Open Interest is mostly used to confirm a trend for a particular futures  contract, For eg, lets look at Reliance 1000 May CALL, the open interest  might tell us that there have been 5 options open in the month of May, a  trader might then wonder does this refer to the number of contracts bought or sold.

*Working*
When a trader buy’s or sell’s an option, the transaction needs to be  entered as either an opening or a closing transaction. If he buy’s 5  RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is opening  his position in a futures contract, which causes the Open interest to rise  by 5, and then after sometime(within) the month he decides to sell his  contract i.e close his position in a particular contract, then he is  causing the open interest to go down by 5.

Open interest applies primarily to the futures market, it helps the measure  the flow of money into the futures Market. For each seller of a futures  contract (eg RELIANCE 1000 CALL) there must be a buyer of that contract.  Thus a seller and a buyer combine to create only one contract.

A rise in open interest in a futures contract along with its price  indicates bullishness, which means investors are creating long positions  and vice versa.

The open interest position that is reported each day represents the  increase or decrease in the number of contracts for that day, and it is  shown as a positive or negative number.

*Advantages of monitoring Open Interest*
Changes in the Open Interst as mentioned earlier can help a trader  interpret the future trend of a particular contract.

*Open Interest RISING ->* Indicates that the present trend (up, down, flat)  will continue

*Open Interest FALLING->* Indicates that the prest trend(up, down, flat) is  likely to change or is coming to and end.

Cash inflation is an excessive increase in the money supply of a given economy, which results in a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services. In either case, it is measured as the annualized percentage rate of change of a price index such as the CPI.

Mainstream economists believe that high rates of inflation are caused by high rates of growth of the money supply.Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the “monetarists” argued that money supply dominated all other factors in determining inflation, while “Keynesians” argued that real demand was often more important than changes in the money supply.

Deflation :

Deflation is the opposite of inflation. Therefore, under the usual contemporary definition of inflation, ‘deflation’ means a decrease in the general price level. Alternatively, the term was used by the classical economists to refer to a decrease in the money supply; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.

Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.

Controlling Inflation :

There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.

Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.

Another method attempted in the past have been wage and price controls (“incomes policies”). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. Many developed nations set prices extensively, including for basic commodities as gasoline. The usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force adjustments in supply. For example, if the official price of bread is too low, there will be too little bread at official prices.

Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.

Arbitrageurs thrive on market imperfections. Arbitrageur is intelligent and knowledgeable person and ready to take the risk He is basically risk averse. He enters into those contracts were he can earn risk less profits. When markets are imperfect, buying in one market and simultaneously selling in other market gives risk less profit. Arbitrageurs are always in the look out for such imperfections.

In the futures market one can take advantages of arbitrage opportunities by buying from lower
priced market and selling at the higher priced market.

• Speculation is all about taking position in the futures market without having the underlying. Speculators operate in the market with motive to make money. They take:
• Naked positions – Position in any future contract.
• Spread positions – Opposite positions in two future contracts. This is a conservative speculative strategy.

Speculators bring liquidity to the system, provide insurance to the hedgers and facilitate the price discovery in the market.

Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.

Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.

Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is
shown as a positive or negative number.

How to calculate Open Interest?

Each trade completed on the exchange has an impact upon the level of open interest for that day.

For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position ( one old buyer and one old seller) open interest will decline by one contract.  The third and final possibility is one old trader passing off his position to a new trader (one old buyer sells to one new buyer). In this case the open interest will not change.

Benefits of monitoring open interest

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or
sideways) will continue.

Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves.

A levelling off of open interest following a sustained price advance is often an early warning of the end to an up trending or bull market.

Open Interest – A confirming indicator

An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along
with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may
indicate a possible trend reversal.

Public money or savings play a vital role in financing many big projects. Thousands of crores are raised every year from the markets either through equity or debt from the market. The merchant banks play a crucial role in helping the corporates raise money from there markets.

The SEBI issued guideline for the merchant bankers in April, 1990

The merchant banks undertake following activities:

1. Project finances advice.

2. Project appraisal

3. Capital restructuring

4. Issue management

5. Loan syndication

6. Foreign currency finances.

7. Investment management

8. Mutual Funds

9. Lease finance

10. Bills Discounting

11. Mergers & Acquisition

12. Working capital finance

13. Government consents

14. Arranging fixed deposits

15. Corporate counselling

16. Underwriting

17. Non-Resident investments

18. Restructuring of sick units.

19. Hire purchase

20. Money market operations

A financial system is a complex, well-integrated set of sub-systems of financial institutions, markets, instruments, and services which facilitates the transfer and allocation of funds, efficiently  and effectively

There are four main components of financial system they are:

FINANCIAL INSTITUTIONS

FINANCIAL MARKETS

FINANCIAL INSTRUMENTS

FINANCIAL SERVICES

1. Often, financial institutions actively involved in the capital market and are also in the capital market.
2. Funds raised in the money market are used to provide liquidity for longer-term investment and redemption of funds raised in the capital market
3. In the development process of financial markets, the development of money market typically precedes the development of the capital market

The function of money market is:

• to serve as an equilibrating force that redistributes cash balances in accordance with the liquidity needs of the participants.
• to form a basis for the management of liquidity and money in the economy by monetary authorities
• to provide a reasonable access to the users of short-term money for meeting their requirements at realistic prices.

As it facilitates the conduct of monetary policy, a money market constitutes a very important segment of the financial system

1. Money Market
2. Capital Market

Following are the features of Annual Report:

One must read an Annual Report with emphasis on the following:

• Director’s Report and Chairman’s statement, which are related to the current and future operational performance of a company.
• Auditors’ Report (including Annexure to the Auditors Report)
• Profit and Loss Account.
• Balance Sheet.
• Notes to accounts attached to the Balance Sheet

The post- economic liberalization era witnessed scams with cyclical regularity in the Indian Capital market. The series of scams in the capital market may lead someone to believe that scams and liberalization are correlated phenomena.

The most infamous scam, known as the 1992 securities was master-minded by Harshad Mehta and other bull operators, not without connivance and collusion of banks. The consequences were so serious that the Bombay Stock Exchange remained closed for a month. This was followed by scams by unscrupulous promoters mostly of finance companies who took advantage of free pricing to raise money by price rigging. Such fly-by-night operators jolted both the stock exchange and investors. Besides, price rigging, grey market activities were common where the share prices were quoted of a premium before they were listed on the stock exchanges. For instance, a Morgan Stanley Mutual Fund unit worth Rs 10 was commanding a premium of Rs 18, that is, it was quoted at Rs. 28 during the subscription period. In March 1995, another scam known as the M S Shoes scam masterminded by an exporter, Pavan Sachdeva, rigged up prices of share leading eventually to a crash. Once again the market had to be closed for three days. In December 1995, the Reliance shares issue—share switching scam—sprung up in which Fair Growth Financial Services, Reliance Industries, and the stock exchange itself were involved. The Bombay Stock Exchange suspended trading in the famous RIL script for three days.

C R Bhansali, a chartered accountant, shook the country’s financial system in May 1997. He identified weaknesses in the regulatory framework of the country’s financial system. By trimming the balance sheet of CRB capital markets, he positioned his company as a unique financial organization with excellent prospects. This created for him an almost unlimited supply of deposits with high interest rates on the one hand, and provided him leverage to rig prices in the market on the other. The investors were lured to part with their money and risk their future.

Price rigging became a recurring ailment of the Indian capital market. This is clearly evident from the fact that in 1998 the technique of price rigging was successfully apply in case of BPL-Videocon and Sterlite scrips, which created a payment crisis. Brokers who acted in concerts with Harshad Mehta, had taken large positions in these scrips. As a consequence, these scrips had to be debarred from the market for a couple of years J C Parekh, the President and other key members of the board of BSE were sacked by SEBI for price rigging and insider trading in this case. The history of insider trading was repeated in March 2001 when Anand Rathi, the President of BSE, was caught red-handed and thereafter sacked by SEBI along with six other broker directors. Ketan Parekh, the new big bull, once again exploited the loopholes and the Anand Rathi bear cartel hammered the market. The hammering rocked the stock market again.

The need of credit rating is different for different parties depending on the benefits it offers to the various parties utilizing these services, viz., investors, issuers, intermediaries and the regulatory authority.

Investors:

• Rating will supplement the investors’ credit evaluation process

• It facilitates comparison of relative value between competing securities.

• It helps in recognizing the risk involved in the investment

Issuers:

• A company with highly rated instrument has the opportunity to reduce the cost of borrowing by quoting less interest rates.

• A company with rating can approach a wider section of investors for resource mobilization.

• Companies with rated instruments can avail of the rating as a marketing tool to create better image in dealing with its customers, lenders and creditors.

• Rating encourages the companies to come out with more disclosures about their accounting system, financial reporting and management pattern.

• Smaller and not so well known companies can access markets.

• Encourages financial discipline as borrowers attempt to obtain ratings by improving financial structured reducing operating risks

Financial Intermediaries

• Th ratings help them in pricing the debt.

• It shifts the burden of establishing credit quality from intermediary to a rating agency thereby easing the due diligence requirement.

• With high credit rated instruments, the brokers can convince their clients to select a particular investment proposal. This saves their time, cost manpower in convincing their clients.

Regulatory Authority

By identifying the risks, rating helps in channelising savings into productive investments

Credit rating serves the objective of protecting the investors

What is Credit Rating :

• Rating reflects the borrower’s accountability, expected capability and inclination to pay interest and principal in a timely manner

• Rating is an isolated function of a credit risk evaluation. Rating is useful in differentiating credit quality.

• Rating will involve issue-specific evaluation.

What  Credit Rating is not:

• Rating is not a general purpose evaluation of the issuer.

• It is not a recommendation to buy/sell/hold a security

• Rating is not an extensive audit of the issuing company.

• Rating is not a one-time assessment of creditworthiness valid over the future life of the security.

Factors that contributed to the growth of Credit Rating:

• High level of defaults in U.S. capitak markets in 1970.

• Regulators stipulation for mandaory ratings.

• Investors awareness of ratings for risk assessment and risk management.

• It helps intermediaries for pricing and placement of financial instruments.

• The increasing role of capital and money markets.

• Globalization of credit markets.

• The continuing growth of information technology.

• The growth of confidence in the efficiency of the market mechanism.

• The withdrawal of government safety nets and the trends towards privatization.

Venture Capitalists also provide management/leveraged buyout financing. The processis of investing of risk capital in an enterprise in which the venture investor shares ownership as well as Board of Directors level management responsibilities with the funding management team.

It is risk finance for entrepreneurial growth oriented companies. It is investment for the medium or long-term, seeking to maximize medium or long term return for both the parties. The investor can add value to the company becaouse of his knowledge, experience and contact base.

It is an actual or potential equity investment in companies through the purchase of stock, warrants, options or convertible securities.

Venture Capital is an equity, equity featured capital seeking investment in new ideas, new companies, new products, new processes or new services, that offer the potential of high returns on investment. It may also include investment in turnaround situations.

CHARACTERSISTICS OF VENTURE CAPITAL

1. Investments are made in equity featured instruments of investment.

2. Young Companies that do not have access to public sources of equity or other forms of capital.

3. Industry, products or services that hold potential of better than normal or average revenue growth.

4. Companies with better than normal or average profitability.

5. Products/services on the early stages of their life cycle.

6. Turnaround companies

7. Long-term and active involvement with investee.

The importance of venture capitalists is not on account of the volume of capital it provides; it is more on account of its indirect benefits. These investments enable the development of entirely new lines  of business. They typically prefer to invest in  knowledge based industries such as Information Technology and Bio-tech.  This has in turn catalyzed entrepreneurship amongst professional managers and technologists to a considerable degree.

INDIAN VENTURE CAPITA INDUSTRY

There are mainly three categories of venture capital funds:

1. Funds promoted by All India development Finacial Institutions and State level Development Financial Institutions.

2. Funds promoted by commercial banks.

3. Funds promoted by private sector financial services companies.

Capital markets deal in both debt and equity. In these markets productive capital is raised and made available to the corporates. The governments both central and state raise money in the capital market, through the issue of government securities. Capital market refers to all the institutes and mechanisms of raising medium and long-term funds, through various instruments available like shares, debentures, bonds etc.

The importance of capital markets has grown in the last ten years. Corporates both in the private sector as well as in the public sector raise thousands of crores of rupees in these markets. The capital markets consist of the primary market and the secondary market . The primary markets are where new stock and bonds issues are sold (underwriting) to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange.

There are two important operations carried on in these markets.
1. The raising the new capital
2. Trading in the securities already issued by the companies

The important constituents of the Capital market are:
1. The Stock Exchanges
2. Banks
3. The investment trusts and companies
4. Specialised financial institutions or development banks
5. Mutual funds
6. Post office savings banks
7. Non-banking financial institutions
8. International financial investors and institutions

Features of primary markets are:

* This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).

* In a primary issue, the securities are issued by the company directly to investors.

* The company receives the money and issues new security certificates to the investors.

* Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

* The primary market performs the crucial function of facilitating capital formation in the economy.

* The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as “going public.”

* The financial assests sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

• Initial public offering;
• Rights issue (for existing companies);
• Preferential issue.