08 December 2010
Sir Please give answers of my following questions:- 1)what's the difference b/w future contract & forward contract? 2)What does ETF(Exchange traded fund)means? 3)What are NRE/FCNR A/c? 4)What is ICD Market? 5)Difference b/w investment banking & merchant banking? 6)what is traveller cheque & telegraphic transfer? 7)what is the differece b/w NRE & NRO a/c
Although a Futures Contract is similar to a Forward Contract in that both are agreements to trade on a set future date, there are some significant differences. Fututres contracts are highly standardized, while each Forward contract is personalized and unique.
Futures are settled at the end on the last trading date of the contract with the settlement price; whereas, the Forwards are settled at the start with a forward price.
The profit or loss on a Futures position is exchanged in cash every day. With the Forwards contract, the profit or loss is realized only at the time of settlement so the credit exposure can keep increasing.
The Futures contract does not specify to whom the delivery of a physical asset must be made; in a Forwards contract it is clearly specified who recieves the delivery.
Futures are traded on an exchange, while Forwards are traded over-the-counter
09 December 2010
Definition of Exchange Traded Fund.
A fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index; they never track actively managed mutual fund portfolios (because most actively managed funds only disclose their holdings a few times a year, so the ETF would not know when to adjust its holdings most of the time). Investors can do just about anything with an ETF that they can do with a normal stock, such as short selling. Because ETFs are traded on stock exchanges, they can be bought and sold at any time during the day (unlike most mutual funds). Their price will fluctuate from moment to moment, just like any other stock's price, and an investor will need a broker in order to purchase them which means that he/she will have to pay a commission. On the plus side, ETFs are more tax-efficient than normal mutual funds, and since they track indexes they have very low operating and transaction costs associated with them. There are no sales loads or investment minimums required to purchase an ETF. The first ETF created was the Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider") in 1993. SPDRs gave investors an easy way to track the S&P 500 without buying an index fund, and they soon become quite popular.
09 December 2010
Some of the basic differences between the futures and forward contracts are as follows:
1. While futures contracts are traded on the exchange, forwards contracts are traded over-the-counter market. 2. In case of futures contracts the exchange specifies the standardized features of the contract, while no pre determined standards are there in the forward contracts. 3. Exchange provides the mechanism that gives the two parties a guarantee that the contract will be honored whereas there is no surety/guarantee of the trade settlement in case of forward contract.
09 December 2010
NRE Bank Account: Non-Resident External Account. Maintained in Indian Rupees, both in the form of savings bank and fixed deposit. Principal and Interest earned thereon are repatriable
FCNR: Foreign Currency Non-Resident Account. It is maintained in foreign Currency viz., US Dollar (USD), Pounds Sterling (GBP), Euro Currency (EUR) and Japanese Yen (JPY), but only as fixed deposits.The Principal and Interest earned thereon are repatriable.
09 December 2010
By definition ETF stands for exchange traded fund, an ETF holds assets such as bonds and stocks and its net worth is equivalent to that of the negotiable instrument it holds; an ETF can also be thought of as an investment portfolio that holds stocks and bonds or other negotiable instruments that are traded on a stock exchange which is very similar to the way that stocks are traded.
The main difference between stocks and ETF's (besides that an ETF is a portfolio of bonds or stocks) is that an exchange traded fund tracks and index hence the reason why they're called index funds. There are many indexes that can be tracked through ETF's, an investor may choose to track and index for it to Dow Jones, NASDAQ, a specific industry such as the manufacturing industry where they may choose to track and index of an emerging market, these markets can be in different countries so much like stocks and investor can also buy an ETF which tracks a particular index of an industry which thrives in different countries across the world.
The whole ETF concept has been around for about 15 years and the first to hit the market did it in 1993 and was better known as "spiders" -- ETF symbol was SPDRs, this ETF in particular tracked the Standard and Poor's 500 index of large-company stocks. During the early 1990s when there is investment vehicle was introduced to the market the most popular type of ETF's were those which track the index of the technology sector because of obvious reasons, today there is a huge variety of ETF's that operate in different countries and it can be said that the amount of ETF's its equivalent to the number of industries that are being traded in the stock exchange.
Benefits of ETFs
One of the most obvious benefits when it comes to ETF's is their low operating costs; let's illustrate this point, the Vanguard total Stock market VIPER which is an ETF that tracks the index for the entire US stock market carries an annual operating cost of 0.07% of the total assets, that is equivalent of saying that a $10,000 investment would have an annual operating fee of seven dollars.
Another great benefit of dealing with an ETF is that such trading vehicle is structured for tax efficiency this is because an ETF itself doesn't have to buy or sell securities so this means that there are not any taxable gains to be passed on. And ETF can generate taxable gains but, an exchange traded fund is often sold as a stock will be sold in the stock market, they are not redeemed by the holders so in order for an investor to realize capital gains he would have to sell the shares or trade the ETF in order to reflect changes in the underlying index.
Last (but not least) ETFs are very flexible when they are compared against other investment instrument such as mutual funds, in other words a mutual fund is often priced once and this usually happens at the end of the trading day, ETFs on the other hand can be bought or sold exactly as you would with stocks and similarly to stocks you could also buy on margin (using other people's money) and you can also sell short when the market conditions are appropriate.
09 December 2010
Difference b/w investment banking & merchant banking
Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks tend to blur. Traditional merchant banks often expand into the field of securities underwriting, while many investment banks participate in trade financing activities. In theory, investment banks and merchant banks perform different functions.
Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated in underwriting and selling securities in large blocks. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. Traditionally, investment banks did not deal with the general public.
Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting and co-investment in projects involving trade of one form or another.
The current offerings of investment banks and merchant banks varies by the institution offering the services, but there are a few characteristics that most companies that offer both investment and merchant banking share.
As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing, bridge financing, mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential.
Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it
09 December 2010
Telegraphic Transfers: A Telegraphic Transfer is one of the quickest methods of transferring money overseas and within Australia. A message is forwarded by Bank Tele-Transmission to an overseas correspondent instructing them to pay a beneficiary a specified sum of money at the request of the Customer.
Travellers Cheques Travellers Cheques are a safe way of carrying funds overseas or within Australia substituting for cash.
09 December 2010
The main points of difference between NRE and NRO accounts are highlighted below:
1. Purpose The basic purpose of NRO account is to keep your existing (i.e., before you become an NRI) funds and also the money you earn or acquire in India after becoming an NRI.
Whereas NRE accounts are meant for foreign exchange earned outside India and transferred to India.
2. Currency As obvious, NRO accounts are maintained in Indian Rupees. NRE accounts are also rupee denominated i.e., maintained in Indian rupees by converting the foreign exchange at the current prevailing exchange rates.
3. Kind of credits allowed Local funds that aren’t eligible to be remitted abroad (i.e., funds which do not qualify under exchange control regulations, for remittance outside India) must be credited to an NRO account. Overseas funds or local funds that are allowed for overseas remittance can instead be credited to NRE account.
4. Inter-account transfers You can make transfer from NRE to NRO account but not vice-versa. And once the funds stands transferred to NRO account, it can’t be transferred back to NRE account. Put another way, it becomes non-repatriable.
5. Taxation NRO accounts interest is taxable under Indian income tax, whereas interest earned on NRE account is exempt (i.e., tax- free).
6. Repatriation Funds in NRO accounts can’t be remitted abroad freely (i.e., can’t be taken outside the country). RBI has allowed remittances only up to USD one million (this limit includes sale proceeds of immovable property held by NRIs) per financial year (April – March) for bonafide purposes (e.g. education, medical expenses etc) to the satisfaction of the bank. However, current income (including interest, dividends, rent, pensions) is freely repartiable but subject to tax deduction at source.
On the other hand, the entire credit balance inclusive of interest earned from NRE accounts is freely repatriable without any restriction and without any reference to RBI.
7. Joint holdings Joint holdings is allowed in both accounts but unlike NRO account (where joint holding with Indian resident is allowed), in case of NRE account joint holder also need to be an NRI.
Thus, if you wish, you can open a NRO account jointly with your relative residing in India. But remember that in such joint accounts, the funds of resident joint holder can’t be credited.
However, for operating both of these accounts, you can authorise an Indian resident – a friend or a family member whom you trust – to operate your account by submitting a ‘mandate letter’ (most banks have a readymade format) to the bank. The mandate operates like a power of attroney (POA).
8. Exchange Risk Unlike NRO account, NRE account is exposed to exchange fluctuation risk.
All foreign exchange remittance received for credit to NRE accounts is first converted to Indian rupees at the prevailing exchange rate. But as repatriation is allowed in foreign currency (i.e., rupee again gets reconverted into dollars), therefore these accounts are susceptible to exchange loss which is basically of two kinds.
First, is the conversion loss – there is difference between buying & selling rate of banks and this difference has to be borne by the account holder. Second, is the day-to-day fluctuations in the exchange rates.
9. Rate of interest Returns on NRO accounts are at par with domestic accounts. In other words, interest paid on NRO savings account is same as that paid on domestic savings account (current rate is 3.50%) and returns on NRO fixed deposits are at par with that offered on domestic fixed deposits (current rates are broadly between 3% and 10% depending on the period and the bank).
Interest on NRE savings deposits are also at the same rate as applicable to domestic saving deposits (currently the interest rate is 3.5%) while interest rates on NRE term deposits are regulated by RBI and are much lower than that paid on the NRO term deposits. These rates are pegged to international (LIBOR/SWAP) interest rates and are revised by RBI from time to time.
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