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Hedge funds are not regulated incase of mutual funds are regulated.

Hedge Fund
DEFINITION of 'Hedge Fund'
Hedge funds are alternative investments using pooled funds that may use a number of
different strategies in order to earn active return, or alpha, for their investors. Hedge funds
may be aggressively managed or make use of derivatives and leverage in both domestic
and international markets with the goal of generating high returns (either in an absolute
sense or over a specified market benchmark). Because hedge funds may have
low correlations with a traditional portfolio of stocks and bonds, allocating an exposure to
hedge funds can be a good diversifier.

INVESTOPEDIA EXPLAINS 'HEDGE FUND'


Each hedge fund strategy is constructed to take advantage of certain identifiable market
opportunities. Hedge funds use different investment strategies and thus are often classified
according to investment style. There is substantial diversity in risk attributes and investment
opportunities among styles, which reflects the flexibility of the hedge fund format. In general,
this diversity benefits investors by increasing the range of choices among investment
attributes.
Legally, hedge funds are most often set up as private investment limited partnerships that
are open to a limited number of accredited investors and require a large initial minimum
investment. Investments in hedge funds are illiquid as they often require investors keep their

money in the fund for at least one year, a time known as the lock-up period. Withdrawals
may also only happen at certain intervals such as quarterly or bi-annually.
t is important to note that "hedging" is actually the practice of attempting to reduce risk, but
the goal of most hedge funds is to maximize return on investment. The name is mostly
historical, as the first hedge funds tried to hedge against the downside risk of a bear market
by shorting the market. (Mutual funds generally can't enter into short positions as one of
their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't
accurate to say that hedge funds just "hedge risk." In fact, because hedge fund managers
make speculative investments, these funds can carry more risk than the overall market.
Hedge fund managers are compensated in two ways: a fee for assets under
management (AUM) and an incentive fee, which is a percentage of any profits. A
typical fee structure may be 2 and 20, where the AUM fee is 2% and the incentive fee
is 20% of profits. Often times, fee limitations such as high-water marks are employed
to prevent portfolio managers from getting paid on the same returns twice. Fee caps
may also be in place to prevent managers from taking on excess risk.

Hedge Fund Strategies


Many hedge fund styles exist; the following classifications of hedge fund styles is a
general overview.

Equity market neutral: These funds attempt to identify overvalued and undervalued
equity securities while neutralizing the portfolios exposure to market risk by
combining long and short positions. Portfolios are typically structured to be market,
industry, sector, and dollar neutral, with a portfolio beta around zero. This is
accomplished by holding long and short equity positions with roughly equal exposure
to the related market or sector factors. Because many investors face constraints
relative to shorting stocks, situations of overvaluation may be slower to correct than
those of undervaluation. Because this style seeks an absolute return, the benchmark
is typically the risk-free rate. (For more, see: Getting Positive Results With MarketNeutral Funds.)

Convertible arbitrage: These strategies attempt to exploit mis-pricings in corporate


convertible securities, such as convertible bonds, warrants, and convertible preferred
stock. Managers in this category buy or sell these securities and then hedge part or
all of the associated risks. The simplest example is buying convertible bonds and
hedging the equity component of the bonds risk by shorting the associated stock. In
addition to collecting the coupon on the underlying convertible bond, convertible
arbitrage strategies can make money if the expected volatility of the underlying asset
increases due the embedded option, or if the price of the underlying asset increases
rapidly. Depending on the hedge strategy, the strategy will also make money if the
credit quality of the issuer improves. (See also: Convertible Bonds: An Introduction.)

Fixed-income arbitrage: These funds attempt to identify overvalued and undervalued


fixed-income securities (bonds) primarily on the basis of expectations of changes in
the term structure or the credit quality of various related issues or market sectors.
Fixed-income portfolios are generally neutralized against directional market
movements because the portfolios combine long and short positions, therefore the
portfolio duration is close to zero.

Distressed securities: Portfolios of distressed securities are invested in both the debt
and equity of companies that are in or near bankruptcy. Most investors are
not prepared for the legal difficulties and negotiations with creditors and other
claimants that are common with distressed companies. Traditional investors prefer to
transfer those risks to others when a company is in danger of default. Furthermore,
many investors are prevented from holding securities that are in default or at risk of
default. Because of the relative illiquidity of distressed debt and equity, short sales
are difficult, so most funds are long. (For more, see: Activist Hedge Funds: Follow
The Trail To Profit and Why Hedge Funds Love Distressed Debt.)

Merger arbitrage: Merger arbitrage, also called deal arbitrage, seeks to capture the
price spread between current market prices of corporate securities and their value
upon successful completion of a takeover, merger, spin-off, or similar transaction
involving more than one company. In merger arbitrage, the opportunity typically
involves buying the stock of a target company after a merger announcement and
shorting an appropriate amount of the acquiring companys stock. (See also: Trade
Takeover Stocks With Merger Arbitrage.)

Hedged equity: Hedged equity strategies attempt to identify overvalued and


undervalued equity securities. Portfolios are typically not structured to be market,
industry, sector, and dollar neutral, and they may be highly concentrated. For
example, the value of short positions may be only a fraction of the value of long
positions and the portfolio may have a net long exposure to the equity market.
Hedged equity is the largest of the various hedge fund strategies in terms of assets
under management. It is also know as the long/short equity strategy.

Global macro: Global macro strategies primarily attempt to take advantage of


systematic moves in major financial and non-financial markets through trading in
currencies, futures, and option contracts, although they may also take major
positions in traditional equity and bond markets. For the most part, they differ from
traditional hedge fund strategies in that they concentrate on major market trends
rather than on individual security opportunities. Many global macro managers use
derivatives, such as futures and options, in their strategies. Managed futures are
sometimes classified under global macro as a result.

Emerging markets: These funds focus on the emerging and less mature markets.
Because short selling is not permitted in most emerging markets and because
futures and options may not available, these funds tend to be long.

Fund of funds: A fund of funds (FOF) is a fund that invests in a number of underlying
hedge funds. A typical FOF invests in 1030 hedge funds, and some FOFs are even
more diversified. Although FOF investors can achieve diversification among hedge
fund managers and strategies, they have to pay two layers of fees: one to the hedge
fund manager, and the other to the manager of the FOF. FOF are typically more
accessible to individual investors and are more liquid. (For more, see: Fund of Funds:
High Society for the Little Guy.)

DEFINITION of 'Forward Contract'


A customized contract between two parties to buy or sell an asset at a specified price on a
future date. A forward contract can be used for hedging or speculation, although its nonstandardized nature makes it particularly apt for hedging. Unlike standard futures contracts,

a forward contract can be customized to any commodity, amount and delivery date. A
forward contract settlement can occur on a cash or delivery basis. Forward contracts do not
trade on a centralized exchange and are therefore regarded as over-the-counter (OTC)
instruments. While their OTC nature makes it easier to customize terms, the lack of a
centralized clearinghouse also gives rise to a higher degree of default risk. As a result,
forward contracts are not as easily available to the retail investor as futures contracts.

INVESTOPEDIA EXPLAINS 'Forward Contract'


Consider the following example of a forward contract. Assume that an agricultural producer
has 2 million bushels of corn to sell six months from now, and is concerned about a potential
decline in the price of corn. It therefore enters into a forward contract with its financial
institution to sell 2 million bushels of corn at a price of $4.30 per bushel in six months, with
settlement on a cash basis.
In six months, the spot price of corn has three possibilities:
1. It is exactly $4.30 per bushel: In this case, no monies are owed by the producer or
financial institution to each other and the contract is closed.
2. It is higher than the contract price, say $5 per bushel: The producer owes the
institution $1.4 million, or the difference between the current spot price and the
contracted rate of $4.30.
3. It is lower than the contract price, say $3.50 per bushel: The financial institution
will pay the producer $1.6 million, or the difference between the contracted rate of
$4.30 and the current spot price.
The market for forward contracts is huge, since many of the worlds biggest corporations
use it to hedge currency and interest rate risks. However, since the details of forward
contracts are restricted to the buyer and seller, and are not known to the general public, the
size of this market is difficult to estimate. The large size and unregulated nature of the
forward contracts market means that it may be susceptible to a cascading series of defaults
in the worst-case scenario. While banks and financial corporations mitigate this risk by

being very careful in their choice of counterparty, the possibility of large-scale default does
exist.
Another risk that arises from the non-standard nature of forward contracts is that they are
only settled on the settlement date, and are not marked-to-market like futures. What if the
forward rate specified in the contract diverges widely from the spot rate at the time of
settlement? In this case, the financial institution that originated the forward contract is
exposed to a greater degree of risk in the event of default or non-settlement by the client
than if the contract were marked-to-market regularly.

DEFINITION of 'Futures'
A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset),
such as a physical commodity or a financial instrument, at a predetermined future date and
price. Futures contracts detail the quality and quantity of the underlying asset; they are
standardized to facilitate trading on a futures exchange. Some futures contracts may call for
physical delivery of the asset, while others are settled in cash. The futures markets are
characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the
underlying asset. For example, a producer of corn could use futures to lock in a certain price
and reduce risk (hedge). On the other hand, anybody could speculate on the price
movement of corn by going long or short using futures.

DEFINITION of 'Option'
A financial derivative that represents a contract sold by one party (option writer) to another
party (option holder). The contract offers the buyer the right, but not the obligation, to buy
(call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price)
during a certain period of time or on a specific date (exercise date).

Call options give the option to buy at certain price, so the buyer would want the stock to go
up.
Put options give the option to sell at a certain price, so the buyer would want the stock to go
down.
In finance, an option is a contract which gives the buyer (the owner or holder) the right, but not the
obligation, to buy or sell anunderlying asset or instrument at a specified strike price on or before a
specified date. The seller has the corresponding obligation to fulfill the transaction that is to sell or
buy if the buyer (owner) "exercises" the option. An option that conveys to the owner the right
to buy something at a specific price is referred to as a call; an option that conveys the right of the
owner to sell something at a specific price is referred to as a put. Both are commonly traded, but for
clarity, the call option is more frequently discussed.
The seller may grant an option to a buyer as part of another transaction, such as a share issue or as
part of an employee incentive scheme, otherwise a buyer would pay a premium to the seller for the
option. An call option would normally be exercised only when the strike price is below the market
value of the underlaying asset at that time, while a put option would normally be exercised only when
the strike price is above the market value. When an option is exercised, the cost to the buyer of the
asset acquired is the strike price plus the premium, if any. When the option expiration date passes
without the option being exercised, then the option expires and the buyer would forfeit the premium
to the seller. In any case, the premium is income to the seller.

Long call
A trader who believes that a stock's price will increase might buy the right to purchase the stock
(a call option) at a fixed price, rather than just purchase the stock itself. He would have no obligation
to buy the stock, only the right to do so until the expiration date. If the stock price(spot Price,S) at
expiration is above the exercise price(X) by more than the premium (price) paid P, he will profit i.e. if
S-X>P, the deal is profitable. If the stock price at expiration is lower than the exercise price, he will let
the call contract expire worthless, and only lose the amount of the premium. A trader might buy the
option instead of shares, because for the same amount of money, he can control (leverage) a much
larger number of shares. For example, if exercise price is 100, premium paid is 10, then a spot price
of 100 to 110 is not profitable. He would earn profit if the spot price is above 110.

Long put[edit]

Payoff from buying a put.

A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed
price (a put option). He will be under no obligation to sell the stock, but has the right to do so until the
expiration date. If the stock price at expiration is below the exercise price by more than the premium
paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put
contract expire worthless and only lose the premium paid. In the whole story, the premium also plays
a major role as it enhances the break-even point. For example, if exercise price is 100, premium
paid is 10, then a spot price of 100 to 90 is not profitable. He would earn profit if the spot price is
below 90.

Short call[edit]

Payoff from writing a call.

A trader who believes that a stock price will decrease can sell the stock short or instead sell, or
"write", a call. The trader selling a call has an obligation to sell the stock to the call buyer, at the
buyer's option. If the stock price decreases, the short call position will make a profit in the amount of
the premium. If the stock price increases over the exercise price by more than the amount of the
premium, the short will lose money, with the potential loss unlimited.

Short put[edit]

Payoff from writing a put.

A trader who believes that a stock price will increase can sell the stock or instead sell, or "write", a
put. The trader selling a put has an obligation to buy the stock from the put buyer, at the buyer's
option. If the stock price at expiration is above the exercise price, the short put position will make a
profit in the amount of the premium. If the stock price at expiration is below the exercise price by
more than the amount of the premium, the trader will lose money, with the potential loss being up to
the full value of the stock. A benchmark index for the performance of a cash-secured short put option
position is the CBOE S&P 500 PutWrite Index (ticker PUT).

DEFINITION of 'Swap'
Traditionally, the exchange of one security for another to change the maturity (bonds),
quality of issues (stocks or bonds), or because investment objectives have changed.
Recently, swaps have grown to include currency swaps and interest rate swaps.

INVESTOPEDIA EXPLAINS 'Swap'


If firms in separate countries have comparative advantages on interest rates, then a swap
could benefit both firms. For example, one firm may have a lower fixed interest rate, while
another has access to a lower floating interest rate. These firms could swap to take
advantage of the lower rates.

How to Calculate Net Asset Value for a Hedge Fund

Identifying the Assets


Identify each asset held by the hedge fund. The net asset value, or NAV, of any
portfolio of pooled securities, including a hedge fund portfolio, is the sum of its
assets minus its liabilities, divided by the number of shares outstanding. For
example, if a hedge fund has $1 billion in assets, $100 million in liabilities and 2
million shares outstanding, the NAV per share is $450. While the principle of
determining NAV is simple, execution can be difficult for hedge funds because they
often hold thinly-traded assets of uncertain value or other assets that aren't traded
in the open market. If the fund doesn't make its holdings public, determining its NAV
isn't possible at all. Some funds consider their holdings to be valuable trade or
proprietary information.
Valuing Publicly Traded Securities
For each asset traded on a public exchange and for which a current market price is
available, determine that price and multiply it by the number of shares or units held
to find the asset's current value in the hedge fund's portfolio. For example, 300,000
shares of Google at 882.55 equals 264,765,000. Total the values of all publicly
traded holdings.
Obtaining Data for Other Securities
List each asset held by the hedge fund for which there is no easily determined
market price. This may be because the asset is thinly traded and there are no
recent trades or because the asset isn't publicly traded. For each of these assets,
find a source that is qualified to estimate its value. This may be a counter-party,
such as an investment bank or securities dealer that trades in the asset, or it may
be an information technology company that uses specialized analytics software to
determine the asset's value. Once the value is determined, list each asset's current
price and multiply that price by the number of shares or units held. Total the values
of all these thinly-traded or non-publicly traded securities.
Hedge Fund's NAV
Total the values for all securities held by the hedge fund, and divide that total by the
number of shares outstanding to find its NAV. Note that when the determination of
value includes estimates from counter-parties and information technology
companies using proprietary software, the rationale for the evaluations may not be
publicly available. This makes the legitimacy or accuracy of the NAV determination
uncertain. Hedge funds and information technology companies that evaluate hedge
fund assets, such as Paladyne systems, are aware of this problem. As a result, they
have called for fund administrators to take more responsibility for establishing
industry-wide evaluation practices and standards. Because hedge funds aren't SECregulated like other pooled investment funds, they have no obligation to use a
particular evaluation method to determine NAV

DEFINITION of 'Capital Markets'


Markets for buying and selling equity and debt instruments. Capital markets channel
savings and investment between suppliers of capital such as retail investors and institutional
investors, and users of capital like businesses, government and individuals. Capital markets
are vital to the functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets, where new stock and
bond issues are sold to investors, and secondary markets, which trade existing securities.

Primary market
From Wikipedia, the free encyclopedia

The primary market is the part of the capital market that deals with issuing of new securities.
Companies, governments or public sector institutions can obtain funds through the sale of a
new stock or bond issues through primary market. This is typically done through an investment
bank or finance syndicate of securities dealers.
The process of selling new issues to investors is called underwriting. In the case of a new stock
issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price
of the security offering, though it can be found in the prospectus. Primary markets create long term
instruments through which corporate entities borrow from capital market.
Once issued the securities typically trade on a secondary market such as a stock exchange, bond
market or derivatives exchange.

Secondary market
The secondary market, also called the aftermarket, is the financial market in which previously
issued financial instruments such asstock, bonds, options, and futures are bought and sold.
[1]
Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage
bank to investors such as Fannie Mae and Freddie Mac.

A market where investors purchase securities or assets from other investors, rather than
from issuing companies themselves. The national exchanges - such as the New York Stock
Exchange and the NASDAQ are secondary markets.
Secondary markets exist for other securities as well, such as when funds, investment banks,
or entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary
market trade, the cash proceeds go to an investor rather than to the underlying
company/entity directly.

WHAT IS CRR AND SLR- 4%-crr and 21.5%slr

Definition of 'Cash Reserve Ratio'


Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which
commercial banks have to hold as reserves with the central bank.

Definition: Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as deposits with the
central bank. CRR is set according to the guidelines of the central bank of a country.
Description: The amount specified as the CRR is held in cash and cash equivalents, is stored in
bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not
run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy
tool and is used for controlling money supply in an economy.

CRR and SLR are the two ratios. CRR is a cash reserve ratio and SLR is statutory liquidity ratio.
Under CRR a certain percentage of the total bank deposits has to be kept in the current account
with RBI which means banks do not have access to that much amount for any economic activity
or commercial activity. Banks cant lend the money to corporates or individual borrowers, banks
cant use that money for investment purposes. So, that CRR remains in current account and
banks dont earn anything on that.
SLR, statutory liquidity ratio is the amount of money that is invested in certain specified
securities predominantly central government and state government securities. Once again this
percentage is of the percentage of the total bank deposits available as far as the particular bank
is concerned. The SLR, the money goes into investment predominantly in the central

government securities as I mentioned earlier which means the banks earn some amount of
interest on that investment as against CRR where it earns zero.

Definition of 'Repo Rate'- 7.25%


Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to
commercial banks in the event of any shortfall of funds.
Definition: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in
case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is
used by monetary authorities to control inflation.
Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive
for banks to borrow from the central bank. This ultimately reduces the money supply in the economy
and thus helps in arresting inflation.
The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and
reverse repo rates form a part of the liquidity adjustment facility.

Definition of 'Reverse Repo Rate'- 6.25%


Reverse repo rate is the rate at which the central bank of a country (RBI in case of India) borrows
money from commercial banks within the country.
Definition: Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of
India in case of India) borrows money from commercial banks within the country. It is a monetary
policy instrument which can be used to control the money supply in the country.
Description: An increase in the reverse repo rate will decrease the money supply and vice-versa,
other things remaining constant. An increase in reverse repo rate means that commercial banks will
get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the
market.

Definition of 'Fpo'
FPO is a process by which a company, which is already listed on an exchange, issues new shares to
the investors or the existing shareholders.
Definition: FPO (Follow on Public Offer) is a process by which a company, which is already listed on
an exchange, issues new shares to the investors or the existing shareholders, usually the promoters.

FPO is used by companies to diversify their equity base.


Description: A company uses FPO after it has gone through the process of an IPO and decides to
make more of its shares available to the public or to raise capital to expand or pay off debt.

DEFINITION of 'Follow On Public Offer - FPO'


An issuing of shares to investors by a public company that is already listed on an exchange.
An FPO is essentially a stock issue of supplementary shares made by a company that is
already publicly listed and has gone through the IPO process.

INVESTOPEDIA EXPLAINS 'Follow On Public Offer - FPO'


FPOs are popular methods for companies to raise additional equity capital in the capital
markets through a stock issue. Public companies can also take advantage of an FPO
issuing an offer for sale to investors, which is made through an offer document. FPOs
should not be confused with IPOs, as IPOs are the initial public offering of equity to the
public while FPOs are supplemantary issues made after a company has been established
on an exchange.

DEFINITION of 'Mortgage-Backed Security (MBS)'


A type of asset-backed security that is secured by a mortgage or collection of mortgages.
These securities must also be grouped in one of the top two ratings as determined by a
accredited credit rating agency, and usually pay periodic payments that are similar to
coupon payments. Furthermore, the mortgage must have originated from a regulated and
authorized financial institution.
Also known as a "mortgage-related security" or a "mortgage pass through."

INVESTOPEDIA EXPLAINS 'Mortgage-Backed Security (MBS)'


When you invest in a mortgage-backed security you are essentially lending money to a
home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to
its customers without having to worry about whether the customers have the assets to cover
the loan. Instead, the bank acts as a middleman between the home buyer and the
investment markets.

This type of security is also commonly used to redirect the interest and principal payments
from the pool of mortgages to shareholders. These payments can be further broken down
into different classes of securities, depending on the riskiness of different mortgages as they
are classified under the MBS.

Wash sale
From Wikipedia, the free encyclopedia

A wash sale (not to be confused with a wash trade) is a sale of a security (stock, bonds, options) at
a loss and repurchase of the same or substantially identical security shortly before or after.[1] The
regulations around wash sales are to protect against an investor who holds an unrealized loss and
wishes to make it claimable as a tax deduction within the current tax year. The security is then
repurchased in the hope that it will recover its previous value, which would only become taxable in
some future tax year. A wash sale can take place at any time during the year. In the UK, a similar
practice which specifically takes place at the end of a calendar year, is known as Bed and
breakfasting. In a bed and breakfasting transaction, a position is sold on the last trading day of the
year (typically late in the trading session) to establish a tax loss. The same position is then
repurchased early on the first session of the new trading year, to restore the position (albeit at a
lower cost basis). The term, therefore, derives its name from the late sale and early morning
repurchase.[2]
In some tax codes, such as the USA and the UK, tax rules have been introduced to disallow the
practice, e.g., if the stock is repurchased within 30 days of its sale. The disallowed loss is added to
the basis of the newly acquired security.

For instance, this rule will be applicable if an investor sells a security X at a loss of $20 and
immediately purchases the same security or a substantially identical security within 30 days. In
this case the loss cannot be claimed and the same should be added to the cost basis of the
remaining pool of securities of X or substantially identical security (except in case of point 4
above)

DEFINITION of 'Wash Sale'


A transaction where an investor sells a losing security to claim a capital loss, only to
repurchase it again for a bargain. Wash sales are a method investors employ to try and
recognize a tax loss without actually changing their position.

INVESTOPEDIA EXPLAINS 'Wash Sale'


The effectiveness of this strategy has been greatly diminished with the implementation of
the IRS 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that
investment was purchased within 30 days of sale (before or after sale).

Liquidity Analysis Ratios


Current Ratio
Current Assets
-----------------------Current Liabilities

Current Ratio =
Quick Ratio
Quick Ratio =

Quick Assets
---------------------Current Liabilities

Quick Assets = Current Assets - Inventories


Net Working Capital Ratio
Net Working Capital Ratio =

Net Working Capital


-------------------------Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios


Return on Assets (ROA)
Return on Assets (ROA) =

Net Income
---------------------------------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2


Return on Equity (ROE)
Return on Equity (ROE) =

Net Income
-------------------------------------------Average Stockholders' Equity

Average Stockholders' Equity


= (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2

Return on Common Equity (ROCE)


Net Income
-------------------------------------------Average Common Stockholders' Equity

Return on Common Equity =

Average Common Stockholders' Equity


= (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2
Profit Margin
Profit Margin =

Net Income
----------------Sales

Earnings Per Share (EPS)


Earnings Per Share =

Net Income
--------------------------------------------Number of Common Shares Outstanding

Activity Analysis Ratios


Assets Turnover Ratio
Assets Turnover Ratio =

Sales
---------------------------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2


Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio =

Sales
----------------------------------Average Accounts Receivable

Average Accounts Receivable


= (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Inventory Turnover Ratio
Inventory Turnover Ratio =

Cost of Goods Sold


--------------------------Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) / 2

Capital Structure Analysis Ratios


Debt to Equity Ratio

Debt to Equity Ratio =

Total Liabilities
---------------------------------Total Stockholders' Equity

Interest Coverage Ratio


Interest Coverage Ratio =

Income Before Interest and Income Tax Expenses


------------------------------------------------------Interest Expense

Income Before Interest and Income Tax Expenses


= Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios


Price Earnings (PE) Ratio
Price Earnings Ratio =

Market Price of Common Stock Per Share


-----------------------------------------------------Earnings Per Share

Market to Book Ratio


Market to Book Ratio =

Market Price of Common Stock Per Share


------------------------------------------------------Book Value of Equity Per Common Share

Book Value of Equity Per Common Share


= Book Value of Equity for Common Stock / Number of Common Shares
Dividend Yield
Dividend Yield =

Annual Dividends Per Common Share


-----------------------------------------------Market Price of Common Stock Per Share

Book Value of Equity Per Common Share


= Book Value of Equity for Common Stock / Number of Common Shares
Dividend Payout Ratio
Dividend Payout Ratio =

Cash Dividends
-------------------Net Income

ROA = Profit Margin X Assets Turnover Ratio


ROA = Profit Margin X Assets Turnover Ratio
Net Income
ROA =
------------------------ =
Average Total Assets

Net Income
-------------- X
Sales

Sales
------------------Average Total Ass

Profit Margin = Net Income / Sales


Assets Turnover Ratio = Sales / Averages Total Assets
What are G-secs?
The Government securities comprise dated securities issued by the Government of India and state
governments as also, treasury bills issued by the Government of India.Reserve Bank of India manages
and services these securities through its public debt offices located in various places as an agent of the
Government.
Treasury Bills
Types
Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus
useful in managing short-term liquidity. At present, the Government of India issues three types of treasury
bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State
Governments.

DEFINITION of 'Mutual Fund'


An investment vehicle that is made up of a pool of funds collected from many investors for
the purpose of investing in securities such as stocks, bonds, money market instruments and
similar assets. Mutual funds are operated by money managers, who invest the fund's capital
and attempt to produce capital gains and income for the fund's investors. A mutual fund's
portfolio is structured and maintained to match the investment objectives stated in its
prospectus.

INVESTOPEDIA EXPLAINS 'Mutual Fund'


One of the main advantages of mutual funds is that they give small investors access to
professionally managed, diversified portfolios of equities, bonds and other securities, which
would be quite difficult (if not impossible) to create with a small amount of capital. Each
shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or
shares, are issued and can typically be purchased or redeemed as needed at the fund's
current net asset value (NAV) per share, which is sometimes expressed as NAVPS.

Some other important Terms Used in Mutual Funds

Sale Price : It is the price you pay when you invest in a scheme and is also
called "Offer Price". It may include a sales load.
Repurchase Price : - It is the price at which a Mutual Funds repurchases its
units and it may include a back-end load. This is also called Bid Price.
Redemption Price : It is the price at which open-ended schemes repurchase
their units and close-ended schemes redeem their units on maturity. Such
prices are NAV related.
Sales Load / Front End Load : It is a charge collected by a scheme when it
sells the units. Also called, Front-end load. Schemes which do not charge a
load at the time of entry are called No Load schemes.
Repurchase / Back-end Load : It is a charge collected by a Mufual Funds
when it buys back / Repurchases the units from the unit holders.
WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS :

A common man is so much confused about the various kinds of Mutual


Funds that he is afraid of investing in these funds as he can not differentiate
between various types of Mutual Funds with fancy names. Mutual Funds
can be classified into various categories under the following heads:-

(A) ACCORDING TO TYPE OF INVESTMENTS :- While launching a new


scheme, every Mutual Fund is supposed to declare in the prospectus the
kind of instruments in which it will make investments of the funds collected
under that scheme. Thus, the various kinds of Mutual Fund schemes as
categorized according to the type of investments are as follows :-

(a) EQUITY FUNDS / SCHEMES


(b) DEBT FUNDS / SCHEMES (also called Income Funds)
(c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)
(d) GILT FUNDS / SCHEMES
(e) MONEY MARKET FUNDS / SCHEMES
(f) SECTOR SPECIFIC FUNDS
(g) INDEX FUNDS

B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME : While


launching new schemes, Mutual Funds also declare whether this will be an
open ended scheme (i.e. there is no specific date when the scheme will be
closed) or there is a closing date when finally the scheme will be wind up.
Thus, according to the time of closure schemes are classified as follows :-

(a) OPEN ENDED SCHEMES

(b) CLOSE ENDED SCHEMES

Open ended funds are allowed to issue and redeem units any time during
the life of the scheme, but close ended funds can not issue new units except
in case of bonus or rights issue.

Therefore, unit capital of open ended

funds can fluctuate on daily basis (as new investors may purchase fresh
units), but that is not the case for close ended schemes. In other words we
can say that new investors can join the scheme by directly applying to the
mutual fund at applicable net asset value related prices in case of open
ended schemes but not in case of close ended schemes. In case of close
ended schemes, new investors can buy the units only from secondary
markets.

C) ACCORDING TO TAX INCENTIVE SCHEMES : Mutual Funds are also


allowed to float some tax saving schemes.

Therefore, sometimes the

schemes are classified according to this also:-

(a) TAX SAVING FUNDS


(b) NOT TAX SAVING FUNDS / OTHER FUNDS

(D) ACCORDING TO THE TIME OF PAYOUT : Sometimes Mutual Fund


schemes are classified according to the periodicity of the pay outs (i.e.
dividend etc.). The categories are as follows :-

(a) Dividend Paying Schemes


(b) Reinvestment Schemes

The mutual fund schemes come with various combinations of the above
categories. Therefore, we can have an Equity Fund which is open ended
and is dividend paying plan. Before you invest, you must find out what
kind of the scheme you are being asked to invest.

You should choose a

scheme as per your risk capacity and the regularity at which you wish to
have the dividends from such schemes

How Does a Mutual Fund Scheme Different from a Portfolio Management


Scheme ?

In case of Mutual Fund schemes, the funds of large number of investors is


pooled to form a common investible corpus and the gains / losses are same
for all the investors during that given peirod of time. On the other hand, in
case of Portfolio Management Scheme, the funds of a particular investor
remain identifiable and gains and losses for that portfolio are attributable
to him only. Each investor's funds are invested in a separate portfolio and
there is no pooling of funds.
Friday, June 12, 2009

What are OTC derivatives?


A derivative is a financial product whose value is 'derived' from an underlying asset (hence the
name). The underlying asset can be anything of value - stock of a company, an index like the
S&P, or a commodity like gold, wheat or oil. Based on where they are traded, derivatives can be
classified as OTC (Over the Counter) or Listed (trading on exchanges). OTC derivatives are
private, tailor-made contracts between counterparties. Listed derivatives are more structured
and comprise standardized contracts where the underlying assets, the quantities and the mode
of settlement are defined by the exchange.
Since listed derivatives are backed by the full faith of the clearing house, they have been the
'traditional' instrument of choice for traders. But OTC derivatives are fast gaining in popularity.
Being private contracts between two counterparties, OTC derivatives can be tailored and
customized to suit exact risk and return needs. On the flip side, of course, lack of a clearing
house or exchange results in increased credit or default risk associated with each OTC contract.
Presented below is a broad classification of different types of OTC contracts, based on the underlying
asset or commodity that drives the value of the instrument.

Interest rate derivatives: The underlying asset is a standard interest rate e.g. the London
Interbank offer rate, or the rate on US treasury bills. Examples of interest rate OTC derivatives
include Swaps, Swaptions, and FRAs.

Credit derivatives: The underlying is the credit quality, risk or credit event of a particular asset or
counterparty. One example is Credit Default Swaps (CDS) on fixed-income securities, which
make payments if the underlying bonds are downgraded by credit rating agencies or if the
company that issued the bonds defaults.

Commodity derivatives: The underlying are physical commodities like wheat or gold. Examples
are forwards.

Equity derivatives: The underlying are equities or an equity index. Examples: Equity swaps or
forwards

FX derivatives: The underlying is foreign exchange fluctuations.

Fixed Income: The underlying are fixed income products - including mortgages