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…)

Modern portfolio theory

Modern portfolio theory

Modern Portfolio Theory

Modern portfolio theory is an investment theory. It allows the investor to assemble an asset portfolio that will maximize the return for a particular level of risk. The theory assumes investors will prefer less risky portfolios. Modern portfolio theory (MPT) can also be used to construct a portfolio that will minimize ↓ risk for a given level of expected return. Due to the abundance of market data, market risk has attracted significant interest since the 1950s. (more…)
Structured Investment Vehicle

Structured Investment Vehicle

Structured Investment Vehicle

A structured investment vehicle (SIV) is a type of special-purpose vehicle that purchases long-term bonds and other fixed-income securities and pays for them with short- to medium-term instruments like commercial paper. Citibank founded the first SIV, Alpha Finance Corporation, in 1988, and since then, numerous SIVs have been set up by specialist fund managers and banks.

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Asian options- Benefits and Risks

Asian options- Benefits and Risks

Asian options-Benefits and Risks

An Asian option is an option type where the payoff depends on the average price of the underlying asset over a certain period as opposed to standard options where the payoff depends on the price of the underlying asset at a specific point in time that is maturity. (more…)
Asset Management company

Asset Management company

Asset Management Company

An Asset Management company is a company that pools funds from its clients and invests them in stocks, real estate, bonds, etc. Asset Management companies manage many hedge funds, pension plans as well as high net worth individual portfolios. They are also called money managers or money management firms. (more…)
Investment Policy Statement

Investment Policy Statement

Investment Policy Statement

An investment policy statement (IPS) is a document drafted between a portfolio manager and a client. It outlines the rules and guidelines that the portfolio manager should abide by when considering asset allocation in the client’s portfolio. In other words, an investment policy statement states how a portfolio manager should try to manage the client’s money. A few examples of issues that are addressed in an IPS are asset allocation decisions, client risk tolerance, leverage, liquidity requirements, and foreign security investment restraints. (more…)
Asian Option

Asian Option (words<500)

Asian Option

An Asian option is a type of option in which the average price of the underlying asset over a period of time dictates the payoff of the option. It is different from the American or European option as in these options, the payoff depends on the price of the underlying asset at a particular point in time. They are also known as average value options.

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Implied Volatility

Implied Volatility in Options Trading

Implied Volatility in Options Trading

Implied volatility is a metric that shows the market's view of the probability of changes in a security’s price. It is used by investors to project future demand and supply. They often use it to price options contracts. What does it indicate? Implied volatility indicates the market's forecast of a probable movement in the price of a given security.  It is often employed to price options contracts. Options with high IV have higher premiums and conversely, options with lower IV have lower premiums. It is denoted by σ (sigma). (more…)
Aggressive Investment Strategy

Aggressive Investment Strategy

Aggressive Investment Strategy

A set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio is known as an investment strategy. It guides an investor to take decisions based on goals, risk tolerance, and future needs for capital. Investment strategies can seek rapid growth where the main aim of investors is capital appreciation. Alternatively, it can also follow a low-risk strategy wherein wealth protection is their main aim. (more…)
Asset Allocation Fund

Asset Allocation Fund

Asset Allocation Fund

An investment strategy that balances the risk and rewards of an individual’s portfolio by apportioning it to other asset classes by taking into consideration individual goals, risk appetite, and investment horizon is referred to as asset allocation.  The fund that provides investors with a diversified portfolio of investments across various asset classes is called an asset allocation fund. The three main asset classes are equity, fixed income, and cash equivalents. (more…)