A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Futures Trading Strategies We look here at some strategies of futures contracts. We refer to single stock futures. However since the index is nothing but a security whose price or level is a weighted average of securities constituting an index, all strategies that can be implemented using stock futures can also be implemented using index futures. Hedging: Long security, sell futures Speculation: Bullish security, buy futures Speculation: Bearish security, sell futures Arbitrage: Overpriced futures: buy spot, sell futures Arbitrage: Under-priced futures: buy futures, sell spot 1. Hedging: Long security, sell futures Futures can be used as an effective risk–management tool. Take the case of an investor Continue reading
Investment Ideas
What is Investment ? – Concept, Definition and Features
Concept of Investment Man, it is said, lives on hope. But, hope is only a necessary condition for life, but not sufficient. There are many other materialistic things that he needs – food, clothing, shelter, etc. And, like his hope, his needs too keep changing through his life. To make things more uncertain, his ability to fulfill the needs too changes significantly. When his current ability (current income) to fulfill his needs exceeds his current needs (current expenditure), he saves the excess. The savings may be buried in the backyard, or hidden under a mattress. Or, he may feel that it is better to give up the current possession of these savings for a future larger amount of money that can be used for consumption in future. In contrast to the above situation, if the amount available for current consumption is less than the current needs, he has to Continue reading
Types of Credit Derivatives
In finance, a credit derivative is a securitized derivative whose value is derived from the credit risk on an underlying bond, loan or any other financial asset. In this way, the credit risk is on an entity other than the counter-parties to the transaction itself. This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which has incurred debt. Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity. Similar to placing a bet at the racetrack, where the person placing the bet does not own the horse or the track or have anything else to do with the race, the person buying the credit derivative doesn’t necessarily own the bond (the reference entity) that is the object of the wager. He or she Continue reading
Rolling Settlement System
Rolling Settlement process , also known as Compulsory Rolling Settlement (CRS) where trades on a stock exchange were to be accounted for and settled on T i.e. trade day plus “X” trading days, where “X” could be 1,2,3,4 or 5 days. Thus, in essence, it means that if say a T+n, where n is the number of days system of rolling settlement was to be followed, trades accounted for on the T i.e. trade day were to be settled on the nth working day minus the T day. The Account period of settling transactions was followed in India for a long time. It worked on the idea that transactions for an entire week were to be settled on a pre-specified date the very next week. However, this process was considered too technical and cumbersome. This settlement risk is lowered in Rolling Settlement as the settlement of debts accounting to different Continue reading
Pricing of Options
Options contracts, as well, must be evaluated to determine their worth. Although like any good or service, supply and demand for, say, options will affect the price; to understand the value underlying the price, we need to look deeper. Just as we would consider such factors as the quantity and quality of earnings, price-earnings ratio, and industry outlook, to determine the value of a firm; so we must use the various performance measures to analyze options and futures. Their analysis is complicated by their relationship with the underlying instrument. The underlying asset price therefore is a critical ingredient in the valuation or pricing of options. A key ingredient in the pricing of options thus is the relationship of the option or future to the underlying security on or before expiration determines its value. The price of an option or a futures security will always be a function of the Continue reading
Claims in Insurance and Claims Management
Claims in Insurance Definition of claims: Claim is a right of insured to receive the amount secured under the policy of insurance contract promised by Insurer. An insurance claim is the actual application for benefits provided by an insurance company. Policy holders must first file an insurance claim before any money can be disbursed to the hospital or repair shop or other contracted service. The insurance company may or may not approve the claim, based on their own assessment of the circumstances. Individuals who take out home, life, health, or automobile insurance policies must maintain regular payments called premiums to the insurers. Most of the time these premiums are used to settle another person’s insurance claim or to build up the available assets of the insurance company. When claims are filed, the insured has to observe the settled rules and procedures and the insurer has also to reciprocate in a Continue reading