Investment Management

What is investment?

Investment is the action taken by an individuals or corporate bodies to add value to already controlled asset or resources. This implies that you must not be the owner of whatever resource you 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 an investment, as a lot of people still consider their living home as investment but your home does not bring in any cash flow expect it is sold and until that happens; it still remains a liability and not an asset.

In general terms we can say that, investment means the use money in the hope of making more money.

In finance, investment means the purchase of a financial product or other item of value with an expectation of favorable future returns. In business, investment means the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business. In an economic sense, an investment is the purchase of goods that are not consumed 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 is the purchase of assets seeking profit from short-term price movement. Speculation has come to mean 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 the market.”

Speculator is somebody who buys something only because they think someone else will pay more for it in the near future, as opposed to an investor, who buys it because analysis confirms that 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 at a higher price, whereas an investor because they promise both a return on capital invested, as well as a return of capital invested.

Unit 5 Derivatives and their Valuation:

Options

Derivative securities play a large and increasingly important role in financial markets. These are securities whose prices are determined by the prices of other securities. These assets are also called contingent (conditional) claims because their payoffs are contingent on the prices of other securities.

Options and future contracts are both derivative securities. Swaps also are called derivatives because the value of derivatives depends on the value of other securities; they can be powerful tools for both hedging and speculation.

How does it start? (Options)

Trading of standardized options contracts on a national exchange started in 1973 when Chicago Board Options Exchange (CBOE) began listing call options. These contracts were almost immediately got a great success. Options contracts are traded now on several exchanges like The National Stock Exchange Limited in India (NSE), has introduced trading in S & P CNX Nifty options from June 4, 2001 and The Mumbai Stock Exchange (BSE) also started trading on options 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 Contract

There are two types of options.

1. A call option2. A put option

A call option gives its holder the right to purchase an asset for a specified price, called the exercise or strike price on or before some specified expiration date. For example, a March 2011 call option on Bajaj Auto with exercise price of Rs. 1080 that means its owner have right to purchase Bajaj Auto stock for a price of Rs. 1080 at any time up to and including the expiration date in March 2011. The holder of the call is not required to exercise the option.