Usually, the investment decision rules are known as capital budgeting decisions or investment criteria. To determine the financial worth of an investment project, sound capital budgeting rules should be followed.The most important property of a good capital budgeting technique is that it should maximize shareholders’ wealth. However, there are some other rules too that must be followed for making an investment decision. These include the following −An investment decision should address all cash flows to determine the correct profitability of a project. This should include all cash inflows and cash outflows. Usually, the calculation of cash flows is a necessary ... Read More

In finance and economics, investments have been categorized into various sectors. Independent and contingent investments are two broad subjects of investment decisions. Usually, there is no relation between independent and contingent decisions, but they may be considered two broad aspects of investments that determine the nature and characteristics of investments altogether.As the names suggest, independent investments are independent in nature, while contingent investments are related to some other types of investment.Independent InvestmentsIndependent investments are free from the influence of any other related investments. It is done singularly and executed for the benefit of the firm undertaking the investments.Independent investments may ... Read More

Delta is the measure of price movement of an options contract when the value of the underlying stock moves ${\$}$1 in value. Many people would assume that the value of an option will also move ${\$}$1 when the value of the underlying stock moves ${\$}$1. However, this is not true. As the cost of an option is much lower than the collective value of the underlying, the value of an option will change less than ${\$}$1 when the price of the underlying changes ${\$}$1.Call Options have Positive DeltaUsually, calls have a positive delta. For example, if the value of delta ... Read More

There is always an inherent risk in all kinds of investments and options contracts are no different. When a trader invests money in options, he can be either a risk-taker or a risk-averse investor.Risk Neutrality is a term used for traders who are indifferent to the risks of losing money. They just consider the final outcomes of the investments without taking care of what the other options of the investments are. Obviously, the gains for risk-neutral investors are higher, but the risk of losing money is also proportional to the risks taken by the risk-neutral traders.The term "risk-neutral" is the ... Read More

Hedging is a popular way to protect investments. It helps in mitigating risks and provides optimum exposure to risks. When a portfolio is hedged, it is often required by the investors to know about the portion of the total portfolio that is risk protected. This is where the hedge ratio comes in.In general, the hedge ratio is the ratio of the value of the investor’s open position to the overall position of the portfolio. In other words, the hedge ratio is the ratio of the open position to the overall position with a hedge to the total size of the ... Read More

Capital Budgeting is the process of evaluating, checking, and implementing a large-scale project that requires a significant amount of money. Capital budgeting may be required in the acquisition of land and building, purchase of machinery, and marketing a new product of the company. The large-scale money spent in executing these decisions is called capital expenditure.Budgeting is a process of maximizing profits by allocating money to the appropriate project and managing the project as and when it requires attention.Capital Budgeting ProcessThe following five steps are necessary in Capital Budgeting −Project Identification and GenerationThe first step of the capital budgeting process is ... Read More

There are many options strategies that a trader can apply while dealing in stock options contracts. One such option strategy is the Calendar Spread where selling an option and buying one takes place at the same time. The option that is sold is usually short term, while the one bought is a longer-term call or put option. Needless to say, a calendar spread requires the options to be of the same strike price and have the same underlying assets.A calendar spread strategy is utilized when there is no movement in the market or when there is no movement to hedge ... Read More

The Net Present Value (NPV) is a measure of an investment’s profitability. It can be either positive or negative. Positive NPVs are preferred because they point toward a profitable investment, while negative NPV investments are rejected as they show large losses.NPV is important because it is the best rule to determine the profitability of an investment project. NPV is the most important investment rule for the following reasons.Note − A positive NPV implies that the profitability of a firm in the present time and unit exceeds the NPV of another in the same time and unit.The Time Value of MoneyNPV ... Read More

Profitability Index (or PI) is a method to evaluate the profitability of investment projects. It is actually a benefit to cost ratio or the ratio of the present value of cash inflows at the required rate of return to the initial cash outflows of the investment.Like NPV and IRR, PI is also a popular investment evaluation technique. However, the measurement procedure and application of the method have some differences in comparison to IRR and NPV. PI is a variation of the NPV method and requires similar computations as the NPV method.Like IRR and NPV, PI also has some merits and ... Read More

There are basically six factors that affect the value of an options contract −The value of the underlying assetExercise priceExpiration timeRisk-free rate of interestVolatilityPayments on the underlying and cost to carry onLet us take a look at each of these factors in detail.The Value of the Underlying AssetThe value of the underlying assets has a significant effect on the value of an options contract. In fact, call options can be considered as buying the underlying, while put options can be viewed as selling the underlying. Therefore, when the value of underlying goes up, the value of the call option increases. ... Read More