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FINANCE CONCEPTS

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FINANCE CONCEPTS
Finance studies and addresses the ways in which individuals, businesses and organizations
raise, allocate and use monetary resources over time, taking into account the risks entailed in
their projects.
Arbitrage is the practice of taking advantage of a price difference between two or
more markets: The activity of buying at the lower price and reselling at the higher price is known
as arbitrage.
Spot Rates Spot market is a market in which goods or securities are traded for immediate
delivery. ‘Spot’ in this context means ‘immediately effective’, so that spot price is the price for
immediate delivery.
Forward Rates the forward exchange market is a market in which contracts are made to
supply currencies at fixed dates in the future at fixed prices
Indian Money Market Money market is the market in which short-term funds are borrowed
and lent. The money market does not deal in cash or money, but in trade bills, promissory notes
and government papers which are drawn for short periods. These short-term bills are known as
near-money.
Instruments in the Indian Money Market comprise money at call (overnight) and short
notice (up to 14 days), term money, commercial paper (CP), certificate of deposits (CDs),
commercial bills, treasury bills and inter-corporate deposits. Of these, the call money and notice
and Treasury bills.
Indian Money Market the Indian money market is a less developed market and cannot be
compared with such advanced money markets as the New York and London money markets.
Factoring is a device by which book debts are quickly realized through outright sale of
accounts receivable to a financial intermediary called ‘factor’. The factor will purchase accounts
receivables from all parties and take over the responsibility of collecting trade dues.
IMF (International monetary fund) IMF is an agency concerned with macro-management and
demand-side management of the World economy.
IBRD (International Bank for Reconstruction and Development) is an agency concerned with
micro-management of projects that it finances in various countries. It mainly deals with the
supply-side issues of economies.
RTA (Regional Trade Arrangement) RTA is a grouping of member countries who trade freely
only amongst themselves and confront outsiders with common tariff walls.

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Options An option is a contract between two parties a buyer and a seller that gives buyer
The right, but not the obligation, to purchase or sell the underlying asset at a later date
at a price agreed upon today.
{Call Right but not the obligation to “buy” a given quantity of underlying asset.
Put Right but not the obligation to “sell” a given quantity of underlying asset. }
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula.
Interest rate swaps These entail swapping only the interest related cash flows between the
parties in the same currency.
Currency swaps These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a difference currency than those in the opposite
direction.
Derivatives The derivatives market is the financial market for derivatives, financial
instruments like futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for over-the-
counter derivatives. The legal nature of these products is very different as well as the way they
are traded, though many market participants are active in both.
Hedging is making an investment to reduce the risk of adverse price movements in an
asset. This is done by taking a position in the futures market that is opposite to the one in the
physical market with the objective of reducing or limiting risks associated with price changes.
Speculation The process of selecting investments with higher risk in order to profit from an
anticipated price movement.
Money Market is a center in which financial institutions congregate for the purpose of
dealing impersonally in monetary assets. It is a market where short term funds are lent and
borrowed.
a) Treasury bills it represents short term borrowings of the government TBM refers to market
where TBS are bought and sold. They may be 14 day TB 91-day TB 182-day TB (they can be
discounted by Discount & Finance House of India] 364- day TB (they are popular due to high
Yield) they are sold through auction once in a fortnight.

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FINANCE CONCEPTS Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. Arbitrage is the practice of taking advantage of a price difference between two or more markets: The activity of buying at the lower price and reselling at the higher price is known as arbitrage. Spot Rates Spot market is a market in which goods or securities are traded for immediate delivery. ‘Spot’ in this context means ‘immediately effective’, so that spot price is the price for immediate delivery. Forward Rates the forward exchange market is a market in which contracts are made to supply currencies at fixed dates in the future at fixed prices Indian Money Market Money market is the market in which short-term funds are borrowed and lent. The money market does not deal in cash or money, but in trade bills, promissory notes and government papers which are drawn for short periods. These short-term bills are known as near-money. Instruments in the Indian Money Market comprise money at call (overnight) and short notice (up to 14 days), term money, commercial paper (CP), certificate of deposits (CDs), commercial bills, treasury bills and inter-corporate deposits. Of these, the call money and notice and Treasury bills. Indian Money Market the Indian money market is a less developed market and cannot be compared with such advanced money markets ...
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