FINANCING

OPTIONS

OPTION

It belongs to family of derivatives

It is a contract that confers the right to its
owner/holder but not obligation to buy or
sell
The buyer of the option is placed in an
advantageous situation as he will exercise his
option only when it is profitable
In other words seller of the option is in
disadvantageous position as he is under
obligation to buy or sell the securities in case
the buyer exercise his option

IMPORTANT TERMS ASSOCIATED

WITH OPTIONS

Buyer is the one who by paying the option

premium buys the right to buy /sell
securities but not the obligation to exercise
his option on the seller /writer of the option
Writer of an option is the one who receives
the option premium & is there by obliged to
sell/buy the securities if the buyer exercise
the option on him
Option price/premium is the price that the
option buyer pays to option seller

CONTD

Expiry Date is the date specified in the options

contract by which the option can be excercised
Strike price The price specified in the options
contract at which the buyer can exercise his
right to buy or sell the securities
At the money option is an option that would
lead to zero cash flow (no profit no loss )to the
holder
In the Money option- is an option that would
lead to positive cash flow to the holder
Out of the money Option is an option that
would lead to negative cash flow to the holder

MULTIPLE OPTION BONDS

Appealing to Different Requirements of

Investors for Income Planning

Flexibility in Tax Planning of Investors

Payment of Interest is staggered with varied
options

Became Popular and adopted for

Infrastructure Bonds also

FINANCIAL ENGINEERING
-MEANING

Corporate finance, bank finance, and

investment finance have changed in recent
years has given birth to a new discipline that
has come to known as financial engineering.
Financial engineering involves the design,
the development, and the implementation of
innovative financial instruments and
processes, and the formulation of creative's
solution to problem in finance

CONTD

For many firms, their risk exposure is unique

in the sense that the risk exposure is based
on an asset whose value is not easily
hedged .
By combining elements of forwards, futures,
options, and swaps, firms can create a
financial instrument that meets the needs of
the corporation that is trying to hedge its
risk exposure or one that offers the
institutional investor an investment
opportunity with a unique payoff structure.

OFFSHORE INSTRUMENTS

Offshore investment is the keeping of

money in a jurisdiction other than one's
country of residence
Offshore centers are widely used and are
accessible to anyone who can meet the
minimum investment amount or pay the
obligatory fees required to open such an
entity.

REASONS FOR OFFSHORE INVESTMENT

Tax Advantages
Investment diversification
Lower levels of regulation
Specialist financial services

FOREIGN DIRECT INVESTMENT

Direct investment into production or business

in a country by a company of another
country.
A Chinese Company building a factory and a
supply chain in the US in order to tap into
the American market would be an example of
Chinese foreign direct investment into
America.

FDI FACT SHEET

From April 2000 to June 2010

AMOUNT
(In million $)

CUMULATIVE AMOUNT OF FDI INFLOWS IN INDIA

170,323

SECTOR-WISE DISTRIBUTION OF FDI EQUITY

INFLOW
NAME OF
INDUSTRY
POWER

GROWTH RATE%
AS ON DEC
2009
3

AUTOMOBILE

5.2

METALLURGICA
L

8.6

PETROLEUM

6.2

CHEMICAL

12

FINANCIAL

8.5

SOFTWARE/HAR
DWARE

33

TELECOM

14

REAL ESTATE

11

CONSTRUCTION

8.5

INDIAS INVESTMENT
OPPORTUNITIES

Engineering & Automobiles

Information Technology
Banking & Financial Sector
Agricultural Short of Investment in agro processing
Infrastructure Mining, Steel, Oil & Gas, Public Transport,
Roads
Jewelry & Diamond Processing
Aviation
Logistics & Transportation
Healthcare
Education

WHAT ARE CONTINGENT

CONVERTIBLE BONDS

bonds are hybrid capital securities that

absorb losses in accordance with their
contractual terms when the capital of the
issuing bank falls below a certain level
As a bail-in mechanism to infuse additional
capital under adverse market conditions
Transfer of risk from taxpayers to the private
sector in times of distress

LEASING

A lease is an agreement whereby the lessor

conveys to the lessee , in return for rent, the
right to use an asset for an agreed period of
time.
A financing arrangement that provides a firm
with an advantage of using an asset, without
owning it, may be termed as leasing.

HIRE PURCHASE

is the legal term for a contract, in which a

purchaser agrees to pay for goods in parts or
a percentage over a number of months

FINANCIAL BENCHMARKING

Financial benchmarking involves running a

financial analysis and making a comparison of
the results in order to assess a firm's overall
competitiveness, efficiency and productivity.
The term benchmarking refers to the process
of comparing one's business practices and
performance standards to other firms within
ones industry. Quality, time, and cost are
the most common divisions to be measured.

CREDIT APPRAISAL IN BANKING

SECTOR

Credit appraisal means an

investigation/assessment done by the bank
prior before providing any loans &
advances/project finance & also checks the
commercial, financial & technical viability of
the project proposed.
Proper evaluation of the customer is preferred
which measures the financial condition &
ability to repay back the loan in future
Credit appraisal is the process of appraising
the credit worthiness of the loan applicant

MEANING OF DUE DILIGENCE

It is the process of carrying out an

investigative analysis of the financial, legal
and operating activities of an entity in
connection with a proposed transaction that
would result in a significant change in the
ownership or the capital structure of the
entity.

AIM OF THE DUE DILIGENCE

PROCESS
Identify problems within the business,
particularly any issues which may give rise to
unexpected liabilities in the future.
Ingredients of a successful Due Diligence
Must be unbiased
Should be carried out by independent
professionals.
Requires the managements co-operation
Done with a positive attitude

What is Credit Rating?

A credit rating is an evaluation report of how well or bad
a company is performing in absolute terms in a particular
market or industry.
Such a report makes it possible for the stakeholders to
compare a companys credit worthiness against other
companies operating in similar market or industry
internationally.
The rating exercise is considered as one of the most
essential reports, besides the External auditors report,
which provides the stakeholders an overview of the
financial standing of the commercial entity.
The report is made up of both; (a) quantitative, and (b)
qualitative information.

Why the Need for a Credit Rating?

(a) The financial sector especially the banking industry in

most emerging economies is going through a process
of change,

(b) Financial transactions have become a major economic

activity in most service-based economies, thus any
disruption or imbalance in its infrastructure will have a
significant impact on the whole economy,

(c) A safe and sound banking industry can bring about

stability within the financial markets,

(d) During the last decade, banks around the world had to
respond to the emerging challenges of competition,
risks and uncertainties,

Economic & Industry Risk in Asia-Pacific Banking Systems

ECONOMIC RISK

INDUSTRY RISK

Very
High

High

Moderately
Moderately L
High
Moderate
Low
o
w

Low

Australia

Moderately
Low

New Zealand
Singapore

Moderate

Hong
Kong
Malaysia

Moderately
High

South
Korea
Taiwan

Thailand
China
Philippines

High
Very High

India

Indonesia
Vietnam

Source: Standard & Poors : Asia-Pacific Banking Outlook 2005

Japan

Banks Rating Methodology

The factors considered in the rating of banks or financial

Institutions are as follows:
Industry Risk
Structure
Ownership profile
Customer base
Regulation
Market position
Degree of diversification
Management style & strategies
Standards of accounting used

Perceived Economic Risk

Credit Risk Strategy
Market/Structural Risk
Trading Risk

Financial Risk
Funding & Liquidity
Capitalization
Earnings

Risk Management
Market Risk
Credit Risk
Financial Flexibility
Banks Credit Rating