Hedge funds are not regulated incase of mutual funds are regulated.

Hedge Fund

DEFINITION of 'Hedge Fund'Hedge funds arealternative investmentsusingpooled fundsthat may use a number of different strategies in order to earn active return, oralpha, for their investors. Hedge funds may beaggressively managed or make use ofderivativesandleveragein both domestic and international markets with the goal of generating highreturns(either in an absolute sense or over a specified market benchmark). Because hedge funds may have lowcorrelationswith a traditionalportfolioofstocksandbonds, allocating an exposure to hedge funds can be a gooddiversifier.

INVESTOPEDIA EXPLAINS 'HEDGE FUND'

Each hedge fund strategy is constructed to take advantage of certain identifiable market opportunities. Hedge funds use different investment strategies and thus are often classified according to investment style. There is substantial diversity in risk attributes and investment opportunities among styles, which reflects the flexibility of the hedge fund format. In general, this diversity benefits investors by increasing the range of choices among investment attributes.

Legally, hedge funds are most often set up as private investmentlimited partnershipsthat are open to a limited number of accredited investors and require a large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year, a time known as thelock-up period. Withdrawals may also only happen at certain intervals such as quarterly or bi-annually.

t is important to note that "hedging" is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market. (Mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk." In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.Hedge fund managers are compensated in two ways: a fee forassets under management (AUM)and anincentive fee, which is a percentage of any profits. A typical fee structure may be 2 and 20, where the AUM fee is 2% and the incentive fee is 20% of profits. Often times, fee limitations such ashigh-water marksare employed to prevent portfolio managers from getting paid on the same returns twice. Fee caps may also be in place to prevent managers from taking on excess risk.

Hedge Fund StrategiesMany hedge fund styles exist; the following classifications of hedge fund styles is a generaloverview. Equitymarket neutral: These fundsattempt to identify overvalued and undervalued equity securities while neutralizing the portfolios exposure to market risk by combining long and short positions. Portfolios are typically structured to be market, industry, sector, and dollar neutral, with a portfoliobetaaround zero. This is accomplished by holding long and short equity positions with roughly equal exposure to the related market or sector factors.Because many investors face constraints relative to shorting stocks, situations of overvaluation may be slower to correct than those of undervaluation. Because this style seeks an absolute return, the benchmark is typically the risk-free rate. (For more, see:Getting Positive Results With Market-Neutral Funds.) Convertible arbitrage: These strategies attempt to exploit mis-pricings in corporate convertible securities, such as convertible bonds, warrants, and convertible preferred stock. Managers in this category buy or sell these securities and then hedge part or all of the associated risks. The simplest example is buying convertible bonds and hedging the equity component of the bonds risk by shorting the associated stock. In addition to collecting the coupon on the underlying convertible bond, convertible arbitrage strategies can make money if the expected volatility of the underlying asset increases due the embedded option, or if the price of the underlying asset increases rapidly. Depending on the hedge strategy, the strategy will also make money if the credit quality of the issuer improves. (See also:Convertible Bonds: An Introduction.) Fixed-income arbitrage: These funds attempt to identify overvalued and undervalued fixed-income securities (bonds) primarily on the basis of expectations of changes in the term structure or the credit quality of various related issues or market sectors. Fixed-income portfolios are generally neutralized against directional market movements because the portfolios combine long and short positions, therefore the portfoliodurationis close to zero. Distressed securities: Portfolios of distressed securities are invested in both the debt and equity of companies that are in or near bankruptcy.Most investors are notprepared for the legal difficulties and negotiations with creditors and other claimants that are common with distressed companies. Traditional investors prefer to transfer those risks to others when a company is in danger of default. Furthermore, many investors are prevented from holding securities that are in default or at risk of default. Because of the relative illiquidity of distressed debt and equity, short sales are difficult, so most funds are long. (For more, see:Activist Hedge Funds: Follow The Trail To ProfitandWhy Hedge Funds Love Distressed Debt.) Merger arbitrage: Merger arbitrage, also called deal arbitrage, seeks to capture the price spread between current market prices of corporate securities and their value upon successful completion of a takeover, merger, spin-off, or similar transaction involving more than one company. In merger arbitrage, the opportunity typically involves buying the stock of a target company after a merger announcement and shorting an appropriate amount of the acquiring companys stock. (See also:Trade Takeover Stocks With Merger Arbitrage.) Hedged equity: Hedged equity strategies attempt to identify overvalued and undervalued equity securities. Portfolios are typically not structured to be market, industry, sector, and dollar neutral, and they may be highly concentrated. For example, the value of short positions may be only a fraction of the value of long positions and the portfolio may have a net long exposure to the equity market. Hedged equity is the largest of the various hedge fund strategies in terms of assets under management. It is also know as thelong/short equity strategy. Global macro: Global macro strategies primarily attempt to take advantage of systematic moves in major financial and non-financial markets through trading in currencies, futures, and option contracts, although they may also take major positions in traditional equity and bond markets. For the most part, they differ from traditional hedge fund strategies in that they concentrate on major market trends rather than on individual security opportunities. Many global macro managers use derivatives, such asfuturesandoptions, in their strategies.Managed futuresare sometimes classified under global macro as a result. Emerging markets: These funds focus on the emerging and less mature markets. Because short selling is not permitted in most emerging markets and because futures and options may not available, these funds tend to be long. Fund of funds: A fund of funds(FOF) is a fund that invests in a number of underlying hedge funds. A typical FOF invests in 1030 hedge funds, and some FOFs are even more diversified. Although FOF investors can achieve diversification among hedge fund managers and strategies, they have to pay two layers of fees: one to the hedge fund manager, and the other to the manager of the FOF. FOF are typically more accessible to individual investors and are more liquid. (For more, see:Fund of Funds: High Society for the Little Guy.)

DEFINITION of 'Forward Contract'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 any commodity, amount and delivery date. A forward contract settlement can occur on a cash or delivery basis. Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk. As a result, forward contracts are not as easily available to the retail investor as futures contracts.

INVESTOPEDIA EXPLAINS 'Forward Contract'Consider the following example of a forward contract. Assume that an agricultural producer has 2 million bushels of corn to sell six months from now, and is concerned about a potential decline in the price of corn. It therefore enters into a forward contract with its financial institution to sell 2 million bushels of corn at a price of $4.30 per bushel in six months, with settlement on a cash basis.In six months, the spot price of corn has three possibilities:1. It is exactly $4.30 per bushel: In this case, no monies are owed by the producer or financial institution to each other and the contract is closed. 2. It is higher than the contract price, say $5 per bushel: The producer owes the institution $1.4 million, or the difference between the current spot price and the contracted rate of $4.30.3. It is lower than the contract price, say $3.50 per bushel: The financial institution will pay the producer $1.6 million, or the difference between the contracted rate of $4.30 and the current spot price.The market for forward contracts is huge, since many of the worlds biggest corporations use it to hedge currency and interest rate risks. However, since the details of forward contracts are restricted to the buyer and seller, and are not known to the general public, the size of this market is difficult to estimate. The large size and unregulated nature of the forward contracts market means that it may be susceptible to a cascading series of defaults in the worst-case scenario. While banks and financial corporations mitigate this risk by being very careful in their choice of counterparty, the possibility of large-scale default does exist.Another risk that arises from the non-standard nature of forward contracts is that they are only settled on the settlement date, and are not marked-to-market like futures. What if the forward rate specified in the contract diverges widely from the spot rate at the time of settlement? In this case, the financial institution that originated the forward contract is exposed to a greater degree of risk in the event of default or non-settlement by the client than if the contract were marked-to-market regularly.

DEFINITION of 'Futures'A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

DEFINITION of 'Option'A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).Call options give the option to buy at certain price, so the buyer would want the stock to go up.Put options give the option to sell at a certain price, so the buyer would want the stock to go down.Infinance, anoptionis a contract which gives thebuyer(the owner or holder) the right, but not the obligation, to buy or sell anunderlyingassetorinstrumentat a specifiedstrike priceon or before a specifieddate. Thesellerhas the corresponding obligation to fulfill the transaction that is to sell or buy if the buyer (owner) "exercises" the option. An option that conveys to the owner the right tobuysomething at a specific price is referred to as acall; an option that conveys the right of the owner tosellsomething at a specific price is referred to as aput. Both are commonly traded, but for clarity, the call option is more frequently discussed.The seller may grant an option to a buyer as part of another transaction, such as a share issue or as part of an employee incentive scheme, otherwise a buyer would pay apremiumto the seller for the option. An call option would normally be exercised only when the strike price is below the market value of the underlaying asset at that time, while a put option would normally be exercised only when the strike price is above the market value. When an option is exercised, the cost to the buyer of the asset acquired is the strike price plus the premium, if any. When the option expiration date passes without the option being exercised, then the option expires and the buyer would forfeit the premium to the seller. In any case, the premium is income to the seller.Long callA trader who believes that a stock's price willincreasemight buy the right to purchase the stock (acall option) at a fixed price, rather than just purchase the stock itself. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price(spot Price,S) at expiration is above the exercise price(X) by more than the premium (price) paid P, he will profit i.e. if S-X>P, the deal is profitable. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can control (leverage) a much larger number of shares. For example, if exercise price is 100, premium paid is 10, then a spot price of 100 to 110 is not profitable. He would earn profit if the spot price is above 110.

Long put[edit]

Payoff from buying a put.A trader who believes that a stock's price willdecreasecan buy the right to sell the stock at a fixed price (aput option). He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put contract expire worthless and only lose the premium paid. In the whole story, the premium also plays a major role as it enhances the break-even point. For example, if exercise price is 100, premium paid is 10, then a spot price of 100 to 90 is not profitable. He would earn profit if the spot price is below 90.

Short call[edit]

Payoff from writing a call.A trader who believes that a stock price willdecreasecan sell the stock short or instead sell, or "write", a call. The trader selling a call has an obligation to sell the stock to the call buyer, at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited.

Short put[edit]

Payoff from writing a put.A trader who believes that a stock price willincreasecan sell the stock or instead sell, or "write", a put. The trader selling a put has an obligation to buy the stock from the put buyer, at the buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock. A benchmark index for the performance of a cash-secured short put option position is theCBOE S&P 500 PutWrite Index(ticker PUT).

DEFINITION of 'Swap'Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps.INVESTOPEDIA EXPLAINS 'Swap'If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates.

How to Calculate Net Asset Value for a Hedge FundIdentifying the AssetsIdentify each asset held by the hedge fund. The net asset value, or NAV, of any portfolio of pooled securities, including a hedge fund portfolio, is the sum of its assets minus its liabilities, divided by the number of shares outstanding. For example, if a hedge fund has $1 billion in assets, $100 million in liabilities and 2 million shares outstanding, the NAV per share is $450. While the principle of determining NAV is simple, execution can be difficult for hedge funds because they often hold thinly-traded assets of uncertain value or other assets that aren't traded in the open market. If the fund doesn't make its holdings public, determining its NAV isn't possible at all. Some funds consider their holdings to be valuable trade or proprietary information.Valuing Publicly Traded SecuritiesFor each asset traded on a public exchange and for which a current market price is available, determine that price and multiply it by the number of shares or units held to find the asset's current value in the hedge fund's portfolio. For example, 300,000 shares of Google at 882.55 equals 264,765,000. Total the values of all publicly traded holdings.Obtaining Data for Other SecuritiesList each asset held by the hedge fund for which there is no easily determined market price. This may be because the asset is thinly traded and there are no recent trades or because the asset isn't publicly traded. For each of these assets, find a source that is qualified to estimate its value. This may be a counter-party, such as an investment bank or securities dealer that trades in the asset, or it may be an information technology company that uses specialized analytics software to determine the asset's value. Once the value is determined, list each asset's current price and multiply that price by the number of shares or units held. Total the values of all these thinly-traded or non-publicly traded securities.Hedge Fund's NAVTotal the values for all securities held by the hedge fund, and divide that total by the number of shares outstanding to find its NAV. Note that when the determination of value includes estimates from counter-parties and information technology companies using proprietary software, the rationale for the evaluations may not be publicly available. This makes the legitimacy or accuracy of the NAV determination uncertain. Hedge funds and information technology companies that evaluate hedge fund assets, such as Paladyne systems, are aware of this problem. As a result, they have called for fund administrators to take more responsibility for establishing industry-wide evaluation practices and standards. Because hedge funds aren't SEC-regulated like other pooled investment funds, they have no obligation to use a particular evaluation method to determine NAV

DEFINITION of 'Capital Markets'Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities.

Primary marketFrom Wikipedia, the free encyclopediaTheprimary marketis the part of thecapital marketthat deals with issuing of newsecurities. Companies, governments or public sector institutions can obtain funds through the sale of a newstockorbond issuesthrough primary market. This is typically done through aninvestment bankorfinance syndicateof securities dealers.The process of selling new issues to investors is calledunderwriting. In the case of a newstock issue, this sale is aninitial public offering(IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in theprospectus. Primary markets create long term instruments through which corporate entities borrow from capital market.Once issued the securities typically trade on asecondary marketsuch as astock exchange,bond marketorderivatives exchange.

Secondary market

Thesecondary market, also called theaftermarket, is thefinancial marketin which previously issuedfinancial instrumentssuch asstock,bonds,options, andfuturesare bought and sold.[1]Another frequent usage of "secondary market" is to refer to loans which are sold by amortgage banktoinvestorssuch asFannie MaeandFreddie Mac.A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as the New York Stock Exchange and the NASDAQ are secondary markets.Secondary markets exist for other securities as well, such as when funds, investment banks, or entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly.

WHAT IS CRR AND SLR- 4%-crr and 21.5%slrDefinition of 'Cash Reserve Ratio'

Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.

Definition:Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.

Description:The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.

CRR and SLR are the two ratios. CRR is a cash reserve ratio and SLR is statutory liquidity ratio. Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity. Banks cant lend the money to corporates or individual borrowers, banks cant use that money for investment purposes. So, that CRR remains in current account and banks dont earn anything on that. SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government and state government securities. Once again this percentage is of the percentage of the total bank deposits available as far as the particular bank is concerned. The SLR, the money goes into investment predominantly in the central government securities as I mentioned earlier which means the banks earn some amount of interest on that investment as against CRR where it earns zero.

Definition of 'Repo Rate'- 7.25%

Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds.

Definition:Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Description:In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.

Definition of 'Reverse Repo Rate'- 6.25%

Reverse repo rate is the rate at which the central bank of a country (RBI in case of India) borrows money from commercial banks within the country.Definition:Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

Description:An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.

Definition of 'Fpo'FPO is a process by which a company, which is already listed on an exchange, issues new shares to the investors or the existing shareholders.Definition:FPO (Follow on Public Offer) is a process by which a company, which is already listed on an exchange, issues new shares to the investors or the existing shareholders, usually the promoters. FPO is used by companies to diversify their equity base.

Description:A company uses FPO after it has gone through the process of an IPO and decides to make more of its shares available to the public or to raise capital to expand or pay off debt.

DEFINITION of 'Follow On Public Offer - FPO'An issuing of shares to investors by a public company that is already listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process.INVESTOPEDIA EXPLAINS 'Follow On Public Offer - FPO'FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue. Public companies can also take advantage of an FPO issuing an offer for sale to investors, which is made through an offer document. FPOs should not be confused with IPOs, as IPOs are the initial public offering of equity to the public while FPOs are supplemantary issues made after a company has been established on an exchange.DEFINITION of 'Mortgage-Backed Security (MBS)'A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Also known as a "mortgage-related security" or a "mortgage pass through."INVESTOPEDIA EXPLAINS 'Mortgage-Backed Security (MBS)'When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets.

This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the riskiness of different mortgages as they are classified under the MBS.Wash saleFrom Wikipedia, the free encyclopediaAwash sale(not to be confused with awash trade) is a sale of a security (stock,bonds,options) at a loss and repurchase of the same or substantially identical security shortly before or after.[1] The regulations around wash sales are to protect against an investor who holds an unrealized loss and wishes to make it claimable as atax deductionwithin the current tax year. The security is then repurchased in the hope that it will recover its previous value, which would only become taxable in some future tax year. A wash sale can take place at any time during the year. In the UK, a similar practice which specifically takes place at the end of a calendar year, is known asBed and breakfasting. In a bed and breakfasting transaction, a position is sold on the last trading day of the year (typically late in the trading session) to establish a tax loss. The same position is then repurchased early on the first session of the new trading year, to restore the position (albeit at a lower cost basis). The term, therefore, derives its name from the late sale and early morning repurchase.[2]In some tax codes, such as the USA and the UK, tax rules have been introduced to disallow the practice, e.g., if the stock is repurchased within 30 days of its sale. The disallowed loss is added to thebasisof the newly acquired security.For instance, this rule will be applicable if an investor sells a security X at a loss of $20 and immediately purchases the same security or a substantially identical security within 30 days. In this case the loss cannot be claimed and the same should be added to the cost basis of the remaining pool of securities of X or substantially identical security (except in case of point 4 above)DEFINITION of 'Wash Sale'A transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain. Wash sales are a method investors employ to try and recognize a tax loss without actually changing their position.INVESTOPEDIA EXPLAINS 'Wash Sale'The effectiveness of this strategy has been greatly diminished with the implementation of the IRS 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that investment was purchased within 30 days of sale (before or after sale).

Liquidity Analysis Ratios

Current Ratio

Current Assets

Current Ratio =------------------------

Current Liabilities

QuickRatio

Quick Assets

Quick Ratio =----------------------

Current Liabilities

Quick Assets = Current Assets - Inventories

Net Working CapitalRatio

Net Working Capital

Net Working Capital Ratio =--------------------------

Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios

Return on Assets (ROA)

Net Income

Return on Assets (ROA) =----------------------------------

Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Return on Equity (ROE)

Net Income

Return on Equity (ROE) =--------------------------------------------

Average Stockholders' Equity

Average Stockholders' Equity= (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2

Return on Common Equity (ROCE)

Net Income

Return on Common Equity =--------------------------------------------

Average Common Stockholders' Equity

Average Common Stockholders' Equity= (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2

Profit Margin

Net Income

Profit Margin =-----------------

Sales

Earnings Per Share (EPS)

Net Income

Earnings Per Share =---------------------------------------------

Number of Common Shares Outstanding

Activity Analysis Ratios

Assets Turnover Ratio

Sales

Assets Turnover Ratio =----------------------------

Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Accounts Receivable Turnover Ratio

Sales

Accounts Receivable Turnover Ratio =-----------------------------------

Average Accounts Receivable

Average Accounts Receivable= (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Inventory Turnover Ratio

Cost of Goods Sold

Inventory Turnover Ratio =---------------------------

Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) / 2

Capital Structure Analysis Ratios

Debt to Equity Ratio

Total Liabilities

Debt to Equity Ratio =----------------------------------

Total Stockholders' Equity

Interest CoverageRatio

Income Before Interest and Income Tax Expenses

Interest Coverage Ratio =-------------------------------------------------------

Interest Expense

Income Before Interest and Income Tax Expenses= Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios

Price Earnings (PE) Ratio

Market Price of Common Stock Per Share

Price Earnings Ratio =------------------------------------------------------

Earnings Per Share

Market to Book Ratio

Market Price of Common Stock Per Share

Market to Book Ratio =-------------------------------------------------------

Book Value of Equity Per Common Share

Book Value of Equity Per Common Share= Book Value of Equity for Common Stock / Number of Common Shares

Dividend Yield

Annual Dividends Per Common Share

Dividend Yield =------------------------------------------------

Market Price of Common Stock Per Share

Book Value of Equity Per Common Share= Book Value of Equity for Common Stock / Number of Common Shares

Dividend Payout Ratio

Cash Dividends

Dividend Payout Ratio =--------------------

Net Income

ROA = Profit Margin X Assets Turnover Ratio

ROA = Profit Margin X Assets Turnover Ratio

Net IncomeNet IncomeSales

ROA =------------------------ =-------------- X------------------------

Average Total AssetsSalesAverage Total Assets

Profit Margin = Net Income / SalesAssets Turnover Ratio = Sales / Averages Total Assets

What are G-secs?The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills issued by the Government of India.Reserve Bank of India manages and services these securities through its public debt offices located in various places as an agent of the Government.Treasury BillsTypesTreasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.DEFINITION of 'Mutual Fund'An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.INVESTOPEDIA EXPLAINS 'Mutual Fund'One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.

Some other important Terms Used in Mutual FundsSale Price: It is the price you pay when you invest in a scheme and is also called "Offer Price". It may include a sales load.

Repurchase Price: - It is the price at which a Mutual Funds repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price: It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load / Front End Load: It is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes which do not charge a load at the time of entry are called No Load schemes.

Repurchase / Back-end Load :It is a charge collected by a Mufual Funds when it buys back / Repurchases the units from the unit holders.WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS :A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing in these funds as he can not differentiate between various types of Mutual Funds with fancy names. Mutual Funds can be classified into various categories under the following heads:-(A) ACCORDING TO TYPE OF INVESTMENTS :-While launching a new scheme, every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as categorized according to the type of investments are as follows :- (a) EQUITY FUNDS / SCHEMES (b) DEBT FUNDS / SCHEMES (also called Income Funds) (c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds) (d) GILT FUNDS / SCHEMES (e) MONEY MARKET FUNDS / SCHEMES (f) SECTOR SPECIFIC FUNDS (g) INDEX FUNDSB) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :While launching new schemes, Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows :- (a) OPEN ENDED SCHEMES (b) CLOSE ENDED SCHEMESOpen ended funds are allowed to issue and redeem units any time during the life of the scheme, but close ended funds can not issue new units except in case of bonus or rights issue. Therefore, unit capital of open ended funds can fluctuate on daily basis (as new investors may purchase fresh units), but that is not the case for close ended schemes. In other words we can say that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes but not in case of close ended schemes. In case of close ended schemes, new investors can buy the units only from secondary markets.C) ACCORDING TO TAX INCENTIVE SCHEMES :Mutual Funds are also allowed to float some tax saving schemes. Therefore, sometimes the schemes are classified according to this also:- (a) TAX SAVING FUNDS (b) NOT TAX SAVING FUNDS / OTHER FUNDS(D) ACCORDING TO THE TIME OF PAYOUT :Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows :- (a) Dividend Paying Schemes (b) Reinvestment SchemesThe mutual fund schemes come with various combinations of the above categories. Therefore, we can have an Equity Fund which is open ended and is dividend paying plan. Before you invest, you must find out what kind of the scheme you are being asked to invest. You should choose a scheme as per your risk capacity and the regularity at which you wish to have the dividends from such schemesHow Does a Mutual Fund Scheme Different from a Portfolio Management Scheme ?In case of Mutual Fund schemes, the funds of large number of investors is pooled to form a common investible corpus and the gains / losses are same for all the investors during that given peirod of time. On the other hand, in case of Portfolio Management Scheme, the funds of a particular investor remain identifiable and gains and losses for that portfolio are attributable to him only. Each investor's funds are invested in a separate portfolio and there is no pooling of funds.Friday, June 12, 2009What are OTC derivatives?A derivative is a financial product whose value is 'derived' from an underlying asset (hence the name). The underlying asset can be anything of value - stock of a company, an index like the S&P, or a commodity like gold, wheat or oil. Based on where they are traded, derivatives can be classified as OTC (Over the Counter) or Listed (trading on exchanges). OTC derivatives are private, tailor-made contracts between counterparties. Listed derivatives are more structured and comprise standardized contracts where the underlying assets, the quantities and the mode of settlement are defined by the exchange.

Since listed derivatives are backed by the full faith of the clearing house, they have been the 'traditional' instrument of choice for traders. But OTC derivatives are fast gaining in popularity. Being private contracts between two counterparties, OTC derivatives can be tailored and customized to suit exact risk and return needs. On the flip side, of course, lack of a clearing house or exchange results in increased credit or default risk associated with each OTC contract.

Presented below is a broad classification of different types of OTC contracts, based on the underlying asset or commodity that drives the value of the instrument. Interest rate derivatives:The underlying asset is a standard interest rate e.g. the London Interbank offer rate, or the rate on US treasury bills. Examples of interest rate OTC derivatives include Swaps, Swaptions, and FRAs. Credit derivatives:The underlying is the credit quality, risk or credit event of a particular asset or counterparty. One example is Credit Default Swaps (CDS) on fixed-income securities, which make payments if the underlying bonds are downgraded by credit rating agencies or if the company that issued the bonds defaults. Commodity derivatives:The underlying are physical commodities like wheat or gold. Examples are forwards. Equity derivatives:The underlying are equities or an equity index. Examples: Equity swaps or forwards FX derivatives:The underlying is foreign exchange fluctuations. Fixed Income:The underlying are fixed income products - including mortgages