Instructor: Prof. S. G. Deb Office : Room no 246 Tel : Extn : 802
A. Objective :
Welcome to the course. The course presents Financial Markets theory and applies it towards gaining an understanding of how financial markets and institutions work. Financial markets and institutions not only affect our everyday life but also involve huge flows of funds and have a significant impact on business profits, production of goods and services, and the well-being of the overall economy. The objectives of this course are: (1) to provide a solid theoretical understanding of the fundamentals of financial markets like equity markets, bond markets and money markets and the financial assets that change hands over there(2) to discuss different types of financial institutions such as banks and investment intermediaries and (3) to discuss the role played by various financial services like leasing ,credit rating, factoring and forfaiting and what benefits they extend to the business world. Financial Institutions and Markets Course,(along with basic Corporate finance course) will provide a foundation for the participants’ further study of Finance, as well as form an essential component of their managerial education about the world in which their business is likely to operate.
Best wishes to all of you !
B. Readings :
[1] Class discussion slides: Slides will be elaborate and made available to the students for reference [2] Financial Markets, Institutions and Financial services by Clifford Gomez ( Prentice Hall India )
[3] Financial Institutions and Markets by F S Mishkin, and S G Eakins ( Pearson Education )
[4] Financial Markets and Institutions, 3rd Edition, by Anthony Saunders and Marcia Cornett, (Tata McGraw Hill).
[5] Foundations of Financial Markets and Institutions, 3rd Edition, by Fabozzi, Modigliani, Jones and Ferri (Prentice-Hall, 2003).
[6] Financial Institutions and Markets, 3rd Edition, by L. M. Bhole (Tata McGraw Hill)
[7] For some concepts students might be requiring to refer to Corporate Finance books like Brealey Myers or Ross Westerfield and Jordan
[8] Other relevant readings will be mentioned and made available to the students from time to time in class.
4) Financial Press:
[1] Economic Times , www.economictimes.com
[2] The Wall Street Journal, www.wsj.com
[3] The Economist, www.economist.com
[4] Financial Times, www.ft.com
5) Internet resources
a. Study Materials available at http://www.nseindia.com/content/ncfm/ncfm_curriculum.htm
b. www.bseindia.com-- Official website of Bombay (Mumbai) Stock exchange
c. www.rbi.org.in--- Official website of reserve bank of India
d. www.amfiindia.com--- Official Website of AMFI ( Association of Mutual Funds in India )
e. Other sources will be intimated during the course
Tentative Session Plan : Session 1 :Introduction, Financial system , Different types of financial systems,( command economy and free market economy ),Definition of Real and financial assets, Broad categories of financial assets, Price and risk of a financial asset – brief idea, the principal economic functions of a financial asset, Financial market--- what it is and the principal functions it performs, major types of financial markets.
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Session 2: Financial Intermediaries : Fund transfer from savers to borrowers ---Direct and indirect route, Need for intermediaries : Transaction cost, Information asymmetry and adverse selection, problem of lemons, principal roles played by intermediaries, types of intermediaries
Markets : Capital markets Sessions 3,4,5,6 Equity and equity markets :
Equity as securities, salient properties, Idea about price and risk of equity, Predicting Stock Prices--- Introduction To Basic Tenets of Equity research, (Fundamental Analyses : Models of stock price determination and EIC analysis– Technical Analysis – Introduction, Dow theory .. Tenets and Criticisms, Charts, Trend Analysis, Price Gaps, Trend Reversal Patterns, Continuation Patterns,
Moving Averages, Oscillators and other indicators
Primary markets: mechanics of raising equity capital in the primary markets-- IPOs, Advantages and disadvantages of going public, Mechanics of an IPO {Registration, Red Herring and Final Prospectus, Valuation of IPOs (Cash Flow method and comparables method), road shows, Fixed Price IPO, Book Building Mechanism, Role played by an Investment Bank in an IPO: lead management services,Underwriting services, Seasoned Equity Offers ( SEOs),tombstones, Cash offers and Rights offers
Secondary Markets, Obligations of the companies vis-a-vis the stock exchanges, Trading process in a stock exchange , market maker (a specialist), commission broker, floor broker , Settlement of Transactions, Over the counter markets : globally and in India, Role of National Securities Depository Limited ( NSDL) and Central Depository Services Limited( CDSL), and Clearing corporation , secondary market operations : Cash market transaction vs margin trading, Operation of a margin account, Account period vs Rolling settlement, Badla, Different types of orders, Dematerialization of shares and depository service, Stock Indices -- calculation
Session :7,8,9,10,11 Debt Markets : Bonds and Bond Markets
Plain Vanilla Bond, Issuer, time to maturity, principal and coupon rate, Pricing of a bond, Risks in a bond, duration, different types of bonds, state of bond markets in India
Money market :
What is it?, Need for a money market , Principal Players in the money market, Money market Instruments : Treasury Bills (T-Bills), Issuer, Investors, Size, Yield/Return from T-bills, Maturities, Pricing of T-bills, T- Bills.. Issuing Procedure, multiple price basis’ or ‘ a uniform price basis’, Example :Process of Auction, Secondary Market, Clearing and Settlement of T- Bill transaction, Chronology of Events in T-Bill market in India, Adhoc T-bills, On tap T- Bills .
Call Money/Notice Money, Participants in the call money market, Securities Trading Corporation of India Ltd. (STCI), Primary Dealers, Purpose of Call money Market, Call rates, Operational Mechanism, Location, Turnover, Term Money/Term deposits, Repurchase Agreements (Repo), Margin/Haircut/additional margin, Settlement of Repo transactions, Repo transaction Mathematics (Examples), Reverse Repo, Why are Repos used?, Difference of a reverse repo with a buy/sale back transaction,
Commercial Paper (CP): definition, maturity, Denomination and size, Participants (issuer and investors), Typical CP document, Why use CPs? (Advantages for borrowers and investors), Credit rating of CPs, Types of CPs
(Direct CPs and dealer CPs), Issue of CPs – procedure, Price and Yield of CPs (examples), Certificate of Deposit ( CDs) : Origin of CDs, Eligibility to issue, Subscribers, CDs and Time deposits compared, Criteria on maximum amount that can be issued , Minimum Size of Issue and Denominations, Maturity, Pricing of CDs ( Examples), Issue / Maturity payment, Secondary market Trading, Bill of Exchange/ Bill Discounting , Features of a BOE, Parties to a BOE, Drawer, Drawee, Payee, Creation of a bill of Exchange, BOE vs Promissory Note, Cheque is also a kind of BOE ? Distinction between a cheque and a BOE, Types of bills (Trade Bills, Bank Bills , Demand Bill, Time bill), Documentary Bills, Clean Bills, Letter of Credit backed Bills: sequence of processes, Discounting of a B/E, Discount rate and effective rate of interest, Example
Intermediaries Session 12,13,14: Mutual Funds, Hedge Funds and Venture Capital Funds : What is a mutual fund, Advantages of Investing through mutual funds , Mutual fund industry.. global scenario, Mutual Fund Industry---- Indian Scenario over the last few decades, Assets managed by Indian Mutual Fund Industry ( US $ billions)– Growth over the last few years, Number of Mutual Fund schemes in Indian Mutual Fund Industry– Growth over the last few years, Indian MF industry vis-a-vis global MF industry, Changing economic environment in the nineties decade…. Mutual fund industry the beneficiaries, Mutual Fund Industry in India: Evolution ( 4 phases ), Structure of a typical mutual fund organization : Sponsor or Settler, Trustee, Asset Management Company (AMC), Custodian, bankers, registrars and transfer agents, Regulatory Framework of MFs in India, Types of mutual funds, By Structure: Open-ended Funds, Closed-ended Funds, By Geographical Locations, Domestic Funds, Offshore mutual funds, By portfolio composition and investment objective, Risks in Funds : Equity Funds : systematic risk, Debt funds : Price Risk/Interest rate risk, Credit Risk, Reinvestment risk, Call risk ,Prepayment risk, Liquidity Risk, Timing Risk, Cash Flow risk,
Equity fund management: Strategies: Active vs passive management, Market timing and stock selection,
Management of Debt Portfolios: Strategies, Duration Management, Credit Selection, Barbell portfolios, Bullet type portfolios, Rupee cost averaging vs Value averaging: ( investors point of view), Evaluation of Performance of Mutual Funds :Performance Indicators: NAV, Total Return, Expense ratio, Income ratio, Portfolio Turnover ratio, Excess Return over benchmark or Tracking Error, Information Ratio, Treynor’s ratio, Sharpe’s ratio, Jensen’s Alpha, Appraisal ratio, M2 measure
IPO of a Mutual Fund, Special Investment and redemption plans: SIP, SWP, STP, Dividend sweep, Triggers, Index Funds : What are these?, Features of Index Funds, Tracking error- Why does it happen?, Rating of mutual funds in India
Hedge Funds and Participatory Notes (PN) : Brief Overview
Venture Capital Funds : Theoretical Framework, VC Equity Vs Traditional Equity , Stages of Financing in a VC deal , Pricing and Valuation by VCs, Examples, Exit routes of VCs, Venture Capital Scenario in India ,
Session 15 : Commercial banks
Role in financial system, Principal organizational structure, Types of banks, Business avenues, balance sheet of a bank/banking system, Evolution of the regulatory framework.
Specialized services :
Session 16,17,18
Factoring and Forfaiting : Factoring .. Origin in India, Factoring … sequence of processes, Functions of a Factor(Finance, Debt administration, Credit Advisory services, Relieving the client from Credit risk totally, Follow up and collection of Receivables, Recourse and Non Recourse Factoring, Advance and Maturity Factoring, Full Factoring, Disclosed and undisclosed factoring, Domestic and Export/Cross Border/International Factoring , Sequence of Processes in Export Factoring , Costs of availing Factoring Service, Cost benefit analysis in a factoring arrangement
Factoring vs Bill Discounting, Factoring Service providers in India, Forfaiting, Forfaiting.. Sequence of processes, Forfaiting vs. Export factoring.
Credit Rating Agencies: Credit Rating 4 Cs, Why should one resort to rating (advantages to issuers, advantages to investors), Rating: sequence of Process in India, Credit rating agencies in India: Origin, Regulation of CRA s: Registration of CRA s, General Obligation/ Code of Conduct, Restriction on Rating of Securities, Inspection/Investigation of CRA, Action in case of Default, Principal rating symbols and implication
Session 19 LEASING : Essential elements in a lease deal, Types of Leases, Advantages of Leasing, Problems of cost benefit analyses.
Session 20 : To be Decided ( Derivatives and Derivative Markets Tentatively)
Pedagogy :
Interactive class lectures, numerical problem solving, short case problem solving, and other assigned readings. Assignments will be given to students on a regular basis after class sessions, and students would be expected to come prepared with the assignments in the next class.
Evaluation:
[1] Quiz : 20%
[2] Mid Term : 25%
[3] Assignments : 15%
[4] End term : 35%
[5] Class Participation : 5%