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It is an investment position taken by an investor or by a company to protect fair value of their specific asset/liability/unrecognised commitment from risk which can affect their profit and loss account.In other words, it is a derivative instrument to balance their risk in other investments to offset potential losses in fair value of their assets/liability/unrecognised commitments.Accounting for fair value of hedge For derivatives of hedging instruments loss or gain is measured according to IAS 21 and for non-derivative hedging instruments is recognized as immediate loss or gain.Carrying amount of the hedged item is adjusted through gain or loss on the ... Read More
People have different goals in terms of investments, some will go for financial securities and some may go for extra income and others may save for retirements etc. to reach their goals people invest in different options like hedge funds, Exchange traded funds, bonds etc.In this, we will compare hedge funds and exchange traded funds.Hedge fundsThese are private portfolio investments, to generate returns it uses management strategies and risk investments. These are open to limited persons and preferences will be given to high net worth investors. Leverages, even short selling and options are different investment strategies used in hedge funds.CharacteristicsOnly ... Read More
Private equity term is used when investors use their funds for acquisition of public entities or in investment in private companies whereas hedge funds are privately owned entities that used to raise funds from investors and invest them back in financial instruments.Private equity funds are used in company acquisition, expansion or to strengthen the balance sheet whereas private equity is used for fundraising.Private equitySignificant parts of private equity are accredited and institutional investors because they can commit large amounts for a longer period of time. Private equity also converts public companies into private companies.Hedge fundsProtecting from financial losses is called ... Read More
Investment is nothing but investors hold the asset or security for a long period of time whereas speculation is for profit making and used usually for a shorter period of time.In other words investments assure amount safety and good returns whereas speculation is opposite to investment that means amount safety and return is not assured. Amount in investment is consistent and the amount in speculation is inconsistent.InvestmentInvestment involves purchase of assets or security hoping it will generate income or expected to appreciate in future. Financial investments include purchasing of bonds or stocks, mutual funds etc. the word investment is not ... Read More
Financial markets are complex and large in size. Before going for differences let us try to understand the terms hedging and forward contract in brief.HedgingIt is the technique which is used to reduce the risk of financial assets. Risk of uncertainty of future income is involved. By hedging they can be certain about future value and date.Some of hedging instruments are as follows −Exchange traded instruments: only traded with standardized investment sizes in organized exchanges.Over the counter instruments: structured exchange is not present or no structured exchange.Commonly used hedging instruments are forwards, futures, options and swaps.Forward contractLet us try to ... Read More
Hedging and speculators play an important role in markets. Hedgers protect themselves against reduced risk of commodities by hedging and by speculation speculators earn profits from changes.HedgingThe term hedging is used to minimize risk of loss due to price movement in the market.This is done by holding two different positions in different markets. In most cases, Loss or gain in one market offset price movements in another market.Some of the advantages are increases liquidity, lowers margin, can invest in various assets, offers flexible price mechanism.Hedging strategies − Forward contract, future contract and money markets.Investors hedge by asset allocation, structure and ... Read More
Both options and warrants are derivatives traded in exchange and give investors an option to buy at pre agreed date and price. The main differences between two are warrants are financial instruments whereas options are contracts. Values ascertained from livestock’s, bullion etc.OptionsThese are derivative securities in the fundamental category in which one party acquires right buy or sell but not right to obligation buy or sell at strike price at a particular date. Option buyer has the right to buy or sell security whereas option seller is the one who confers.Option premium is charged by seller to buyer. The underlying ... Read More
Investors have different options to invest their money in stock markets. One of them is the options category of securities in which they trade their securities at agreed date and price.Options are sub divided into the following −Call optionIn this option buyer has the right to buy assets at strike price at a particular date. To acquire call option investors have to pay some upfront cost call premium through which they can get the right to purchase a product at a fixed price on a particular date. Stocks, currencies, bonds etc. covered in call options.ExampleLet’s say, a buyer and seller ... Read More
Both options and swaps are derivatives of financial instruments. Both values depend on the underlying asset.OptionsRight to buy or sell the asset at a pre agreed price at a particular date. Important terms used in this are exercise date, strike price and option premium. It is in the non-recoverable amount.Exercise date - Date on which option should be exercised.Strike price - Price at which option should be exercised.Option premium - Price paid to acquire option.The types of options are as follows−Call option - At pre agreed date and price, buyer has right to buy financial asset.Put option - At pre ... Read More
Financial derivatives are categorized into forward contracts, futures contracts, options and swaps. Futures can be understood as legal binding of trade at a future date at an agreed price. On the other hand options are investors have the right to buy or sell products in stipulated time at pre specified price.Future contractFuture contract is the contract between involved parties to buy or sell financial assets at a set price at a future agreed date. Key elements in future contracts are date, buyer, seller and price.These are transferable and standardized contracts. These are traded in NYSE/NASDAQ/BASE/NSE. It includes currencies, stocks, commodities ... Read More