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…)

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…)
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…)
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…)
Hedge Ratio

Hedge Ratio

Hedge Ratio

The ratio of exposure to a hedging instrument to the value of the hedged asset is called a hedge ratio. It compares the value of a position protected through the use of a hedge with the size of the entire position itself. It is the comparative value of the open position hedges with the position’s aggregate size itself. A ratio of 1 or 100 indicates that the position is fully hedge and a ratio of 0 indicates that it is not hedged at all. (more…)
Trade Validation

Trade Validation

Trade Validation

 In the financial market, a trade is the conversion of an order placed on the exchange which is said to be completed when the buyer gets the securities and the seller gets the payment for the same. There is a number of steps involved in the successful completion of the trade. All the steps together create a 'Trade Lifecycle'. The Trade lifecycle consists of various trading and operational activities. Once, the trade is captured and enriched, the next step is of validating the trade to reduce the possibility of errors in the process ahead. (more…)