Question

Q9.
Answer following questions in very brief:
a)
If you must buy some asset in future and you just want to hedge the risk what sort of derivative trading will you do? Explain in brief with payoff diagram.
(3)
b)
If you have long position in one asset and you want to hedge the risk of price drop in that asset while still having the upside in case the asset price goes up, what sort of derivative trading will you do? Explain in brief with payoff diagram.
(3)
c)
Briefly explain the benefits of having a thriving capital markets even in an economy like India where banking system provides most of the funding to firms.
(3)
d)
What are the four types of traders? Name two types who facilitate the price discovery process and briefly state how do they facilitate?

Answer 1

The answer to the question are:

C) A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. The benefits of thriving capital markets are

They channel savings into productive investment and help companies. Investors and individuals manage risk. Capital markets provide a supplementary source of funding to bank lending.and acts as a 'spare Tyre' of the economy.

Other ways of raising funds get a chance to be the owner Of the company and to share profit as dividends, bonus and also capital appreciation.

D) There are 4 main type of trader's

The scalper

The day trader

The swing trader

The position trader

The scalper are a type of short term trader that may dart in or out of a stock or other asset class dozones or in some case hundreds of times per day. Scalper are of often high energy individual who thrive during time of stress.

The day trader

The day trader are the the active trader who execute in intrady strategies two profit off of price change for a given asset.

Swing trading

Swing trading is a speculative trading strategy in financial marketing where a tradable asset is held for one or more days in an effort to profit from price changes or swings.

The position trader

Deposition trader is an individual who holds the investment for an extended period of time with the expectation that it will appreciate in value.