Terminology
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ADR
American
Depository Receipt
is essentially stock of a foreign company trading on US financial
markets. The
stock of many non-US companies (including India)
trades on US exchanges
through the use of ADRs. ADRs enable US
investors to buy shares in foreign companies without undertaking
cross-border
transactions.
American
Option An option (contract) which may be exercised at any valid
business date through out the life of the option.
Describes a currency strengthening in response
to market demand rather than by official action.
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A risk-free type of trading where the same
instrument is bought and sold simultaneously in two different markets
in order
to profit from the difference in these markets.
An option whose payoff depends on
the average price of the underlying asset over a certain period of time
as
opposed to at maturity. Also known as an average option. 
B
An
overall statement of a
country's economic transactions with the rest of the world over some
period,
often a year. A table of the balance of payments shows amounts received
from
the rest of the world and amounts spend abroad. The current account
includes
exports and imports, that is visible trade, and receipts from and
spending
abroad on services such as tourism. It also includes receipts of
property
incomes from abroad and remittances of property incomes abroad, and
receipts and
payments of international transfers, that is gifts. The capital account
of the
balance of payments includes inward and outward foreign direct
investment, and
sales and purchases of foreign securities by residents and of domestic
securities by non-residentsThe
third
element in the balance of payments is changes in official foreign
exchange
reserves
It
includes loans, cash credit and overdrafts, and inland bills and
foreign bills
purchased and discounted. Bills exclude those rediscounted with RBI and
IDBI. Bank credit to commercial sector
includes credit to
commercial sector by RBI and commercial banks. RBI's credit
includes advances to and investments in shares and debentures of
financial
institutions, and land mortgage banks.Net Bank Credit to government
includes
total net credit to Central and State governments by RBI and commercial
banks.
Credit to government by commercial banks indicates investments by banks
in
government securities.
Bank
Rate
is
that rate at
which the RBI lends overnight money to
commercial banks.
Bond is
an IOU from a government or
company.
In exchange for you lending them money, they issue a bond that promises
to pay you back in the future the amount lent (principal) plus interest
(yield).
C
Call/
Notice/ Term Money Call money market is that part of
the national
money market where the day to day surplus of funds, of banks and
primary
dealers, are traded in. Call/ Notice/ term money market ranges between
one day
to 15 days borrowing and considered as highly liquid. Other key feature
is that
the borrowings are unsecured and the interest rates are very volatile
depending
on the demand and supply of the short term surplus/ defeciency amongst
the
interbank players.
CBLO
(Collateralized Borrowing and Lending Obligation) is a
money market instrument as approved by RBI and developed by CCIL
(Clearing
Corporation of India Limited) for the benefit of the entities who have
either
been phased out from inter bank call money market or have been given
restricted
participation in terms of ceiling on call borrowing and lending
transactions
and who do not have access to the call money market. It is a type of
derivative
debt instrument, securitised by approved bonds lodged with the CCIL
through
Subsidiary General Account. The instrument has short maturities, from
1day (to
an year).Membership to CBLO segment is extended to entities who are
RBI- NDS
members viz. Nationalized Banks, Private Banks, Foreign Banks,
Co-operative
Banks, Financial Institutions, Insurance Companies, Mutual Funds,
Primary
Dealers etc. Associate Membership to CBLO segment is extended to
entities who
are not members of RBI- NDS viz. Co-operative Banks, Mutual Funds,
Insurance
companies, NBFC's, Corporates, Provident/ Pension Funds etc. Eligible
securities are Central Government securities including Treasury
Bills,as
specified by CCIL from time to time. The instrument was developed when
the RBI
decided to turn the Call Money Market into a pure interbank market and
phase
out other entities.
Certificate
of Deposit Certificates of Deposit
(“CD”) were introduced in 1989 following the acceptance of the Vaghul
Working
Group of Money Market. These are also usance promissory notes issued at
a
discount to the face value and transferable in demat form. They attract
stamp
duty. CDs are issued by scheduled commercial banks and it offers them
an
opportunity to mobilise bulk resources for better fund management. To
the
investors they offer better cash management opportunity with market
related
yield and high safety.
Clearing
Organization or Clearing House An
entity
through which futures and other derivative transactions are
cleared and settled. It is also charged with assuring the proper
conduct of
each contract’s delivery procedures
and the adequate financing of trading. A clearing organization may be a
division of a particular
exchange, an adjunct or affiliate thereof, or a freestanding entity.
Commercial Paper It
is a
short term money market instrument comprising of unsecured, negotiable,
short
term usance promissory note with fixed maturity, issued at a discount
to face
value. CPs are issued by corporates to mpart flexibility in raising
working
capital resources at market determined rates. CPs are actively traded
in the
secondarymarket since they are issued in the form of Promissory Notes
and are
freely transferable in demat form.
Commodity Futures click to see details
Commodity Index
An
index or average, which may be weighted, of selected commodity prices,
intended to be
representative of the markets in general or a specific subset of
commodities, e.g., agricultural
commodities or metals.
CMR
The ‘call
money rate’ is the interest rate in the call money market,
where money is lent (by one bank to another, typically) for short
durations,
ranging from ‘overnight’ to 14 days.
CMYC
Constant
Maturity Yield Curve is a curve
which relates the yield on a security to its time to maturity. The
usual practice worldwide is to provide yields of traded bonds
for finely defined residual maturity brackets. The monthly
CMYs given here provide information on (Indian government)
bond yields for several chosen residual maturities,
like 3 & 6 months, 1/2/5/10/12/15 years. Say, the market
determined YTMs for all traded Gilts with 340 to 380 days left to
mature would give the CMY for the 1 year maturity bracket. The monthly
CMYs are estimated from marketwide data, i.e., from all trades for
the month reported on the RBI NDS platform.
Correction
A short-term drop in stock market prices. The term comes from the
notion that, when this happens, overpriced stocks are returning back to
their "correct" values.
CPI
Consumer Price
Index is an economic indicator that measures the change in a batch of
consumer
products. The change in price is
considered to be inflation.
CPI actually measures the increase in prices a consumer will
have to pay for a particular commodity basket (which may be revised
every four
to five years to factor in changes in consumption pattern). India
does not
have an aggregate CPI, but only sectional CPIs for industrial workers
(CPI-IW),
agricultural labour (CPI-AL), urban non-manual workers (CPI-UNME) and
rural
labour (CPI-RL).
Credit
Crunch The situation created when banks hugely reduced
their lending to each other because they were uncertain about how much
money they had. This in turn resulted in more expensive loans and
mortgages for ordinary people.
Credit
Default Swap A swap designed to transfer credit risk, in
effect a form of financial insurance. The buyer of the swap makes
periodic payments to the seller in return for protection in the event
of a default on a loan.
Credit
derivatives are based on the risk of borrowers defaulting on
their loans, such as mortgages.
CRR
Cash
Reserve
Ratio is the percentage of
bank deposits which are statutorily parked with the RBI as reserve.
Currency
peg A commitment by a government to maintain its currency at a
fixed value in relation to another currency. Typically this is done by
the government buying its own currency to force the value up, or
selling its own currency to lower the value. One example of a peg was
the fixing of the exchange rate of the Chinese yuan against the dollar.

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D
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Derivative
A
financial
instrument, traded on or off an exchange, the price of which is
directly dependent upon (i.e., "derived
from") the value of one or more underlying securities, equity indices,
debt instruments,
commodities, other derivative instruments, or any agreed upon
pricing
index or arrangement (e.g., the movement over
time of the Consumer Price Index or freight rates).
Derivatives involve
the trading of
rights or obligations based on the underlying product, but do not
directly
transfer property. They are
used to hedge risk or to exchange a floating rate of return for fixed
rate of
return.
Derivatives
include
futures, options, and swaps. For example, futures contracts are
derivatives of
the physical
contract and options on futures are derivatives of futures contracts.
Dividends
A payment by a company to its shareholders, usually linked to its
profits.
E
ECBs
(External Commercial Borrowings) include bank loans,
suppliers' and buyers' credits, securitised instruments such as fixed
and
floating rate bonds (without convertibility) and commercial borrowings
from
private sector windows of multilateral Financial Institutions such as
International Finance Corporation, ADB, AFIC, CDC etc, Euro-issues
including
Euro-convertible bonds and GDRs, credit from official export credit
agencies
and investment by FIIs in dedicated debt funds. ECBs are being
permitted by the
Government for providing an additional source of funds to Indian
corporates and
PSUs for financing expansion of existing capacity and as well as for
fresh
investment, to augment the resources available domestically. ECBs can
be used
for any purpose (rupee-related expenditure as well as imports) except
for
investment in stock market and speculation in real estate.
EPS Earnings per share is the
total profits of a company divided by the number of shares. A
company with Rs.1 billion in earnings and
200 million shares would have earnings of Rs.5 per share.
Equity
In a business, equity is how much all of the shares put together are
worth. In a house, your equity is the amount your house is worth minus
the amount of mortgage debt that is outstanding on it.
Exchange-Traded
Fund (ETF) An
investment vehicle holding an asset such as a commodity that issues
shares that are traded like a stock on a securities exchange.
F
FDI
refers to an investment made to acquire lasting interest
in enterprises operating outside of the economy of the investor.
Further, in
cases of FDI, the investor´s purpose is to gain an effective
voice in the
management of the enterprise. The forms of investment by the direct
investor
which are usually classified as FDI are equity capital, the
reinvestment of
earnings and the provision of long-term and short-term intra-company
loans
(between parent and affiliate enterprises).
FII (Foreign Institutional
Investor) in the Indian capital
market means an institution established or incorporated outside India which proposes to make investment
in India
in securities.
It may be — an institution established or incorporated outside India as
a
pension fund, mutual fund, investment trust, insurance company or
reinsurance
company; an International or Multilateral Organisation or an agency
thereof or
a Foreign Governmental Agency, Sovereign Wealth Fund or a Foreign
Central Bank;
an asset management company, investment manager or advisor, bank or
institutional portfolio manager, established or incorporated outside
India and
proposing to make investments in India on behalf of broad based funds
(and its
proprietary funds); a trustee of a trust established outside India and
proposing to make investments in India on behalf of broad based funds
(and its
proprietary funds); university fund, endowments, foundations or
charitable
trusts or charitable societies.
Currency
Futures: A Currency Futures contract is a standardised foreign exchange
derivative contract traded on a recognized stock exchange to buy or
sell one
currency against another on a specified future date, at a price
specified on
the date of contract.
{Some
Features of exchange traded currency futures
newly introduced in India:
Standardized
currency futures shall have the following features:
a. Only USD-INR contracts are allowed to be traded.
b. The size of each contract shall be USD 1000.
c. The contracts shall be quoted and settled in Indian Rupees.
d. The maturity of the contracts shall not exceed 12 months.
e. The settlement price shall be the Reserve Bank of India’s
Reference Rate on the last
trading day.
Only
‘persons resident in India’
may purchase or sell currency futures to hedge an exposure to foreign
exchange
rate risk or otherwise. Membership for both trading and clearing, in
the currency
futures market shall be subject to the guidelines issued by the SEBI.
Banks
authorized by the RBI under the Foreign Exchange Management Act, 1999
as ‘AD
Category - I bank’ are permitted to become trading and clearing members
of the
currency futures market of the recognized stock exchanges, on their own
account
and on behalf of their clients, subject to fulfilling certain minimum
prudential requirements.]
Some
other FX derivatives instruments are:
Currency
Option A contract that grants the holder the
right, but not the
obligation, to buy or sell currency at a specified exchange rate during
a
specified period of time. For this right, a premium is paid to the
broker,
which will vary depending on the number of contracts purchased.
Currency
options are one of the best ways for corporations or individuals to
hedge
against adverse movements in exchange rates. Currency options provide a way
of availing benefits of the upside from any currency exposure while
being
protected from the downside, for the payment of an upfront premium;
these
contracts were allowed in the Indian market to be used as a hedge for
foreign
currency loans.
Currency
Swap:
A swap that involves the exchange of principal and interest in one
currency for
the same in another currency. For
example, a
customer in India
having a loan in USD may enter into a currency swap in order to hedge
its USD
interest rate risk as well as the USD/INR exchange risk. Under this
type of
swap, the client may cover either only interest payment or principal
repayment
or both.
Quanto Swap:
Customer pays, say, USD 12
month LIBOR, in-arrears quantoed into INR (i.e. fixings are in USD
LIBOR but
all payments made in INR and are calculated based on an INR notional).
XCS
(Cross Currency Swap): Parties to
exchange a given amount of one currency for another and to pay back
with
interest these currencies in the future.
FRA/ Forward Rate Agreement
An
over-the-counter contract between parties that determines the currency
exchange
rate, to be paid or received on an obligation beginning at a future
start date.
The contract will determine the rates to be used along with the
termination
date and notional value. On this type of agreement, it is only the
differential
that is paid on the notional amount of the contract.
Fractional
Deposit Lending A
banking system in which only a fraction of the total deposits managed
by a bank
must be kept in reserve.See Reserve
Bank.
Fundamentals
Fundamentals determine a company, currency or security's value. A
company's fundamentals include its assets, debt, revenue, earnings and
growth.
Futures
Contract An
agreement to purchase or sell a commodity for delivery at a specified
time in
the future: (1) at a price
that is determined at initiation of the contract; (2) that obligates
each party
to the contract to fulfill
the contract at the specified price; (3) that is used to assume or
shift price
risk; and (4) that
may be satisfied by delivery or offset. 
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G
GDP Gross Domestic Product is
defined as the total market value of all final goods and services
produced
within a given country (or region) in a given period of time (calendar
year/financial year/quarter). It is also considered the sum of value
added at
every stage of production (the intermediate stages) of all final goods
and
services produced within a country in a given period of time, and it is
given a
money value.
The
most common approach to measuring and understanding GDP
is the expenditure method:
GDP
= C + I + G + (X-M), C
is private consumption in the economy; I is defined as
investments by business or households in capital; G is the sum of
government
expenditures on final goods and services; X is gross exports (as
GDP captures the amount a country
produces, including goods and services produced for other nations'
consumption,
therefore exports are added) & M is gross imports (M is subtracted
since
imported goods will be included in the terms G, I, or C, and must be
deducted
to avoid counting foreign supply as domestic.
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