Question

Research, define, describe, and explain the above-mentioned (Minimum 250 words answer for each questions)

Explain what financing instruments are and discuss options, futures, derivatives and securities valuation.

Answer 1

1.Derivatives are the most modern financial instrument in hedging risk.The person or company who wish to a avoid risk can deal with the other who are willing to accept the risk for a price.the common place where such transaction take place is called derivative markets.The most common derivatives are currency forward, futures, options, interest rate swaps.

generally derivatives are settled at a future date.and this requires less initial investment.and further we can say that derivatives are product whose value is to be derived from the value of one or more basic variables.

2. Futures are basically an agreement to buy or sell something at predetermined price at a specified time in future . Future contracts are standardise in terms of quantity and amount as the case may be.and hence they are said to be highly standardise.

Future contract entails brokerage fees for buying and selling it. and also every participants is subject to maintain margin as decided by the exchange authorities.

when you buy a future contract it will said to have long position and when you sell it you will said to have short position.

Future contracts are used for both to have exposure in market and also to hedge the portfolio against price fluctuations.

3.Options is a claim without any liability,.More specifically option is a contract that gives a holder a right, without any obligation to buy or sell an asset at an agreed price on or before specified period of time.

the option to buy an asset is called call option and the option to sell an asset is called put option.The price at which option can be exercised is called exercise price or strike price.the holder will pay the price for getting call/put option is called option premium.this has to be paid whether option exercised or not

Options can be classified in two categories

European Option : Where option is allowed to exercise only on maturity date.

American Option : where option is exercised any time before its maturity

when an option holder exercises his right to buy or sell it may have 3 possibilities

- an option is said to be in the money when it is advantageous to exercise it.

- when it is not advantageous it is called out of the money

-when option holder does not gain or lose it is called at the money.

4. valuation of securities is an important decision for investor of portfolio. investor should buy under priced shares and over priced shares. hence valuation of securities is essential.

there are various method to value security

1 Book value : book value of share will be divided by net worth of firm divided by the number of equity shares. where net worth will be assets minus liabilities.

2 Intrinsic value:Here earning and dividends are essential ingredients in determining the market value of security.the discount rate is used and all earning are discounted and then will be divided by number of shares.

3.Replacement method :when the company is liquidated and its asset are to be replaced by new ones, then replacement value of the asset will be taken for valuation of securities.