on04 December, 2011

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.

Base Rate  Base Rate is a new lending rate for banks introduced by the Reserve Bank of India, which will replace the existing prime lending rate (PLR). This new rate which is the base rate will be applicable to all loans with a minimum tenure of one year while loans below one year will not be linked to base rates. The base rate of each bank will be calculated based on its cost of deposits. The proposed Base Rate would include those cost elements which can be clearly identified and are common across borrowers. Base Rate would include the card interest rate on retail deposit with one year maturity, interest on regulatory provisioning i.e. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), Overhead Cost of banks and capital cost. Actual lending rates charged by banks would be Base Rate + borrowers specific charges which include product specific Operating Cost, Credit Risk premium and tenor premium. (The apex bank decided to restructure the existing BPLR model as it felt that there was no transparency in the way banks treated top corporate clients and common borrowers. Banks normally lend at much lower rates, as low as 5-6 per cent, to woo corporate borrowers while common borrowers pay a much higher rate.) For an illustration on how the Base Rate could be calculated see RBI.

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).

instrument since May this 2011 when the first auction was conducted by RBI on behalf of GOI.) The US Treasury also issues Cash Management Bills for maturities of less than six months.

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.

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.

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  or a CDS is a bilateral swap contract, between the buyer and seller of protection (/insurance), to hedge default risk usually of a corporation or Government bond and is the most widely used credit derivative. When a lender purchases a CDS from an insurance company, the liability of the loan becomes a credit that may be swapped for cash on the event of a default. (Though most CDSs are documented using standard forms promulgated by the International Swaps and Derivatives Association (ISDA), Credit default swaps are not traded on an exchange and there is no required reporting of transactions to a government agency.)

The RBI has introduced CDS on corporate bonds is to provide market participants a tool to transfer and manage credit risk in an effective manner through redistribution of risk. CDS provides credit protection to corporate bond buyers, as the sellers of the swaps guarantee the credit-worthiness of the product. Thus, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. To avoid the pitfalls of non-transparent CDS deals as witnessed during the global crisis, RBI has mandated that all market makers shall report their CDS trades in corporate bonds within 30 minutes of the trade to the Clearing Corporation of India Ltd (CCIL) trade repository CCIL Online Reporting Engine (CORE) beginning December 1, 2011.

Credit derivatives are based on the risk of borrowers defaulting on their loans, such as mortgages.

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.

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.

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.

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.

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.

Fiscal Deficit is the total deficit spending of the government which is current government spending plus interest payments on previously accumulated debt, minus government income or tax revenues, (usually) expressed as a percentage of GDP, so that figures are comparable across the years and even countries.

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.]

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.

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.

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.