Derivatives

October 12, 2010 By Leave a Comment
The floor of the Chicago Board of Trade, a maj...
Image via Wikipedia

In business finance, a derivative is a derived value of an asset. Shares, or currencies can be assets. Based on the derived value, a financial agreement is made between two parties. It is basically a forecasted price of an asset. Underlying is what the forecasted asset is called. In business finance, all derivatives are based on the forecasted value of the underlying.

Exchange-traded and Over-the-counter (OTC) are the two markets in which derivatives are traded. Exchange-traded markets are supported by the stock exchanges. Providing guarantee, stock exchanges minimize transactional risks in exchange-traded markets. Exchange-traded markets are controlled by centralized regulatory mechanism. Also, there are umpteen business finance traders in exchange-traded markets. Stock exchanges also want companies that offer exchange-traded derivatives to become their member through a registration process. In over-the-counter markets, all the above mentioned things are missing. OTC markets are private in nature. On OTC markets, the length of the contract can be mutually decided on.

Swaps, futures, and options are the common types of derivatives. Other types of derivates do exist, since forecasted business finance can be based on any kind of asset or security. Examples of other types of derivatives are foreign exchange derivatives, and equity derivatives. In business finance, futures is a contract between two parties to trade an asset on a future date. Price for the asset will be as of today. The same price will be applicable on the future date of trade. Futures are traded on the futures exchange. The futures exchange is a place where futures contracts are traded.
A swap, like the name suggests, is swapping benefits of a party’s financial instrument for the others’. It is not a replacement business finance mechanism, but rather a win-win business finance mechanism. Here too, the forecasted value of the underlying is taken into account.

Option is another derivative that establishes a non-obligatory contract to buy or sell an asset within a timeframe, and at an agreed price. Options have expiration dates. Within the expiration date trade has to happen. After this date, the option is closed for no other business finance activity.

Enhanced by Zemanta
Filed Under: Business Culture Tagged With: , , , , , , ,

Indian Bond Market

October 10, 2010 By Leave a Comment
The island of Manhattan, whence the term is de...
Image via Wikipedia

The bond market is called the debt market. In this market, business finance traders trade bonds. In real sense, a bond is a kind of security for a debt taken. Issuers (borrowers) of the bond will be liable to repay the holders of it. Interest needs to be paid until the bond reaches maturity. After this, the principal of the bond needs to be paid. So in other words, a bond can be classified as a kind of loan.

More than equity markets, the bond market is sought by the business finance community all over the world. But in India this has not been the case. However, things have changed in India over the last decade or so. After the financial reforms in 1992, the bond market started to make progress. Banks were asked to drop off a part of their mediation in the financial markets. Ecosystem of the market was set as the control system; which meant that the market was not dictated by the government and national banks. In the early 1990′s old government securities were put under the hammer. Ending the era of rehearsed interest rates, the financial reform ushered in a fresh wave of business finance management. On account of this, demand and supply of business finance was the controlling factor in the bond market.

There are different types of bond markets in India. They are namely, corporate bond market, funding bond market, municipal bond market, and government bond market. Systems like delivery versus payment in the Indian bond market, ensures smooth settlement of outstanding business finance issues. The reserve bank of India has created a controlling system called the trade for trade system. Under this system no settlement other than bonds or funds are used to close bond transaction. Foreign investors with business finance of up to thirty percent as fixed income can now invest in the bond market in India.

There have been a slew of other measures taken by the government of India, to enhance the workings of the Indian bond market. The bond market in India has got enormous business finance potential.

Enhanced by Zemanta
Filed Under: Industries Tagged With: , , , , , , ,

Muni Bond Defaults Seldom a Failure

October 9, 2010 By Leave a Comment
An assortment of United States coins, includin...
Image via Wikipedia

Many investors, especially those with a ferocious understanding of the stock market, prefer to invest in equities. They hope for their capital to skyrocket and a number of economic tools and sources exist that can help them monitor the numbers in the stock market and look for potential indicators. Equities market can be very volatile, with many defaults taking place everyday.

Bonds of federal, corporate and municipal types, all offer one thing in common, which is a much lower risk of losing your investment. Bonds promise to pay you a stipulated profit at the end of ten years or more, and no more. This means your returns will not match up with the profits of the establishment, but neither can your losses be. The rate of interest at which you will receive your returns along with your capital, has been predetermined at the time of buying the bond. Corporate bonds are the most volatile in the bonds market, because corporate companies are highly prone to go bankrupt and be unable to pay back their debt. This is known as a default. However, as a bond, debt has been insured by various methods and the investor can get back a major portion of his capital, or equivalent, in case of a default.

Federal bonds, issued through treasuries securities and saving bonds can never go bankrupt, because of the nature of their establishment and the mitigation techniques that exist against risks. Muni bond defaults are thought to be very slightly prone in our nation. While muni bonds are also covered by insurances and by other mitigation strategies, when defaults are expected, the outcome will not be devastating to the investor. In the event of a default, a part of the due interest, along with the capital is always salvaged and sometimes if there be federal aid or other help, normalcy is restored.

Enhanced by Zemanta
Filed Under: Industries Tagged With: , , , , , , ,

Foreign Currency Convertible Bonds (FCCBs) in the Indian Business Finance Scene

September 7, 2010 By Leave a Comment
A bond issued by the Dutch East India Company,...
Image via Wikipedia

Foreign Currency Convertible Bonds (FCCBs) are prepared and disbursed in the currency of the borrower. A foreign national bank lending business finance to a company located in another country will issue a foreign currency convertible bond in the local currency of the company. Foreign investment institutions and banks will have the benefit of using these bonds as both a debt instrument as well as an equity instrument. From this we understand, that it is a win-wins situation for the investor and the borrower. Investors benefit if the share value of the company they have invested in increases.

Indian companies on account of their enormous business finance needs can tap into the potential of foreign money markets. In a bull-market scenario, foreign currency convertible bonds were a cheap business finance option. But the situation is changing. After the recession, debt has increased. Plunging stock prices have made companies resort to offering sweeteners. By lowering their share prices, companies hope that foreign currency convertible bondholders will take the shares instead. What it also does is that the FCCB holders can now have a greater pie of equity. More foreign investor equity presence means lesser control for Indian companies over the scheme of things.

Given the fickle nature of the equity markets, the Indian government has laid some measures to neutralize the vagaries of business finance conditions. Investors or issuers are now allowed to make revisions to the conversion prices of foreign currency convertible bonds. The issuers can set the conversion price at a higher rate in a timeframe of 6 months. They can either take a two-month average of the company share price or a six-month average.

Conversion rates have been problematic. During the Bull Run from 2003 to 2007, conversion rates were pegged highly. Driven by the assumption that the stock markets will continue their bull run, FCCB holders promised themselves attractive returns. After the recession, everything has come down. Markets are now driven by common sense, at least not by suspicion. Now companies are faced with either trying to get the conversion in or pay the debt.

Enhanced by Zemanta
Filed Under: Economic Growth Tagged With: , , , , , , ,

Indian Capital Markets: An Overview

September 5, 2010 By Leave a Comment
The Bombay Stock Exchange, in Mumbai, is Asia'...
Image via Wikipedia

It all started in India, when twenty-two agents started the Bombay Stock Exchange (BSE). That was way back in 1875. From then on, Indian markets have evolved continuously. Transparency is a buzzword in the Indian business finance scene. Characterized by operational excellence, and conformity to rules and regulations, the Indian financial market is a beacon of the economy. The Indian stock market is probably the oldest in Asia. In 1994, the National Stock Exchange (NSE) was commenced. NSE’s objectives are to provide for speedy transactions. It also encouraged small investors.

The Company Act of 1956 governs the securities market in India. Having the powers to regulate companies, the central government and the company law board abide by the companies act of 1956. Powers such as auditing of accounting information, reviewing the business finance model and looking into the other affairs of the company are given to the government. Investigators from the directorate of investigation do the audits.

The Securities Contracts (Regulation) Act of 1956 and the Securities and Exchange Board of India (SEBI) Act of 1992.are the other body of rules that govern the Indian capital markets. Control of stocks, listings, contracts and a variety of other things are dealt by the former act. SEBI is concerned with the growth of the securities and business finance market in India. It looks into various other things like eligibility criteria for registration, developing the code of conduct, and so on. One of SEBI’s main activities is to protect the business finance interests of investors, by providing the facilities to safeguard their wealth. In many ways, SEBI is instrumental in attracting investments, due to the safe nature in the Indian business finance scene.

At a broad level, the Indian security market can be grouped into the savers and the spenders. The savers are normal households, and the spenders are companies and the government. If the money of the savers is put in financial securities, then spenders get money to operate, and in turn the savers get interest or dividend to enjoy. Hence the security market is where the companies meet the savers.

Enhanced by Zemanta
Filed Under: Business Culture Tagged With: , , , , , , ,