Investing Strategy You Should Learn
You don't have to have a strategy in order to invest. But with the right strategy, you can make investing a whole lot easier -- and more profitable.
The problem is that everywhere you turn, you see someone telling you that their strategy is the best one -- and in some cases, the only one that will make you successful. With so many different ways to profit from stocks, how do you decide which one is right for you?
Perhaps the most amazing thing about investing in stocks is how many different ways there are to make money. Let's take a brief look at some of the popular strategies many investors use:
Large-cap investors seek the stability of established companies with proven track records. Stocks like Wal-Mart (NYSE: WMT) and Microsoft (Nasdaq: MSFT) have their fastest growth phase behind them now, but shareholders don't have to worry about them going belly-up anytime soon.
Value investors look for stocks that trade at attractive prices. Like a Christmas shopper waking up at 4 a.m. on the day after Thanksgiving, value investors hope to snag bargains by buying out-of-favor stocks. While some beaten-down companies never recover, others, such as Fairfax Financial (NYSE: FFH), provide stellar returns when they come back.
Growth investors focus more on companies with strong prospects for the future. Although they prefer not to pay too much, growth investors are willing to pay up for the most promising businesses. Google (Nasdaq: GOOG) is a good example, with more than 75% annual earnings growth in the past five years.
Dividend investors value stocks that pay them back with generous income streams. Dividend-paying stocks like Duke Energy (NYSE: DUK), with its 4.8% yield, won't always show big price jumps. But over time, dividend investors hope to outpace their counterparts.
Small-cap investors look beyond the security of blue-chip stocks to find undiscovered companies, such as specialty chemical-maker Innophos (Nasdaq: IPHS), that have the potential to become the household names of tomorrow. While this strategy is somewhat riskier, small-cap investors expect the profits from their successes to outweigh the losses from failures.
International investors recognize that great companies exist throughout the world. You might not run into companies like Cemex (NYSE: CX) very much on the financial pages, but their relative obscurity can bring greater rewards as well.
You'll notice that as you read about these strategies, you can almost picture the typical investor who uses them. Stereotypical dividend investors are widows and orphans who count on quarterly dividend checks to pay bills, while international investors might bring to mind a jet-setting globetrotter with a faint British accent.
Tuesday, May 4, 2010
Saturday, April 24, 2010
Resource depletion
Is an economic term referring to the exhaustion of raw materials within a region. Resources are commonly divided between renewable resources and non-renewable resources. Use of either of these forms of resources beyond their rate of replacement is considered to be resource depletion.
Resource depletion is most commonly used in reference to the farming, fishing, mining, and fossil fuels.
Resource depletion is most commonly used in reference to the farming, fishing, mining, and fossil fuels.
Climate change
Is a change in the statistical distribution of weather over periods of time that range from decades to millions of years. It can be a change in the average weather or a change in the distribution of weather events around an average (for example, greater or fewer extreme weather events). Climate change may be limited to a specific region, or may occur across the whole Earth.
In recent usage, especially in the context of environmental policy, climate change usually refers to changes in modern climate. It may be qualified as anthropogenic climate change, more generally known as "global warming" or "anthropogenic global warming" (AGW).
For information on temperature measurements over various periods, and the data sources available, see temperature record. For attribution of climate change over the past century, see attribution of recent climate change.
In recent usage, especially in the context of environmental policy, climate change usually refers to changes in modern climate. It may be qualified as anthropogenic climate change, more generally known as "global warming" or "anthropogenic global warming" (AGW).
For information on temperature measurements over various periods, and the data sources available, see temperature record. For attribution of climate change over the past century, see attribution of recent climate change.
Government debt
Also known as public debt or national debt - is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government. By contrast, annual government deficit refers to the difference between government receipts and spending in a single year.
A corporate bond
Is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)
Consumer debt
Is consumer credit which is outstanding. In macroeconomic terms, it is debt which is used to fund consumption rather than investment.
Tax policy
Is the government's approach to taxation, both from the practical and normative side of the question.
Wednesday, April 21, 2010
The Index Options
When you invest in only one or two stocks, you are taking the chance that they might not go up when the market does. Most people cannot afford to buy variety of stocks wide enough to fluctuate with the entire market. But now there is a relatively new investment. They are designed to let investors profit from the rise or fall of the total market.
Index option s are like stocks options. they give you the right to buy or sell securities at a predetermined price anytime before the option expires. an option to buy a call , the right to sell is a put.
When you buy such an option from a broker, you merely place a bet that some broad index of stocks will rise or fall. usually within the next 90 days. an index option usually cost only a few hundred dollars, but you could reap the same profits as if you had invested.
That is because a small move up or down in the index can cause a much bigger change in the value of the options trading. and the chills. Because if you wager wrongly you lose everything you had invested.
Index option s are like stocks options. they give you the right to buy or sell securities at a predetermined price anytime before the option expires. an option to buy a call , the right to sell is a put.
When you buy such an option from a broker, you merely place a bet that some broad index of stocks will rise or fall. usually within the next 90 days. an index option usually cost only a few hundred dollars, but you could reap the same profits as if you had invested.
That is because a small move up or down in the index can cause a much bigger change in the value of the options trading. and the chills. Because if you wager wrongly you lose everything you had invested.
Wednesday, April 14, 2010
Secret of Savings?
What is the secret of saving more?
Simply this:
Pay yourself first.
When you collect your paycheck, do not rush out and spend it all. Lay away a fix amount every week or every month for your own savings or investments. That is paying yourself first - and it is smart.
Simply this:
Pay yourself first.
When you collect your paycheck, do not rush out and spend it all. Lay away a fix amount every week or every month for your own savings or investments. That is paying yourself first - and it is smart.
Where to Put Your Savings?
Where is the best place to put your savings?
This is no time to be taking needless chances with your money. But it is possible to put your cash into institutions or instruments offering returns that are safe, big and guaranteed.
Among the many safe and rewarding places are money-market funds, bank money-market deposit accounts, bank certificates of deposits,. Bonds hold out tempting yields, too, but they are riskier because their face value - the price that you buy or sell them for rises and falls along with the gyrations of interest rates.
Determining where to put your savings, you have to weigh and balance off three traditional concerns.
*Yield - how much am I earning on my money?
*Liquidity - how quickly can I withdraw my money if I need it?
*Safety - am i sure to get back every penny I put in?
Wednesday, April 7, 2010
Financial Futures
Even for the experts, the commodities futures market has always been gamble. But now there are futures contracts for people who don't know beans about soybeans. The so-called in this case are good old stocks and bonds, and they are traded in the fast and furious financial futures market.
The financial futures include contracts in Treasury bills, bonds and notes, bank certificates of deposit and a variety of other interest-bearing securities. when you buy one of this contracts, you are betting that, for example, interest rates will go down in the future and thus the prices of the bills, bonds or notes covered by the contract will go up.
You can buy financial futures through commodity firms or through brokers who specialized in commodities are large stock brokerage houses. But if you are a would-be buccaneer in the financial futures market, take a tip from the experts and do your trading on paper for a while, until you get your sea legs.
If and when you are ready to start wheeling and dealing for real, then pick active markets, such as those trading in Treasury bill and Treasury bond futures. the more trading that is going on, the more likely you are to to find a buyer or a seller for your contract at the price you want. And don't forget to place stop orders with your broker. They instruct him to close out your position when the price reaches a certain level and they can help you limit any losses.
But any way you can play it, futures is a highly leveraged business. So this kind of investment - while increasingly popular - is not for those who aren't prepared to take substantial risk.
The financial futures include contracts in Treasury bills, bonds and notes, bank certificates of deposit and a variety of other interest-bearing securities. when you buy one of this contracts, you are betting that, for example, interest rates will go down in the future and thus the prices of the bills, bonds or notes covered by the contract will go up.
You can buy financial futures through commodity firms or through brokers who specialized in commodities are large stock brokerage houses. But if you are a would-be buccaneer in the financial futures market, take a tip from the experts and do your trading on paper for a while, until you get your sea legs.
If and when you are ready to start wheeling and dealing for real, then pick active markets, such as those trading in Treasury bill and Treasury bond futures. the more trading that is going on, the more likely you are to to find a buyer or a seller for your contract at the price you want. And don't forget to place stop orders with your broker. They instruct him to close out your position when the price reaches a certain level and they can help you limit any losses.
But any way you can play it, futures is a highly leveraged business. So this kind of investment - while increasingly popular - is not for those who aren't prepared to take substantial risk.
Friday, April 2, 2010
Pricing of Futures
"
When the deliverable asset exists in plentiful supply, or may be freely created, then the price of a futures contract is determined via arbitrage arguments."
This is typical for stock index futures, treasury bond futures, and futures on physical commodities when they are in supply (e.g. corn after the harvest). However, when the deliverable commodity is not in plentiful supply or when it does not yet exist.
For example on wheat before the harvest or on Eurodollar Futures or Federal funds rate futures (in which the supposed underlying instrument is to be created upon the delivery date).
The futures price cannot be fixed by arbitrage. In this scenario there is only one force setting the price, which is simple supply and demand for the asset in the future, as expressed by supply and demand for the futures contract.
"
When the deliverable asset exists in plentiful supply, or may be freely created, then the price of a futures contract is determined via arbitrage arguments."
This is typical for stock index futures, treasury bond futures, and futures on physical commodities when they are in supply (e.g. corn after the harvest). However, when the deliverable commodity is not in plentiful supply or when it does not yet exist.
For example on wheat before the harvest or on Eurodollar Futures or Federal funds rate futures (in which the supposed underlying instrument is to be created upon the delivery date).
The futures price cannot be fixed by arbitrage. In this scenario there is only one force setting the price, which is simple supply and demand for the asset in the future, as expressed by supply and demand for the futures contract.
Currency Swap
"This type of swap is also known as a cross-currency interest rate swap, or cross-currency swap.
"
Currency swap is a foreign-exchange agreement between two parties to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.
There are three different ways in which currency swaps can exchange loans:
The most simple currency swap structure is to exchange the principal only with the counterparty, at a rate agreed now, at some specified point in the future. Such an agreement performs a function equivalent to a forward contract or futures.
The cost of finding a counterparty (either directly or through an intermediary), and drawing up an agreement with them, makes swaps more expensive than alternative derivatives (and thus rarely used) as a method to fix shorter term forward exchange rates. However for the longer term future, commonly up to 10 years, where spreads are wider for alternative derivatives, principal-only currency swaps are often used as a cost-effective way to fix forward rates. This type of currency swap is also known as an FX-swap.
Another currency swap structure is to combine the exchange of loan principal, as above, with an interest rate swap. In such a swap, interest cash flows are not netted before they are paid to the counterparty (as they would be in a vanilla interest rate swap) because they are denominated in different currencies. As each party effectively borrows on the other's behalf, this type of swap is also known as a back-to-back loan.
Last here, but certainly not least important, is to swap only interest payment cash flows on loans of the same size and term. Again, as this is a currency swap, the exchanged cash flows are in different denominations and so are not netted. An example of such a swap is the exchange of fixed-rate US Dollar interest payments for floating-rate interest payments in Euro.
"This type of swap is also known as a cross-currency interest rate swap, or cross-currency swap.
"
Currency swap is a foreign-exchange agreement between two parties to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.
There are three different ways in which currency swaps can exchange loans:
The most simple currency swap structure is to exchange the principal only with the counterparty, at a rate agreed now, at some specified point in the future. Such an agreement performs a function equivalent to a forward contract or futures.
The cost of finding a counterparty (either directly or through an intermediary), and drawing up an agreement with them, makes swaps more expensive than alternative derivatives (and thus rarely used) as a method to fix shorter term forward exchange rates. However for the longer term future, commonly up to 10 years, where spreads are wider for alternative derivatives, principal-only currency swaps are often used as a cost-effective way to fix forward rates. This type of currency swap is also known as an FX-swap.
Another currency swap structure is to combine the exchange of loan principal, as above, with an interest rate swap. In such a swap, interest cash flows are not netted before they are paid to the counterparty (as they would be in a vanilla interest rate swap) because they are denominated in different currencies. As each party effectively borrows on the other's behalf, this type of swap is also known as a back-to-back loan.
Last here, but certainly not least important, is to swap only interest payment cash flows on loans of the same size and term. Again, as this is a currency swap, the exchanged cash flows are in different denominations and so are not netted. An example of such a swap is the exchange of fixed-rate US Dollar interest payments for floating-rate interest payments in Euro.
Thursday, April 1, 2010
Warrants Option
Is a security that entitles the holder to buy stock of the issuing company at a specified price, which is usually higher than the stock price at time of issue.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.
Warrants are actively traded in some financial markets such as Deutsche Börse and Hong Kong. In Hong Kong Stock Exchange, warrants accounted for 11.7% of the turnover in the first quarter of 2009, just second to the callable bull/bear contract.
Is a security that entitles the holder to buy stock of the issuing company at a specified price, which is usually higher than the stock price at time of issue.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.
Warrants are actively traded in some financial markets such as Deutsche Börse and Hong Kong. In Hong Kong Stock Exchange, warrants accounted for 11.7% of the turnover in the first quarter of 2009, just second to the callable bull/bear contract.
Put Option
A put option (usually just called a "put") is a financial contract between two parties, the writer (seller) and the buyer of the option. The buyer acquires a short position by purchasing the right to sell the underlying instrument to the seller of the option for specified price (the strike price) during a specified period of time.
If the option buyer exercises their right, the seller is obligated to buy the underlying instrument from them at the agreed upon strike price, regardless of the current market price. In exchange for having this option, the buyer pays the seller or option writer a fee (the option premium).
By providing a guaranteed buyer and price for an underlying instrument (for a specified span of time), put options offer insurance against excessive loss. Similarly, the seller of put options profits by selling options that do not become exercised. Such is the case when the ongoing market value of the underlying instrument makes the option unnecessary; i.e. the market value of the instrument remains above the strike price during the option contract period.
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A put option (usually just called a "put") is a financial contract between two parties, the writer (seller) and the buyer of the option. The buyer acquires a short position by purchasing the right to sell the underlying instrument to the seller of the option for specified price (the strike price) during a specified period of time.
If the option buyer exercises their right, the seller is obligated to buy the underlying instrument from them at the agreed upon strike price, regardless of the current market price. In exchange for having this option, the buyer pays the seller or option writer a fee (the option premium).
By providing a guaranteed buyer and price for an underlying instrument (for a specified span of time), put options offer insurance against excessive loss. Similarly, the seller of put options profits by selling options that do not become exercised. Such is the case when the ongoing market value of the underlying instrument makes the option unnecessary; i.e. the market value of the instrument remains above the strike price during the option contract period.
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Option Styles
The style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options - as well as others where the payoff is calculated similarly - are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging.
Tradesight is the best place on the web to learn how to trade any of them.
The style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options - as well as others where the payoff is calculated similarly - are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging.
Tradesight is the best place on the web to learn how to trade any of them.
Fixed Income
Refers to any type of investment that yields a regular (or fixed) return.
Governments issue government bonds in their own currency and sovereign bonds in foreign currencies. Local governments issue municipal bonds to finance themselves. Debt issued by government-backed agencies is called an agency bond.
Companies can issue a corporate bond or get money from a bank through a corporate loan ("preferred stock" is also sometimes considered to be fixed income).
"iIf you lend money to a borrower and the borrower has to pay interest once a month, you have been issued a fixed-income security."
Securitized bank lending (e.g. credit card debt, car loans or mortgages) can be structured into other types of fixed income products such as ABS - asset backed securities which can be traded on exchanges just like corporate and government bonds.
Refers to any type of investment that yields a regular (or fixed) return.
Governments issue government bonds in their own currency and sovereign bonds in foreign currencies. Local governments issue municipal bonds to finance themselves. Debt issued by government-backed agencies is called an agency bond.
Companies can issue a corporate bond or get money from a bank through a corporate loan ("preferred stock" is also sometimes considered to be fixed income).
"iIf you lend money to a borrower and the borrower has to pay interest once a month, you have been issued a fixed-income security."
Securitized bank lending (e.g. credit card debt, car loans or mortgages) can be structured into other types of fixed income products such as ABS - asset backed securities which can be traded on exchanges just like corporate and government bonds.
Employee Stock Option
Is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option (such as vesting and limited transferability) attempt to align the holder's interest with those of the business' shareholders. If the company's stock rises, holders of options generally experience a direct financial benefit. This gives employees an incentive to behave in ways that will boost the company's stock price.
"Employee stock options are mostly offered to management as part of their executive compensation package. "
They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation. Alternatively, employee-type stock options can be offered to non-employees: suppliers, consultants, lawyers and promoters for services rendered. Employee stock options are similar to warrants, which are call options issued by a company with respect to its own stock.
Is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option (such as vesting and limited transferability) attempt to align the holder's interest with those of the business' shareholders. If the company's stock rises, holders of options generally experience a direct financial benefit. This gives employees an incentive to behave in ways that will boost the company's stock price.
"Employee stock options are mostly offered to management as part of their executive compensation package. "
They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation. Alternatively, employee-type stock options can be offered to non-employees: suppliers, consultants, lawyers and promoters for services rendered. Employee stock options are similar to warrants, which are call options issued by a company with respect to its own stock.
Call Option
"Call options are most profitable for the buyer when the underlying instrument is moving up, making the price of the underlying instrument closer to the strike price. "
Is a financial contract between two parties, the buyer and the seller of this type of option. It is the option to buy shares of stock at a specified time in the future. Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.
The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price
The call buyer believes it's likely the price of the underlying asset will rise by the exercise date. The risk is limited to the premium. The profit for the buyer can be very large, and is limited by how high underlying's spot rises. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money".
"Call options are most profitable for the buyer when the underlying instrument is moving up, making the price of the underlying instrument closer to the strike price. "
Is a financial contract between two parties, the buyer and the seller of this type of option. It is the option to buy shares of stock at a specified time in the future. Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.
The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price
The call buyer believes it's likely the price of the underlying asset will rise by the exercise date. The risk is limited to the premium. The profit for the buyer can be very large, and is limited by how high underlying's spot rises. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money".
Bond Option
Is an OTC-traded financial instrument that facilitates an option to buy or sell a particular bond at a certain date for a particular price. It is similar to a stock option with the difference that the underlying asset is a bond. Bond options can be valued using the Black model or with a lattice based short rate model such as Black-Derman-Toy, Ho Lee or Hull–White.
Is an OTC-traded financial instrument that facilitates an option to buy or sell a particular bond at a certain date for a particular price. It is similar to a stock option with the difference that the underlying asset is a bond. Bond options can be valued using the Black model or with a lattice based short rate model such as Black-Derman-Toy, Ho Lee or Hull–White.
Foreign Exchange Option
(commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.
"The global market for exchange-traded currency options was notionally valued by the Bank for International Settlements at $158,300 billion in 2005.
"
The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Most of the FX option volume is traded OTC and is lightly regulated, but a fraction is traded on exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts.
Foreign Exchange Derivative
Is a financial derivative where the underlying is a particular currency and/or its exchange rate. These instruments are used either for currency speculation and arbitrage or for hedging foreign exchange risk. For detail see:
* Foreign exchange option
* Forex swap
* Currency future
* Currency swap
* Foreign exchange hedge
* Binary option
Real Options Analysis
ROA (not to be confused with return on assets) applies put option and call option valuation techniques to capital budgeting decisions. A real option itself, is the right — but not the obligation — to undertake some business decision; typically the option to make, abandon, expand, or shrink a capital investment.
"The opportunity to invest in the expansion of a firm's factory, or alternatively to sell the factory, is a real option."
ROA, as a discipline, extends from its application in Corporate Finance, to decision making under uncertainty in general, adapting the mathematical techniques developed for financial options to "real-life" decisions. For example, R&D managers can use Real Options Analysis to help them determine where to best invest their money in research; a non business example might be the decision to join the work force, or rather, to forgo several years of income and to attend graduate school. Thus, in that it forces decision makers to be explicit about the assumptions underlying their projections, ROA is increasingly employed as a tool in business strategy formulation.
Real Estate Derivatives
The market for US real estate derivatives, while in a nascent stage, made significant progress in 2007[citation needed]. There are now a diverse set of indices and methodologies being used to create and structure real estate derivatives, for both residential and commercial real estate.
Power reverse dual currency note
A dual currency note (DC) pays coupons in the investors' domestic currency with the notional in the issuer’s domestic currency. A reverse dual currency note (RDC) is a note which pays a foreign interest rate in the investor's domestic currency. A power reverse dual currency note (PRDC Note) or power reverse dual currency bond (PRDC Bond) is an exotic financial structured product where an investor is seeking a better return and a borrower a lower rate by taking advantage of the interest rate differential between two countries.
The power component of the name denotes higher initial coupons and the fact that coupons rises as the domestic/foreign exchange rate depreciates. The power feature comes with a higher risk for the investor. Cash flows may have a digital cap feature where the rate gets locked once it reaches a certain threshold. Other add-on features are barriers such as knockouts and cancel provision for the issuer.
Interest Rate Derivative
"The interest rate derivatives market is the largest derivatives market in the world."
An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest rate.
The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. This compares with 75% for foreign exchange options, 25% for commodity options and 10% for stock options.
Inflation Derivative
(or inflation-indexed derivatives) refers to an over-the-counter and exchange-traded derivative that is used to transfer inflation risk from one counterparty to another. Typically, real rate swaps also come under this bracket, such as asset swaps of inflation-indexed bonds (government-issued inflation-indexed bonds, such as the Treasury Inflation Protected Securities, UK inflation-linked gilt-edged securities (ILGs), French OATeis, Italian BTPeis, German Bundeis and Japanese JGBis are prominent examples). Inflation swaps are the linear form of these derivatives. They can take a similar form to fixed versus floating interest rate swaps (which are the derivative form for fixed rate bonds), but use a real rate coupon versus floating, but also pay a redemption pickup at maturity (i.e., the derivative form of inflation indexed bonds).
Fund derivative
"Fund derivatives have had explosive growth over the past 10 years but are still a major growth area. New structures are constantly being developed to suit market and client opportunities."
A fund derivative is a financial structured product related to a fund, normally using the underlying fund to determine the payoff. This may be a private equity fund, mutual fund or hedge fund. Purchasers might want exposure to a fund to get exposure to a star fund manager or management style as well as the asset class.
Typical fund derivatives might be a call option on a fund, a CPPI on a fund, or a leveraged note on a fund. More complicated structures might be a guarantee sold to a fund that ensures it cannot fall in value by more than a certain amount. Maturities might range from three to ten years. The big players in this field are BNP Paribas, Societe Generale, Barclays, Deutsche Bank, Citigroup, Credit Suisse, etc.
Equity-Linked Note
"equity derivatives - is a class of derivatives which value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively traded.
"
An Equity-Linked Note (ELN) is a debt instrument, usually a bond, that differs from a standard fixed-income security in that the final payout is based on the return of the underlying equity, which can be a single stock, basket of stocks, or an equity index. A typical ELN is principal-protected, i.e. the investor is guaranteed to receive 100% of the original amount invested at maturity but receives no interest.
Usually, the final payout is the amount invested, times the gain in the underlying stock or index times a note-specific participation rate, which can be more or less than 100%. For example, if the underlying equity gains 50% during the investment period and the participation rate is 80%, the investor receives 1.40 dollars for each dollar invested. If the equity remains unchanged or declines, the investor still receives one dollar per dollar invested (as long as the issuer does not default). Generally, the participation rate is better in longer maturity notes, since the total amount of interest given up by the investor is higher.
Equity-linked note can be thought of as a combination of a zero-coupon bond and an equity option. Indeed, the issuer of the note usually covers the equity payout liability by purchasing an identical option. In some equity-linked notes, the payout structure is more complicated, resembling an exotic option. Equity-linked notes are one type of Structured product .
Most equity-linked notes are not actively traded on the secondary market and are designed to be kept to maturity. However, the issuer or arranger of the notes may offer to buy back the notes. Unlike the maturity payout, the buy-back price before maturity may be below the amount invested in first place.
Credit Derivative
"Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity."
A 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 counterparties 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.
The parties will select which credit events apply to a transaction and these usually consist of one or more of the following:
a.) Bankruptcy (the risk that the reference entity will become bankrupt)
b.) Failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan)
c.) Obligation default (the risk that the reference entity will default on any of its obligations)
d.) Obligation acceleration (the risk that an obligation of the reference entity will be accelerated e.g. a bond will be declared immediately due and payable following a default)
e.) Repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity's obligations)
f.) Restructuring (the risk that obligations of the reference entity will be restructured).
Where credit protection is bought and sold between bilateral counterparties, this is known as an unfunded credit derivative. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.
This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic CDOs; credit linked notes; single tranche CDOs, to name a few. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.
"Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity."
A 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 counterparties 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.
The parties will select which credit events apply to a transaction and these usually consist of one or more of the following:
a.) Bankruptcy (the risk that the reference entity will become bankrupt)
b.) Failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan)
c.) Obligation default (the risk that the reference entity will default on any of its obligations)
d.) Obligation acceleration (the risk that an obligation of the reference entity will be accelerated e.g. a bond will be declared immediately due and payable following a default)
e.) Repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity's obligations)
f.) Restructuring (the risk that obligations of the reference entity will be restructured).
Where credit protection is bought and sold between bilateral counterparties, this is known as an unfunded credit derivative. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.
This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic CDOs; credit linked notes; single tranche CDOs, to name a few. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.
Constant proportion portfolio insurance
"These rules are predefined and agreed once and for all during the life of the product.
"
Constant proportion portfolio insurance (CPPI) is a capital guarantee derivative security that embeds a dynamic trading strategy in order to provide participation to the performance of a certain underlying. See also dynamic asset allocation. The intuition behind CPPI was adopted from the interest rate universe.
In order to be able to guarantee the capital invested, the option writer (option seller) needs to buy a zero-coupon bond and use the proceeds to get the exposure he wants. While in the case of a bond+call, the client would only get the remaining proceeds (or initial cushion) invested in an option, bought once and for all, the CPPI provides leverage through a multiplier. This multiplier is set to 100 divided by the crash size (as a percentage) that is being insured against.
For example, say an investor has a $100 portfolio, a floor of $90 (price of the bond to guarantee his $100 at maturity) and a multiplier of 5 (ensuring protection against a drop of at most 20% before rebalancing the portfolio). Then on day 1, the writer will allocate (5 * ($100 – $90)) = $50 to the risky asset and the remaining $50 to the riskless asset (the bond). The exposure will be revised as the portfolio value changes, i.e. when the risky asset performs and with leverage multiplies by 5 the performance (or vice versa). Same with the bond.
Credit-linked note
"The Italian dairy products giant, Parmalat, notoriously dressed up its books by creating a credit-linked note for itself, betting on its own credit worthiness."
A credit linked note (CLN) is a form of funded credit derivative. It is structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. The issuer is not obligated to repay the debt if a specified event occurs. This eliminates a third-party insurance provider.
It is issued by a special purpose company or trust, designed to offer investors par value at maturity unless the referenced entity defaults. In the case of default, the investors receive a recovery rate.
The trust will also have entered into a default swap with a dealer. In case of default, the trust will pay the dealer par minus the recovery rate, in exchange for an annual fee which is passed on to the investors in the form of a higher yield on their note.
The purpose of the arrangement is to pass the risk of specific default onto investors willing to bear that risk in return for the higher yield it makes available. The CLNs themselves are typically backed by very highly-rated collateral, such as U.S. Treasury securities.
In Hong Kong and Singapore, credit-linked notes have been marketed as "minibonds" and sold to individual investors. After Lehman Brothers, the major issuer of minibond in Hong Kong and Singapore, filed for bankruptcy in September 2008, many retail investors of minibonds claim that banks and brokers mis-sold minibonds as low-risk products. Many banks accepted minibonds as collateral for loans and credit facilities.
Contract for difference
"For example, when applied to equities, such a contract is an equity derivative that allows investors to speculate on share price movements, without the need for ownership of the underlying shares."
A contract for difference (or CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead to the seller.) In effect CFDs are financial derivatives that allow investors to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.
CFDs are currently available in the United Kingdom, The Netherlands, Poland, Portugal, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, France, Ireland, Japan and Spain. Some other securities markets, such as Hong Kong, have plans to issue CFDs in the near future. CFDs are not permitted in the United States, due to restrictions by the U.S. Securities and Exchange Commission on over-the-counter (OTC) financial instruments.
Derivatives Market
"In Finance,
derivatives is the collective name used for a broad class of financial instruments that derive their value from other financial instruments (known as the underlying), events or conditions. Essentially, a derivative is a contract between two parties where the value of the contract is linked to the price of another financial instrument or by a specified event or condition."
Are the financial markets for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.
Derivatives are usually broadly categorised by the:
1. Relationship between the underlying and the derivative (e.g. forward, option, swap)
2. Type of underlying (e.g. equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives)
3. Market in which they trade (e.g., exchange traded or over-the-counter)
4. Pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality)
Another arbitrary distinction is between:
1. Vanilla derivatives (simple and more common) and
2. Exotic derivatives (more complicated and specialized)
There is no definitive rule for distinguishing one from the other, so the distinction is mostly a matter of custom.
Derivatives are used by investors to:
1. Provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
2. Speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level)
3. Hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
4. Obtain exposure to underlying where it is not possible to trade in the underlying (e.g. weather derivatives)
5. Create optionality where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)
"In Finance,
derivatives is the collective name used for a broad class of financial instruments that derive their value from other financial instruments (known as the underlying), events or conditions. Essentially, a derivative is a contract between two parties where the value of the contract is linked to the price of another financial instrument or by a specified event or condition."
Are the financial markets for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.
Derivatives are usually broadly categorised by the:
1. Relationship between the underlying and the derivative (e.g. forward, option, swap)
2. Type of underlying (e.g. equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives)
3. Market in which they trade (e.g., exchange traded or over-the-counter)
4. Pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality)
Another arbitrary distinction is between:
1. Vanilla derivatives (simple and more common) and
2. Exotic derivatives (more complicated and specialized)
There is no definitive rule for distinguishing one from the other, so the distinction is mostly a matter of custom.
Derivatives are used by investors to:
1. Provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
2. Speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level)
3. Hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
4. Obtain exposure to underlying where it is not possible to trade in the underlying (e.g. weather derivatives)
5. Create optionality where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)
Tuesday, March 30, 2010
The National Diet
" The National Diet, or Japan’s legislature, is considered “the highest organ of state power” and “the sole law-making organ of the State” based on the Constitution. "
Japan’s government is divided into three separate branches:
JUDICIAL
EXECUTIVE
LEGISLATIVE
The Diet is made up of two houses:
The House of Representatives and the House of Councillors, that are primarily responsible for making laws, approving the annual national budget, initiating amendments to the Constitution, conducting investigations on the government, impeaching judges convicted of criminal or unethical conduct, and formally selecting the Prime Minister of Japan.
Though both houses play a seemingly equal important role within the legislative branch of the government, the lower house, or the House of Representatives is considered more powerful.
The lower house has the authority to override this decision by a two-thirds vote. The House of Councillors cannot block legislation when certain issues arise such as treaty amendments and budget concerns.
The lower house may also dissolve the government if it passes a motion of no-confidence introduced by 50 of its members. Despite the added power, the lower house is still subject to dissolution by the Prime Minister, who is currently Junichiro Koizumi, through a passage of no-confidence, as was recently seen in Canada late last year.
The Diet is required under the Constitution to meet at least once a year. During these sessions, the Emperor, who is recognized as the symbol of the Japanese nation and the unity of its people, outlines the government’s plans for the coming year. The National Diet Building is located in Japan’s capital, Tokyo.
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Profit from Canadian Stocks
CANADA
A strong economy.
Sound fiscal policy.
Political stability.
A strong banking system.
Great profit potential.
One of the information I got is about the condition of Canada great effort to achieved the strongest economy among other nation, and still expected to grow faster over the next two years? Others say that Canada is almost have the strongest banking system too in the world? or that the canadian dollar is seeing one of the world's strongest currenies. The fact that Canada is the number one supplier of foreign oil in the U.S.?
Canadian energy stocks have staged a big comeback as oil prices rebounded from their lows. With gold bullion over $1,100 an ounce, and Canada has some of the best in the world including giants such as Barrick Gold, Goldcorp, and Kinross.
But Canada isn't just about energy and gold. The Canadian market offers a wide-range of low-risk blue-chip utility, pipeline, telecommunications, financial, and transportation stocks.
Only a few American investors know about the Canadian success story and how to profit from it. now, according to the report, More and more Americans are investing money in Canada.
The reason is because of Huge energy reserves and the vast Alberta Oil Sands make Canada second only to Saudi Arabia in terms of proved and probable reserves. And all that oil is right on America’s doorstep, not half a world away.
CANADA
A strong economy.
Sound fiscal policy.
Political stability.
A strong banking system.
Great profit potential.
One of the information I got is about the condition of Canada great effort to achieved the strongest economy among other nation, and still expected to grow faster over the next two years? Others say that Canada is almost have the strongest banking system too in the world? or that the canadian dollar is seeing one of the world's strongest currenies. The fact that Canada is the number one supplier of foreign oil in the U.S.?
Canadian energy stocks have staged a big comeback as oil prices rebounded from their lows. With gold bullion over $1,100 an ounce, and Canada has some of the best in the world including giants such as Barrick Gold, Goldcorp, and Kinross.
But Canada isn't just about energy and gold. The Canadian market offers a wide-range of low-risk blue-chip utility, pipeline, telecommunications, financial, and transportation stocks.
Only a few American investors know about the Canadian success story and how to profit from it. now, according to the report, More and more Americans are investing money in Canada.
The reason is because of Huge energy reserves and the vast Alberta Oil Sands make Canada second only to Saudi Arabia in terms of proved and probable reserves. And all that oil is right on America’s doorstep, not half a world away.
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