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Financial Instruments

GROUP 8 Akshat Sardana (12P003) Amit Gupta (12P006) Avnish Chawla (12P015) Harshit Dixit (12P019) Parag Gupta (12P033) Suchit Juneja (12P053)

Definition
Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

Or Simply
Financial instruments can be thought of as easily tradeable packages of capital, each having their own unique characteristics and structure.

Categorization By Asset Class

Instruments

Equity Based

Debt Based

Foreign Exchange

Short Term
(< 1 Year)

Long Term
(>1 Year)

Financial Instruments

LONG TERM DEBT (>1 YEAR)

A bond is a formal contract to

Bonds

repay borrowed money with interest at fixed intervals GOI bonds maturity ranges from of 1-30 years. Most Government bonds are issued as fixed rate bonds (coupon rate is fixed for the entire life of the bond)

Trade Date

Trade Time

Nomenclature of Security 9.15% GOVT.STOCK 2024 9.15% GOVT.STOCK 2024 8.99% M.P. GS 2022 9.15% GOVT.STOCK 2024 9.15% GOVT.STOCK 2024 8.20% GOVT.STOCK 2025

Amount (Face value in Rs.Crore) 25 25 10 25

Price per Rs.100 nominal 108.25 108.30 101.95 108.30

Indicative YTM

08-02-2013 08-02-2013 08-02-2013 08-02-2013

16:57:05 16:54:56 16:31:39 16:54:50

8.0487 8.0424 8.6732 8.0424

08-02-2013 08-02-2013
08-02-2013 08-02-2013 08-02-2013 08-02-2013

16:47:25 16:53:45
16:49:56 16:55:41 16:42:12 16:54:45

40 25
13 2 50 25

108.29 102.04
103.18 102.20 113.18 102.04

8.0437 7.9387
7.9390 8.0518 8.0400 7.9387

8.33% GOVT.STOCK 2026


8.28% GOVT.STOCK 2032 10.25% G. S. 2021 8.20% GOVT.STOCK 2025

A bond future is a contractual

Bonds (Options and Futures)

obligation for the contract holder to purchase or sell a bond on a specified date at a predetermined price A bond option gives you the right but not an obligation to buy or sell a bond at a certain price on or before the option expiry date

An agreement between two

Interest Rate Swaps

parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount Principal Amount is notional and is not actually exchanged between the counterparties Can be customized in a number of ways like fixed for fixed, fixed for floating etc.

They are used to hedge the risk

Interest Rate Caps and Floors

associated with floating interest rates The create the maximum (cap) or minimum (floor) rate at the cost of a premium Interest rate caps are used by borrowers Interest rate floors are used by lenders Both cap and floor can be employed simultaneously to create a collar

Financial Instruments

SHORT TERM DEBT (<1 YEAR)

Commercial Paper (CP) is an

Commercial Paper in India

unsecured money market instrument issued in the form of a promissory note. Issued by large corporates (For India; networth > Rs 4 crores), primary dealers (PDs) and the All-India Financial Institutions (FIs) Can be issued for maturities between 7 days to 1year from the date of issue.

Treasury bills or T-bill are short

T Bills

term debt instruments issued by the Government of India T Bills are issued in three tenors, namely, 91 day, 182 day and 364 day. The Reserve Bank of India announces the issue details of Tbills through a press release every week.

Introduced in July 1989 Can be issued scheduled

Certificates Of Deposits

commercial banks (except RRBs) and All India Financial Institutions Maturity is a min of 7 days and max of 12 months (in case of FIs minimum 1 year and maximum 3 years) Issued in a multiple of 1 lakh

A short-term interest rate (STIR)

STIR (Short Term Interest Rates) Futures

future is a futures contract that derives its value from the interest rate at maturation Common short-term interest rate futures are Eurodollar, Euribor, Euroyen, Short Sterling and Euroswiss, which are calculated on LIBOR at settlement

Financial Instruments

EQUITY

The capital stock of an

Stocks, Stock Options and Futures

incorporated business constitutes the equity stake of its owners or simply the part of company you own Stock options and futures are similar to Bond options and futures

A mutual fund is nothing more

Mutual funds

than a collection of stocks and/or bonds It is good because of professional management, diversification, and liquidity Disadvantages include cost to companies Can be either Equity Funds (stocks) , Fixed Income Funds (bonds) or Money Market Funds (T Bills)

Financial Instruments

FOREIGN EXCHANGE

FX spot is an agreement between two

Spot/ Futures Forex And Options

parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. The standard settlement timeframe for foreign exchange spot transactions is T + 2 days Futures Forex: Contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future ForEx Options: Gives the owner the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date

Currency Swaps: A currency swap

Currency Swaps

involves two parties that exchange a notional principal with one another in order to gain exposure to a desired currency Following the initial notional exchange, periodic cash flows are exchanged in the appropriate currency

Outright Forwards And Forex Swaps

Outright Forwards: A contract

with locked in currency exchange rates and specified date ForEx Swaps: A simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward)