Finance

Futures

- A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. - The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.

Cons of Derivatives:

- Hard to Value - Subject to counterparty default (if OTC) - Complex to understand - Sensitive to supply and demand factors

Pros of Derivatives:

- Lock in Price - Hedge against risk - Can be leveraged - Diversify Portfolio

Call Option

-A call is an option contract giving the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time. -The specified price is known as the strike price and the specified time during which a sale is made is its expiration or time to maturity. -Call options may be purchased for speculation, or sold for income purposes. They may also be combined for use in spread or combination strategies.

Derivatives

-A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset. -The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages.

Forwards

-A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. -Unlike standard futures contracts, a forward contract can be customized to a commodity, amount and delivery date. Commodities traded can be grains, precious metals, natural gas, oil, or even poultry. A forward contract settlement can occur on a cash or delivery basis.

Mutual Funds

-A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. -Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price -Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek -Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns. -The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds

Portfolio Construction: Risk and Return

-A portfolio's expected return is a weighted average of the returns of the portfolio's component assets. -Standard deviation is a little more tricky and requires that a new probability distribution for the portfolio returns be constructed.

Alpha vs Beta

-Alpha shows how well (or badly) a stock has performed in comparison to a benchmark index -Beta indicates how volatile a stock's price has been in comparison to the market as a whole. -A high alpha is always good. -A high beta may be preferred by an investor in growth stocks but shunned by investors who seek steady returns and lower risk

Exchange-Traded Funds (ETFs)

-An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock -ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes. -ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international. -ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually

Indexes

-An index measures the performance of a basket of securities intended to replicate a certain area of the market, such as the Standard & Poor's 500. -You cannot invest directly in an index -The S&P 500 and the US Aggregate Bond Index are common benchmarks for the American stock and bond markets, respectively

Options

-An options contract is an agreement between two parties to facilitate a potential transaction on the underlying security at a preset price, referred to as the strike price, prior to the expiration date. -The two types of contracts are put and call options, both of which can be purchased to speculate on the direction of stocks or stock indices, or sold to generate income. For stock options, a single contract covers 100 shares of the underlying stock.

Commodities Trading

-Commodities are great for diversifying portfolios beyond stocks and bonds, as commodities tend to move in the opposite direction of equities. -The commodities markets are typically driven by supply and demand. -There are a number of ways to invest in commodities, such as futures, options, and exchange-traded funds (ETFs) -Similarly, commodities can be an important way to diversify a portfolio beyond traditional securities—either for the long term or as a place to park cash during unusually volatile or bearish stock markets, as commodities traditionally move in opposition to stocks.

Delta Hedging

-Delta hedging is an options strategy that seeks to be directionally neutral by establishing offsetting long and short positions in the same underlying -By reducing directional risk, delta hedging can isolate volatility changes for an options trader -One of the drawbacks of delta hedging is the necessity of constantly watching and adjusting positions involved. It can also incur trading costs as delta hedges are added and removed as the underlying price changes

Hedge Funds

-Hedge funds are alternative investment vehicles that employ a variety of strategies to generate alpha for their accredited investor clients. -They are more expensive as compared to conventional investment instruments because they have a Two And Twenty fee structure, meaning they charge two percent for asset management and take 20% of overall profits as fees. -They have had an exceptional growth curve in the last twenty years and have been associated with several controversies.

Implied Volatility vs. Historical Volatility:

-Implied, or projected, volatility is a forward-looking metric used by options traders to calculate probability -Implied volatility, as its name suggests, uses supply and demand, and represents the expected fluctuations of an underlying stock or index over a specific time frame. -With historical volatility, traders use past trading ranges of underlying securities and indexes to calculate price changes. -Calculations for historical volatility are generally based on the change from one closing price to the next

Swaps

-In finance, a swap is a derivative contract in which one party exchanges or swaps the values or cash flows of one asset for another. -Of the two cash flows, one value is fixed and one is variable and based on an index price, interest rate or currency exchange rate -Swaps are customized contracts traded in the over-the-counter (OTC) market privately, versus options and futures traded on a public exchange -The plain vanilla interest rate and currency swaps are the two most common and basic types of swaps.

Portfolio Manager

-Portfolio managers work with a team of analysts and researchers to craft investment strategies and decisions for institutional or individual investors' portfolios. -Portfolio managers work for wealth management firms, pension funds, foundations, insurance companies, banks, hedge funds and other organizations in the securities industry. They oversee the daily management of investment portfolios on behalf of individual or institutional clients. A portfolio manager is typically responsible for all aspects of an investment portfolio: everything from creating and managing an overall investment strategy that matches client needs to implementing that strategy by selecting an appropriate mix of securities and investment products and managing that mix on a continual basis.

Private Equity

-Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies. -Private equity firms make money by charging management and performance fees from investors in a fund. -Among the advantages of private equity are easy access to alternate forms of capital for entrepreneurs and company founders and less stress of quarterly performance. Those advantages are offset by the fact that private equity valuations are not set by market forces. -Private equity can take on various forms, from complex leveraged buyouts to venture capital.

Put Option

-Puts give holders of the option the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame. -Put options are available on a wide range of assets, including stocks, indexes, commodities, and currencies. -Put option prices are affected by the underlying asset price and time decay. They increase in value as the underlying asset falls in price, and lose value as time to expiration nears.

Standard Deviation (SD)

-Standard deviation measures the dispersion of a dataset relative to its mean -A volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low. -As a downside, it calculates all uncertainty as risk, even when it's in the investor's favor—such as above average returns

Capital Asset Pricing Model (CAPM)

-The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital -ERi​=Rf​+βi​(ERm​−Rf​)

Bull Call Spread Option Strategy

-You expect stock prices to go up moderately in the near-term and you want to take advantage of this movement. Specifically, you expect the stock of ABC Corporation, which is now trading at $50, to move up to about $55 in the next few months. This is likely to create a beneficial effect for the options of the stock. -You could then buy a call option on 100 shares of ABC Corporation for $5 per share, for an outlay of $500, at a strike price of $53. At the same time, you sell a call option on 100 shares of ABC Corporation at a strike price of $56 for $4.00 per share, so that you receive $400 from the buyer. This way, you have defrayed your $500 initial investment, so that your net initial investment is $100.

10K Report

detailed financial report that must be filed with the Securities and Exchange Commission also available to shareholders

Time Value of Money (TVM)

the concept that money available today is worth more than the same amount tomorrow

10Q Report

the quarterly unaudited financial statements of corporate issuers that are filed with the SEC, and which are a public record. Included in the 10Q are the corporation's balance sheet; income statement; retained earnings statement; and sources and uses of cash statement.