Home » Archive

Options and Derivatives Fundamentals and Trading

Options and Derivatives Fundamentals and Trading, Stock Investment Strategy, Stock Perfomance Analysis and Strategy »

There are 3 aspects of financial management
Investment decisions

ð  In which asset to invest?
Financing (funding) decisions
ð  How to fund the purchase of these assets?
Dividend Policy decisions
ð  How to retain and/or distribute profits?
This chapter focuses on the financing decision
Funding Decisions
Financial objective of a corporation is to maximise return subject to an acceptable level of risk
Returns generated from net cash flows of the business
Risk is the variability of these cash flows, caused by either
–      1.Business Risk
–      2.Financial Risk

Business Risk
–      The level of business risk depends upon the type of operations of …

Options and Derivatives Fundamentals and Trading »

The price, or premium, paid for an option is affected by a range of variables. The relationship between the market price of the asset and the exercise price is a key variable. The option is more valuable the closer the two prices are. The value also increases with the time to the expiration of the contract. Purely on the basis of probability, there is a greater chance that the option may be exercised if the option has a long life. Similarly, the more volatile the price of the underlying asset, …

Options and Derivatives Fundamentals and Trading »

The holder of an option has the right to buy or sell a specified commodity, at a predetermined price, on a specified date (European option) or throughout a specified period (American Option). A key word in the definition is ‘right’. The buyer, or holder, of the option has no obligation to exercise the option. The element of choice, or option, overcomes one of the disadvantages of hedging in the futures market wherein, if a ‘profit’ is made in the physical market, a roughly offsetting loss will be made on closing …