World Of Finance

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        World of Finance by M.Vijaya Sai What is an Option? An option is a contract to buy or sell a specific financial product officially known as the option's underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, exchange-traded fund (ETF), or similar product. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. And it has an expiration date. When an option expires, it no longer has value and no longer exists. Options come in two varieties, calls and puts, and you can buy or sell either type. You make those choices - whether to buy or sell and whether to choose a call or a put - based on what you want to achieve as an options investor. Buying and Selling If you buy a call, you have the right to buy the underlying instrument at the strike price on or before the expiration date. If you buy a put, yo...

        World of Finance by M.Vijaya Sai   In general Swap means the exchange of one asset or liability for a comparable asset or liability for the purpose of lengthening or shortening maturities or raising or lowering coupon rates to maximize revenue or minimize financing costs. This may entail selling one securities issue and buying another in foreign currency; it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream or vice versa  while not swapping the principal component of the bond. Swaps are generally traded over-the-counter. In finance a swap is a derivative in which two counterparties consent to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. The cash flows are planned over a...

        World of Finance by M.Vijaya Sai   What is Absolute Return? Investment returns have conventionally been measured against a market index rather than in terms of whether the investments appreciate in value or not. Absolute Return investments seek to generate positive investment returns at all times. What is a hedge fund? Hedge funds can be defined as absolute return oriented investment vehicles which utilize sophisticated investment techniques for the purpose of achieving superior risk adjusted returns. Hedge funds are frequently referred to as alternative investments. What is the history of hedge fund investing ? The first acknowledged hedge fund was introduced in 1949, even though leverage and short selling had been used long before this time, but not collectively in a low risk hedged model. The original model of long/short equities in the similar sector has evolved into a multitude of strategies. Portfolios ...

        World of Finance by M.Vijaya Sai   Options Strategies Let us refresh our memory on Options which I covered in my previous article  Futures and Options – Part1 and  Futures and Options – Part 2.Options are financial instruments that give the buyer the right to buy (for a call option) or sell (for a put option) the underlying security at some specific point of time in the future (European Option), which is fixed in advance i.e. when the option is written. Call options increase in value as the underlying stock increases in value. Likewise put options increase in value as the underlying stock decreases in value. In this article we will discuss some most commonly used options strategies . These strategies depend on whether investors are growth-oriented or conservative, or short-term aggressive traders. Options are generally used to speculate on the movement of the price of underlying asset or hedge an existin...

As you may know, I covered derivatives, types of derivatives, hedging and futures concepts in the previous article . I also explained the concept of Future Contracts and its uses. Options An option is a contract where the buyer has the “right” (depends on buyer to execute it), but not the “obligation” (legally bonded) to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a security, just like a stock or bond, and constitutes a binding legal contract with strictly defined terms and conditions. Futures Vs Options Remember from the previous article, Futures are contracts where both the buyer and the seller have the obligation to honor the contract whereas option does not involve any obligation for both the parties. A contract is a zero sum game i.e. one party will book loss while the other take home the profit. Ifthe contract is futures, the losing party will pay the winning party. However, in options, the buyer will d...