Lil more on derivatives….

I wish to add to what Shelly has talked about…..Derivatives are an excellent tool for managing the risks associated with the market fluctuations.

As stock derivatives, there are currency derivatives which are available.

Apart from other risks, Foreign Trade is subject to risks from currency fluctuations. Exporters and Importers in order to safeguard themselves against unfavourable currency fluctuations use currency derivatives as a hedging mechanism.

In case where an importer has to make payments in a foreign currency to the exporter at a future date, he can invest in a buy (long) position for currency futures by paying a premium. On the date when the payment is due to be made by the importer the required currency amount is available at the strike price of the currency futures. Hence, the importer is safeguarded from the any depreciation in the value of his currency.

Similarly, where an Exporter is expecting payments from the importers in a foreign currency, they can invest in a sell (short) position for currency futures in which payment is to be received. When the payments are received by the exporter even if the domestic currency has appreciated in comparison to the currency in which payments have been received the exporter does not suffer any losses. The exporter can accept the payment and the sell the currency in the derivative market at the pre decided strike price.

The buying and selling of currency futures does not help the exporters and importers earn any profits. However, they enable them lock in the exchange price of the payments to be made and received. This helps importers and exporters keep up with their estimated budgets and forecasted revenues.

Hope u find it interesting..
Kriti

Basic of Options

Hello,

I have written a small blog on Options.
Please refer to the link below to access it. Looking forward to responses and queries.

http://neha-viewpoint.blogspot.com/2010/04/basic-of-options.html

hey,
thanx for sharing the information.
Shelly, i wanted to know that among options and futures, which is more favourable?
On what basis do we deicide?

Parri Passu- Charge on an Asset

When an asset is given to the custody of the lender, the asset is said to be charged to the lender. The lender gets the right on the asset upon failure of the borrower to repay the loan. The charge can be a first/second charge or a pari passu charge.

In the case of first charge, the lender gets absolute right on the security. Any surplus from the sale of the asset should be turned over to the borrower.

In the case of the second charge the lender gets the right on the asset after satisfying the first lender. Any surplus after satisfying his claim should be turned over to the borrower.

Pari passu charge gives a parallel proportionate right to the lenders. Realisation of the asset should be shared in proportion to the balances outstanding to the respective lenders.

Hello All !!!!!!!!

Thanx Shelly for sharing this information.Frnds infact i also want to share some new concepts with u that i learnt during this internship....
we all knw that we prepare depriciation schedule but actually we prepare this according to Companies Act 1956 and also Income Tax Act 1961.We treat like this
Acc. to Companies Act, Depriciation for the year = Opening Balance + Op. Bal ( including Cp WIP)+ Addition during the year - Cl. Balance.
Acc. to Income Tax Act 1961, Depriciation for the year = Opening Balance + Addition during the year - Cl. Balance
And then in Consolidate St. Of Provision for Income Tax:
we subtract depriciation calculated as per the Income Tax Act from THe depriciation Calculated from the Companies Act.
Thus how we make Depriciation Schedule.

Discussion on Derivatives

Friends

Let me answer Neha's question...There are two types of option - call option and put option .

A call option gives the buyer the right to purchase an asset for a specific price called strike price by paying an amount right now called the premium. Lets take a hypothetical example , I have a view that X Ltd stock may rise in near future.Currently X Ltd. is trading at Rs. 100.I buy a call option on X Ltd stock with a strike price of Rs. 90( i.e I have a right to buy the stock @ Rs. 90 on expiration) by paying a premium of Rs 10. Now at expiration if the market price of the stock increases to say Rs. 120 , I will exercise this option. This is because I have purchased the right to buy it @ Rs. 90. However if the stock price falls say to Rs 70 , I will not exercise this right. In this case I will lose the premium which was paid initially i.e Rs. 10 at the time of buying this option.

In contrast , put option gives the holder the right to sell an asset for a specific strike price on a specified expiration date . Say a put option which expires in May on Y Ltd. with strike price of Rs. 90 entitles its owner to sell Y Ltd . stock at Rs. 70 at expiration even when the market price is less than Rs. 90. Ofcourse premium is to be paid buy this put option.

Hope this helps Neha..Please free to shoot further questions...Hope to see others participation as well.

Cheers

Shelly Nayyar

NUTS AND BOLTS OF DERIVATIVES

Friends

Hope you are all enjoying your SIP.

Let me share with you ABC of Derivatives.

Well... this is an attempt to answer the first question..What are Derivatives? In finance, derivatives is the collective name used for a broad class of financial instruments. These instruments provide payoffs that depend on the value of other assets such as commodity prices, bonds and stock prices or market index values. Their values derive from the values of other assets. Company stock options, for instance allow employees to profit from changes in the company's stock price without owning shares.

Derivatives come in two basic categories, option type contracts and forward type contracts. These may be listed on the exchange or they may be privately traded.

Options buyers get a right to buy or sell an asset over a specific period.There is no obligation to buy or sell the asset. For getting this right the buyer has to pay a price (premium) to the seller of the contract.

Forward type contracts, which includes forwards, futures and swaps commit the buyer and seller to trade a given asset at a set price on a future date. These contracts involve price fixing on the current date.

The important point to note here is that in options contract there is an option to buy or sell however in the forward types contract there is a commitment.

Waiting for you to shoot further questions.

Happy learning

Shelly Nayyar