Free cash flows (FCF) is the cash that generated by company after cash flow to maintain their capital assets and its operations. In other words, FCF is the cash remaining after paying taxes, payrolls etc. FCF is the effective measurement to measure company’s performance and financial healthTypesFree cash flow to the firm (FCFF)FCFF is the difference between cash flow (operating activities) and capital expenditureFree cash flow to equity (FCFE)FCFE is difference between sum of (FCFF+net borrowing) and (Interest amount * (1- tax))The formulae for free cash flows are as follows −Using cash flow statementsDifference between cash from operations to capital expenditureFree ... Read More

Before going for a swap contract, first let us know about SWAP. Swap is a derivative contract linking two parties which are involved in an exchange of cash flows of financial instruments at pre agreed rate. Applications of swap are risk hedging and to access new markets.A swap contract is a financial derivative wherein the transacting agents can swap revenue streams arising from underlying assets, which are held by parties.TypesTypes of swaps are as follows −These types are explained below −Interest rate swap − In this swap, parties agree to exchange the payments based on predetermined notional principal amounts.Currency swap ... Read More

According to the Section 2 (b) of Indian Contract Act 1872, an acceptance is defined as “when the person to whom the proposal has been made signifies his assent thereto, the offer is said to be accepted. Thus, the proposal when accepted becomes a promise”.In other words, an offeree to whom a proposal is made, accepts the offer unconditionally is said to be an acceptance. An offer that is accepted becomes a promise.Rules of valid acceptanceThe rules of valid acceptance are as follows −Given only to whom an offer is made.It is communicated.In some cases, acceptance should be given before ... Read More

The major differences between backwardation and contango are as follows −BackwardationIt refers to the prevailing conditions of the market, when future price of commodities (gold, silver etc.) trade lower than anticipated price.Usually takes place when value determined (spot price – futures price) is lower than cost of carrying.Spot price is higher when compared to forward price of future contract in a market normal backwardation.Forward price of the future contract is lower as compared to spot price in a market in normal backwardation.Convenience yield, oversupply of futures/spot etc. are reasons for backwardation.Forward price curve is sloping downward (inverted market).Occurs rarely.Results a ... Read More

It is an agreement in which the seller will sell a predetermined amount of commodities to the buyer on a particular date at a specific price. The main difference from future contract and option contracts is that holder in future contracts has obligation to act. Commodity contracts include assets like crude oil, gold, silver, wheat, corn, natural gas etc.AdvantagesThe advantages of the commodity future contract are as follows −Seller receives fixed sales price.Since the buyers agree to take commodities at a particular rate, if there is any price drop, the seller does not lose.Limited risk for sellers.Better production plans.DisadvantagesThe disadvantages ... Read More

Total return swap (TRS) is an agreement between the two parties in which they exchange returns on financial assets. One party will pay on a set rate and the other will pay on the total return of the underlying asset (bond, loan, equity interest etc.). In this swap, the party receives an income without owning it.CharacteristicsThe characteristics of total return swap are as follows −Referenced asset.It clearly states what is included in the total return.Reference index.Spread included.Whether notional is fixed or notReceive or pay.Swap price.Effective date and maturity date.Payment frequency.TypesThe two types of TRS are as follows −Credit derivative − ... Read More

Credit default swap acts as the insurance policies. It is a financial derivative which allows an investor to offset their credit risk with that of other investors. In this swap, the buyer will pay quarterly installments to the seller. It protects against high-risk corporate debts, municipal bonds and sovereign bonds.It is an agreement between protection buyer and protection seller. In this, any loss of buyer from credit event (bankruptcy, restructuring etc.) in reference instrument is compensated by protection seller. In case of default, the seller will pay bond face value to the buyer.FormulaThe formula to calculate the credit default swap ... Read More

Currency swap is an agreement between the parties to exchange principal amounts of different currencies at a predetermined rate on a future date.TypesThe two types of currency swaps are as follows −Fixed to fixed − Exchange of fixed interest payments in one currency on loan equivalent in other currency.Fixed to floating − Fixed rate obligations in one currency are exchanged for floating rate obligations in other currency.StagesThe stages included in the currency swaps are as follows −Foreign exchange market is spotted.Exchanging of interest payments during swap term is carried out.On maturity principle is re-exchanged.Principal is usually exchanged in any of ... Read More

Interest rate swap is an agreement between parties to exchange interest rates. Let’s say, we have two parties (first party and second party). Then, the most commonly used interest rate agreement is “first party agrees to pay at fixed interest rate to second party and second party agrees to pay at floating interest rate to first party”. Mostly banks, corporations and investors use interest rate swaps.Reasons to useThe reasons to use the interest swap rates are explained below −Offset risk of floating interest rate.To lock the future fixed rate.Leverage rate between the currencies.To speculate on the predicated fluctuation rates.TypesThe two ... Read More

Currency futures is a type of contract in which two sides agree to exchange a specific quantity of a particular currency on a specific date at a pre agreed price. These are legally binding agreements and on expiry date, counter parties will have to deliver the amount on a delivery date at pre agreed price. They can also be used to hedge the currency risks or price speculations.Specifications of currency futures are as follows −Parties to the contract.Size of contract.Position limitations.Spot and future prices.Margins requirements (initial, maintenance, variations margins).Market to market.Formula to calculate the currency future is given below −Currency ... Read More