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
Stock Investments
Portfolio Analysis in Investment Portfolio Management
The main aim of portfolio analysis in investment portfolio management is to give a caution direction to the risk and return of an investor on portfolio. Individual securities have risk return characteristics of their own. Therefore, portfolio analysis indicates the future risk and return in holding of different individual instruments. The portfolio analysis has been highly successful in tracing the efficient portfolio. Portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. An investor can sometime reduce portfolio risk by adding another security with greater individual risk than any other security in the portfolio. Portfolio analysis is mainly depending on Risk and Return of the portfolio. The expected return of a portfolio should depend on the expected return of each of the security contained in the portfolio. The amount invested in each security is most important. The portfolio’s expected holding period value relative 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
The Dow Jones Theory on Stock Market Movements
The Dow Jones Theory The Dow Jones Theory is probably the most popular theory regarding the behavior of stock market prices. The Dow Jones theory has been around for almost 100 years, yet even in today’s volatile and technology-driven markets, the basic components of this theory still remain valid. The theory derives its name from Charles H. Dow, who established the Dow Jones & Co. and was the first editor of the Wall Street Journal — a leading publication on financial and economic matters in the U.S.A. Although Dow never gave a proper shape to the theory, ideas have been expanded and articulated by many of his successors. The Dow Jones theory classifies the movement of the prices on the share market into three major categories: Primary Movements, Secondary Movements and Daily Fluctuations. 1) Primary Movements: They reflect the trend of the stock market and last from one year Continue reading
Rights Offering (Issue)
Whenever an existing company wants to issue new equity shares, the existing shareholders will be potential buyers of these shares. Generally the Articles or Memorandum of Association of the Company gives the right to existing shareholders to participate in the new equity issues of the company. This right is known as ‘pre-emptive right’ and such offered shares are called ‘Right shares‘ or ‘Rights issue‘. A rights issue involves selling securities in the primary market by issuing rights to the existing shareholders. When a company issues additional share capital, it has to be offered in the first instance to the existing shareholders on a pro-rata basis. This is required in India under section 81 of the Companies Act, 1956. However, the shareholders may by a special resolution forfeit this right, partially or fully, to enable the company to issue additional capital to public. Under section 81 of the Companies Act 1956, Continue reading
History of Derivatives Market in India
Interestingly, derivatives have been existed in India since long time in one form or the other. But, they were not liberalised nor efforts were put to enlighten the public. The area of existence of derivatives was in commodities, it was association by traders in Bombay which was named as Bombay Cotton Trade Association (BCTA) in 1875 and started dealing with the futures contracts. By the starting of 19th century derivatives in India crawled to top making India one of the worlds largest in futures industry. But, in the early 1952 Government banned trade in cash-settlements and option contracts. As a result derivatives’ trading was shifted to informal forward contracts which were a normal practice. Trading at that time was restricted to only few brokers, and their trading practice was typical located under the banyan tree in front of the town hall in Bombay. This practise was followed for long time Continue reading