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Growth & Empowerment Articles
Page 124 of 160
Rules to be followed while making Investment Decisions
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 MoreWhat is the difference between Independent and Contingent Investments?
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 MoreWhat is Delta in stock options contracts?
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 MoreWhat is meant by Risk Neutrality?
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 MoreWhat is a Hedge Ratio?
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 MoreWhat is Capital Budgeting?
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 MoreWhat is a Calendar Spread in Stock Options Strategies?
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 MoreWhat are the merits of the Profitability Index Method?
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 MoreFactors that affect the value of a stock options contract
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 MoreWhat are the characteristics of Capital Budgeting Decisions?
Capital Budgeting is a process of evaluating long-term business decisions that need large amounts of capital. It is a way to find a better deal for the growth of the business. Capital budgeting is often related to important capital decisions that impact the bottom-line of a company. It has certain characteristic features. Here are the features one by one.Large InvestmentsCapital budgeting is related to investments of large funds. It is often used to find projects that need large investments. Managers of a company identify the need for a capital budget where large sums of money are required. In capital budgeting ...
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