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.

Arbitrage 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.

Asian Option 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

Balance of Payment 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-residents. The third element in the balance of payments is changes in official foreign exchange reserves.

Bank credit (RBI) 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.

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.

Current Account  Transactions where the payments are income for the recipient. A country's balance of payments on current account includes trade in goods, or visibles; trade in services, or invisibles; payments of factor incomes, including dividends, interests, migrants remittances from earnings abroad; and international transfers, that is gifts. Current account is contrasted with capital account, where transactions do not give rise to incomes, but represent changes in the form in which assets are held.

Demand deposits (RBI) includes current deposits, demand liabilities portion of savings bank deposits, overdue deposits and cash certificates, outstanding telegraphic and mail transfers and margins against letters of credit/guarantees.

Depression Technically, a depression is any economic downturn where real GDP declines by more than 10 percent and a downturn which persists for 3 or more years. (IMF regards periods when global growth is less than 3% to be global recession). [During the Great Depression of the 1930s lasting from August 1929 to March 1933, real GDP declined by almost 33 percent, this was followed by a period of recovery, then another less severe depression of 1937-38, when GDP declined by 18%. By this yardstick, the United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. During the Great Depression, unemployment was around 25%, compared to 8.1% (Feb, 2009) in the recent downturn. About 9000 banks failed during the 1930's compared to only 17 now. The stock market has now dropped about 53% from its high, whereas during the Great Depression the Dow fell almost 90%.]

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.

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.

European Option An option that can only be exercised at the end of its life i.e at the maturity date.

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

Foreign Exchange Derivatives

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.

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.]

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.