TMFI 7th Banking Professional Exam Understanding Terminology
(i) Primary Market vs Secondary Market
(1) Primary Market is a market where new securities are issued for the first time, whereas Secondary Market is a market where already-issued securities are traded.
(2) In the Primary Market, only Primary Dealers (PDs) and authorized underwriters can directly bid, whereas the Secondary Market is open to banks, NBFIs, and other investors.
(3) Securities are issued through periodic auctions in the Primary Market, whereas securities are traded regularly in the Secondary Market.
(4) Prices are determined through the auction process in the Primary Market, whereas prices are determined by supply and demand in the Secondary Market.
(5) The Primary Market helps raise new funds for the government or companies, whereas the Secondary Market provides liquidity and helps in price discovery.
(ii) LCR vs NSFR
(1) LCR focuses on short-term liquidity for 30 days, whereas NSFR focuses on stable funding for one year.
(2) LCR is calculated as High-Quality Liquid Assets ÷ Net Cash Outflows, whereas NSFR is calculated as Available Stable Funding ÷ Required Stable Funding.
(3) LCR ensures that a bank can meet its short-term liquidity needs during stress, whereas NSFR ensures a stable funding structure over the longer term.
(4) LCR mainly focuses on immediate liquidity needs, whereas NSFR focuses on long-term funding stability.
(5) LCR requires sufficient liquid assets to cover 30-day net cash outflows, whereas NSFR requires sufficient stable funding for one-year funding needs.
(iii) Forward Contract vs Futures Contract
(1) A Forward Contract is a customized contract between two parties, whereas a Futures Contract is a standardized contract.
(2) A Forward Contract is traded over the counter (OTC), whereas a Futures Contract is traded on an organized exchange.
(3) The terms of a Forward Contract can be changed according to the parties’ needs, whereas the terms of a Futures Contract are standardized.
(4) A Forward Contract is normally settled at maturity, whereas a Futures Contract is marked to market and settled daily.
(5) A Forward Contract has higher counterparty risk, whereas a Futures Contract has lower counterparty risk because of the clearinghouse.
(6) A Forward Contract has lower liquidity, whereas a Futures Contract generally has higher liquidity.
(iv) Call Option vs Put Option
(1) A Call Option gives the buyer the right to buy an asset at the strike price, whereas a Put Option gives the buyer the right to sell an asset at the strike price.
(2) A Call Option benefits when the asset price rises, whereas a Put Option benefits when the asset price falls.
(3) A Call Option is exercised when the market price is above the strike price, whereas a Put Option is exercised when the market price is below the strike price.
(4) A Call Option is useful when an investor expects the price to increase, whereas a Put Option is useful when an investor expects the price to decrease.
(5) The Call Option seller must sell the asset if the buyer exercises the option, whereas the Put Option seller must buy the asset if the buyer exercises the option.
(v) Money Market vs Foreign Exchange Market
(1) Money Market deals mainly with short-term funds and debt instruments, whereas Foreign Exchange Market deals with currencies and currency-related instruments.
(2) Money Market generally covers instruments with maturities up to one year, whereas Foreign Exchange Market deals in spot, forward and swap transactions.
(3) Money Market mainly serves short-term funding and liquidity needs, whereas Foreign Exchange Market mainly facilitates currency exchange and manages foreign exchange risk.
(4) Participants in Money Market mainly earn interest income, whereas participants in Foreign Exchange Market may earn from exchange rate movements and bid-ask spreads.
(5) Money Market mainly involves banks, NBFIs, corporations and governments, whereas Foreign Exchange Market also involves central banks and other global market participants.
(vi) Demand Liabilities vs Time Liabilities
(1) Demand Liabilities can be withdrawn on demand, whereas Time Liabilities are generally payable after a specified period.
(2) Current deposits and call deposits are examples of Demand Liabilities, whereas fixed deposits and term deposits are examples of Time Liabilities.
(3) Demand Liabilities are more likely to be withdrawn suddenly, whereas Time Liabilities are generally more stable until maturity.
(4) Demand Liabilities usually carry little or no interest, whereas Time Liabilities generally earn interest.
(5) Both Demand Liabilities and Time Liabilities are included in the relevant liability base for SLR purposes, whereas their nature and maturity are different.
(vii) Premium Bond vs Discount Bond
(1) A Premium Bond trades above its face value, whereas a Discount Bond trades below its face value.
(2) A Premium Bond generally has a coupon rate higher than the current market yield, whereas a Discount Bond generally has a coupon rate lower than the current market yield.
(3) An investor may face a capital loss when a Premium Bond is redeemed at par, whereas an investor may earn a capital gain when a Discount Bond is redeemed at par.
(4) Coupon income partly compensates for the capital loss on a Premium Bond, whereas coupon income adds to the capital gain on a Discount Bond.
(5) The market price of a Premium Bond is above par, whereas the market price of a Discount Bond is below par.
(viii) Transaction Risk vs Translation Risk
(1) Transaction Risk arises from changes in exchange rates between the transaction date and settlement date, whereas Translation Risk arises when foreign financial statements are converted into the parent company’s currency.
(2) Transaction Risk affects actual cash flows, whereas Translation Risk mainly creates an accounting or balance-sheet impact.
(3) Transaction Risk arises during the period between the transaction and settlement, whereas Translation Risk generally arises during financial statement consolidation.
(4) Transaction Risk can be hedged using forwards, futures or options, whereas Translation Risk is generally more difficult to hedge.
(5) Transaction Risk directly affects the amount of home currency received or paid, whereas Translation Risk affects the reported value of foreign assets, liabilities, income or equity.
