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What is Beta of a Company?The "beta" of a company is an indicator of how sensitive the stock prices of the company are to systematic risk. Systematic risks are usually measured by looking at the return on a "market portfolio, " a portfolio that contains enough stocks and other investment securities. A market portfolio is diversified enough so that all the firm-specific risks are assumed to cancel each other out so that returns are affected only by systematic risks.In other words, the Beta of a company’s stock is relevant to its nature of business, as systematic risks are related to ... Read More
Financial leverage is used to buy more debt to buy more assets. However, an excessive amount of financial leverage increases the risk of failure, as it is more difficult to repay debt. Most of the companies have some level of financial leverage, however caution must be taken not to overdo it. In case of financial leverage, the beta value goes up with increased leverage which may point towards distress or issues with the financials.What is the main advantage of financial leverage?Corporate firms utilize financial leverage mainly to increase the company’s Earnings Per Share (EPS) and to increase its Return On ... Read More
All options have an underlying asset, such as a stock, an exchange-traded fund, or a future, the values of which change over time. The value of an option, therefore, also change along with the underlying asset. Depending on the price of the underlying asset, an option can be in-the-money, outof-the-money, or at-the-money situation. Each of these situations offers an intrinsic value to the option.In-the-Money (ITM) OptionITM option contracts have an intrinsic value.If a call option that offers the buyer the right to buy an asset at a set price before a deadline has an underlying asset the price of which ... Read More
Straddle is an options strategy where the investors buy and sell a put and a call option simultaneously. The type of underlying, expiry date, and strike prices remain the same for the straddle strategy to work. The investors who use the straddle strategy expect something drastic in the market to happen in the future but are unsure whether this will lead to the markets to go up or down.Types of Straddle OptionsStraddle options can be of two types −Long StraddleShort StraddleLong StraddleIn a long straddle options strategy, the investor buys both a long call and a long put option with ... Read More
A number of studies using different techniques and different economies and time periods have found that equity betas are unstable in both individual common stock and portfolios.Equity beta measures the volatility of a security relative to the market’s volatility. A security with a beta of 1.00 rises and falls at the same rate as a broad market index, for example S&P 500.Finance theory ascertains that as individual stocks are aggregated into portfolios, the diversification effect must produce a beta for the portfolio that is relatively more stable since beta instability in the individual stocks is driven, at least in part, ... Read More
Strips and straps are two options strategies applied to increase the returns from an investment. Both strips and straps are related to options where market movements are compared with the underlying stock’s prices. As profits can be made from both upward and downward direction of the stock’s value, adding one or more options to increase the profit is the underlying concept in the case of strip and strap option strategies.Strip OptionsStrips mean buying two put options and one call option at the same time where the expiry date, strike price, and the underlying assets are identical. This is also considered ... Read More
Suppose we have a matrix of order m x n. Initially we are at the top-left corner cell (0, 0), and in each step, we can only move right or down in the matrix. Now among all possible paths from the top-left corner cell (0, 0) to bottom-right corner cell(m-1, n-1), we have to find the path with the maximum non-negative product. If the answer is too large, then return the maximum non-negative product modulo 10^9+7.So, if the input is like2-422-424-82then the output will be 256 because the path is the colored one, 2-422-424-82so product is [2 * 2 * ... Read More
Arbitrage Pricing TheoryArbitrage Pricing Theory (APT) is used to assess and anticipate the returns of assets and portfolios.APT is a model that shows the relationship between an asset’s expected risk and the return.The APT model shows how the changes in macroeconomic factors affect an asset’s returns. These variables are inflation, interest rates, exchange rates, etc.APT is an alternative model to the Capital Asset Pricing Model (CAPM). Although, both the theories represent the relationship between risk and expected risk, the arbitrage pricing theory is harder to gauge and implementArbitrage is the process of buying an asset at a lower price and ... Read More
A "strangle" is an investment strategy where an investor buys both "call" and "put" options. Both of these options have identical maturity dates but the strike prices are different. These options are usually bought "out of money."Generally, the strike price of a call option is higher than the underlying stock’s price, whereas the strike price of a put option is lower than the underlying stock’s price. Strangle is a popular option when the investors realize that a large price movement will occur on their stock but they do not know the direction of the movement.In case the price of the ... Read More
Options are a type of derivative financial instrument between two parties who contractually agree to transact an asset at an agreed price before a future date. An "option" provides its owner the opportunity and right to either buy or sell the asset at the exercise price, but the owner is not bound to exercise (buy or sell) the option. If the option reaches its expiration date without being traded, it becomes useless without any value.Basically, two types of options are there in the market −Call options – Call options let the option holder buy an asset at a specified price ... Read More