What is Financial Derivatives?

Financial derivatives are financial instruments that are linked to specific
assets. By nature, these instruments are similar to contingent instruments Claims
and liabilities related to financial instrument will arise after a specific period of time. Derivative instruments are not considered a financial claim or liability for the holder thereof at the given moment.
But financial derivatives can be traded in the market and they will obtain a market value, which will depend upon the market price of the underlying financial or non-financial asset.

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What is Other Accounts Receivable or Payable?

Accounts receivable/payable includes trade credits, advances and other
receivables or payables. Trade credit means the suppliers of goods/services extend credit to the buyer/user. Advances are prepayments made for work which is in progress or for purchase of goods and services.

What is Loans and Borrowings?

Loans are financial assets. This asset is created when a creditor (saver) lends
funds directly to a debtor (borrower). There will be an evidence of a non-negotiable document for the creation of the asset.
Loans can be classified further into short term loans, medium term loans and long term loans.

• Short term loan :- Loans with maturity of one year or less.
• Medium term loan :- Loans with maturity from 1 to 5 years.
• Long term loan :- Loans with maturity of more than 5 years.

Financial leasing, factoring arrangements which are treated as substitute for
borrowing money come under the head loans and borrowings.

What is Shares other than Equity?

Equity shares represent ownership rights of the holders or subscribers. Once
the creditors’ liability is settled, what is remaining is up to the equity shareholders
to share. Participating preference share is also included in this category of shares
and other equity.

What is Securities other than shares?

Securities other than shares are negotiable instruments in the financial
market. These securities include government treasury bills, government bonds, corporate bonds/debentures, commercial paper, certificate of deposits, etc. These securities serve as an evidence that the issuer assumes the obligation to settle the issue by paying cash or in exchange of other financial instrument or any other item with an economic value. The said security provides evidence of financial claim on its issuer, and specifies the interest payment/principal repayment schedules.The popular securities in practice can be

1. Coupon basis securities
2. Amortised basis securities
3. Discount or zero coupon basis securities
4. Deep discount basis securities
5. Indexed basis securities
6. Masala securities
7. Green securities

1. Coupon basis securities: Coupon interest payments are made during the life of the instrument. The principal repayment is made on maturity.
2. Amortised basis securities: Interest payments and principal repayments are made in instalments during the life of the instrument.
3. Discount or zero coupon basis securities: Securities issued at a price below the face value and repaid on face value at maturity.
4. Deep discount basis securities: Securities issued at a big/deep discount belowthe face value and the principal and a substantial part of the interests is paid at maturity.
5. Indexed basis securities: Securities which tie the amount of interest and/or principal payment to a reference index such as consumer price index or an exchange rate index.
6. Masala securities: Rupee denominated borrowings by Indian entities in overseas markets. This new instrument is to tempt the global investors.
7. Green securities: Debt instruments that raise money to fund clean energy projectsonly. Companies that raise money through these securities have to invest it only in areas that are environment friendly such as renewable energy, waste management clean transport or sustainable land use.

Preference shares that offer a fixed preference dividend income is also treated
as securities other than shares. Preference shares do not provide ownership right
to the subscriber or holder.

Securities other than shares can be classified further as short term securities,
medium term securities and long term securities.

• Short term securities: Securities with maturity period of one year or less.
• Medium term securities: Securities with maturity from 1 to 5 years,
• Long term securities: Securities with maturity of more than five years.

Classification on the basis of Structure of Market

Financial markets may be classified into unorganised markets and organised
markets on the basis of structure.

Unorganised Markets

There are a number of moneylenders, indigenous bankers, local traders, etc
who lend money to the public and collect deposits from the public. There are als
private finance companies, chit funds, etc., who are very active especially in rural
areas. These people or players are not controlled by the RBI. They don’t have &
formal structure of organisation. Recently RBI has introduced several measures to
bring this unorganised sector into the organised one.

Organised Markets

Standard rules, regulations and statutes for governing the financial dealing
are there in organised markets. High degree of institutionalisation and innovative
instruments are seen in organised markets. All aspects of organised markets are
regulated by regulatory bodies like RBI, SEBI, etc. There is no room for ambiguity
or confusion or manipulation in these markets due to the strict supervision and
control by the regulators.