Real options

We have been almost entirely concerned with the valuation of derivative dependent on financial assets. Real assets include land, building, plant, and so on.Often there are embedded options.Valuation is difficult because market prices are not readily available. We start by explaining the traditional approach to evaluating investments in real assets and their shortcomings. CAPITAL INVESTMENT… Continue reading Real options

Mechanics of option market

          Fundamental and types of option The option is fundamentally different from the forward, future, and swap contracts. An option gives the holder of the option the right to do something. The holder of the option does not have to exercise this right. By contrast in a forward contract, future, or… Continue reading Mechanics of option market

Future contract

A futures contract is an agreement between two parties to buy or sell an asset. This contract executes at a certain time in the future for a certain price. Unlike forward contracts, futures contracts normally traded on an exchange. To make trading possible, the exchange specifies certain standardized features of the contract. As two parties… Continue reading Future contract

Forward contract

A forward contract is a particular simple derivative. It is an agreement to buy or sell assets at a certain future time for a certain price. A forward contract can be contrasted with a spot contract, which is an agreement to buy or sell an asset today. It is traded in the over-the-counter market. Usually… Continue reading Forward contract

Stock option

Options traded both on the exchange and in the over-the-counter market. Call option and put option. Now we will discuss the call option.                              Call option Call option gives holder to right buy the underlying the price of an option to purchase… Continue reading Stock option

Put-call parity

  To understand put-call parity. We assume. We have two  portfolios. Portfolio A and Portfolio B One European call option plus an amount of cash equal to   portfolioB: One European put option plus one share.Both are worth.max At  expiration of the options. Because the option is European, they can not be exercised prior to… Continue reading Put-call parity

Interest rate market

For any given currency many different rates are regularly quoted.These include mortgage rates prime borrowing rates, deposit rates.Interest rate applicable on the credit risk situation.Higher the credit risk higher Interest rate .In this post we discuss about three rate which is important for option and future market . Treasury rate-: Treasury rate applicable to borrowing… Continue reading Interest rate market

Categorised as Derivatives

Forward Market

Forward market is an over the counter market.lets understand what is OTC market?Over the counter market Over the counter market is an important alternative to exchange and measured in term of total volume and trading.It is a telephone and computer linked network of dealers who do not physically meet.Trades are done between a financial institution… Continue reading Forward Market

Credit derivatives

Credit derivative are contracts where the payoff depends on the creditworthiness of one or more commercial or sovereign entities , credit derivative allow companies to manage their credit risk actively. According to the definition, the use of the derivative security determines whether the derivative is a credit derivative or not. A simple derivative contract like… Continue reading Credit derivatives

Derivative and risk management

A company faces several kind of risk.Unanticipated change in selling price,cost taxes,demand,interest rate technology fluctuated profitability of a firm.Sometime managers are not able to reduce risk.They try many strategies.All financial difficulties and risk can reduce their risk entering into financial contracts. Risk hedging by derivatives  The topic will explain what is derivatives and how to hedge risk… Continue reading Derivative and risk management