Investment ManagementWhat is investment?Investment is the action taken by an individuals or corporate bodies to add value to alreadycontrolled asset or resources. This implies that you must not be the owner of whatever resourceyou invest as your investment.There are so many forms of investment. For example Shares investment, real estate investment,insurance investment, business, bonds etc. Please note that your living home is not aninvestment, as a lot of people still consider their living home as investment but your home doesnot bring in any cash flow expect it is sold and until that happens; it still remains a liability andnot an asset.In general terms we can say that, investment means the use money in the hope of making moremoney.In finance, investment means the purchase of a financial product or other item of value with anexpectation of favorable future returns. In business, investment means the purchase by aproducer of a physical good, such as durable equipment or inventory, in the hope of improvingfuture business. In an economic sense, an investment is the purchase of goods that are notconsumed today but are used in the future to create health.Investment has a connotation of a long term holding period, in contrast to speculation, which isthe purchase of assets seeking profit from short-term price movement. Speculation has come tomean different things to different people, yet still retain something of its original meaning:namely, to reflect or theorize without a factual basis.As per Keynes, “the activity if forecasting the prospective yield of assets over their whole life,”in contrast to speculation, which means “the activity if forecasting the psychology in themarket.”Speculator is somebody who buys something only because they think someone else will paymore for it in the near future, as opposed to an investor, who buys it because analysis confirmsthat the investment is of high quality and good value, so it is worth holding.A speculator buys things because they expect a less informed person will buy it off them later ata higher price, whereas an investor because they promise both a return on capital invested, aswell as a return of capital invested.
Unit 5 Derivatives and their Valuation:OptionsDerivative securities play a large and increasingly important role in financial markets. These aresecurities whose prices are determined by the prices of other securities. These assets are alsocalled contingent (conditional) claims because their payoffs are contingent on the prices of othersecurities.Options and future contracts are both derivative securities. Swaps also are called derivativesbecause the value of derivatives depends on the value of other securities; they can be powerfultools for both hedging and speculation.How does it start? (Options)Trading of standardized options contracts on a national exchange started in 1973 when ChicagoBoard Options Exchange (CBOE) began listing call options. These contracts were almostimmediately got a great success. Options contracts are traded now on several exchanges like TheNational Stock Exchange Limited in India (NSE), has introduced trading in S & P CNX Niftyoptions from June 4, 2001 and The Mumbai Stock Exchange (BSE) also started trading onoptions on Sensex from June 4, 2001.They are known as common stock, stock indexes, foreign exchange, agricultural commodities,precious metals, and interest rate futures.The Options ContractThere are two types of options. 1. A call option 2. A put optionA call option gives its holder the right to purchase an asset for a specified price, called theexercise or strike price on or before some specified expiration date. For example, a March 2011call option on Bajaj Auto with exercise price of Rs. 1080 that means its owner have right topurchase Bajaj Auto stock for a price of Rs. 1080 at any time up to and including the expirationdate in March 2011. The holder of the call is not required to exercise the option.