III SEMESTER MODEL I B com CBCS -MG UNIVERSITY

Core 9- FINANCIAL MARKET OPERATIONS

Module 1
1.What do you mean by financial system?
A financial system is a set of institutions, such as banks, insurance
companies, and stock exchanges, that permit the exchange of funds. ...
Borrowers, lenders, and investors exchange current funds
to finance projects, either for consumption or productive investments,
and to pursue a return on their financial assets.
2. What are the main components of the Indian Financial System?
There are four main components of the Indian Financial System
1. Financial Institutions.
2. Financial Assets.
3. Financial Services.
4. Financial Markets.

3. What are the main functions of a good financial system?

Some of the main functions of a good financial system are: 1.
Inducement to Save, 2. Mobilization of Savings, 3. Allocation of
Funds, 4.The financial system helps production, capital-accumulation,
and growth by (i) encouraging savings, (ii) mobilizing them, and (iii)
allocating them among alternative uses and users.
4. What is capital market?
There are broadly two types of financial markets in an
economy– capital market and money market. Now capital
market deals in financial instruments and commodities that are long-
term securities. The funds will be used for productive purposes and
create wealth in the economy in the long term.
Capital market is a market for long-term securities that includes both
debt and equity. Companies and governments can raise long term funds
(more than a year) through this market. The capital market connects the
surplus units with the deficit units. These instruments have a higher risk
than money market instruments.

5. What are the different types of capital market?

These markets are divided into two different categories:
primary markets—where new equity stock and bond issues are sold to
investors—and secondary markets, which trade existing securities.
6. What is money market market?
The money is an important part of Indian Money market, where
surplus funds on day-to-day basis are traded. What are
some examples of money market? The Treasury bills, repurchase
agreements, commercial papers etc. are the examples of money
market instrument.
7. What are the functions of Indian Financial System?
The financial system enables lenders and borrowers to exchange funds.
India has a financial system that is controlled by independent regulators
in the sectors of insurance, banking, capital markets and various
services sectors.
8. What are the main functions Financial system?
Value exchange: a way of making payments.
Intermediation: a way of transferring resources between savers and
borrowers.
Risk transfer: a means for pricing and allocating certain risks.
Liquidity: a means of converting assets into cash without undue loss
of value.

9. What are the objectives of the money market ?

The objectives of the money market are to implement the monetary
policy of the country. Monetary policy has three main objectives —
growth, equity and price stability. The objective of the monetary policy
in the first decade of planning was the revival of traditional weapons of
monetary control.
10. What is Zero coupon bond?
A zero-coupon bond is a debt security that does not pay interest but
instead trades at a deep discount, rendering a profit at maturity, when
the bond is redeemed for its full face value.
11. What is Commercial Paper?
Commercial paper is a money-market security issued (sold) by large
corporations to obtain funds to meet short-term debt obligations (for
example, payroll) and is backed only by an issuing bank or company
promise to pay the face amount on the maturity date specified on the
note.
12. What is RBI repo?
Repo rate is the rate at which the central bank of a country (Reserve
Bank of India in case of India) lends money to commercial banks in the
event of any shortfall of funds. Repo and reverse repo rates form a part
of the liquidity adjustment facility.
13. What are Gilt-edged securities?
Securities refer to high-grade bonds that some national governments
and private organizations issue in an effort to generate revenue. These
vehicles were originally issued by the Bank of England. These
instruments got their names because the certificates were printed on
paper stock with gilded edges.
14. What are the objectives of SEBI?
The fundamental objective of SEBI is to safeguard the interest of all
the parties involved in trading. It also regulates the functioning of the
stock market. SEBI's objectives are: To monitor the activities of the
stock exchange.
5 Mark Questions and Answers
15. What are the money market instruments?
The list of money market instruments traded in the money market
are:
▪ Certificate of Deposit
Lending substantial financial resources to an organization can be
done against a certificate of deposit. The operating procedure is
similar to that of a fixed deposit, except the higher negotiating
capacity, as well as lower liquidity of the former.

▪ Commercial Paper
This type of money market instrument serves as a promissory note
generated by a company to raise short term funds. It is unsecured,
and thereby can only be used by large-cap companies with renowned
market reputation. The maturity period of these debt instruments lies
anywhere between 7 days to one year, and thus, attracts a lower
interest rate than equivalent securities sold in the capital market.

▪ Treasury Bills
These are only issued by the central government of a country when
it requires funds to meet its short term obligations

Call Money
1. Interbank market where funds are borrowed and lent for 1 day
or less.
2. If >1 day and up to 14 days, it is called notice money.
3. Mutual funds, scheduled commercial & cooperative banks act
as both borrowers and lenders.
4. LIC, GIC, NABARD, IDBI act only as lenders.

Cash management Bills

1. It's a comparatively new short-term instrument issued by RBI
on behalf of Govt.
2. Issued to meet temporary mismatches in cash flow of Govt.
 3. They resemble T-bills in character but are issued for less than
91 days only.

Commercial Bills
1. Negotiable instruments which are issued by all India FIs, NBFCs,
SCBs, Merchant banks & Mutual funds.
2. Drawn by seller on the buyer (buyer gives seller)
3. Commercial bills are unsecured, short-term debt issued by a
corporation, often times for the financing of short-term liabilities
and inventory.

16. What are the Powers of SEBI?

1. To regulate and approve by-laws of stock exchanges.
2. Inspect the books of accounts of recognized stock exchanges and call
for periodical returns.
3. Inspect the books of financial Intermediaries.
4. Compel certain companies to get listed on one or more stock
exchanges.
5. To handle the registration of brokers.

17.What are debentures? List out different types of debentures.

Debentures are a debt instrument used by companies and government
to issue the loan. ... Companies use debentures when they need to
borrow the money at a fixed rate of interest for its expansion.
Types of Debentures
• Redeemable and Irredeemable (Perpetual) Debentures
Redeemable debentures carry a specific date of
redemption on the certificate. The company is legally bound to repay
the principal amount to the debenture holders on that date. On the other
hand, irredeemable debentures, also known as perpetual debentures, do
not carry any date of redemption..
• Convertible and Non-Convertible Debentures.
Convertible debentures are those debentures which give an option
to the holder to get it converted either in a share of the issuing company
 or in cash after a specified period of time. On the other hand, non-
convertible debentures are those which do not provide any such option
to the holder at the time of maturity.
• Fully and Partly Convertible Debentures. Convertible debentures are
those debentures which give an option to the holder to get it converted
either in a share of the issuing company or in cash after a specified
period of time. On the other hand, non-convertible debentures are those
which do not provide any such option to the holder at the time of
maturity.
• Secured (Mortgage) and Unsecured (Naked) Debentures.
A secured debenture is secured by the charge on some asset or set of
assets which is known as secured or mortgage debenture and another
when it is issued solely on the credibility of the issuer is known as
the naked or unsecured debenture
• First Mortgaged and Second Mortgaged Debentures.
Second mortgage debentures are those debentures on which the holders
have the claim on the asset charged after the claim of first mortgage
debentures is settled. Mortgage debentures have been gaining
popularity among investors in recent times. The investors feel secure
for the money they invest in mortgage debentures
• Registered Unregistered Debentures (Bearer) Debenture.
Bearer debentures are unregistered debentures that can be transferred
by mere delivery. No records are maintained in the
company's debenture-holders' register for the ownership of these
securities

17. Distinguish between: Debt Market & Equity Market?

Following are the main difference between debt & equity market:
Points - - Debt Market
- Equity Market
Meaning - The debt market is the market where debt instruments
are traded.
 -The equity market is the market where equity shares
are traded.
Instruments -In debt instruments includes debentures, bonds, Notes
& Mortgages.
- In equity market equity and preference shares are
traded.
Status of holder -Debt instrument holders are creditors of the issuing
companies.
- Equity holders are the owners of the issuing
companies.
Risk - Investments in debt securities typically involve less risk
than equity investments.
-Investments in equity typically involve more risk than debt
investments.
Volatility - -Debt market is less volatile.
-Equity market is more volatile.
Returns - In debt market there is less risk and hence returns are
also low.
-Equity market is more risky and may offer attract and
higher return as compared to debt market.
Income - of debt market is fixed.
-Income in equity market is variable..

18. Components of Capital Market: Primary Market and

Secondary Market |
• Primary Market (New Issue Market): Primary market is also known as
new issue market. ...
• Secondary Market (Stock Exchange)
 19. List out the types of capital market Instrument?
Equity shares-
Equity shares are long-term financing sources for any company.
These shares are issued to the general public and are non-redeemable
in nature. Investors in such shares hold the right to vote, share profits
and claim assets of a company
• Preference shares:
Preference shares, more commonly referred to as preferred stock,
are shares of a company's stock with dividends that are paid out to
shareholders before common stock dividends are issued. If the
company enters bankruptcy, preferred stockholders are entitled to be
paid from company assets before common stockholders.

Different Types Of Preference Shares?

▪ Cumulative Preference Share : Cumulative shares have a

provision that allows investors to be paid dividends in arrears. It
so happens that a company doesn’t have the financial capacity to
pay dividends to its shareholders. Unless dividends are not paid to
preference shareholders, they cannot be paid to common
shareholders. In such a scenario, the company decides to pay
cumulative dividends in the next year .
▪ Non Cumulative Preference Shares : Non cumulative preferred
shareholders are eligible to be paid dividends only from a year’s
profit. So a non cumulative preferred stock does not issue unpaid
dividends to the shareholders neither can holders of such stock
claim unpaid dividends in the future.
▪ Redeemable Preference Shares : In case of redeemable shares,a
company has the right to buy back the shares for its own use from
shareholders at a fixed date or by giving prior notice after a period
of time.
▪ Irredeemable Preference Shares : These shares can only be
redeemed by the company at the time of liquidation or when the
company winds up operations.
• Participating preference shares : Participating preference shares
is where the company issuing the dividends pays increased
dividends to the shareholders along with the preference
dividend. This is done at a fixed rate. Additionally,
participating preference shareholders have rights on the surplus
asset of the company at the time of its liquidation.
▪ Non Participating Preference Shares : In case of non participating
preference shares the shareholders are entitled only to the
dividends at a fixed rate and not to the surplus profit. The extra
profit is distributed among the common shareholders.
▪ Convertible Preference Shares : Shareholders of such shares have
the option to convert the common shares to preferred shared.
These shares are opted by investors who wish to receive preferred
share dividend as well as want to benefit from an increase in the
common shares. So the benefits are two fold- fixed returns by
means of preferred dividends as well as the opportunity to earn
higher returns as the common stock price increases. This
conversion can happen within a certain period as per prior
agreement, stated in the memorandum.
▪ Non Convertible Preference Shares : Shareholders of these shares
do not hold the rights to convert to issuer’s common shares.
▪ Preference shares with a callable option : For shareholders having
preference shares with a callable option, the issuing company
holds the right to call in or buy back the stocks at a predetermined
price after a set date. The call price, date post which the shares can
be called and the call premium are mentioned in the prospectus.
• Debt instruments:
A debt instrument can be in paper or electronic
form. Bonds, debentures, leases, certificates, bills of exchange
and promissory notes are examples of debt instruments. These
instruments also give market participants the option to transfer the
ownership of debt obligation from one party to another
There are different types of Debt Instruments available in India such
as;
• Bonds.
• Certificates of Deposit.
• Commercial Papers.
• Debentures.
• Fixed Deposit (FD)
• G - Secs (Government Securities)
• National savings Certificate (NSC)

15 Mark Questions and Answers

20. Write Note on Money market
1. Definition of Money Market
Money market is also defined as a mechanism through which short-
term funds are loaned and borrowed and through which a large part of
the financial transactions of a particular country are cleared.
2. Importance of Money Market

The money market meets the short-term requirements of the borrowers

and provides liquidity to the lenders. These markets therefore provide
information for monetary policy formulation and management.

It is for this reason that development of a money market itself becomes

an important monetary regulation measure. Money markets are not
merely a channel for transferring short-term funds from savers to
investors, but also provide information on the underlying conditions of
supply and demand.

More importantly, they are essential for moving from quantity based to
market-based instruments of monetary management. There is,
therefore, an urgent need for deepening and broad-basing the market
for debt instruments and Govt. dated securities. Institutional support
should be provided wherever needed.

3. Objectives

The objectives of the money market are to implement the monetary

policy of the country. Monetary policy has three main objectives —
growth, equity and price stability. The objective of the monetary policy
in the first decade of planning was the revival of traditional weapons of
monetary control.

In the second decade, the emphasis shifted to economic growth and

control of money supply. During the 70’s and 80’s faster economic
growth and price stability assumed importance. The credit policy on
the other hand, has been evolved to meet the credit needs of the
developing economy and on the other hand, to keep in check inflation-
ary prices. This policy has come to be known as “controlled
expansion”.

In addition the monetary policy takes care of promotional aspects such

as:
(i) Monetary integration of the country,

(ii) Directing credit flow according to policy priorities,

(iii) Assisting in mobilisation of the savings of the community,

(iv) Promotion of capital formation and

(v) Maintain an appropriate structure of relative prices and demand

containment.

When the balance of payments situation acquired crisis dimension in

mid 1990-91 the RBI through its monetary and credit policy measures
aimed at import compression and demand containment. Since then the
focus of monetary policy has changed in consistent with a
comprehensive package of stabilisation and structural reforms meas-
ures initiated in mid-1991

5. Functions

1. A money market by providing profitable investment opportunities

for short-term surplus funds helps to enhance the profit of financial
institutions.

2. A money market enhances the amount of liquidity available to the

entire country.

3. A well-developed money market helps to avoid wide seasonal

fluctuations in the interest rates.
4. A well-developed money market, through quick transfer of funds
from one place to another, helps to avoid the regional gluts and
stringencies of funds.

5. By providing various kinds of credit instruments suitable and

attractive for different sections, a money market augments the supply
of funds.

6. A well organized money market is essential for the successful

operation of the central banking policies.

6. Limitations of Money Market:

Unlike other well developed capital markets,
Indian capital market has not developed in that manner. The capital
market has become almost synonymous with equity market. The debt
market which is many time bigger than equity market, in developed
countries like USA, UK and Japan has hardly developed in India. The
Govt. securities market is confined only to banks and institutions and
to some extent to provident fund.

21. What is SEBI?Explain about SEBIand it’s functions?

SEBI is essentially a statutory body of the Indian Government that

was established on the 12th of April in 1992. It was introduced to
promote transparency in the Indian investment market. Besides its
headquarters in Mumbai, the establishment has several regional
offices across the country including, New Delhi, Ahmedabad,
Kolkata and Chennai.
It is entrusted with the task to regulate the functioning of the Indian
capital market. The regulatory body lays focus on monitoring and
regulating the securities market in India to safeguard the interest of
investors and aims to inculcate a safe investment environment by
implementing several rules and regulations as well as by formulating
investment-related guidelines.

The Structural Set Up of SEBI India

SEBI India follows a corporate structure. It has a Board of Directors,

senior management, department heads and several crucial
departments.
To be precise, it comprises of over 20 departments, all of which are
supervised by their respective department heads, who in turn are
administered by a hierarchy in general.

The SEBI’s hierarchical structure comprises of the following 9

designated officers –

▪ The Chairman – Nominated by the Indian Union Government.

▪ Two members belonging to the Union Finance Ministry of India.

▪ One member belonging to the Reserve Bank of India or RBI.

▪ Other five members – Nominated by the Union Government of

India.

The below-mentioned list highlights some of the most important

departments of SEBI –
▪ The Information Technology Department.
▪ The Foreign Portfolio Investors and Custodians.

▪ Office of International Affairs.

▪ National Institute of Securities Market.

▪ Investment Management Department.

▪ Commodity and Derivative Market Regulation Department.

▪ Human Resource Department.

Besides these, other crucial departments take care of legal, financial

and enforcement-related affairs.

Powers and Functions of SEBI

Being a regulatory body, SEBI India has several powers to perform

vital functions. The SEBI Act of 1992 carries a list of such powers
vested in the regulatory body. The functions of SEBI make it an
issuer of securities, protector of investors and traders and a financial
mediator.
The following pointers offer a brief idea about the same.

Functions –
▪ To protect the interests of Indian investors in the securities market.

▪ To promote the development and hassle-free functioning of the

securities market.

▪ To regulate the business operations of the securities market.

▪ To serve as a platform for portfolio managers, bankers,
stockbrokers, investment advisers, merchant bankers, registrars,
share transfer agents and other people.

▪ To regulate the tasks entrusted on depositors, credit rating

agencies, custodians of securities, foreign portfolio investors and
other participants.

▪ To educate investors about securities markets and their

intermediaries.

▪ To prohibit fraudulent and unfair trade practices within the

securities market and related to it.

▪ To monitor company take-overs and acquisition of shares.

▪ To keep the securities market efficient and up to date all the time
through proper research and developmental tactics.

Powers –
▪ Quasi-judicial powers:In cases of frauds and unethical practices

pertaining to the securities market, SEBI India has the power to

pass judgements.
The said power facilitates to maintain transparency, accountability
and fairness in the securities market.

▪ Quasi-executive powers: SEBI has the power to examine the

Book of Accounts and other vital documents to identify or gather
evidence against violations. If it finds one violating the
regulations, the regulatory body has the power to impose rules,
pass judgements and take legal actions against violators.
 ▪ Quasi-Legislative powers: To protect the interest of investors,
the authoritative body has been entrusted with the power to
formulate suitable rules and regulations. Such rules tend to
encompass the listing obligations, insider trading regulations and
essential disclosure requirements. The body formulates such rules
and regulation to get rid of malpractices that are prevalent in the
securities market.
The Supreme Court of India and the Securities Appellate Tribunal
tend to have an upper hand when it comes to the powers
and functions of SEBI. All its functions and related decisions have
to go through the two apex bodies first.
A few of them are mentioned below –

I. A mutual fund sponsor, a group of a company or an associate of

an AMC cannot hold – 10% or more of the total shareholding and
voting rights in an AMC or other mutual fund. An AMC cannot be
represented on any other mutual fund’s board.
II. In an AMC of a mutual fund, a shareholder cannot hold 10% or
more of the total shareholding either directly or indirectly.

III. For a sectorial or thematic index, none of the single stocks can
have over 35% weight in the said index. While for other indices
the cap is 25%.

IV. When it comes to the top three constituents of the index, their
aggregate weight cannot exceed beyond 65%.

V. When it comes to an individual constituent of the index, the trading

frequency should be at least a minimum 80%.
VI. Each liquid scheme must have at least 20% in liquid assets like
treasury bills, government securities, cash, repo on government
securities, etc.

At the end of every calendar year, mutual funds must ensure that they
have been in accordance with the guidelines issued by the Securities
and Exchange Board of India. It further requires them to make their
constituents of the indices public by getting it published in their
respective websites.
***************************************************
******************************************
MODULE 2
PRIMARY MARKET
PART A (2 MARK)

1. What do you mean by primary market?

The primary market is where securities are created. It's in this market that firms sell
(float) new stocks and bonds to the public for the first time. An initial public
offering, or IPO, is an example of a primary market.

2. What is right issue?

A rights issue is a way by which a listed company can raise additional capital.
However, instead of going to the public, the company gives its existing shareholders
the right to subscribe to newly issued shares in proportion to their existing holdings.

3. What is IPO?
Initial public offering is the process by which a private company can go public by
sale of its stocks to general public. It could be a new, young company or an old
company which decides to be listed on an exchange and hence goes public.

4. What is shelf prospectus?

 A shelf prospectus is a type of prospectus that allows a single short
form prospectus to be filed on SEDAR for a public offering where the issuer has no
present intention to immediately sell all of the securities being qualified as soon as
a receipt for the final short form prospectus has been obtained.

5. What is ESOP?
An employee stock ownership plan (ESOP) is a type of employee benefit plan
which is intended to encourage employees to acquire stocks or ownership in the
company.The ESOPs help in minimizing problems related to incentives.

6. What is bonus issue?

A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of
free additional shares to existing shareholders. A company may decide to distribute
further shares as an alternative to increasing the dividend payout. For example, a
company may give one bonus share for every five shares held.

7. Who are merchant bankers?

The term merchant bank refers to a financial institution that conducts underwriting,
loan services, financial advising, and fundraising services for large corporations and
high-net-worth individuals (HWNIs). Unlike retail or commercial
banks, merchant banks do not provide financial services to the general public.

PART B (5MARKS)
8. Who are the participants in new issue market?

• Merchant Bankers (Managers to the Issue)

• Underwriters to the Issue

• Brokers to the Issue

• Registrars to the Issue (Registrar and Share Transfer (R&T) Agents): ...

• Bankers to the Issue

• Syndicate Members

• Depositories
 9. Discuss the steps in book building process?
1) The Issuer, who is planning an offer, appoints a lead merchant banker(s)as 'Book
runner' or 'Book Running Lead Manager'.
2) Book runner prepares the draft red herring prospectus (RHP) and other
documents to be filed with SEBI and ROC.
3) The Issuer specifies the number of securities/issue size to be issue the price band
for the bids and the minimum bid size in the RHP.

4) The book runner circulates the draft prospectus filed with SEBI to
different categories of investors.
5) The Issuer also appoints syndicate members, stock brokers & SCSBs
for the purpose of accepting bids, applications and placing orders with
the issuer.
6) The book built issue normally remains open for a period of 3 to 7
working days.
7) During the period, when the issue is open to the public for bidding, the
applicants may approach the stock brokers of the stock exchange through which the securities
are offered under on-line system or self certified Syndicate Banks, as the case may be, to
bidding for the securities.

8) The syndicate members/brokers/Self Certified Sy

(SCSBs) input the orders into an electronic book
called 'bidding
9) The syndicate members/brokers intimate the orders received by them. On receipt of an offer
thethe name and number of shares ordered by investor which they are willing to subscribe. In
fact, he build orders from the members of syndicate.
10) On the close of the book building period, the book runners evaluate
the bids on the basis of the demand at various price levels.
II) The book runners and the Issuer decide the final price at which the securities shall issued.
12) Final prospectus, stating the price and the number of securities proposed
to be issued, is filed with the Registrar of Companies (RoC).
13. Allocation of securities is made to the successful bidders. All bids
14) The securities will be listed within the stipulated period with designated
stock exchanges.
 10. What are types of ESOP?
o Employee stock option scheme
o Employee stock purchase scheme
o Share appreciation rights

11. What are the types of offer document?

• Prospectus
• Abridged prospectus
• Red herring prospectus
• Statement in lieu of prospectus
• Letter of offer
• Placement document
• Shelf prospectus

12. Explain the method of floating new issue?

o Public issue
o Private placement
o Right issue
o Bonus issue
o Employee stock option plan

15 MARK QUESTIONS

1. What are the different methods of floating new issue

1. Public issue
Initial public offerings
Further public offering
2. Private placement
Preferential issue
Qualified institutional placement
Institutional placement programme
3. Rights issue
 4. Bonus issue
5. Employee stock option plan
2. What are the different methods of pricing an issue
. FIXED PRICE ISSUE
 When the issuer decides the price in consultation with the merchant banker and mentions it in
the prospectus, it is known as fixed price issue.
BOOK BUILT ISSUE
 Pricing mechanism whereby new securities are priced on the basis of assessment of market
demand
 Issue price is fixed on the basis of bids received from investors
3. Write a note about various intermediaries in the new issue market
Merchant bankers
Underwriters to the issue
Registrar and share transfer agents(registrar to the issue
Brokers to the issue
Bankers to the issue
Syndicate members

Depositories

4. Briefly explain the process of book building.

 Issuer appoints lead merchant banker as book runner

Book runner prepares draft RHP and other documents to be filed with SEBI and ROC

Issuer specifies – no. securities,price band etc.

Book runner circulates draft RHP with different categories of investors

Book runner appoints syndicate members and issuer appoints stock brokers,SCSBs

Issue opens for a period of 3-7 working days

Applicants may approach stock brokers (online) or through SCSB

Syndicate members/brokers/SCSB input orders to ELECTRONIC BOOK( BIDDING)

On receipt of offer book runner enters name and number of shares and price

On closing- book runners evaluate bids on the basis of demand

Book runner and issuer decides final price

Final prospectus, stating price and no of securities proposed to be issued is filed with ROC

Allocation of securities

Listing of securities with stock exchanges

5. What are the different innovative financial instruments that has been used in new issue market?
Secured Premiun Notes( With Detachable Warrant)
Foreign Currency Convertible Bonds
Yankee Bonds
Hybrid Instruments
DepositoryReceipts
GDR, ADR,IDR
Infrastructure Bonds
Perpetual Bonds
Derivative Instruments
Securitised Debt Instrument
 MODULE 3
2 MARKS QUESTIONS

1. What do you mean by secondary market?

It is the market where the existing securities of companies are traded.
It provides liquidity and marketability to the securities which are issued in the primary market
2. Define stock exchange
The Securities Contract (Regulation ) Act 1956 defines a stock exchange as “any body of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating
or controlling business of buying, selling or dealing in securities”
3. What is listing?
Securities of a company is said to be listed when they have been included in the official list of
stock exchange for trading
4. Differentiate between investors and speculator
Investor is a person who buys securities with the intention to earn income, they retain their
securities for a long period and earn income through dividends. They are interested in safety
and regularity of income.
Speculator is a person who buys securities with a view to sell them in future at a profit. He is
always interested in appreciation of capital and quick profit
5. What is rigging the market?
Artificially pushing up the market price of a particular security.
6. What is kerb trading?
is the trading of securities outside the mainstream stock exchange, either because the company
operating the exchange has very strict listing requirements (cf: alternative stock exchange) or
because investors are so interested to continue trading even after the official business hours that
they set up alternative avenues for their trading, sometimes even the curbs outside the main stock
exchange, which is the origin of the phrase.
7. What is square off?
Square off means to settle the position. If you square off a trade, it means you have no position
at the end of the day- only profit or loss.
5 MARKS QUESTIONS

1. Differentiate between primary market and secondary market

Primary Market Secondary Market

Market where new securities are Market where already issued securities
issued to the public are traded

It is also called new issue market It is also called old issues market or stock
exchanges

There is no geographical location Covers stock exchanges and other places

where trading facilities are available

Securities issued by listed or unlisted Securities of listed companies are only

companies traded

Securities issued by the company to Listed securities are traded by investors

investors

2. What are the advantages and dis advantages of listing?

ADVANTAGES
Liquidity
Image
Wider market for shares
Easy finance
Collateral securities
Protection of investors
Disclosure of vital information

DIS ADVANTAGES
Subjected to strict rules and regulations
May have to disclose vital information to competitors
Lead to speculation
Heavy expenditure
3. What are the requirements to be complied by a company for getting its shares listed?
 File application prescribed form
Follow requirements specified in companies act and SEBI
Comply with conditions of corporate governance
Deposit 1 % of the issue amount on public issue
Submit the required documents
4. Write an essay on Indian Stock Exchanges

Bombay Stock Exchange (BSE),National Stock Exchange (NSE), Calcutta Stock

Exchange (CSE), Metropolitan Stock Exchange (MSE), India International
Exchange (India INX), NSE IFSC Ltd.

5. Write about different types of speculators.

Bull
Bear
Stag
Lame duck

6. What are the different methods of

trading in stock exchange
Screen based trading
Screen based trading. Form
of trading that uses modern
telecommunication and computer
technology to combine information transmission with trading in financial markets.
Online trading
Buying and selling of securities online through internet
7. Who are foreign institutional investors?
 FII means an entity established or incorporated outside India which proposes to make
investment in India and which is registered as FII with SEBI.
8. What is private equity?
Answer: Private equity is essentially a way to invest in some asset that isn't publicly
traded, or to invest in a publicly traded asset with the intention of taking it private.
Unlike stocks, mutual funds, and bonds, private equity funds usually invest in more
illiquid assets, i.e. companies
9. What is Margin Trading?

Margin trading is a system of purchasing securities with funds borrowed from brokers.
For margin trading, the client opens an account with the broker by depositing a certain
amount in cash or securities. He also agrees to maintain the margin at a certain level.

10. What is Wash Sales?

Answer: Wash sales are fictitious transactions. Under this method, the speculator sells his
securities and then repurchases the same through a broker at a higher price. Actually, no
transaction takes place in the wash sales. By this process, an artificial demand can be
created which mill ultimately, lead to an artificial rise in price. The speculator will then sell
the securities at the increased price and makes the profit.

15 MARKS QUESTIONS

1. Define stock exchange, what are the role and functions of stock exchange

1. Ready and continues market for securities

2. Wider distribution of securities
3. Mobility and channelization of capital
4. Safety of capital and protection of investors
5. Evaluation of securities
6. Regulation of company management
7. Barometer of business progress
8. Help to bank
9. Facilities for speculation
 10. Agency for capital formation
11. Supply of long term funds
12. Act as clearing house of business information

2. Write a note on members of stock exchange.

COMMISSION BROKERS

 Members who act on behalf of their clients (as agents)

 They either buy or sell securities as per clients instructions

 They enable clients to trade through them

 Get commission as a fixed percentage of the total price

 Commission/brokerage is the income

 Has to register himself SEBI

FLOOR BROKERS OR SUB BROKERS

 Who do business in stock exchange for principal brokers

 Have to affiliate with a stock broker and register with SEBI

 Receives remuneration not exceeding 40% of the brokerage broker gets

JOBBERS

 Independent broker who deals in securities for himself

 Buys and sells securities in his own name and earns profit

 Functions as a wholesaler

 Transact with other brokers or jobbers

 Quote two prices – price at which they are ready sell and purchase

 Difference in price is the profit for jobbers

TARAWANIWALAS

 They act both as a broker and jobber

 They are dealers in stock exchange

ARBITRAGEURS

 Brokers who monitor prices of shares in different markets

 Buy shares from markets where price is low and sells in market where

price is high

➢ earns profit from the small price differences

➢ engage in large volume of trade in scrips

SECURITY DEALER

 Brokers who specialise in dealings of government securities

 Central and state government

 Since the introduction of reputed financial institutions as primary dealers in government

securities, their significance has declined

ODDLOT DEALERS

 Specialize in securities of odd lots

 Oddlot is less than round lots or less than market lot or standard lots

 Round lot is anything that can be divided by 100

 For eg. 85 shares is odd lot and 200 shares is round lot.

3. What are the process involved in trading in stock exchange?

➢ Selection of a broker and opening a trading account

➢ Placing an order
➢ Making the contract/execution of order
➢ Preparing the contract note
➢ Settlement

4. Explain the processes involved in the settlement process.

✓ Determination of obligation of trading members by NSCCL

✓ Members make available the required securities in the designated accounts with the clearing
banks, upon instructions of NSCCL clearing banks debit members account to the extent of
payment obligations.
✓ Settlement is complete upon release of pay out funds and securities to custodian/members
5. Who is depository? What are the role and functions of a depository?
A depository is an institution which transfers the ownership of securities in electronic mode
on behalf of its members.

Role and functions

• dematerialisation
• account transfer
• transfer and registration
• corporate actions
• pledge and hypothecation
• linkages with clearing system

MODULE-4 MUTUAL FUND

PART A ( 2 MARKS)

1. Define mutual fund.

“a mutual fund is established in the form of a trust by a sponsor to raise monies by the trustees
through the sale of units to the public under one or more schemes for investing in securities in
accordance with these regulations”.
2. What are MMMFs?
A money market fund (MMF) is a type of fixed income mutual fund that invests in debt
securities. Money market mutual funds, also known as money market funds, are fixed-income
mutual funds that invest in high-quality, short-term debt. They are considered one of the safest
investments
3. What is balanced fund?
A balanced fund is a mutual fund that contains a stock component, a bond component, and
sometimes a money market component in a single portfolio. Balanced mutual funds have
holdings that are balanced between equity and debt, with their objective somewhere between
growth and income.
4. What is ELSS fund?
ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-
related instruments. ELSS funds are also called tax saving schemes since they offer tax
exemption of up to Rs. 150,000 from OUR annual taxable income under Section 80C of the
Income Tax Act.
5. What is NFO?
A new fund offer (NFO) is the first subscription offering for any new fund offered by an
investment company. A new fund offer occurs when a fund is launched, allowing the firm to
raise capital for purchasing securities. Mutual funds are one of the most common
new fund offerings marketed by an investment company.
6. Who is an AMC?
Asset management companies (AMCs) are firms pooling investments from various individual
and institutional investors. The company manages the investment by investing in capital assets
such as stocks, real estate, bonds, and so on. The asset management companies have
professionals called fund managers who decide where the pooled money is invested. Fund
managers identify the investment options that are in line with the objectives of the investors.

PART B{5 MARKS)

7. Differentiate between open end and close end scheme.
 An open-ended fund allows investors to enter and exit the fund anytime after the NFO, whereas
a close-ended fund restricts the entry and exit of investors to the NFO period. Moreover, unlike
close-ended funds, open-ended funds do not have a limitation on the number of units they can
issue. More units of an open-ended fund get created when an investor invests his/her money in
the fund. Similarly, when an investor redeems his/her units of an open-ended fund, the mutual
fund units are taken out of circulation.

While open-ended funds allow investors to make use of systematic plans – systematic
investment plans (SIPs), systematic withdrawal plans (SWPs) and systematic transfer
plans (STPs), close-ended funds do not support this facility.

8. What is NAV?

Net asset value (NAV) represents a fund's per unit market value. This is the price at which
investors buy fund units from a fund company or sell it back to the fund house. It is calculated
by dividing the total value of all the assets in a portfolio, minus all its liabilities.

9. What are the significance of mutual funds?

“a mutual fund is established in the form of a trust by a sponsor to raise monies by the
trustees through the sale of units to the public under one or more schemes for investing
in securities in accordance with these regulations”.

Wide Selection of Options

Diversification of Assets

Professional Money Management

Low Management Fees and Expenses

10. What are the types of mutual fund?

a mutual fund is established in the form of a trust by a sponsor to raise monies by the
trustees through the sale of units to the public under one or more schemes for investing in
securities in accordance with these regulations”.types of mutual funds are classified into

Open end and close end scheme(EXPLAIN )

Portfolio classification

Other classification

PART C(15 MARKS)

11. EXPLAIN the concept of mutual fund? Discuss the advantages and disadvantages of mutual
fund.

a mutual fund is established in the form of a trust by a sponsor to raise monies by the
trustees through the sale of units to the public under one or more schemes for investing
in securities in accordance with these regulations”.

Advantages of mutual fund are

• Reduced risk
• Professional management
• Diversification of portfolio
• Automatic reinvestment
• Timing of investment
• Liquidity
• Saving habit
• Tax shelter
• Investment care

Disadvantages of mutual fund are

o Market risk
o Returns not guaranteed
o High cost
o No control over investment decision
o Lock in period
o Over diversification

12. What are the SEBI guidelines for mutual fund?

• A mutual fund should be constituted in the form of a trust.

• A sponsor should have a track record of min 5 years of experience in the field of
financial service.
 • The mf should have the custodian.
• Schemes of mf launched by AMC Should be approved by trustees.
• Mf should not be in deal to carry forward transactions on securities.
• Every close end scheme other than equity linked savings scheme should be listed on
recognised stock exchange.(explain all the SEBI guidelines)

Module V
Part A

1. What do you mean by Forwards?

A forward contract is a customized derivative contract obligating counterparties to buy
(receive) or sell (deliver) an asset at a specified price on a future date. A forward
contract can be used for hedging or speculation, although its non-standardized nature
makes it particularly useful for hedging.
2. What do you mean by Futures?
Futures are derivative financial contracts that obligate the parties to transact an asset at
a predetermined future date and price. Here, the buyer must purchase or the seller must
sell the underlying asset at the set price, regardless of the current market price at the
expiration date A futures market is an auction market in which participants buy and sell
commodity and futures contracts for delivery on a specified future date. Futures are
exchange-traded derivatives contracts that lock in future delivery of a commodity or
security at a price set today.

3. What do you mean by Options?

Options are financial instruments that are derivatives based on the value of underlying
securities such as stocks. An options contract offers the buyer the opportunity to buy or
sell—depending on the type of contract they hold—the underlying asset. Unlike
futures, the holder is not required to buy or sell the asset if they choose not to.
4. What do you mean by Swaps?
 A swap is a derivative contract through which two parties exchange the cash flows or
liabilities from two different financial instruments. Most swaps involve cash flows
based on a notional principal amount such as a loan or bond, although the instrument
can be almost anything. Usually, the principal does not change hands. Each cash
flow comprises one leg of the swap. One cash flow is generally fixed, while the other
is variable and based on a benchmark interest rate, floating currency exchange rate or
index price.

The most common kind of swap is an interest rate swap. Swaps do not trade on
exchanges, and retail investors do not generally engage in swaps. Rather, swaps
are over-the-counter contracts primarily between businesses or financial institutions
that are customized to the needs of both parties.

5. What do you mean by Derivatives?

A derivative is a contract between two parties which derives its value/price from an
underlying asset. The most common types of derivatives are futures, options, forwards
and swaps. Description: It is a financial instrument which derives its value/price from
the underlying assets.
6. What do you mean by Call options?

Call options allow the holder to buy the asset at a stated price within a specific
timeframe.

7. What do you mean by Put options?

Put options allow the holder to sell the asset at a stated price within a specific
timeframe.

Part B

Short Essays

8. What are the Major Commodity Exchanges in India?

MULTI COMMODITY EXCHANGE

 MCX, among the first exchanges to open in India, accounts for more than 80 percent
of the country’s commodity futures market. It ranked the world’s sixth largest
commodity futures exchange by number of contracts traded.

NATIONAL COMMODITY & DERIVATIVES EXCHANGE LTD

Launched in 2003, NCDEX is the second biggest exchange and is promoted by leading
financial institutions and state owned banks. Goldman Sachs holds a minority stake.

NATIONAL MULTI COMMODITY EXCHANGE

Based in Ahmedabad, NMCE was the first exchange in India to be promoted after the
Indian government demutualised the platform for commodity futures. It started with
futures in gold and silver.

INDIAN COMMODITY EXCHANGE

ICEX, based in Gurgaon, was given recognition for futures trading in 2009, and is now
building up its warehouse facilities. Reliance Exchangenext Ltd. is its anchor investor
with MMTC Ltd., Indiabulls Financial Services Ltd., Indian Potash Ltd., KRIBHCO
and IDFC among other partners.

ACE

Ace Commodity Exchange, earlier known as Ahmedabad Commodity Exchange Ltd,

started futures operations in 2010, but has been in the commodity trading business more
than 50 years. The Kotak group is a majority stake holder.

9. What are the differences between futures and forward?

FUTURES CONTRACT
Standardized
Clearinghouse guarantees performance
Traded on organized stock exchange
FORWARD CONTRACT
Customized
Counterparty risk
 Traded over the counter

10. What are the Advantages of Derivatives?

Advantages of Derivatives

Unsurprisingly, derivatives exert a significant impact on modern finance because they

provide numerous advantages to the financial markets:

1. Hedging risk exposure

Since the value of the derivatives is linked to the value of the underlying asset, the
contracts are primarily used for hedging risks. For example, an investor may purchase
a derivative contract whose value moves in the opposite direction to the value of an
asset the investor owns. In this way, profits in the derivative contract may offset losses
in the underlying asset.

2. Underlying asset price determination

Derivates are frequently used to determine the price of the underlying asset. For
example, the spot prices of the futures can serve as an approximation of a commodity
price.

3. Market efficiency

It is considered that derivatives increase the efficiency of financial markets. By using

derivative contracts, one can replicate the payoff of the assets. Therefore, the prices of
the underlying asset and the associated derivative tend to be in equilibrium to
avoid arbitrage.Arbitrage is the strategy of taking advantage of price differences in
different markets for the same asset. For it to take place, there must be a situation of at
least two equivalent assets with differing prices. In essence, arbitrage is a situation that
a trader can profit from opportunities.
 4. Access to unavailable assets or markets

Derivatives can help organizations get access to otherwise unavailable assets or

markets. By employing interest rate swaps, a company may obtain a more favorable
interest rate relative to interest rates available from direct borrowing.

11. What are the Disadvantages of Derivatives?

1. High risk

The high volatility of derivatives exposes them to potentially huge losses. The
sophisticated design of the contracts makes the valuation extremely complicated or
even impossible. Thus, they bear a high inherent risk.

2. Speculative features

Derivatives are widely regarded as a tool of speculation. Due to the extremely risky
nature of derivatives and their unpredictable behavior, unreasonable speculation may
lead to huge losses.

3. Counter-party risk

Although derivatives traded on the exchanges generally go through a thorough due

diligence process, some of the contracts traded over-the-counter do not include a
benchmark for due diligence. Thus, there is a possibility of counter-party default.

Part C

Essays

12. What are the Types of Derivatives?

1. Forwards and futures
These are financial contracts that obligate the contracts’ buyers to purchase an asset at
a pre-agreed price on a specified future date. Both forwards and futures are essentially
the same in their nature. However, forwards are more flexible contracts because the
parties can customize the underlying commodity as well as the quantity of the
commodity and the date of the transaction. On the other hand, futures are standardized
contracts that are traded on the exchanges.

2. Options
Options provide the buyer of the contracts the right, but not the obligation, to purchase
or sell the underlying asset at a predetermined price. Based on the option type, the buyer
can exercise the option on the maturity date (European options) or on any date before
the maturity (American options).

3. Swaps
Swaps are derivative contracts that allow the exchange of cash flows between two
parties. The swaps usually involve the exchange of a fixed cash flow for a floating cash
flow. The most popular types of swaps are interest rate swapsInterest Rate SwapAn
interest rate swap is a derivative contract through which two counterparties agree to
exchange one stream of future interest payments for another, commodity swaps, and
currency swaps.
*************************************************