Finance Glossaory-4

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Derivatives: A derivative is a security whose price ultimately depends on that of another asset.

Derivative means a contact of an agreement.

Types of Derivatives:

1. Forward Contracts

2. Futures

3. Options

4. Swaps.

1. Forward Contracts: - It is a private contract between two parties.

                                                An agreement between two parties to exchange an asset for a price that is specified todays. These are settled at end of contract.

2. Future contracts: - It is an Agreement to buy or sell an asset it is at a certain time in the future for a certain price. Futures will be traded in exchanges only.These is settled daily.       

Futures are four types:

1. Commodity Futures: Wheat, Soyo, Tea, Corn etc..,.

2. Financial Futures: Treasury bills, Commercial Paper, Equity Shares, bonds, etc..,

3. Currency Futures: Major convertible Currencies like Dollars, Founds, Yens,                                    and Euros.

4. Index Futures: Underline assets are famous stock market indicies. NewYork Stock Exchange.

3. Options: An option gives its Owner the right to buy or sell an Underlying asset on or before a given date at a fixed price.

                        There can be as may different option contracts as the number of items to buy or sell they are,

                                    Stock options, Commodity options, Foreign exchange options and interest rate options are traded on and off organized exchanges across the globe.

Options belong to a broader class of assets called Contingent claims.

The option to buy is a call option.The option to sell is a PutOption. 

The option holder is the buyer of the option and the option writer is the seller of the option.

The fixed price at which the option holder can buy or sell the underlying asset is called the exercise price or Striking price.

A European option can be excercised only on the expiration date where as an American option can be excercised on or before the expiration date.

Options traded on an exchange are called exchange traded option and options not traded on an exchange are called over-the-counter optios.

When stock price (S1) <= Exercise price (E1) the call is said to be out of money and is worthless.

When S1>E1 the call is said to be in the money and its value is S1-E1.

4. Swaps:   Swaps are private agreements between two companies to exchange casflows in the future according to a prearranged formula.

So this can be regarded as portfolios of forward contracts.

Types of swaps:

1: Interest rate Swaps

2: Currency Swaps.

  

1. Interest rate Swaps:  The most common type of interest rate swap is ‘Plain Venilla ‘.

Normal life of swap is 2 to 15 Years.

It is a transaction involving an exchange of one stream of interest obligations for another. Typically, it results in an exchange of ficed rate interest payments for floating rate interest payments.

2. Currency Swaps: - Another type of Swap is known as Currency as Currency Swap. This involves exchanging principal amount and fixed rates interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equalant loan in another currency. Like interest rate swaps currency swars can be motivated by comparative advantage.

Finance Glossaory-part-2

Futures: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Seed Capital: The initial equity capital used to start a new venture or business. This initial amount is usually quite small because the venture is still in the idea or conceptual stage. Also, there's a high risk that the venture will fail.

Institutional Investor: A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face less protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.

Disinvestment: 1. The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture".

2. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods.

Underwriter: A company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's distribution network.

Balance of Trade: The largest component of a country's balance of payments. It is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.

Balance of Payments: A record of all transactions made by one particular country during a certain period of time. It compares the amount of economic activity between a country and all other countries.

Bridge Financing: A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations.

Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.

Capital Lease: A lease considered to have the economic characteristic of asset ownership.

Operating Lease :A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset.

Dematerialization—DEMAT: The move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

Market Segmentation : A marketing term describing the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action.

FMCG

FMCG is an acronym for Fast Moving Consumer Goods. FMCG is a classification that refers to wide range of frequently purchased consumer products including: toiletries, soaps, cosmetics, teeth cleaning products, shaving products, detergents, other non-durables such as glassware, bulbs, batteries, and plastic goods such as buckets. ‘Fast Moving’ is in opposition to consumer durables such as kitchen appliances that are generally replaced less than once a year. The category may include pharmaceuticals, consumer electronics and packaged food products and drinks, although these are often categorised separately. The term Consumer Packaged Goods (CPG) is used interchangeably with FMCG.

Book Building:The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.

An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.

What is Reverse Book Building (Delisting of shares)?

The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date.

What is Anti Dumping Duty?

Where any article is exported from any country or territory to India at less than its normal value then upon the importation of such article to India the central Govt. may be notification in the official gazette impose an anti dumping duty not exceeding the margin of dumping in relation to such article. For purpose of identification, assessment and collection of Anti Dumping Duty on dumped articles and for determination of injury, the Govt. has appointed Additional Secretary to the Govt. of India Ministry of Commerce as designated Authority for purpose of above rules.

It is to be understood that imposition of Anti Dumping Duty is based on Commodity to Commodity, country to country and suppliers in Exporting countries.

Capital Budgeting Techniques

There are a number of capital budgeting techniques available to an analyst. For our purposes, we will only review net present value and internal rate of return.