Financial Markets: FX Risk, Demat, Mutual Funds, and Money Instruments

Foreign Exchange Markets and Risk Management

Sectors of the Foreign Exchange Market

• Spot Market
• Forward Market
• Currency (Market)

Determinants of Foreign Exchange Rates

1. Interest Rate Differentials
2. Inflation Rate Differentials
3. Government Policies
4. Market Expectations
5. Investment Opportunities
6. Speculations

Risks Faced by International Companies (Exposure Types)

• Transaction Exposure Risk
• Economic Exposure Risk
• Translation Exposure Risk

Methods of Managing Foreign Exchange Risk

1. Exposure Netting
2. Forward Exchange Contracts
3. Currency Futures and Options
4. Currency Swaps Agreements
5. Foreign Currency Bank Accounts
6. Appropriate Capital Structure

Foreign Exchange Terminology

1. Exchange Rates
2. Spot Rate
3. Forward Rate
4. Direct Quote
5. Indirect Quote
6. Two-Way Quote
7. Bid Rate
8. Offer Rate
9. American Quote
10. European Quote

Risk Hedging Tools

1. Forward Contracts
2. Future Contracts
3. Currency Options
4. Money Market Operations
5. Leading and Lagging
6. Currency Swaps

Dematerialization of Securities

Definition of Dematerialization

Dematerialization is the process of converting physical certificates to an equivalent number of securities in electronic form, which are then credited into the investor's account. In simple terms, it is paperless trading.

Advantages of Dematerialization

1. From the Investor's Point of View

• It is speedier and avoids delays in transfer.
• Saves on stamp duty.
• Avoids a lot of paperwork.

2. From the Issuer Company's Point of View

• Savings in printing certificates and postage expenses.
• Stamp duty waiver.
• Easy monitoring of buying and selling patterns in securities.

3. General Advantages

• Elimination of bad deliveries.
• Elimination of risk associated with physical handling.
• Single point interface.
• Short settlement cycle.
• Immediate transfer and registration.

Disadvantages of Dematerialization

1. System failure
2. Fraud
3. Additional record keeping requirements
4. Additional costs

Mutual Funds: Selection and Regulatory Framework

Key Factors for Mutual Fund Selection

1. Expense Ratio
2. Age of the Fund
3. Price-to-Earnings (P/E) Ratio
4. Fund Manager Track Record
5. Timing (Market timing considerations)
6. Past Performance

Mutual Fund Regulations and Obligations

A. Investor Rights

(Details regarding investor rights are implied by the original structure.)

B. Investor Obligations

(Details regarding investor obligations are implied by the original structure.)

C. Rights and Obligations of the Mutual Fund (AMC)

1. Adherence to the Agreement (Trust Deed/Constituent Documents)
2. Diligence and Integrity of the Asset Management Company (AMC)
3. Consultation with Unit Holders
4. Ensuring No Conflict of Interest
5. Calling for Information (from related parties)
6. Custodian of Assets
7. Intimation to SEBI (Securities and Exchange Board of India)

Key Money Market Instruments

• Treasury Bills (T-Bills)
• Banker's Acceptance
• Certificate of Deposit (CD)
• Commercial Paper
• Eurodollars
• Repurchase Agreements (Repos)
• Reverse Repo
• Term Repo