Question

What do the term mutually exclusive and independent in capital budgeting mean?

Distinguish between transactional and informational market efficiency.

What are derivatives?

Answer 1

An Independent Project is a project whose cash flows are not affected by the accept/reject decision for other projects. Thus, all Independent Projects which meet the Capital Budgeting critierion should be accepted.

Mutually Exclusive Projects are a set of projects from which at most one will be accepted. For example, a set of projects which are to accomplish the same task. Thus, when choosing between "Mutually Exclusive Projects" more than one project may satisfy the Capital Budgeting criterion. However, only one, i.e., the best project can be accepted.

Informational Market Efficiency: If prices always incorporate all available information. In this scenario, all new information about any given firm is certain and immediately priced into that company's stock.It is known as informationally efficient market.

Transactional Market Efficiency: If the transaction cost in the market is same than it is known as transactional market efficiency.So no trader in the market gets benefit out of difference in the tansation cost.

Derivatives: This is the type of financial instrument whose price is derived from the price of some other underlying asset.