Assignment 1

Q.1 What is Real Economy and what is Financial Economy. How does RE depend on FE? Real Economy is the physical side of the economy. It deals with goods, services. It is concerned with using resources to produce the goods and services that make the satisfaction of wants and needs possible. Hence, it is reflective of growth, profits and job creation. Financial Economy is the branch of economics concerned with the workings of financial markets, such as the stock market, and the financing of companies. It can be distinguished from other branches of economics by its concentration on monetary activities, in which money of one type or another is likely to appear on both sides of a trade.Or a branch of economics that analyzes the use and distribution of resources in markets in which decisions are made under uncertainty. Or which deals with financial instrument and financial securities. As real economy deals with only goods and services so it becomes very difficult to assign value to different goods and their amount .So it becomes very difficult to decide what amount of a particular goods to be exchanged for other goods and services. Another problem was the transportation of goods to other places for trading. With the financial-economy people can trade with the other part of the world in a very easy way and valuation of goods and services is done in a proper way. So financial economy is very important to support real economy. Settlement of transaction is the main factor here. For any transaction to take place, we require goods & services, and also when any transaction takes place, money is the main factor to complete the transaction. Real market depends on financial market for Liquidity in a major way.. The money invested can be withdrawn instantly and used elsewhere. The financial economy also insures the individual against the tyrannies of real economy like adverse weather conditions etc through contracts like futures Growth of economy also depends on spread and depth of transactions in different financial vehicles in the financial market. However, unregulated financial economy can pull down the growth of real economy, hurt profits, reduce demand and slowdown growth as happened in the financial meltdown of 2008.

Q. 2 What precautions should we take when we deal with Financial Markets? While dealing with financial markets, we need to take following precautions: 1. We should make sure that the Company we are investing in is registered with the Stock Exchange .One should also make sure that the broker or intermediary with whom we are dealing should be registered broker with stock exchanges, so the risk factor is removed. 2. Take informed decisions by studying the fundamentals of thecompany. Find out the business the company is into, its futureprospects, quality of management, past track record etc. Sources ofknowing about a company are through annual reports, economicmagazines, databases available with vendors,etc. 3. Do not be attracted by announcements of fantastic results/newsreports, about a company. Do your own research before investing inany stock.

4. Be cautious about stocks which show a sudden spurt in price ortrading activity. They can even fall abruptly. 5. Any advicethat claims that there are huge returns expected,especially for acting quickly, may be risky and may to lead to losingsome, most, or all of your money. 6. One should invest only certain percentage of his or her wealth in equity markets, because in equity market nothing is certain and one should invest only that much amount which one can afford to lose or in other words the amount if get lost does not affect the investor. A person should have sufficient liquidity to carry on his life well. 7. One should never invest in equity markets by taking loan or debt as it will lead to big trouble in the equity markets does not go according to the investor perception. In other words one should never trade in equity market by taking leverage. 8. An Investor should avoid intraday trading as its like gambling. 9. An investor must analyse the Quarterly Results before investing in any particular Company. 10. Investors should not take quick decisions i.e. if a company makes some loss in a quarter, he should not sell its shares without knowing the reason for some loss.

Assignment 2
Q1 What is the relation between call money market and central bank rate policy? The call money market is an integral part of the Indian Money Market, where the day- to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. Call money is the money that is lent for one day in this market , and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Call money usually serves the role of equilibrating the short-term liquidity position of banks Call Money Market Participants are: 1. Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs 2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc. Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s. The most active segment of the money market has been the call money market, where the day to day imbalances in the funds position of scheduled commercial banks are eased out. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

However the entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed access to this market beyond December 31, 2000. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1- 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also not uncommon. Hence there is a high degree of interest rate risk for participants. In view of the short tenure of such transactions, both the borrowers and the lenders are requiredto have current accounts with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. The call market enables the banks and institutions to even out their day to day deficits and surpluses of money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR). The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis. When interest rate increases lenders try to lend money in this way call money and interest rate are related. Q2 Why the investors are investing in US treasury even the US is giving 0% as interest? US treasury is a big market, investors invest in it to park their money. And treasury bills are mostly issued in discount so investors get a return with very less risk. T-Bills are issued at a discount to their face value. This means that a T-Bill is sold for less than its face value at maturity. This difference between the purchase price and the amount received at maturity equals the investors interest on the bond.

Assignment 3
Q1Money market provides liquidity to the economy. Explain the statement and describe the instruments used in money market. Money market is a market for short term funds i.e. up to 1 year . These instruments are negotiable .i.e can be sold in the market any time, Hence they are highly liquid. Instruments under money market are-

Certificate of deposits-A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty

Treasury Bills- Treasury bills start being issued by the Indian govt. in 1917. They are short-term instruments issued by the Reserve Bank of India. They are one of the safest money market

instruments because they are danger free, but the returns from this instrument are not very huge. The primaries as well as the secondary markets circulate this instrument. They have 3-month, 6month and 1-year maturity periods. Repurchase agreements- Repurchase agreements are also known as repos. They are short-term loans that buyers and sellers have consent to sell and repurchase. Repurchase agreements are sold by sellers with a assure of purchasing them back at a given price and on a given date in the future. The buyer will also purchase the securities and other instruments in the repurchase contract with a assure of selling them back to the seller. Commercial Papers-Commercial papers are promissory notes that are unsecured and issued by companies and financial institutions. They are issued at a discounted rate of their face value. They have a fixed maturity of 1 to 270 days. They are issued for financing of inventories, accounts receivables, and settling short-term liabilities or loans. Commercial papers yield higher returns than T-bills. Call money market- If borrowing (or lending) is made for one day (overnight), it is known as Call
Money. This segment is also called overnight money market.

Notice money market- If the maturity of borrowing (or lending) is more than 1 day but up to 14 days, then it is known as Notice Money. Term money market- Term Money refers to money borrowed (or lent) for more than 14 days but less than one year.

Q2 who are the players in money markets and what the risk factor in this market are? RBI Government Banks. Private Companies [for commercial papers] Private dealers [for commercial papers] Satellite dealers [for commercial papers] In call money market As lenders and borrowers: Commercial banks, State Bank of India, Cooperative Banks, Discount and FinanceHouse of India ltd. (DFHL) Securities Trading Corporation of India (STCI). As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India (UTI),General Insurance Corporation (GIC), Industrial Development Bank of India (IDBI),

National Bank for Agriculture and Rural Development (NABARD)

Risk factor is very less in Indian money market because firstly its short term and Banks usually dont default . And commercial papers are issued by companies possessing a high credit rating, the chances of a default are highly minimized.

Assignment 4
Q1 Why all the financial markets depend upon the U.S economy? U.S is the largest economy and second is the Europe .About 60% of the global currency reserves have been invested in the United States dollar, while 24% has been invested in the euro. The country is one of the world's largest and most influential financial markets .Foreign investments made in the United States total almost $2.4 trillion, which is more than twice that of any other country. American investments in foreign countries total over $3.3 trillion, which is almost twice that of any other country. The credit rating of USA stands at AAA. Next thing is the transparency existing in U.S. economy. In India movement in financial market is due to liquidity , and India has most of the money invested by FIIs ,hence changes in US economy has a lot of effect in Indian Market.

Q2 what is the difference between bond price and yield?

Bond Price is the sum paid to buy a bond. Bond prices have an inverse relationship with interest rates. When interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield. Bond prices and yields are inversely related. Q3 Define expected rate of return of the investor? On which factor this depends? Its the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. It depends on Risk and Opportunity cost and Time of the investment. Higher the risk, higher the expected returns and vice versa Q4 FII and DII their investment in the bond market and equity market from Monday to latest? Compile the figures. FII EQUITY DATE 29-Feb2012 GROSS PURCHASE 3,679.30 GROSS SALE 3,028.80 DEBT GROSS PURCHASE 1,145.10 GROSS SALE 106.50

NET 650.50

NET 1,038.60

28-Feb2012 27-Feb2012

2,955.40 3,079.30

2,099.00 3,621.70

856.40 542.40

3,561.40 3,789.60

1,095.70

2,465.70

1,286.50 2,503.10

DII
29-Feb2012 28-Feb2012 27-Feb2012 3666.2 3086.61

579.63 1113.77 727.59 329.09 1283.87 1206.72

1544.84 1871.08 1905.86

-431.07 -587.21 -699.14

2937.55 2957.94

2209.96 2628.85