Compound Options

Compound Options

Compound Options  (Words<500)

A compound option is an option on another option. A split-free or compound option is an option for which an underlying asset is an option.  Compound options have two strike prices and two expiry dates and also two premiums if the option is exercised. Compound Option provides the owner with the right to buy or sell another option. The first option is called overlying and the second option is called underlying. Compound options can be of any combination of Calls & Puts. (more…)
Black-Scholes-Merton Model

Black-Scholes-Merton Model

Black-Scholes-Merton Model

The Black-Scholes-Merton model is a differential equation used to solve for option prices. The Black-Scholes-Merton model won a noble prize in economics. The standard BSM model is only used to price European options as it does not take into account American options because they can be exercised before maturity. (more…)
Effective Duration

Effective Duration

Effective Duration (Words <500)

The duration calculation for bonds that have embedded options is known as effective duration. It helps in evaluating the price sensitivity of hybrid security to change the benchmark yield curve. This measure of duration takes into consideration the fact that expected cash flows will fluctuate as interest rate changes and therefore is a measure of risk. (more…)

risk

Risks Faced by Securities Trading Organizations

Risks Faced by Securities Trading Organizations/Stock Broker firms 

Risk refers to the uncertainty about the effects or implications of an activity, often focusing on negative, undesirable consequences. Risk management can be defined as the action of identifying and assessing potential risk and developing appropriate strategies to mitigate or minimize the risk to the best possible level. As we know, there is no business that does not possess risk. Though it is not possible to mitigate the risk completely, some risks can be identified, and thus they can be minimized. Like all other businesses, Securities Trading Organization and Stockbroker firms face various risks, which, if not identified, can create a hurdle for organizations. The risks either can be from inside the organization e.g. lower efficiency of management or from outside the organization e.g. risk of intense competition or macro-economic changes. (more…)
Basis Point Value

Basis Point Value

Basis Point Value

Basis points represent a unit employed to measure interest rates and other financial percentages. A basis point equals 1/100th of a single percentage point. It can be denoted as 0.01% or 0.0001 in decimal form. (more…)
Simple moving average (SMA)

Simple moving average (SMA)

Simple moving average (SMA)

Moving Average (MA) is a commonly used technical analysis and is a stock indicator. The reason for calculating the moving average of a stock is to help smooth out the price data over a specified period of time by creating a constantly updated average price. There are two types of moving averages. They are simple moving average (SMA) and exponential moving average (EMA). The longer the time period of the moving average the greater is the lag. A 100-day moving average would have a greater lag than a 10 day moving average. (more…)
Chooser Option

Chooser Option

Chooser Option

An option contract that allows the holder to decide the nature of the option i.e., whether the option is a call or put before the expiry date is called a Chooser Option. It is an option contract where the holder may choose at some point during the life of the option whether the option is a call or a put. These options have the same strike price and expiry date regardless of it being a call or a put. (more…)
reference data in trading

Reference Data in Trading

Reference Data in Trading

Trading, here, refers to the transfer of a stock or security from the seller to the buyer. There is a number of risks involved in trading such as Liquidity Risk, Market Risk, Credit Risk, Interest rate risk, and so on. Along with all the risks mentioned, consideration of Operational Risk is also of so much importance. Operational risk refers to uncertainties and hazards faced in performing day-to-day or routine activities. --- Change it  (more…)
Fund of Funds (FOFs)

Fund of Funds (FOFs)

Fund of Funds (FOFs)

Fund of Funds is a type of pooled investment fund that invests in other funds. Its investment strategy is holding a portfolio filled with other funds instead of directly investing in stocks, bonds, and other securities. It is also known as multi-manager investment. They generally invest in other mutual funds or hedge funds. (more…)
Downside Risk

Downside Risk

Downside Risk

Risk is the uncertainty of losing money invested in a security. To measure the risk or volatility of security we use Standard deviation. Standard deviation measures risk based on returns of security that are positive as well as negative. Therefore Standard deviation measures upside risk as well as downside risk.  As there is a risk and return trade-off, we say an investor should be compensated in terms of returns for the risk that he takes. But why would an investor be paid for the upside deviation, an investor should be worried about the downside deviation(risk)? (more…)