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Finance Management Articles
Page 11 of 96
What are the Limitations of Ratio Analysis?
What is Ratio Analysis?Ratio analysis is a good way of comparing the conditions of a business with its peers. It helps businesses understand their own strengths and weaknesses.Ratio analysis are basically tools to measure the various relationships between two or more financial items. It also helps businesses compare themselves with companies of scale. However, there are some drawbacks of ratio analysis that affect its efficiency.Limitations of Ratio AnalysisThere are some prominent drawbacks of ratio analysis which analysts and investors should be aware of. They are as follows −Base of ComparisonAlthough ratio analysis is a good way to measure the performances ...
Read MoreWhat is the Purpose of Inter-Firm Comparisons?
What is Inter-Firm Comparisons?Financial ratios can be compared with one another in order to get a gist of the performance and other attributes of a company in relation to the other major firms. Such a performance of a company that shows the financial ratios is known as Cross-Sectional Analysis or Inter-Firm Comparison.In an Inter-Firm Comparison chart, various attributes such as Market Share, Return on Equity (ROE), Net Worth (NW), Capital Employed (CE), Net Sales (NS), Profit Before Interest and Taxes (PBIT), etc., are put in one table. This table helps one to see the performance and efficiency of one company ...
Read MoreTrend Analysis Vs Ratio Analysis
Businesses use past and present data in order to find a pattern and predict the future. This review of past and present forms of data is usually known as Trend Analysis which is one of the most popular tools in the hands of financial analysts and managers. Ratio analysis, on the other hand, are tools to measure the various relationships between two or more financial items.Financial ratios can be used to represent trend analysis. In fact, financial ratios are the backbone of trend analysis.Trend Analysis Vs Ratio AnalysisFollowing are the differences between Trend analysis and Ratio analysis −Based on the ...
Read MoreWhat is option contract?
Options contract is the contract between parties in which, a buyer has the right to sell or buy a particular asset at future date on agreed price. These types of contract are used in securities, commodities etc.In this, buyer will look at ask price and if he wants to buy into option contract, he will offer the bid price (which is lower than bid price). After the contract is purchased from the seller, a position is opened and seller is paid to buy an asset on strike price. Buyer has to sell, buy or exercise the contract before an expiry ...
Read MoreWhat are swap curves?
Swap curve is the relationship between swap rates and varying maturities. This curve tells about the expected returns at different maturity dates. It is a two dimensional curve in which, Y-axis represents the swap rates and X-axis represents maturity dates.These curves are calibrated and constructed in segments depends on market prices of different fixed income. The short end (not more than 3 months) swap curve is calibrated to unsecured deposit rates. Middle end (in between 3 months to 2 years) is derived in combination of interest rate futures and forward rate agreement contracts.Long term (more than or equal to 10 ...
Read MoreDifference between deflation and disinflation?
DeflationIt is decline in goods/services price when rate of inflation falls below zero percentage. It is linked to unemployment and productivity levels of goods/services are low. Deflation acts as economy indicator for deteriorating conditions.Causes of deflation are as follows −Structural changes (capital markets)Productivity increasedWhen decrease in currency supplyEffects of deflation are −Reduces business revenueLow wagesLayoffsDisinflationIt is nothing but decrease in rate of inflation or price inflation is slowing. It is a point where inflation increases at slower rates. Money supply slows down because of tighter monetary policy is cause of disinflation. Disinflation is not always a negative. It can be ...
Read MoreHow to Compare interest rate and inflation?
Interest rateIt is either the cost of money borrowed or reward for saving the money. Generally, interest rates are calculated in terms of percentages. Public borrow money from banks in the form of loans. Banks borrows money from public in form of deposits and pays interest for money deposits. Interest rates can beFixed interest rates: charges are fixed throughout the loan lifeVariable interest rates: charges changes with prime rateIncrease in interest rates results in the following −Decrease in inflation.Decrease in circulation of money in market.Expense borrowing.Decrease in demand of goods and services.Price of goods and services will decrease.Decrease of interest ...
Read MoreWhat is the difference between floating currency and fixed currency?
Let us first see what floating currency is and fixed currency −Floating currencyA floating currency is a monetary system that is not backed by gold or assets. Based on supply and market expectations value of the currency fluctuates. The value of a currency is determined by the level of foreign reserves and global demand.If the currency has demand, then the value of currency appreciates and impacts country’s exports (lower the demand for exported goods). To attract consumers, an exporter has to low their prices which decreases their profits and faces risk of going out of business.If the currency demand is ...
Read MoreWhat is fixed for floating and fixed to fixed swaps?
The fixed for floating and fixed to fixed swaps are explained below −Fixed for floating swapFixed for floating swap is an agreement between the parties, which involves swapping of fixed rate loan (cash flow interest) of one party to floating rate loans of other party. A company goes for fixed for floating swaps to reduce interest expenses and for match assets and liabilities that are more sensitive to floating interest rates.Reasons to go for fixed for the floating swap are as follows −Reduces interest rates.Diversifies risk.Performs financial hedges (expecting decreasing of interest rates).Match between assets and liabilities, which are sensitive ...
Read MoreHow future contracts are terminated?
Future contractsThese are a standardized agreements between parties −One party commits to sell stipulated quantity, quality of commodities, securities or any other specific items at particular price on or before future date (agreed in agreement)Daily settlements of all Gains/losses (till status of contract is open)Provides either physical delivery or cash settlementFeaturesBuyer (LONG) agree to receive deliverySeller (SHORT) agree to make deliveryTraded on exchanges (either by Pits or electronically)Can be terminated prior to contract expiration (by offsetting transactions)Future contract has a underlying instrument (currency, commodity etc.), size (amount of underlying item covered in contract), delivery cycle, expiration date, quality specification, delivery ...
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