Risk and reward?
Chapter 1: Intro The biggest risk in any financial transaction is that you get it wrong. Do your research, look at charts of past performance, read the financial press on risk management – in short, know the risks that you’re taking. It’s vital to minimise these, because there are many other risks that can also trip you up and […]
What are interest rate swaps (IRS)?
This is where one stream of fixed-rate interest payments is exchanged for a floating rate stream of interest payments. The contract is based on an agreed principal amount – let’s say $1 million. Delta Corp is currently receiving a fixed rate of 1.5 per cent interest per month on its principal amount, while Omega Investments […]
What are forwards?
A forward contract is a private agreement between two parties obliging either the buyer or seller to purchase or offer an asset at a set price at a specified time. This sounds much like the futures market so far, but where futures are largely standardised and transparent, forwards are custom built – terms agreed privately between buyer […]
What are asset-backed securities
Say a financial company takes an illiquid asset, like a loan or mortgage, and engineers it into something that can be easily sold in the form of a share or security. This is called securitisation. A typical example is the mortgage-backed security. Let’s look at that a little more closely. In this example, Omega Investments has purchased a […]
What are credit default swaps?
A credit default swap (or CDS) is linked to, but not sold by, a corporation or a government that has issued bonds on the capital markets. The seller of the CDS, a bank or other financial institution, receives regular payments – like an insurance premium – from the buyer to cover the possibility that the […]
What are options?
Options are most commonly associated with stocks and stock indices. There are two types of option: a call option (to buy) and a put option (to sell). In an option you’re entering into a contract with a vendor to purchase or sell a specified quantity (100 shares per option) of a security at an agreed price […]
What are futures?
Futures are among the most common derivatives and play a crucial role in financial markets. They help reference pricing expectations for products as varied as commodities, stocks and interest rates. They can also be used in the procurement of raw materials and to hedge against market volatility. As opposed to spot markets, where the price you pay for a product is the current […]
