instruments. Strike Price The price at which the holder of a derivative contract exercises his right if it is economic to do so at the appropriate point in time as delineated in the financial product's contract. Structured Notes Fixed income instruments with embedded derivative products. Swap Spread (see also Plain Vanilla Interest Rate Swap)

The difference between the swap yield curve and the government yield curve for a particular maturity, referring to the market prices for the fixed rate in a plain vanilla interest rate swap. Swaptions (see also Plain Vanilla Interest Rate Swap) Options on swaps. T Theta The sensitivity of a derivative product's value to changes in the date, all other factors staying the same. Time Value (see also Intrinsic Value; Premium) For a derivative contract with a non-linear value structure, time value is the difference between the intrinsic value and the premium. V Value at Risk or VaR (see also RiskMetrics) The caculated value of the maximum expected loss for a given portfolio over a defined time horizon (typically one day) and for a pre-set statistical confidence interval, under normal market conditions Value of a Basis Point The change in the value of a financial instrument attributable to a change in the relevant interest rate by 1 basis point (i.e. 1/100 of 1%). Vega The sensitivity of a derivative product's value to changes in implied volatility, all other factors staying the same. Volatility (see also Standard Deviation; Implied Volatility) In finance, a statistical measure of dispersion of a time series around its mean; the expected value of the difference between the time series and its mean; the square root of the variance of the time series. Y Yield Curve For a particular series of fixed income instruments such as government bonds, the graph of the yields to maturity of the series plotted by maturity.

Yield Curve Risk The potential for loss due to shifts in the position or the shape of the yield curve. Z Zero Coupon Instruments Fixed income instruments that do not pay a coupon but only pay principal at maturity; trade at a discount to 100% of principal before maturity with the difference being the interest accrued. Zero Coupon Yield Curve For zero coupon bonds, the graph of the yields to maturity of the series plotted by maturity.

Article by Chand Sooran, Principal Victory Risk Management Consulting, Inc. Accretion Reverse of dilution. Accretion is where a corporate action (share buyback or issue of shares in a smaller proportion than the increase in income following a merger or public tender offer, for example) leads to an increase in earnings per share. ADR (American Depositary Receipt) Negotiable certifi cates representing one or several shares. Their face value is stated in dollars and interest is also payable in dollars. ADRs allow American investors to buy shares in foreign-based companies that are not quoted on an American Stock Exchange. AMS Asset Management and Services. Arbitrage Activity that consists of attempting to profit by price differences on the same or similar financial assets. For example, in the case of a takeover bid, where the predator offers a price that exceeds the price at which the targets shares are trading. Attribution right Right to receive bonus shares issued in connection with a capital increase paid up by capitalising retained earnings. Attribution rights are quoted. Avoir fiscal Dividend tax credit available to individual shareholders resident in France on the dividends distributed by French companies. The purpose of the tax credit is to avoid double taxation of distributed earnings, in the hands of the company and the shareholder. The avoir fi scal granted to individual shareholders resident in France is equal to one-half of the net dividend. It is deductible from personal income tax. If the avoir fi scal cannot be set off against taxable income, it is refunded by the French Treasury.

B2B or BtoB Business to Business: sales of products or services by one company to another. B2C or BtoC Business to Consumer: sales of products or services by a company to a consumer. B2E portal Intranet site for Group employees. The home page includes a browser, links to services and a wealth of information concerning the various functions within the Group, practical information for employees and career information. Back office Department responsible for all administrative processing. BNL bc BNL banca commerciale (formerly Banca Nazionale del Lavoro). Bond/Debenture Debt security whereby the issuer undertakes to pay the lender a fixed capital sum at a specific future date, plus twice-yearly or annual interest payments. Interest payments generally at fixed rates may vary over the life of the bond. Debentures are unsecured bonds. Capital Amount of cash or assets contributed by shareholders, plus any profits, retained earnings or premiums transferred to the capital account. The capital may be increased or reduced during the life of the company. Capital increase A method of increasing a companys shareholders equity. The capital may be increased by issuing new shares for cash or in exchange for assets, such as shares in another company. Alternatively, it may be increased by capitalising additional paid-in capital, retained earnings or profits and either raising the par value of existing shares or issuing new shares without consideration. Existing shareholders may have a preemptive right to subscribe for the new shares or this right may be cancelled. A capital increase may be carried out to give new investors an opportunity to become shareholders. All capital increases must be authorised in advance by the shareholders, in Extraordinary General Meeting. Cash flow Cash generated by operations that can be used to fi nance investment without raising equity or debt capital. CECEI Comit des tablissements de Crdit et des Entreprises dInvestissement: Committee headed by the Governor of the Banque de France responsible for monitoring the proper operation of the French fi nancial and banking system. CIB Corporate and Investment Banking, one of the BNP Paribas Groups core businesses. Comit Consultatif des Actionnaires Shareholder Consultation Committee. A group of individual shareholders selected to advise the company on its communications targeted at individual shareholders. The

BNP Paribas Comit Consultatif des Actionnaires was set up in the fi rst half of 2000, at the time of the merger. Consolidated net income Net income of the Group after deducting the portion of the profi ts of subsidiaries attributable to minority shareholders. Convertible bond Bond convertible into the issuers shares on terms set at the time of issue. Corporate governance Series of principles and recommendations to be followed by the management of listed companies. Coupon The coupon represents the right of he security for a given year. Custody fee Fee received by a bank or broker to hold and service securities recorded in a securities account. Custody fees are payable annually in advance. They are not refunded if the securities are sold during the year, but no fees are payable on securities deposited during the year until the beginning of the next year. CVR (Contingent Value Rights Certificate) Financial instrument generally issued in connection with the acquisition of a listed company, guaranteeing the value of the underlying security at a pre-determined date. The CVR entitles the shareholder of the target to receive an amount equal to the positive difference between the offer price and a reference price. Derivatives Contracts whose value is based on the performance of an underlying financial asset, index or other investment, used to hedge or profit from future changes in the value of the underlying. Dilution Impact on the rights attached to a share of the issue of securities (in connection with a capital increase, a merger, a stock-for-stock tender offer or the exercise of rights), assuming that there is no change in the total income of the issuer. Dividend Portion of net profit that the Annual General Meeting decides to distribute to shareholders. The amount of the dividend is recommended by the Board of Directors. It represents the revenue on the share and the amount can vary from one year to the next depending on the companys results and policy. EONIA Euro OverNight Index Average. EUREX A derivatives market. EURIBOR (European InterBank Offered Rate) The most commonly used money-market rate in the eurozone. Euroclear Formerly Sicovam. Clearing house for securities transactions.

Euronext SA Company that operates the Paris, Brussels and Amsterdam Stock Exchanges. Euronext SA establishes market rules, decides to accept or reject listing applications and manages all trading technologies. FCP (Fonds Commun de Placement) Fund invested in stocks, bonds and/or money-market securities. An FCP is similar to a SICAV, but is not a separate legal entity. FCPs are generally smaller than SICAVs and are easier to manage. They are subject to less restrictive regulations and can be more specialised. FRB French Retail Banking. Free cash flow Cash available after fi nancing operations and investments, available to pay down debt. Free float The amount of capital which is not under the control of stable shareholders. In other words, capital that can be freely bought and sold and is therefore available to investors, excluding for example shares held by the State, or shares that are subject to shareholders pacts and so on. On 1 December 2003, the stocks that make up the CAC 40 index became weighted according to their free floats, as opposed to their market capitalisations. This change was born out of a desire to be consistent with the major world market indexes which already function in this manner, and to ensure greater comparability between industries and shares. BNP Paribas has a free fl oat of 95% one of the highest on the Paris stock market. Gain/loss on securities Positive/negative difference between the sale price of a security and the purchase price. Goodwill Difference between the cost of shares and the Groups equity in the fair value of the underlying net assets. Hedge funds Funds that take both long and short positions, use leverage and derivatives and invest in many markets. IAS International Accounting Standards IFRS International Financial Reporting Standards. IFU (Imprim Fiscal Unique) French tax return issued by a bank or broker, listing all the securities transactions carried out on behalf of the taxpayer and all the coupon payments made to the tax payer. Institutional investor

Financial institution which, by definition or by virtue of its articles of association, is required to hold a certain proportion of its assets in stocks and shares. Examples include insurance companies and pension funds. Investment club A variable- or split-capital company, which enables its members to jointly manage a portfolio of marketable securities formed from an initial investment and/or regular capital contributions. Clubs benefit from a favourable regime in respect of capital gains tax. The FNACI (National Federation of Investment Clubs), which is located at 39, rue Cambon, 75001 Paris, provides on request all the information required for the launching and smooth running of these clubs. IRFS International Retail Banking and Financial Services. Abbreviation replaced by IRS in 2008. IRS International Retail Services. Abbreviation that replaces IRFS. ISIN code The new identifi cation number for securities listed on the stock market. The ISIN code replaces the well-known Sicovam code which had since become the Euroclear code. On 30 June 2004, Euronext Paris put an end to its existing system for identifying securities and replaced it with a system that uses ISIN codes. Having already been adopted by a number of European stock markets including Amsterdam, Brussels, Lisbon and Frankfurt, the new system gives a unique identity to each share and therefore facilitates cross-border transactions between investors, primarily by improving harmonisation within Euronext. The ISIN code comprises 12 characters: 2 letters to indicate the issuing country (e.g., FR for France and US for the United States) and 10 fi gures. BNP Paribass ISIN code is FR0000131104. LBO Leveraged Buy Out. Company acquisition financed primarily by debt. In practice, a holding company is set up to take on the debt used to finance the acquisition of the target. The interest payments due by the holding company are covered by ordinary or exceptional dividends received from the acquired target. LIFFE London International Financial Futures and Options Exchange. Liquidity Ratio between the volume of shares traded and the total number of shares in issue. LME London Metal Exchange. M&A Mergers & Acquisitions. Market capitalisation Value attributed to a company by the stock market. Market capitalisation corresponds to the share price multiplied by the number of shares outstanding. Market-maker/ Market-making contracts

Market-makers commit to maintaining fi rm bid and offer prices in a given security by standing ready to buy round lots at publicly-quoted prices. Market-making contracts generally concern mid-cap stocks and are intended to enhance the stocks liquidity. In France, market-making contracts (contrats danimation) are entered into between Euronext, the issuer and a securities dealer. MONEP (March dOptions Ngociables de Paris) Paris traded options market, including CAC 40 index options and equity options. OAT (Obligation Assimilable du Trsor) French government bonds. OCEANE (Obligation Convertible En Actions Nouvelles ou Existantes) Bond convertible for new shares or exchangeable for existing shares of the issuer. OPA (Offre Publique dAchat) French acronym for a public tender offer for cash. OPE (Offre Publique dchange) French acronym for a public stock-for-stock tender offer. OPF (Offre Prix Fixe) French acronym for a public offering of securities at a set price. OPR (Offre Publique de Retrait) French acronym for a compulsory buyout offer (fi nal stage in a squeeze-out). OPRA (Offre Publique de Rachat dActions) French acronym for an offer to buy out the minority shareholders of a company that already largely controlled (first stage in a squeeze-out). Option Contract giving the buyer the right (but not the obligation), to purchase or sell a security future date, at a price fi xed when the option is written (exercise price), in exchange for a premium paid when the option is purchased. Options to purchase a security are known as calls options to sell a security are known as puts. OPV (Offre Publique de Vente) French acronym for a public offering of securities at a set price. ORA (Obligation Remboursable en Actions) French acronym for equity notes, representing bonds redeemable for shares. P/E Price/Earnings ratio. Ratio between the share price and earnings per share. The P/ serves to determine the multiple of earnings per share represented by the share price. Par value The par value of a share is the portion of capital represented by the share. PEA (Plan dpargne en Actions) French name for personal equity plans. Savings products designed to promote private share ownership, invested in shares of companies that have their headquarters European Union country or in units in qualifying unit trusts. Revenues and capital are exempt from personal income tax and capital gains tax provided that the savings left

in the plan for at least five years. Investments in PEAs are capped at EUR 120,000 individual. PEE (Plan dpargne Entreprise) French name for employee share ownership plans. Payments into the plan and reinvested interest are exempt from personal income tax provided that they are left in the plan least five years (with early withdrawal allowed in certain specific cases). Surrender are also exempt from personal income tax. Pre-emptive subscription rights When a company issues shares for cash, each shareholder has a pre-emptive right subscribe for a number of new shares pro rata to the number of shares already held. right can be traded on the stock market. Companies can ask the General Meeting to cancel shareholders pre-emptive subscription rights to facilitate certain operations or the company to open up its capital to new investors. Preference shares Preference shares are shares that pay dividends at a specifi ed rate and have a preference over ordinary shares in the payment of dividends and the liquidation of assets. They not carry voting rights. Price guarantee When a company acquires control of a listed target, it is required to offer the targets minority shareholders the opportunity to sell their shares at the same price as that received by the sellers of the controlling interest. The offer must remain open for at least fi fteen trading days. Primary market Market where newly-issued securities are bought and sold. Prime brokerage Activity consisting of providing a wide range of services to hedge funds, including nancing, securities settlement/delivery, custody, securities lending/borrowing, etc. Public tender offer Offer to buy shares of a company, usually at a premium above the shares market price, for cash or securities or a combination of both. Where only a small proportion of the companys shares are traded on the market and the offer is followed by a compulsory buyout, the process is known as a squeeze-out. Quorum General Meetings can take place only if there is a quorum. For Ordinary General Meetings, on first call there is a quorum if the shareholders present and represented hold at least 1/4 of the voting rights. There is no quorum requirement on second call. For Extraordinary General Meetings, the quorum corresponds to 1/3 of the voting rights on first call and 1/4 on second call. For Combined Meetings, the quorum requirements depend on whether the resolutions are "ordinary" or "extraordinary". Quotation The quotation determines the price of a security on the market at a given point in time. Prices are generally quoted on a continuous basis throughout the day (from 9:00 a.m. to 5:30 p.m.), providing a real-time indication of the prices at which the security concerned is changing hands. Continuous quotation allows market players to closely

track market trends. Quotations for securities with a low trading volume are made once a day. Rating/rating agencies A rating represents an assessment of the default risk on debt securities. The rating awarded to an issuer has a direct impact on the issuer's borrowing costs. Changes in ratings also have a significant impact on the issuer's share price. The main rating agencies are Standard & Poors, Moodys and Fitch. Report On the Euronext Paris market, transaction allowing an investor to carry forward a buy or sell position from one deferred settlement date to the next. ROE Return on Equity. Ratio between consolidated net income and consolidated shareholders equity. Secondary market Market where securities are bought and sold subsequent to their issue. Settlement Monthly date when transactions with deferred settlement (Service de Rglement Diffr) are unwound (or extended). This date corresponds to the fi fth trading day before the last trading day in the month. Share A share is a transferable security representing a portion of the capital of a limited company or a partnership limited by shares. Ownership of shares is evidenced by an entry in the issuer's share register (registered shares) or in a securities account kept in the holder's name by a bank, stockbroker or other accredited intermediary (bearer shares). Shares quoted on the stock exchange are also referred to as "equities". SICAV (Socit dInvestissement Capital Variable) Variable capital investment company that manages a portfolio of securities on behalf of its shareholders. Shares may be purchased or redeemed at any time. The shares are not listed but their value (corresponding to the company's net asset value per share) varies each day based on changes in the value of the securities held in the portfolio. SICOVAM (Socit Interprofessionnelle pour la Compensation des Valeurs Mobilires) Now renamed Euroclear France. Organisation responsible for clearing securities trades, centralising all stock market transactions and facilitating the transfer of securities between member institutions. SPVT (Spcialiste en Pension des Valeurs du Trsor) Primary dealer in French government bond repos. SRD (Service de Rglement Diffr) French market where the main French and foreign equities are traded. Equities or bonds purchased with deferred settlement are purchased on credit. The buyer is required to settle the purchase price and the seller is required to deliver the securities on the next settlement date, unless one or other of the parties asks for the transaction to be carried over to the next settlement date (report). Subscription right

Right to participate in a share issue for cash. TBB (Taux de Base Bancaire) Interest base rate. TMO (Taux Mensuel de Rendement des Emprunts Obligataires) Interest rate corresponding to the monthly bond yield. TPI (Titre au Porteur Identifiable) Procedure allowing issuers to obtain information about the identity of holders of bearer shares from Euroclear. Trade Centre Specialised sales force set up by BNP Paribas to partner its corporate customers' international development. The Trade Centres offer importers and exporters a wide range of customised services based on the "one-stop-shopping" principle. Treasury shares Shares held by the issuer. Treasury shares are stripped of voting and dividend rights and are not taken into account in the calculation of earnings per share. TSDI (Titre Subordonn Dure Indtermine) French acronym for perpetual subordinated notes. TSR Total Shareholder Return: corresponding to return on the capital invested by shareholders, including dividends and unrealised gains on the shares. UCITS Undertaking for Collective Investment in Transferable Securities. Term covering unit trusts and variable capital investment companies. Voting right Right of a shareholder to vote in person or by proxy at General Meetings. Warrant Certificate issued on a stand-alone basis or strippable from another security (share, bond) giving the holder the right to acquire securities (share, bond). Warrants issued by financial institutions acting as market-maker give the holder the right to purchase (call warrant) or sell (put warrant) various underlyings (interest rate, index, currency, equities) at a fixed exercise price during a fi xed exercise period. Although these warrants constitute options, they cannot be sold short. Work flow Process automation technology allowing the sequential transmission of digital documents and files to the various people responsible for processing the data. Yield Indicator of the return on an investment, expressed in percent. For shares, the yield corresponds to the ratio between the last dividend paid and the last share price.

Accounts Payable Amounts owing on open account to creditors for goods and services.

Accounts Receivable Money owed to a business for merchandise or services sold on open account. Accrual Basis Accounting method whereby income and expense items are recognized as they are earned or incurred, even though they may not have been received or actually paid in cash. Accrual Bonds Bonds that do not make periodic interest payments, but instead accrue interest until the bond matures. Also known as zero-coupon bonds. Accrued Interest Interest that has accumulated between the most recent payment and the sale of a security, i.e. deemed to be earned on a security but not yet paid to the investor. At the time of the sale, the buyer pays the seller the securitys price plus accrued interest Acquisition One company taking over controlling interest in another company. Adjusted EPS Adjusted Earnings per share AFM Amman Financial Market After-tax Return An investment's return after all income taxes have been deducted. AGICO Acronym for Arabian General Investment Corporation. The company has changed its name to SHUAA Capital psc in April 2001. Alpha Measure of risk-adjusted performance. An alpha is usually generated by regressing the security or mutual fund's excess return on benchmark indexs excess return. American Depository Receipt (ADR) Receipt for the shares of a foreign-based corporation held in the vault of a U.S. bank and entitling the shareholder to all dividends and capital gains.

Amortization Accounting procedure that gradually reduces the cost value of a limited life or intangible asset, such as goodwill, through periodic charges to income. Amortization also refers to the reduction of debt by regular-payments of interest and principal suffici Annual Meeting Once-a-year meeting when the managers of a company report to stockholders on the year's results, and the board of directors stands for election for the next year. Annual Report Yearly record of a corporation's financial condition that must be distributed to shareholders. Included in the report is a escription of the company's operations as well as its balance sheet and income statement. Annuity A long-term investment that provides tax-deferred growth and income at regular intervals for as long as you specify. Arbitrage Profiting from differences in price when the same security, currency, or commodity is traded on two or more markets. Ask Price The price at which a market maker is willing to sell a specified quantity of a particular security. Asset Anything having commercial or exchange value that is owned by a business, institution, or individual. Asset Allocation Apportioning of investment funds among categories of assets, such as cash equivalents, stocks, fixed-income investments, and such tangible assets as real estate, precious metals, and collectibles. Asset allocation affects both risk and return and is a cen Assets Under Management The value of the assets that a company manages, but does not own.

Authorized Shares Maximum number of shares of any class a company may legally create under the terms of its articles of incorporation. Normally, a corporation provides for future increases in authorized stock by vote of the stockholders. The corporation is not required to

Bad Debt Open account balance or loan receivable that has proven uncollectible and is written off. Balance of Payments System of recording all of a country's economic transactions with the rest of the world during a particular time period. Balance of Trade Net difference over a period of time between the value of a country's imports and exports of merchandise. Balance Sheet Financial report showing the status of a company's assets, liabilities, and owners' equity on a given day. Balanced Fund A fund that invests in both stocks and bonds whose objective is both growth and income. Basis point One one-hundredth of 1 percent. Yield differences among fixed-income securities are stated in basis points Bear Market Prolonged period of falling prices. Bearer security A security that has no identification as to owner. It is presumed to be owned by the person who holds it. Bearer securities are freely negotiable, since ownership can be quickly transferred from seller to buyer by delivery of the instrument. However, note Beta Coefficient measuring a stock's relative volatility. The beta is the covariance of a stock in relation to the rest of the stock market.

Beta measure of the relative volatility of a stock or other security as compared to the volatility of the entire market (usually measured for a benchmark index). A beta above 1.0 shows greater volatility than the overall market, while betas below 1.0 are less v Bid The price at which a buyer will purchase a security. Bid Price The price at which a market-maker is willing to purchase a specified quantity of a particular security. Blue Chip Common stock of a nationally known company that has a long record of profit growth and dividend payment and a reputation for quality management, products, and services. Board of Directors Group of individuals elected, usually at an annual meeting, by the shareholders of a corporation and empowered to carry out certain tasks as spelled out in the corporation's charter. Bond Any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bond insurers and reinsurers A partial list of bond insurers includes American Municipal Bond Assurance Corp. (AMBAC), ACA Financial Guaranty, Asset Guaranty Insurance Co., AXA Re Finance, Capital Guaranty Insurance Co., Capital Markets Assurance Corp. (CapMAC), Capital Reinsurance Co Bond Ratings An indicator of the creditworthiness of specific bond issues. These ratings are often interpreted as an indication of the likelihood of default on the part of the respective bond issuers. Bonds with the smallest default probability are rated AAA (or Aaa) Bonus Issue Also known as a capitalization or scrip issue. This is when a company issues free shares to a company's existing shareholders. No money changes hands and the share price falls pro rata. This is usually used as an exercise to make the shares more marketabl

Book-entry A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates. Bottom-Up Approach An investment strategy that focuses on individual stocks, rather than general market trends. It assumes strong companies can perform well independent of the market environment. Broker Person who acts as an intermediary between a buyer and seller, usually charging a commission. BSE Bahrain Stock Exchange Budget Estimate of revenue and expenditure for a specified period. Budget Deficit Excess of spending over income for a government, corporation, or individual over a particular period of time. Budget Surplus Excess of income over spending for a government, corporation, or individual over a particular period of time. BVPS Book Value per share

Call Option Right to buy shares of a particular stock or stock index at a predetermined price before a preset data, in exchange for a premium. Call premium A dollar amount, usually stated as a percent of the principal amount called, paid by the issuer as a "penalty" for the exercise of a call provision.

Callable bonds Bonds which are redeemable by the issuer prior to the maturity date at a specified price at or above par. Cap The top interest rate that can be paid on a floating-rate security. Capital Asset Long-term asset that is not bought or sold in the normal course of business. Capital Gain Difference between an asset's purchase price and selling price, when the difference is positive. Capital Markets Markets where capital funds - debt and equity - are traded. Capital Stock Stock authorized by a company's charter. The number and value of issued shares are normally shown, together with the number of shares authorized, in the capital accounts section of the balance sheet. Capitalization Rate Rate of interest used to convert a series of future payments into a single present value. Cash Cow A business that generates a continuing flow of cash. Such a business usually has wellestablished brand names whose familiarity stimulates repeated buying of the products. Stocks that are cash cows have dependable dividends. Cash Dividend Cash payment to a corporation's shareholders, distributed from current earnings or accumulated profits. Cash Equivalents Instruments or investments of such high liquidity and safety that they are virtually as good as cash. Examples are Money Market Funds and Treasury Bills.

Closed-End Fund Type of fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end funds, closed-end funds do not stand ready to issue or redeem shares on a continuous basis. Closed-end investment company An investment company created with a fixed number of shares which are then traded as listed securities on a stock exchange. After the initial offering, existing shares can only be bought from existing shareholders. CMO (Collateralized Mortgage Obligation) A bond backed by a pool of mortgage pass-through securities or mortgage loans, which generally supports several classes of obligations. Collar Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security. Common Stock Units of ownership of a public corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of sec Consolidated Financial Statement Financial statement that brings together all assets, liabilities, and operating accounts of a parent company and its subsidiaries. Controlling Interest Ownership of more than 50% of a corporation's voting shares. A much smaller interest, owned individually or by a group in combination, can be controlling if the other shares are widely dispersed and not actively voted. Convertibles Corporate securities (usually preferred shares or bonds) that are exchangeable for a set number of another form (usually common shares) at a prestated price. Corporation A legal entity, separate and distinct from the persons who own it. It has three chief distinguishing features: limited liability (owners can lose only what they invest); easy transfer of ownership through the sale of shares; and continuity of existence.

Cost of Capital Rate of return that a business could earn if it chose another investment with equivalent risk in other words, the opportunity cost of the funds employed as the result of an investment decision. Cost of capital is also calculated using a weighted average Countercyclical Stocks Stocks that tend to rise in value when the economy is turning down or is in recession. Coupon This part of a bearer bond denotes the amount of interest due, and on what date and where payment will be made. Bearer coupons are presented to the issuer's designated paying agent for collection. With registered bonds, physical coupons don't exist. (See " CSE Casablanca Stock Exchange Current Ratio Current assets divided by current liabilities. The ratio shows a company's ability to pay its current obligations from current assets. Current yield The ratio of interest to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of $1,000 that pays $80 per year in interest would have a current yield of 8%. CUSIP The Committee on Uniform Security Identification Procedures, established under the auspices of the American Bankers Association to develop a uniform method of identifying securities. CUSIP numbers are unique nine-digit numbers assigned to each series of se Custodian Bank or other financial institution that keeps custody of stock certificates and other assets of a fund, individual, or corporate client. Cyclical Stocks Stocks that tend to rise quickly when the economy turns up and to fall quickly when the economy turns down.

Date of Record Date on which a shareholder must officially own shares in order to be entitled to a dividend. Dated date (or issue date) The date of a bond issue from which the first owner of a bond is entitled to receive interest. Debenture Unsecured debt obligation, issued against the general credit of a corporation, rather than against a specific asset. Default Failure to pay principal or interest when due. Defaults can also occur for failure to meet nonpayment obligations, such as reporting requirements, or when a material problem occurs for the issuer, such as a bankruptcy. Defensive Securities Stocks and bonds that are more stable than average and provide a safe return on an investor's money. When the stock market is weak, defensive securities tend to decline less than the overall market. Delisting Removal of a company's security from an exchange because the firm did not abide by some regulation or the stock does not meet certain financial ratios or sales levels. Depreciation Amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depreciable life. Deregulation Greatly reducing government regulation in order to allow freer markets to create a more efficient marketplace. Derivative Instrument A contract whose value is based on the performance of an underlying financial asset, index, or other investment. Devaluation Lowering of the value of a country's currency relative to gold and/or the currencies of other nations.

Discount The amount by which the purchase price of a security is less than the principal amount, or par value. Discount note Short-term obligations issued at discount from face value, with maturities ranging from overnight to 360 days. They have no periodic interest payments; the investor receives the note's face value at maturity. Discount rate The rate the Federal Reserve charges on loans to member banks. Div Yield Dividend Yield Diversification Spreading of risk by putting assets in several categories of investments. Dividend 1. A company's payment of profits to its stockholders. 2. A mutual fund's payment of profits to its shareholders. 3. A return of part of the premium on participating insurance to reflect the difference between the premium charged and the combination of ac Dividend Payout Ratio Percentage of earnings paid to shareholders in cash. In general, the higher the payout ratio, the more mature the company. Dividend Yield Annual percentage of return earned by an investor on a stock. The yield is determined by dividing the amount of the dividends per share by the current market price per share. Dow Jones Industrial Average (DJIA) A popular index in the United States used to measure and report value changes in representative US stock groupings. "The Dow" is a price-weighed average of 30 actively traded blue chip stocks primarily of industrial companies. Duration The weighted maturity of a fixed-income investment's cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.

DVPS Dividend per share

Earnings Per Share (EPS) Portion of a company's profit allocated to each outstanding share of common stock. EFG EFG-Hermes (Egypt) Embedded option A provision within a bond giving either the issuer or the bondholder an option to take some action against the other party. The most common embedded option is a call option, giving the issuer the right to call, or retire, the debt before the scheduled matu EMNEX Emirates Bank International UAE Equity Index EPS Earnings per Share Equity Fund A fund that invests primarily in stocks. Also known as a stock fund. Eurobond Bond denominated in U.S. dollars or other currencies and sold to investors outside the country whose currency is used. EV Enterprise Value EV / Equity Enterprise Value to Equity Ratio Ex-Dividend The interval between a fund distribution's record date and payable date. During this period, investors who purchase shares are not entitled to the distribution payment.

Exercise Price Price at which the stock or commodity underlying a call or put option can be purchased (call) or sold (put) over the specified period Extension risk The risk that rising interest rates will slow the anticipated rate at which mortgages or other loans in a pool will be repaid, causing investors to find their principal committed longer than expected. As a result, they may miss the opportunity to earn a hi

Face amount Par value (principal or maturity value) of a security appearing on the face of the instrument Federal funds rate The interest rate charged by banks on loans of their excess reserve funds to other banks. The Federal Reserve's ability to add or withdraw reserves from the banking system gives it close control over this rate. Changes in the federal funds rate are sometim Fiscal Year A 365-day accounting period for which a company or mutual fund prepares financial statements. Fixed Asset Tangible property used in the operations of a business, but not expected to be consumed or converted into cash in the ordinary course of events. Floating-rate bond A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index. Floor The lower limit for the interest rate on a floating-rate bond. Forward Contract Purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the current or spot rate, with delivery and settlement at a specified future date.

Front Running Practice whereby a securities or commodities trader takes a position to capitalize on advance knowledge of a large upcoming transaction expected to influence the market price. Futures Contract An agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date.

General obligation bond A municipal bond secured by the pledge of the issuer's full faith, credit and taxing power. Global Depository Receipt (GDR) Receipt of shares in a foreign-based corporation traded in capital markets around the world. The advantage to the issuing company is that they can raise capital in many markets, as opposed to just their home market. The advantage of GDRs to local investor Growth Stock Stock of a corporation that has exhibited faster-than-average gains in earnings over the last few years and is expected to continue to show high levels of profit growth.

Hedge Strategy used to offset investment risk, typically from adverse movements in interest rates or securities prices. A perfect hedge is one eliminating the possibility of future gain or loss. Hedge Fund Private investment partnership or an off-shore investment corporation in which the general partner has made substantial personal investment, and whose offering memorandum allows for the fund to take both long and short positions, use leverage and derivati High-yield bond Bonds issued by lower-rated corporations, sovereign countries and other entities rated Ba or BB or below and offering a higher yield than more creditworthy securities, sometimes known as junk bonds. Holding Company A company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors. Also called parent company.

Hostile Takeover Takeover of a company against the wishes of current management and the board of directors.

IFCG International Finance Corporation Global Index Index Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base period. Initial Public Offering (IPO) A corporation's first offering of stock to the public. Insider Trading Practice of buying and selling shares in a company's stock by that company's management or board of directors, or by a holder of more than 10% of the company's shares. Intangible Asset Right or nonphysical resource that is presumed to represent an advantage to the firm's position in the marketplace. Such assets include copyrights, patents, trademarks, goodwill, and franchises. Interest Compensation paid or to be paid for the use of money. Interest is generally expressed as an annual percentage rate. Internal Rate of Return (IRR) Discount rate at which the present value of the future cash flows of an investment equal the cost of the investment. Investment-grade Bonds considered suitable for preservation of invested capital by the rating agencies and rated Baa or BBB or above. Issuer An entity which issues and is obligated to pay principal and interest on securities.

Junk Bond A debt obligation with a rating of Ba or BB or lower, generally paying interest above the return on more highly rated bonds, sometimes known as high-yield. This low-rated bond as it offers higher interest rates along with higher risk, makes it more appropr

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Leverage The use of borrowed money to increase investing power. Leveraged Buyout Takeover of a company, using borrowed funds. Most often, the target company's assets serve as security for the loans taken out by the acquiring firm. Liability Claim on the assets of a company. LIBOR (London Interbank Offered Rate) The rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities. Liquidity Ability to buy or sell an asset quickly and in large volume without substantially affecting the asset's price.

Management Buyout Purchase of all of a company's publicly held shares by the existing management, which takes the company private. Management Fee Charge against investor assets for managing the portfolio of an open- or closed-end fund as well as for such services as shareholder relations or administration.

Mark to the Market Adjust the valuation of a security or portfolio to reflect current market values. Market Capitalization Value of a corporation as determined by the market price of its issued and outstanding common stock. It is calculated by multiplying the number of outstanding shares by the current market price. Marketability A measure of the ease with which a security can be sold in the secondary market. Maturity The date when the principal amount of a security is payable. Maturity Date Date on which the principal amount of a note, bond, certificate of deposit, or other debt security becomes due and payable. Merger Combination of two or more companies, either through a pooling of interests, where the accounts are combined; a purchase, where the amount paid over and above the acquired company's book value is carried on the books of the purchaser as goodwill; or a con Minority Interest Interest of shareholders who, in the aggregate, own less than half the shares in a corporation. Monopoly Control of the production and distribution of a product or service by one firm or a group of firms acting in concert. Mortgage pass-through A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis. MSM Muscat Securities Market

Mutual fund Also known as an open-end investment company, to differentiate it from a closed-end investment company. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their share

Naked Option Option for which the buyer or seller has no underlying security position. NBAD National Bank of abu Dhabi Net Asset Value (NAV) The price of a share of a fund, net of sales charges. Price may vary daily. Net Present Value (NPV) Method used in evaluating investments whereby the net present value of all cash flows (such as the cost of the investment) and cash inflows (returns) is calculated using a given discount rate, usually a rquired rate of return. An investment is acceptable Net Worth Amount by which assets exceed liabilities. NIAT Net Income After Tax Non-callable bond A bond that cannot be called for redemption by the issuer before its specified maturity date.

Off-Balance-Sheet Financing Financing that does not add debt on a balance sheet and thus does not affect borrowing capacity as it would be determined by financial ratios. Offer The price at which a seller will sell a security.

Offering price The price at which members of an underwriting syndicate for a new issue will offer securities to investors. Open-End Fund A listed fund that continually creates new shares on demand. The fund shareholders buy the shares at net asset value and can redeem them at any time at the prevailing market price. Over the Counter (OTC) Market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange. Oversubscribed Underwriting term describing a new stock issue where there are more buyers than available shares.

P/B Price to Book Ratio P/E Price to Earnings Ratio Par value The principal amount of a bond or note due at maturity. Paying agent Place where principal and interest are payable. Usually a designated bank or the office of the treasurer of the issuer. PB Price to Book Ratio; Compares a stock's market value to the value of total assets less total liabilities (book value). Determined by dividing current stock price by common shareholder equity per share (book value) adjusted for stock splits. Poison Pill Strategic move by a takeover-target company to make its stock less attractive to an acquirer.

Premium The amount by which the price of a security exceeds its principal amount. Prepayment The unscheduled partial or complete payment of the principal amount outstanding on a mortgage or other debt before it is due. Prepayment risk The risk that falling interest rates will lead to heavy prepayments of mortgage or other loansforcing the investor to reinvest at lower prevailing rates. Present Value Value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate. Price/Earnings Ratio (P/E) Price of a stock divided by its earnings per share. The P/E ratio may either use the reported earnings from the latest year (called a trailing P/E) or employ an analyst's forecast of next year's earnings (called a forward P/E). Primary market The market for new issues. Principal The face amount of a bond, payable at maturity. Private Placement Sale of stocks, bonds, or other investments directly to an institutional investor. Privatization Process of converting a publicly operated enterprise into a privately owned and operated entity. Profit Taking Action by short-term securities or commodities traders to cash in on gains earned on a sharp market rise.

Prospectus Formal written offer to sell securities that sets forth the plan for a proposed business enterprise or the facts concerning an existing one that an investor needs to make an informed decision. Put Option Contract that grants the right to sell at a specified price a specific number of shares by a certain date.

Quick Ratio Cash, marketable securities, and accounts receivable divided by current liabilities.

Ratings Designations used by credit rating agencies to give relative indications of credit quality. Realized Profit (or Loss) Profit or loss resulting from the sale or other disposal of a security. Registered bond A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished when the securities are properly endorsed by the registered owner. Reinvestment risk The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment. REMIC (Real Estate Mortgage Investment Conduit) Because of changes in the 1986 Tax Reform Act, most CMOs are now issued in REMIC form to create certain tax advantages for the issuer. The terms REMIC and CMO are now used interchangeably. Retail Investor An investor who buys securities on his own behalf, not for an organization. Retained Earnings Net profits kept to accumulate in a business after dividends are paid.

Return on Equity Amount, expressed as a percentage, earned on a company's common stock investment for a given period. Revenue bond A municipal bond payable from revenues derived from tolls, charges or rents paid by users of the facility constructed with the proceeds of the bond issue. Rights Offering Offering of common stock to existing shareholders who hold rights that entitles then to buy newly issued shares at a discount from the price at which shares will later be offered to the public. ROaA Return on Average Assets RoaE Return on Average Equity

Secondary market Market for issues previously offered or sold. Seed Money Venture capitlist's first contribution toward the financing or capital requirements of a start-up business. Selling Short Sale of a security not owned by the seller; a technique used (1) to take advantage of an anticipated decline in the price or (2) to protect a profit in a long position. Settlement date The date for the delivery of securities and payment of funds. Sharpe Ratio A measure of a portfolio's excess return relative to the total variability of the portfolio. SHUAA Arabic acronym for Arabian General Investment Corporation

Sinker A bond with a sinking fund. Sinking fund Money set aside by an issuer of bonds on a regular basis, for the specific purpose of redeeming debt. Sovereign Risk Risk that a foreign government will default on its loan or fail to honor other business commitments because of a change in national policy. Speculation Assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. Standard deviation The square root of the variance. A measure of dispersion of a set of data from its mean. Stock Dividend Payment of a corporate dividend in the form of stock rather than cash. Swap The sale of a block of bonds and the purchase of another block of similar market value. Swaps may be made to establish a tax loss, upgrade credit quality, extend or shorten maturity, etc. Synergy Ideal sought in corporate mergers and acquisitions that the performance of a combined enterprise will exceed that of its previously separate parts.

Top-Down Approach An investment strategy that focuses on general market trends and selects specific stock sectors that can benefit from these broad trends. Total Return Annual return on an investment including appreciation and dividends or interest.

Trade date The date when the purchase or sale of a bond is executed. Transfer agent A party appointed by an issuer to maintain records of securities owners, to cancel and issue certificates and to address issues arising from lost, destroyed or stolen certificates. Treasury Stock Stock reacquired by the issuing company and available for retirement or resale. Trustee A bank designated by the issuer as the custodian of funds and official representative of bondholders. Turnover A measure of trading activity; the volume of shares traded as a percent of total shares listed during a specified period, usually a day or a year. In the case of mutual funds, turnover is a measure of trading activity during the previous year, expressed as

Underwrite To assume the risk of buying a new issue of securities from the issuing corporation or government entity and reselling them to the public. Unit investment trust Investment funds created with a fixed portfolio of investments that never changes over the life of the trust. They are created by brokerage houses, and are liquidated as investments within the trust are paid off. They provide a steady, periodic flow of inc

Volatility Characteristic of a security, commodity, or market to rise or fall sharply in price within a short-term period.

Window Dressing Trading activity near the end of a quarter or fiscal year that is designed to dress up a portfolio to be presented to clients or shareholders.

Yield The annual percentage rate of return earned on a security. Yield is a function of a security's purchase price and coupon interest rate. Yield curve A line tracing relative yields on a type of security over a spectrum of maturities ranging from three months to 30 years. Yield to call A yield on a security calculated by assuming that interest payments will be paid until the call date, when the security will be redeemed at the call price. Yield to maturity A yield based on the assumption that the security remains outstanding to maturity. It represents the total of coupon payments until maturity, plus interest on interest, and whatever gain or loss is realized from the security at maturity.

Zero-coupon bond A bond where no periodic interest payments are made. The investor receives one payment, which includes principal and interest, at redemption (call or maturity). (See "discount note.")