Mutually exclusive investments are investments that are connected to each other where taking up one negates the use of the other investment. These investments usually serve different purposes but when one of them is undertaken, the other cannot be done. There are many examples of mutually exclusive investments, but they are primarily related to funds invested to complete different projects.Note − Mutually exclusive investments are usually for different projects. However, they may be contingent investments that are derived when an extra investment is needed to serve the major purpose.Characteristics of Mutually Exclusive InvestmentsHere are the major characteristics of mutually exclusive ... Read More

Collar Option StrategyA collar option strategy is created to diminish both positive and negative returns of the underlying assets. It can hedge the options against the volatility of the market and limit the return of a portfolio within a specified range.To do this, a protective put and a covered call option are used. Generally, it is created by holding an underlying stock, buying out-of-the-money put options, and selling an out-of-the-money call option.How does a Collar Option Strategy work?A collar option strategy is used to limit both upside and downside of an investment. It involves a long position on an underlying ... Read More

The following three important steps are involved in evaluating an investment decision −Estimation of Cash FlowEstimation of Internal Rate of Return (the Opportunity Cost of Capital)Application of a decision rule for making the choiceLet us take a closer look at each of these steps.Estimation of Cash FlowDiscounted Cash Flow (DCF) techniques address the time value of money as well as the opportunity costs, which is the cost of foregoing investment in a project for selecting another in its place. The major types of DCF include Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index.NPV is the gap ... Read More

Net Present Value or NPV is a classic economic method of evaluation of investment proposals. It is a Discounted Cash Flow (DCF) technique that considers the time value of money. NPV correctly postulates the cash flows that arise at different time periods that are comparable in terms of their present values.Steps to Calculate NPVThere are some steps that must be followed to calculate NPV. Here are the four rules that must be followed to calculate NPV correctly.Forecasting Cash Flows − This is the first step of the NPV calculation where an accurate forecast should be made about cash flows of ... Read More

The Value Additivity Principle in NPV states that the value of the total NPV of a bigger project is equal to the summation of all smaller NPVs of projects. In other words, the summation of all smaller NPVs provides the bigger NPV of an investment project. The NPV of a group of the independent projects will be equivalent to the NPV of all the independent projects.If A and B are two smaller projects, then the total NPV of the bigger project (A+B) would be −NPV (A+B) = NPV (A) + NPV (B)Value Additivity is an important principle because using it, ... Read More

Internal Rate of Return (IRR) is a popular investment evaluation method, as it offers the profitability of a project in percentage terms. The IRR criterion is also popular because it can be easily compared with the opportunity cost of capital. However, like all other investment evaluation methods, it also has some merits and demerits.Merits of IRR MethodFollowing are the merits of using IRR as an investment evaluation method −Time value of money − IRR considers the time value of money. It states that a rupee today will be worth more than a rupee tomorrow. By considering the time value of ... Read More

Bullish SpreadA Bullish Spread or Bull Spread is a strategy in which the traders of options profit from the increase of the price of the underlying asset of the option. This strategy may contain both put and call options with different strike prices. In a bull call spread, an option is bought at a lower strike price while an option with the same expiry is sold at a higher price.Bull StrategyIn a Bull Strategy,         Maximum gain = High strike price − lower strike price − net premium paidWhen the price of the underlying goes above the ... Read More

The "butterfly options strategy", also called "butterfly spreads" contain both bullish and bearish options. The trader in butterfly spreads has four options having the same expiry dates but three different strike prices. The trader buys two options contracts that have a higher and lower price, and two contracts with a price in between. The difference between high and low strike price is equal to the strike price in between.A butterfly strategy contains the following −Buying or selling of Call/Put optionsCombining four option contractsSame underlying assetSame expiry dateDifferent strike prices, with two contracts at same strike priceExplanationButterfly spreads work the best ... Read More

The prices of shares keep moving up and down in the market and hence, they are called "volatile" which means not constant over time. Implied volatility means how much the price of an option will move in a given period of time. The term is more applicable in the case of options contracts.Predicting volatility is a very important issue in finance. Investors often want to know how much an option or a stock can move up or down to reap the benefits and implied volatility can help them ascertain the basics of price movements.Implied Volatility – DefinitionImplies Volatility (or IV) ... Read More

Businesses need to take various investment decisions from time to time to stay functional and competitive. These decisions not only increase the competitive edge of a company but also add new dimensions to the existing manufacturing and financial position of a company.The investments needed for growth can be divided into the following four categories −Expansion InvestmentsDiversification InvestmentsModernization InvestmentsReplacement InvestmentsExpansion InvestmentsExpansion investment is made to increase the production of a certain product. It requires the firms to increase their capacity to manufacture or build a new production line to expand the current business volume. Expansion is often required when the demand ... Read More