In the context of an investment, a situation of certainty is one in which the return from the investment is known for sure. Let us say, an individual invests in government securities and holds them to maturity. The individual can be sure about the redemption of the amount invested on maturity and payment of interest. Therefore, his/her rate of return is known for sure. The term risk, in the context of investments, refers to the variability of the expected returns. It is an attempt to quantify the probability of the actual return being different from the expected return. Though there is a subtle distinction between uncertainty and risk, it is common to find the use of both the terms interchangeably. Types of Risks associated with Investments The variability of the return or the risk can be segregated into many components, based on the factors that give rise to it. Broadly, Continue reading
Investment Management
Basics of Commodity Futures Markets
Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes agricultural products, metals, petroleum, financial instruments, foreign currencies and stock indexes. Trading has also being imitated in future contracts , enabling option buyers to participate in future market with known risks. In other words Futures markets have been described as continuous auction market and as a clearing house for the latest information about supply and demand. Participants in Future Market The following are the participant in future market which are as follows: Hedgers: Hedgers are individuals and firms that makes purchases and sales in the future market solely for the purpose of establishing a known price level —weeks or month in advance -for something Continue reading
Types of Life Insurance Claims
Claims Management Department The claims department is one of the key departments in an insurance company. The claims department has the following functions to perform: To provide the customers of insurance and reinsurance companies with high quality of service. This role gives a long-term edge to the company and hence is referred to as the strategic role. To monitor the claims and see that whether the benefits of insurance exceed the costs of claims. This role is referred to as the cost-monitoring role of the claims department. To see that the expectations of the customers are met with regard to speed, manner and efficiency of the service. This is called the customer service role of the claims department. To meet the standard of service, to keep up to the customers expectations and still operate within the budget. This is the managerial role of the claims department. Both the quality of Continue reading
Forex Market or Foreign Exchange Market – History, Definition, Characteristics and Parties Involved
Foreign exchange refers to money denominated in the currency of another nation or group of nations. Foreign exchange can be cash, bank deposits or other short-term claims. But in the foreign exchange market as the network of major foreign exchange dealers engaged in high-volume trading, foreign exchange almost always take the form of an exchange of bank deposits of different national currency denominations. A Foreign exchange market or Forex market is a market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent. Short History of the Foreign Exchange Market Foreign exchange markets mainly established to make easy cross border trade in which there is involvement of different currencies by governments, companies and individual investors. More ever these markets generally existed to supply for the international movement of capital and money, even the initial markets had speculators. Today, Continue reading
Different Types of Swaps
In finance, a SWAP is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. Conventionally they are the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. A swap is an agreement to exchange one stream of cash flows for another. Swaps are most usually used to: Switch financing in one country for financing in another To replace a floating interest rate swap with a fixed interest rate (or vice versa) In August 1981 the World Bank issued $290 million in euro-bonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks. The rapid growth in the use of interest rate swaps, currency swaps, and swaptions (options on swaps) has been phenomenal. Continue reading
Arbitrage Pricing Theory (APT) – Definition and Formula
A substitute and concurrent theory to the Capital Asset Pricing Model (CAPM) is one that incorporates multiple factors in explaining the movement of asset prices. The arbitrage pricing model (APT) on the other hand approaches pricing from a different aspect. It is rarely successful to analyze portfolio risks by assessing the weighted sum of its components. Equity portfolios are far more diverse and enormously large for separate component assessment, and the correlation existing between the elements would make a calculation as such untrue. Rather, the portfolio’s risk should be viewed as a single product’s innate risk. The APT represents portfolio risk by a factor model that is linear, where returns are a sum of risk factor returns. Factors may range from macroeconomic to fundamental market indices weighted by sensitivities to changes in each factor. These sensitivities are called factor-specific beta coefficients or more commonly, Continue reading