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.