T+1 Settlement Cycle: Clearing Process in Indian Capital Markets
Introduction to Clearing and Settlement
Clearing and settlement is the backbone of the securities market. It ensures that every trade executed on the stock exchange is completed safely and efficiently – the buyer receives the securities and the seller receives the funds. In India, the equity market follows a T+1 rolling settlement cycle, meaning settlement takes place one working day after the trade date.
The 7-Step Settlement Cycle
Step 1: Trade Execution (T Day)
The process begins when an investor
Read MoreFinancial Derivatives: Options and Futures Pricing Problems
Interest Rates, Forwards, and Futures Contracts
Alba, having worked all summer, would like to deposit her money to earn extra income. A bank offers her 5% compounded semiannually. A friend starting a new business offers her 4.92% compounded quarterly. Which option is better and why?
Solution: We compare the effective annual rates.
- Bank Offer: \((1 + \frac{0.05}{2})^2 – 1 = 5.0625\%\)
- Friend’s Offer: \((1 + \frac{0.0492}{4})^4 – 1 \approx 5.012\%\)
The first option is better because it yields a higher
Fama-French Three-Factor Model vs. CAPM Risk Factors
Important Risk Factors in Asset Pricing
Industry Factor
- FIndustry = RIndustry – RStocks: Stocks in the same industry are all exposed to industry-specific shocks (demand, prices, technology).
- This implies stocks in the same industry tend to have higher correlations with each other.
- Stocks in an industry will have a large beta with respect to that industry’s factor (BIndustry). Stocks in nearby industries will have moderate BIndustry, and stocks in unrelated industries will have zero BIndustry.
Size
Read MoreBusiness Entity Tax Comparison: S-Corp, C-Corp, & LLC
Key Factors in Choosing a Business Tax Entity
Qualified Business Income (QBI) Deduction
- Provides a 20% deduction on qualified business income.
- Available for S-Corporations and Partnerships (pass-through entities).
- Not available for C-Corporations.
- Subject to income thresholds (e.g., for 2024: $191,950 for single filers and $383,900 for joint filers), above which the deduction may be limited or phased out.
Self-Employment (SE) Taxes
- Tax Base: Net earnings from self-employment * 0.9235.
- Rates: 12.4% for Social
Financial Markets & Investment Concepts: Core Principles
1. Efficient Market Hypothesis: Strong Form & Abnormal Returns
According to the strong form of the efficient market hypothesis, which of the following activities can still generate abnormal returns?
- a) Technical analysis
- b) Fundamental analysis
- c) Insider trading
- d) Active asset management
- e) None of the above
Since strong form efficiency implies all information (public and private) is already incorporated in prices, none of the above activities can generate abnormal returns.
2. Security Market Line
Read MoreFixed Income Markets: Trading & Portfolio Strategies
The Secondary Bond Market Explained
The secondary market refers to all bond transactions that take place after the bond’s initial settlement in the primary market and before its maturity, early redemption, or cancellation. Unlike equity markets, which have long operated with high levels of organization and transparency, fixed income markets have traditionally been more opaque, especially in terms of price discovery and trade reporting. However, since the financial crisis of 2008-2012, regulation
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