Let us understand what free cash flow to firm (FCFF) and free cash flow to equity are, before learning about their differences.Free cash flow to firm (FCFF)Free cash flow is an integral measurement tool which is used in management accounting. This allows business members to monitor and measure the values of their business to avoid failure and to expand their business by keeping features needs in mind.In simple words, free cash flow is the leftover money in the firm after deducting all the expenses like debts, expenses, rent etc. It also indicates the health of the company. By free cash ... Read More

Call option is the contract in which, buyer has a right to buy shares of number at strike price before an expiry date.In this, the buyer has no right for an obligation.In this option, premium is paid for risk associated with an obligation.These are purchased mainly for speculation and are sold for income purposes.If the security price is more than the purchase price then, an option is profitable (buying the stock at a lower price than market value).If the security price is lower than the purchase price, then the option is not profitable.TypesThe types of call option contract are as ... Read More

Put option is the contract in which the holder has a right to sell equity shares of number at strike price before an expiry date.Put option is available in stocks, indexes, commodities and currencies.Price change is impacted by underlying assets, time decay, interest rates, and strike price. If there is decline in interest rate and increase in underlying asset, then value of put option increases.If there is decrease in interest rates, underlying assets and nearing expiry dates, then value of put option decreases.If the option expires is profitable then, it will exercise and if option expiry is unprofitable, then the ... Read More

Let us learn about the depression and recession before understanding the differences between them.DepressionDepression is a more prolonged and severe form of recession. According to the IMF, if the GDP declines over 10% then it is considered as depression. Depression is always borne out of recession and debate continues when it will end, some say it will end when the economy starts to grow again and some say it will end output returns to pre-crisis level.Some of the greatest depressions are mentioned below −Worst downturn was recorded in 1929 and lasted for 10 years leaving a deep scar on the ... Read More

Inflation and deflation are burning issues which almost every country experienced. In simple words inflation is an increase in price of goods and services and decrease in purchasing power. Deflation is where decrease in price of goods and services and increase in purchasing power.InflationThis situation occurs due to variability in demand and supply of money. This results over time, the price of goods and services increases. Example is the rise in gold price due to the fall in money value.Due to inflation the common man has spent more money purchasing goods and services because the general price will have upward ... Read More

Let us learn about the exchange traded derivatives and over the counter (OTC) before understanding the differences between them.Exchange traded derivativesWith a standardized contract, exchanged traded derivatives consist of options and futures mostly and traded on public exchanges. Determines expiry date, settlement process, lot size and states underlying instruments on which derivatives are created. By providing market based pricing information these derivatives promote transparency and liquidity.TypesStock derivatives − Commonly traded asset class are common stockIndex derivatives − Instead of simply future of a particular stock, these derivatives are sold to investors who like to buy/sell an entire exchangeCurrency derivatives − ... Read More

People who do business internationally should be aware of exchange rates and how they work exactly. Let’s try to understand about floating currency exchange rate and fixed currency exchange rate.Floating currency exchange rateFloating currency exchange rate depends on demand and supply. If demand for currency is high then value increases and if demand for currency is low then value decreases. This exchange rate affects a country’s trade position internationally.Advantages of the floating currency exchange rate are as follows −Change of internal policy.Large reserves are not needed.Central bank has less power.Disadvantages of the floating currency exchange rate are as follows −Uncertainty.Volatility ... Read More

Equity swaps is a derivative contract between parties, which involves exchange of future cash flows between two cash streams. Cash streams are also called “leg”. One cash stream/leg has equity based cash flows (return on equity index etc.) and the other cash stream has fixed income cash flows (LIBOR etc.)In this, exchange takes place on fixed dates and these cash flows have predetermined notional amounts. They do not imply exchange of principal amounts. They offer a high degree of flexibility and equity swap contracts are customised according to needs of parties.Advantages of equity swaps are as follows −Gain exposure to ... Read More

Let us learn about the fixed interest rate and floating interest rate before understanding the differences between them.Fixed interest rateIn fixed interest rate the lending rate is fixed. In fixed interest rate loan tenure and months installment are known before. Switching of fixed rates to floating rate (a few years) is called reset.Fixed interest rate is ideal when you want to pay fixed EMI and to meet deadlines without any difficulties. With fixed interest rates, people can plan their finances better and it helps in eliminating/decreasing market risk associated with interest rates. The main advantage of fixed interest rate is ... Read More

Both terms recession and slowdown affects the economy negatively. Cause, manner and degree in which they affect the economy differ.RecessionIt is the term used in general economic activity. In macroeconomics, recession is recognized when there is negative GDP growth rate after two consecutive quarters. Recession is the part of the economic cycle of expansion and contraction.Recession indicators are as follows −Gross Domestic product (negative GDP indicates sharp decline in productivity)Real income (purchasing power depends on real income, if real income decrease then purchasing power decreases)Manufacturing (exports/imports and trade surplus/deficits with other countriesstrength health of manufacturing sector)Wholesale/retail (measures market performance of ... Read More