Revisionary Test Paper (Revised Syllabus-2008)
Thirdly, by providing a market quotation of the prices of shares and bonds
– a sort of collective judgment simultaneously reached by many buyers and sellers in the market-the stock exchangeserves the role of barometer, not only of the state of health of individual companies, but also ofthe nation’s economy. The changes in share prices are brought about by a complex set of factors,all operating in the market simultaneously. Share values as a whole are subject to secular trendsset by the economic programme of the nation, and governed by factors like general economicsituation, financial and monetary policies, tax changes, political environment, international - economicand financial development, etc.
Shortcoming of Stock Markets:
•Scarcity of floating stocks: Financial institutions, banks and insurance companies own 80percent of the equity capital of the private sector.•Speculation: 85 percent of the transactions on the NSE and BSE are speculative in nature.•Price rigging: evident in relatively unknown and low quality scripts. Causes short termfluctuations in the prices.•Insider trading: Obtaining market sensitive information to make money in the markets.
Answer 1. (b)(i)Forward contract and Future contract
Forward contracts are private bilateral contracts and have well established commercialusage. Future contracts are standardised tradable contracts fixed in terms of size, contractdate and all other features. The differences between Forward and Futures contracts aregiven below :1.The contract price is not publicly disclosedand hence not transparent.1.The contract price is transparent.2.The contract is exposed to default risk bycounterparty.2.The contract has effective safeguardsagainst defaults in the form of clearingcorporation guarantees for trades and dailymark to market adjustments to the accountsof trading membersbased on daily pricechange.3.Each contract is unique in terms of size,expiration date and asset type/quality.3.The contracts are standardised in terms ofsize, expiration date and all other features.4.The contract is exposed to the problem ofliquidity4.There is no liquidity problem in the contract.5.Settlement of the contract is done bydelivery of the asset on the expiration date.5.Settlement of the contract is done on cashbasis.
Forward contractsFuture contracts