Indian Software Industry earns about thirty percent of its total revenue from BFSI (Banking, Financial Services and Insurance) segment. Impact of Information Technology on this sector has been so large that it is difficult to imagine the shape of this industry without the IT components. Without ATMs it is difficult to visualize a bank, without depository it is difficult to imagine a settlement system and without streaming quotes it is difficult to imagine a trading system in equities, foreign exchange, derivatives and other financial markets. Even after all the transformational changes we have seen over the past decade or two, existing reality is probably only a minuscule part of the possibility in terms of increase in efficiency, productivity, reach, speed and introduction of new financial products.
Realization of these possibilities is, to a large extent, in the hands of the Information Technology professionals. Business is always hungry for improvement in speed and efficiency, additional functionalities, more automation of routine processes and for tapping the computational prowess or IT to handle situations involving complex computations such as risk management, option pricing and simulations. Meeting these expressed expectations and going beyond to the next stage where business would like to move in future, is the challenge that the IT industry faces, especially those companies which focus on the BFSI segment.
To be able to do that, software professionals need to understand the basics as well as intricacies of financial business. Only those who understand the business can understand what needs to be delivered to the business. Without proper understanding of the context of a software application and the purpose for which it is being designed and delivered, software engineering is prone to becoming routine and mechanical. Without the understanding of business context, possibility of creative application of software skills cannot be fully explored and exploited. Understanding the business environment not only helps a software engineer appreciate the importance of his work but also motivates him to think innovatively. It is difficult to be passionate about writing patches for certain application all the time. But knowing how and why the innocuous looking patch is crucial in supporting flawless functioning of a multi-billion dollar business of a bank can make a big difference.
This Series is a small effort in making the big difference, which can be induced by learning the subject matter underlying and encompassing the software applications in the BFSI space with special focus on capital markets, treasury and wealth management.
To understand the financial markets let us start with asking the very basic question – why do financial markets exist? What role do they play? What is the economic rationale for the existence of the stock market? Why do we need derivatives? While many of these questions would be addressed in other chapters, let us first understand why financial markets exist.