Investment Valuation in India

Hedging through Futures / Forward contracts With the business environment getting increasing complex, profitability often depends on factors that are beyond the control of an organisation like commodity prices, stock prices, interest rates, exchanges rates, etc. As a result, modern business has been subjected to more complexity, uncertainty and risk. Futures markets often permit managers to reduce or control risks through hedging strategies. In other words, futures markets can provide the managers certain tools to reduce and control their risks.  Simply put Hedging means reducing risk. It is the process of investment into securities (usually a derivative) with the objective of reducing or controlling risk. Examples of Hedging: E.g. 1. Firm A is a manufacturer of automobile cars in India and they import auto parts from USA. Firm views that parts may increase in future and thereby increase the cost of cars and this may significantly affect the profitability of the...

A Aggregate Risk Total amount of exposure a bank has with a customer for both spot and forward contracts. American Option An option which may be exercised at any valid business date through out the life of the option. Appreciation Describes a currency strengthening in response to market demand rather than by official action. Arbitrage A risk-free type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets. Around Used in quoting forward "premium / discount". Ask Price Ask is the lowest price acceptable to the buyer. Asset In the context of foreign exchange is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal. At Best An instruction given to a dealer to buy or sell at the best rate that is currently avail...

Futures Future contracts are agreements between two parties to buy or sell an asset (underlying) at a given point of time in the future. They are standardized contract i.e. an agreement, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price (the futures price) determined by the parties involved. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange. Assume that no cash settlement was done between the two parties. A futures contract gives the holder the obligation to make or take delivery under the terms of the contract. Also both parties of a futures contract must fulfill the contract on the settlement date – it is legally binding. The seller delivers the underlying asset to the buyer, or, if i...

Please find the link below to download the ebook on Futures and options trading strategies. Futures & Options Trading Strategies Please note that ebooks in the links may have specific copyrights and full credits are given to the authors and publishers. These are freely circulated for educational purposes only.

"India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis. Indian banks have very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed financial institutions. The equity and the forex markets provide the channels through which the global crisis can spread to the Indian system. The other three segments of the financial markets - money, debt and credit markets could be impacted indirectly. Risk aversion, deleveraging and frozen money markets have not only raised the cost of funds for Indian corporates but also its availability in the international markets. This will mean additional demand for domestic bank credit in the near term. Reduced investor interest in emerging economies could impact capital flows significantly. The impending recession will also impact on Indian exports. Even EMEs which do not have direct or significant exposure to stressed financial instrumen...

What is a Futures Contract? Futures contract means a legally binding agreement to buy or sell the underlying security on a future date . Future contracts are the organised/standardised contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash . Cash settlement entails paying/receiving the difference between the price at which the contract was entered and the price of the underlying asset at the time of expiry of the contract. What is an Option contract? Option contract is a type of derivatives contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period . The buyer/holder of the option, purchases the right from the seller/wri...