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New Financial

Products and Services


Prof. Sarbesh Mishra
Finance Area.
Preface
 Structural change in international capital market
has led to the emergence of new products and
innovative techniques of operation in capital
market.

 Financial intermediaries including banks have


already started expanding their activities in the
financial services sector by offering a variety of
new products.
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Merchant Banking
 It’s a financial intermediary who helps to transfer
capital from those who possess it to those need it.
 Merchant banking includes wide range of activities
i.e. management of customers securities, portfolio
management, project counseling and appraisal,
underwriting of shares and debentures, acting as
banker for refund orders, handling interest and
dividend warrants etc.
 Merchant banker renders a host of services to
corporate and promotes industrial growth.
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Loan Syndication
 Loan arranged by a bank called lead manager for a
borrower who is usually a large corporate customer or
a government department.
 The other banks who are willing to lend can participate
in the loan by contributing an amount suitable to
their own lending policies.
 Since single bank can’t provide huge sum of loan, a
number of banks join together and form a syndicate.
 It also enables the members of the syndicate to share
the credit risk associated with a particular loan
among themselves.
 This is otherwise referred as “Consortium Financing”.
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Mutual Funds
 This refers to fund raised by a financial service
company by pooling the savings of the public.
 It is invested in a diversified portfolio with view to
spreading and minimizing risk.
 The fund provides investment avenue for small
investors who can’t participate in the equities of big
companies.
 It ensures low risk, steady returns, high liquidity and
better capital appreciation in long run.

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Factoring
 It refers to managing the process of sales
ledger by financial service company.
 It’s an arrangement under which financial
intermediary assumes credit risk in the
collection of book debts for its clients.
 A factor provides credit information, collects
debts, monitors sales ledgers, and provides
finance against debts.

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Forfaiting
 It’s a technique by which forfaitor (Financing
Agency) discounts an export bill and pay
ready cash to the exporter who can concentrate
on the export front without bothering about the
collection of export bills.

 The exporter is protected against the risk of


non-payment of debts by the importers.

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Securitisation
 It’s a process by which a financial company
converts its ill-liquid, non-negotiable and high
value financial assets into securities of small
value which are made tradable and transferable.
 It is best suited for housing finance companies
whose loans are always long-term in nature and
their money is locked up for a considerable period.
 In such cases, securitisation would help the
financial institution to raise cash against such
assets by means of issuing securities of small
values to the public.
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Derivative Security
 It’s a security whose value depends on the value
of other basic variables backing the security.
 A derivative security is basically used as risk
management tool and it is resorted to cover the
risks due to price fluctuations by the investments
manager.
 It helps to break the risks into various components
such as credit risk, interest rates risk, exchange
rates risk and so on.
 In India some forms of derivatives are in operation
namely forwards in forex market
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Letter of Credit (LOC)
 An innovative funding mechanism for the import of
goods and services on deferred payment terms.
 LOC is an arrangement of a financing institution /
bank of one country with another institution / bank
/ agent to support the export of goods and
services so as to enable the importers to import on
deferred payment terms.
 This is backed by a guarantee furnished by the
institution / bank in the importing country.
 This helps the exporter to get payment
immediately as soon as the goods are shipped.
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Infrastructure Bond
 It is a kind of debt instrument issued with a view to
giving tax shelter to investors.
 The resources raised through this bond will be used
for promoting investment in the field of certain
infrastructure industries.
 Tax concessions are available under sec. 88, sec.
54 EA and sec. 54 EB of Income Tax Act.
 HUDCO has issued for the first time such bonds.
 It’s face value was Rs. 1000 each carrying an
interest rate of 15% per annum payable semi-
annually.
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Miscellaneous
 Yankee Bonds – If bonds are raised in USA, they are
called as Yankee Bonds and if they raised in Japan
they are called as Samurai Bond.
 Floating Rate Notes (FRNs) – These are debt
instrument which facilitate the periodic interest rate
adjustment.
 Loyalty Coupons – These are entitlements to the
holder of debt for two to three years to exchange into
equity shares at discount prices.
 Global Depository Receipt – It’s a dollar denominated
instrument traded in a stock exchange in Europe or
the USA.
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New Products in the FOREX Market
 Forward Contract – In a forward transaction the
delivery of foreign currency takes place at a specified
future date for a specified price.
 Obligation is there to honour this contract at any cost
else penalty will be levied i.e. genuine business.
 It is having a fixed or flexible maturity features i.e. 30th.
Sept’08 or 1-30th. Sept’08.
 These are traded over the counter (OTCEI) or simply
be a signed contract between two parties.
 Forwards transact only when purchased and on the
settlement date.
 In the case of physical delivery, the forward contract
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specifies to whom to make the delivery
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Options
 Buyer of the option has a right to buy or sell a
fixed amount of currency against another currency
at a fixed rate on a future date according to his
option.
 There is no obligation to buy or sell, but it is
completely left to his option.
 Options are of two types, namely 1. Call Options
(Option to buy) 2. Put options (Option to sell)
 Option trading leads to speculations and legal
restrictions are imposed in India.
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Futures
 It’s a legal contract where there is an agreement to buy
or sell a stated quantity of foreign exchange at a future
date at an agreed price on a stated stock exchange.
 The future date is called the delivery date or final
settlement date. The pre-set price is called the futures
price. The price of the underlying asset on the delivery
date is called the settlement price.
 Futures are rebalanced, or "marked to market," every
day to the daily spot price of a forward with the same
agreed-upon delivery price and underlying asset.
 The counterparty for delivery on a futures contract is
chosen by the clearing house.
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SWAPS
 Transaction wherein a financial intermediary buys and
sells a specified foreign currency simultaneously for
different maturity dates.
 It results into simultaneous buying and selling of same
foreign currency of the same value for the different
maturities to eliminate risk.
 It is also used to enter into arbitrage operations i.e.
arbitrage is the practice of taking advantage of a price
differential between two or more markets.

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