CSEET · Economic and Business Environment

Indian Financial Markets: formula sheet

Full chapter guide

Key formulas

Components of the financial system: Financial system = Institutions + Markets + Instruments + Services; Learn this four-part list. It is the base of most answers.
Basic classification by maturity: Financial market = Money market (up to 1 year) + Capital market (above 1 year); Capital market is further split into primary and secondary markets.
Functions of financial markets: Mobilise savings, allocate funds, price discovery, liquidity, lower transaction cost, information; Write at least four with a one-line explanation each.
Primary vs secondary: who gets the money: Primary market: money goes to the company. Secondary market: money goes to the selling investor; This is the single most tested difference. Write it first in any comparison answer.
Methods of raising capital in the primary market: IPO + FPO + Rights issue + Private placement; IPO is for unlisted companies. FPO is for listed companies. Rights issue is for existing shareholders. Private placement is for selected persons.
Rights issue entitlement: Shares offered = Shares held × Rights ratio; If the ratio is 1:5, you get 1 new share for every 5 held. Fractions are ignored in simple questions unless the question says otherwise.
Value of a trade: Trade value = Number of shares × Price per share; Brokerage and taxes are extra and are shown separately.
Annual interest on a debenture or bond: Interest = Face value × Coupon rate; Example: ₹1,000 face value at 8% coupon gives ₹80 a year. It is based on face value, not market price.
Current yield: Current yield = (Annual interest ÷ Market price) × 100; Shows the return on what you pay today. A bond bought below face value has a current yield above its coupon rate.
Price and interest rate link: Market interest rates ↑ ⇒ bond prices ↓ (and the reverse); Applies to existing fixed-rate bonds. Use it to explain why bond prices change.
Order of claim on winding up: Secured creditors and debenture holders → unsecured creditors → preference shareholders → equity shareholders; A simplified order for exam answers. Debt holders are paid before owners.
Exchange rate meaning: US$1 = ₹X means one dollar costs ₹X; Rupee cost of a dollar. A higher X means the rupee is weaker.
Rupee value of a dollar amount: Rupees = Dollar amount × Exchange rate; Use it to convert import bills or export receipts.
Forward premium or discount: Forward premium = Forward rate − Spot rate (if positive); discount if negative; If the forward rate is higher than spot, the foreign currency is at a premium.
Depreciation of the rupee: Rupee depreciates when the rupee price of a foreign currency rises; For example, ₹82 per dollar to ₹84 per dollar is a fall in rupee value.
Forward vs futures: Forward = OTC + customised + no exchange guarantee; Futures = exchange-traded + standardised + clearing guarantee; The most common comparison question.
Futures: buyer's profit: Profit = (Price at settlement − Agreed futures price) × Quantity; The seller's profit is the reverse. Ignore margin and costs unless asked.
Call option buyer's profit at expiry: Profit = Max(Spot price − Strike price, 0) × Quantity − Premium paid; Maximum loss is the premium. Profit can be large.
Put option buyer's profit at expiry: Profit = Max(Strike price − Spot price, 0) × Quantity − Premium paid; Maximum loss is the premium.
Right vs obligation: Option buyer: right. Option seller: obligation. Futures buyer and seller: both obligation.; Core difference between futures and options.
Regulator-to-market map: Securities market → SEBI | Banking, money, G-Sec, forex → RBI | Insurance → IRDAI | Pension funds → PFRDA; Use this first to decide which regulator a question is about.
SEBI's three-part role: SEBI = Protective + Developmental + Regulatory functions; Group every SEBI function under one of these three heads in a written answer.
SEBI's three powers: Quasi-legislative (rules) + Quasi-judicial (orders) + Executive (inspect, enforce); Give one example for each power.
RBI's main roles: Issuer of currency + Banker to government + Banker to banks + Credit controller + Forex manager; A handy list for functions-of-RBI questions.

Quick revision

The financial system links savers and borrowers through institutions, markets, instruments and services.
Money market deals in short-term funds; capital market deals in long-term funds.
Primary market is where new securities are issued; secondary market is where existing securities are traded.
Stock exchanges are the main secondary market venues.
Capital market instruments include equity shares, preference shares, debentures and bonds.
The debt market deals in fixed-income securities such as government and corporate bonds.
The foreign exchange market is where one currency is exchanged for another at an exchange rate.
A derivative is a contract whose value depends on an underlying asset.
RBI regulates banks and the money market and manages forex rules.
SEBI regulates the securities market and protects investors.
IRDAI regulates the insurance sector.

Common mistakes

Treating financial market as only a stock exchange. Fix: State that a financial market includes money, capital, forex and derivatives markets, and that it may be electronic or over the phone.
Mixing up money market and capital market on the time period. Fix: Fix the rule: money market is up to one year, capital market is above one year.
Saying the company receives money when shares are traded on the BSE or NSE. Fix: Remember that stock exchange trades are between investors. The company gets money only when it issues shares itself.
Confusing IPO and FPO. Fix: IPO is the first public offer by an unlisted company. FPO is a further offer by a company already listed.
Calling debenture holders owners of the company. Fix: Remember that debenture holders are creditors. They get interest and have no voting rights.
Saying that dividend on equity shares is fixed. Fix: Equity dividend depends on profits and the board's decision. Only preference shares carry a fixed rate of dividend.
Saying a forward contract delivers currency immediately. Fix: Link forward with future. Rate is fixed today, delivery happens later.
Calling a rise in ₹ per dollar an appreciation of the rupee. Fix: If you need more rupees to buy a dollar, the rupee has weakened. That is depreciation.
Saying futures and forwards are the same. Fix: Add the difference: futures are standardised, exchange-traded and guaranteed by a clearing corporation; forwards are private OTC deals.
Saying an option buyer must buy or sell. Fix: The buyer has only a right. The seller (writer) has the obligation.

Exam tips

Begin every answer with a definition. It secures easy marks even if you forget the rest.
Use a list or a simple labelled structure for classification. Examiners scan for it.
Always mention the one-year line between money and capital markets.
Give Indian examples such as RBI, SEBI, NSE and BSE to show context.
In a distinction question, compare at least four points such as purpose, period, instruments and participants.
Always include the line 'money goes to the company' versus 'money goes to the selling investor'. Examiners look for it.
For 'methods of raising capital', give one line on each of the four methods and state who the offer is made to.
In a comparison, write in two columns of points or in paired sentences. Do not write one long paragraph.