Derivatives are a special category of investment banking instruments called as alternative investments. Derivatives derive their value from the underlying security. They have finite, predefined life, predefined reference rate, predefined reference price, predefined notional amount. They are not issued to raise capital. In most of the cases derivatives are used for arbitrage.
Two And Twenty Hedge Fund Compensation:
Two and twenty compensation is a type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. More specifically, this phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned.
Binary Option is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money.These types of options are different from plain vanilla options
Also sometimes referred to as “all-or-nothing options” or “digital options”.
Blue Sky Law – Law governing Securities :
Blue Sky Law is the security regulation.When trade happens in different states, each and every state has its own securities (stocks/bonds – financial instruments) regulation.These regulations are drawn from the blue sky law.Blue sky law is a comprehensive set of laws governing the securities.
Information on who has the authority to deal with violation issues has been clearly mentioned by Uniform Securities Act (USA) in these laws. Power of each state administrator is also mentioned in this law.This is a measure to protect investors.
Sellers who are ready to sell their financial offerings must abide by this law. They need to provide information (financial details) which is reviewwd and approved by the state administrator. This is a security measure against investment fraud.If the application of seller is not approved by state administrator, it needs a review.
Terms of futures contract:
Quality of underlying asset
Contract size (Ex: Grain contract = 5000 Bushels)
Delivery time (Ex: December corn contract)
Settlement of some contracts = Future prices – Market price
Price quotation and tick size
Daily price limits
Major components of a Broker Dealer is given below :
1) Front office – trading departments, investment banking, mergers and acquisitions, R&D, stock brokers, sales management
2) Middle office – Order control
3) Back office – control operations
In some organizations middle office and back office are integrated into one entity.
Buck The Trend:
When a security or a class of assets sees its market-driven price move in the opposite direction of the broad market or its competition. The move could be in either direction, but generally occurs as a result of good performance in the face of negative broad market performance.The meaning is often extrapolated out from just asset prices to business and market fluctuations. If a company is recording increased sales while its competitors lose business, that company would be “bucking the trend”.
NYSE Affirmative Obligation:
Affirmative obligation is an obligation of Newyork Stock Exchange (NYSE) specialists to enter the market on a particular security (either by posting or bidding and ask) when there is not sufficient market demand and supply to efficiently match orders.
It is a New York Stock Exchange rule that governs the behavior of specialists. Affirmative obligation is the mandate of the specialists to step in and act as either the buyer or the seller when public investor orders exist do not match up naturally. It is also known as positive_obligation.
Forex/FX Base Currency:
Base currency is the first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency.For accounting purposes, a firm may use the base currency to represent all profits and losses.
It is sometimes referred to as the “primary currency”.
Example for Base currency : EUR/USD
First currency listed is the base currency. The value of base currency is always 1.In FOREX markets usually US Dollar is considered the base currency.
There are three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.
In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Negative Obligation – Opposite to affirmative obligation/positive obligation:
Negative obligation is a New York Stock Exchange rule that governs the behavior of specialists. Negative obligation is the mandate of the specialists not trade for the specialist’s firm’s own account when enough public investor orders exist to match up naturally — without intervention.It is opposite to affimative or positive obligation.
SRO (Self-regulatory Organization) is an induatry. This organization is empowered to oversee, regulate and when necessary take punitive action against brokers/dealers or their employees.
Some examples of SRO include NYSE (New York Stock Exchange), NASD (national Association Of Security Dealers).
Fixed income bond 30 years:
Fixed Income Bond 30-Year Treasury is a U.S. Treasury debt obligation that has a maturity of 30 years.The 30-year Treasury used to be the bellwether U.S. bond.Now 10-year Treasury is considered to be the benchmark.
Treasury Bond is also called as T-bond or long bond.It will have maturity of twenty to thirty years.
The U.S. Federal government stopped issuing the well-known 30-year Treasury bonds/long bonds for a four and a half year period starting October 31, 2001 and concluding February 2006.
U.S Federal government is now issuing 30-year treasury bond quarterly.
When do companies go piblic?, What is the perfect time to start IPO(Initial Public Offering)?
A company or an organization can go public/start their IPO(Initial public offering) after gaining sufficient reputation. Aninvestor will look at the business model, previous performance of the organization, scope of their future projects before making a final decision on investing in the company’s stock.
FOREX Market – Purchasing Power Parity (PPP): Similar goods in different currency areas ahould be worth the same when FOREX valuations are taken into account.Foreign exchange values should be adjusted to bring their values inline
Stock market vs futures market:
Primary purpose of stock markets is to raise capital for the companies.
Primary purpose of futures market is to hedge the price risk of companies and individual investors.
National Association Of Security Dealers Automated Quotation(NASDAQ) Order Routing Systems are the electronic systems used by NASDAQ brokers/dealers :
1) SOES – Small Order Execution System
2) ACES – Advanced Computerized Execution System
3) CAES – Computer Assisted Execution Systems
Options – Non-linear derivative:
Option is a kind of non-linear derivative.Options are traded both in exchanges and over-the-counter (OTC).
There are two types of options :
1) Call Option
2) Put Option
Call option gives the holder the right to buy the underlying asset at a specified price at a specified date.
Put option gives the holder the right to sell the underlying asset at a specified price at a specified date.
The price in the contract is known as strike price or the exercise price.
The date mentioned in the contract is known as expiration date or maturity.