Options contract is the contract between parties in which, a buyer has the right to sell or buy a particular asset at future date on agreed price. These types of contract are used in securities, commodities etc.In this, buyer will look at ask price and if he wants to buy into option contract, he will offer the bid price (which is lower than bid price). After the contract is purchased from the seller, a position is opened and seller is paid to buy an asset on strike price. Buyer has to sell, buy or exercise the contract before an expiry ... Read More

Swap curve is the relationship between swap rates and varying maturities. This curve tells about the expected returns at different maturity dates. It is a two dimensional curve in which, Y-axis represents the swap rates and X-axis represents maturity dates.These curves are calibrated and constructed in segments depends on market prices of different fixed income. The short end (not more than 3 months) swap curve is calibrated to unsecured deposit rates. Middle end (in between 3 months to 2 years) is derived in combination of interest rate futures and forward rate agreement contracts.Long term (more than or equal to 10 ... Read More

DeflationIt is decline in goods/services price when rate of inflation falls below zero percentage. It is linked to unemployment and productivity levels of goods/services are low. Deflation acts as economy indicator for deteriorating conditions.Causes of deflation are as follows −Structural changes (capital markets)Productivity increasedWhen decrease in currency supplyEffects of deflation are −Reduces business revenueLow wagesLayoffsDisinflationIt is nothing but decrease in rate of inflation or price inflation is slowing. It is a point where inflation increases at slower rates. Money supply slows down because of tighter monetary policy is cause of disinflation. Disinflation is not always a negative. It can be ... Read More

Interest rateIt is either the cost of money borrowed or reward for saving the money. Generally, interest rates are calculated in terms of percentages. Public borrow money from banks in the form of loans. Banks borrows money from public in form of deposits and pays interest for money deposits. Interest rates can beFixed interest rates: charges are fixed throughout the loan lifeVariable interest rates: charges changes with prime rateIncrease in interest rates results in the following −Decrease in inflation.Decrease in circulation of money in market.Expense borrowing.Decrease in demand of goods and services.Price of goods and services will decrease.Decrease of interest ... Read More

Let us first see what floating currency is and fixed currency −Floating currencyA floating currency is a monetary system that is not backed by gold or assets. Based on supply and market expectations value of the currency fluctuates. The value of a currency is determined by the level of foreign reserves and global demand.If the currency has demand, then the value of currency appreciates and impacts country’s exports (lower the demand for exported goods). To attract consumers, an exporter has to low their prices which decreases their profits and faces risk of going out of business.If the currency demand is ... Read More

The fixed for floating and fixed to fixed swaps are explained below −Fixed for floating swapFixed for floating swap is an agreement between the parties, which involves swapping of fixed rate loan (cash flow interest) of one party to floating rate loans of other party. A company goes for fixed for floating swaps to reduce interest expenses and for match assets and liabilities that are more sensitive to floating interest rates.Reasons to go for fixed for the floating swap are as follows −Reduces interest rates.Diversifies risk.Performs financial hedges (expecting decreasing of interest rates).Match between assets and liabilities, which are sensitive ... Read More

Future contractsThese are a standardized agreements between parties −One party commits to sell stipulated quantity, quality of commodities, securities or any other specific items at particular price on or before future date (agreed in agreement)Daily settlements of all Gains/losses (till status of contract is open)Provides either physical delivery or cash settlementFeaturesBuyer (LONG) agree to receive deliverySeller (SHORT) agree to make deliveryTraded on exchanges (either by Pits or electronically)Can be terminated prior to contract expiration (by offsetting transactions)Future contract has a underlying instrument (currency, commodity etc.), size (amount of underlying item covered in contract), delivery cycle, expiration date, quality specification, delivery ... Read More

It is a specific type of foreign currency cash flow hedge used to reduce or eliminate risk arises to foreign currency of an entity’s net investment in a foreign operation. In other words, it is the hedge designed to remove entity’s changes in net investment value to foreign investment in a foreign operation. That foreign operation occurs due to change in foreign exchange rates between local currency of foreign investee and reporting currency of investor.The hedging instrument in his hedge can be derivative, non-derivatives or a combination of both. Derivatives like foreign exchange forward contract and non-derivative like foreign currency ... Read More

Hedging an asset or liability limits the exposure to extreme changes in its value. Hedging is done to mitigate the risk of loss. Any gain arises through hedging instrument will uplift the item in the financial statement (in case of asset value falls drastically).Accounting for fair value hedges is done by company with respect to exposure of fair value change of item. This item can be asset or liability to company and can be attribute to particular risk which result in generating profit or loss to companySteps involved in fair value hedge accountingFair value of hedged item and hedging instrument ... Read More

Let us first understand what GAAP.GAAP (Generally Accepted Accounting Principles)GAAP offers standards for the true and fair value of companies financial wellbeing. It is defined by Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).Advantages of GAAP includeFacilities consistencyIncrease investors trust.Comparability of financial statements.Decision making.Disadvantages include:Compels financial statements according to creditors instead of equity holders.Non – GAAP (Generally Accepted Accounting Principles)Non – GAAP is not a standard one. Necessary adjustments are made for conveying significant information. Securities and Exchange Commission (SEC) issues rules and regulations.Advantages of Non – GAAP include −Provides Quality information.Provides Predictive information.Provides relevant and ... Read More