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Symbiosis Institute of

Management Studies (SIMS)

LAUNCH
PAD-2011
Pre-Orientation Primer No.2
Pre Orientation Primer

Prepared by: Ms. Soumya Suresh


PRE ORIENTATION PRIMER

Hi!
On behalf of the Batch of 2011, I would like to extend a very warm welcome to all
of you.

This module deals with certain basic finance and economy related terms, many of
which we come across almost everyday. The purpose of adding this to your Pre
Orientation primer is to bring everyone onto the same platform with regard to
their basic knowledge, irrespective of the field they decide to take on in future.
Some of you may be aware of most terms mentioned herein but I suggest you all
go through them so as to refresh your concepts.

If there are any queries, you could mail me at soumya812@gmail.com

Looking forward to seeing you all soon!

Regards
Soumya Suresh
Member, InFINite – The Finance Club
Batch 2008-2011

SECURITIES
It is a negotiable instrument having financial value. It can be of 2 types :
• Debt
• Equity

DEBENTURES
It is a form in which a company can raise money. Investors can invest
money in the company by becoming lenders. The company, as a
recognition of the money received from the investors issues a debenture
certificate and the investors become the creditors/debenture holders of the
company.
Debentures carry a fixed rate of interest and are redeemed after a given
period of time.

BOND
A bond is simply a loan in the form of a security with different terminology:
The issuer is equivalent to the borrower, the bond holder to the lender, and
the coupon to the interest. Bonds enable the issuer to finance long-term
investments with external funds. Note that certificates of deposit (CDs) or
commercial paper are considered to be money market instruments and not

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bonds.

EQUITY SHARES
Equity shares are the right to ownership in a company.

PORTFOLIO
A collection of investments made by an investor.

DIVERSIFIED PORTFOLIO
A portfolio consisting of a large variety of investments in such a way that the
overall risk of the portfolio is reduced.

MUTUAL FUND
It is a form of investment opportunity for small investors to invest in the stock
market. It works on the 'principle of large numbers', wherein the small investors
pooling their funds in together sums up to be a sizeable figure so as to enable
them to hold a diversified portfolio of investments.

INDIAN FINANCIAL MARKETS

INDIAN FINANCIAL
MARKETS

MONEY MARKET CAPITAL MARKET

PRIMARY SECONDARY
MARKET MARKET

MONEY MARKET
The market in which all those securities which have a short maturity period (Less
than 1 year) are transacted.
Eg – Treasury Bills/T bills

CAPITAL MARKET
It provides a platform for the people who require money/capital (business houses
etc) and the people who have surplus cash (retail investors, mutual funds etc) to
come together.
It has two components :
• Primary Market – This is the market in which any company which wants
to raise money for the first time can raise money through an IPO (initial
public offer)
• Secondary Market – This is the market in which the shares and other
securities can be traded after they have been issued through the primary
market

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FUTURES AND FORWARDS
With the current financial crisis, we've come across this term quite a bit!

While futures and forward contracts are both a contract to deliver a commodity
on a future date at a prearranged price, they are different in several respects:
• Forwards transact only when purchased and on the settlement date.
Futures, on the other hand, are rebalanced, or "marked to market," every
day to the daily spot price (current price) of a forward with the same
agreed-upon delivery price and underlying asset.
• Example - Consider a futures contract with a $100 price: Let's say that on
day 50, a forward with a $100 delivery price (on the same underlying asset
as the future) costs $88. On day 51, that forward costs $90. This means
that the mark-to-market would require the holder of one side of the future
to pay $2 on day 51 to track the changes of the forward price. This money
goes, via margin accounts, to the holder of the other side of the future. (A
forward-holder, however, would pay nothing until settlement on the final
day, potentially building up a large balance)
• Futures are always traded on an exchange, whereas forwards always trade
over-the-counter, or can simply be a signed contract between two parties.
• Futures are highly standardized, whereas some forwards are unique.
• In the case of physical delivery, the forward contract specifies to whom to
make the delivery. The counterparty for delivery on a futures contract is
chosen by the clearing house.

OPTIONS
These are financial instruments that convey the right, but not the obligation, to
engage in a future transaction on some underlying asset.
Participants in a transaction of options
• Option Holder – The one who purchases the right to buy or sell an option
in the future
• Option Writer – The one who sells the right to the option holder and
receives a premium for this.
Put option – Option to sell a given asset in the future
Call option – Option to buy a given asset in the future

NAV – NET ASSET VALUE


It is the value of the Asset minus Liabilities.

FOREX LOSS
Nowadays, most companies have international transactions in which they receive
income in foreign currency. The accounts of the company are maintained in the
domestic currency – “rupee”, thus forex loss is the loss incurred by a company
due to the fluctuating exchange rates.

GLOBAL DEPOSITORY RECEIPTS (GDR)


A Global Depository Receipt (GDR) represents the ownership in the shares of a

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foreign company trading on the other financial markets (other than American
markets).

AMERICAN DEPOSITORY RECEIPTS (ADR)


An American Depositary Receipt (ADR) represents the ownership in the shares
of a foreign company trading on US financial markets.

ADRs and GDRs are not for investors in India – they can invest directly in the
shares of various Indian companies.
But the ADRs and GDRs are an excellent means of investment for NRIs and
foreign nationals wanting to invest in India.

GROSS DOMESTIC PRODUCT (GDP)


This is the sum total of all the goods and services produced in the economy in a
given year.

MARK TO MARKET ACCOUNTING


This is the form of accounting in which the asset prices reflect the current market
values. This method was favoured since it was claimed that it accurately
reflected the actual worth of the business but it is also considered to be one of
the main causes of the current credit crisis.

INFLATION
It refers to the rise in the general price levels of goods and services in an
economy over a period of time.

To control
inflation

Monetary Policy Fiscal Policy


(RBI) (Government)

Quantitative Qualitative Government Taxes


Measures Measures Purchases

SLR

CRR

Repo Rate

*This is NOT a comprehensive list.

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CASH RESERVE RATIO (CRR)
This is the amount of deposits which a commercial bank needs to keep with the
RBI as reserves. Currently, it is 5% (15th March, 2008).

STATUTORY LIQUIDITY RATIO (SLR)


This is the amount of deposits which a bank needs to keep with itself in the form of
liquid assets. Currently, it is 24% (15th March, 2008).

REPO RATE
This is the rate at which commercial banks borrow from the RBI. Currently, it is 5%
(15th March, 2008).

REVERSE REPO RATE


This is the rate at which the RBI borrows from the commercial banks. Currently, it is
3.5% (15th March, 2008).

RECESSION
Definitely, a term we've heard numerous times in the recent past!
A general slowdown in the economy wherein there is a decline in the GDP for two
successive quarters.

FACTS
In India, we follow the Direct Rate Quotation Method of denoting the exchange rate,
wherein the Foreign Currency is kept constant and the unit of Home currency fluctuates.

In India, we follow the Managed Float/ Dirty Float method of Exchange Rate – a system
of floating exchange rates in which the government or the country's central bank
occasionally intervenes to influence the exchange rate.

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