Capital Style

WE can take capital or the very word capital’s dichotomy can be understood as capping the little.

Capital = Working capital+ FIxed Capital or the industrial capital, this term industrial capital can be widely understood to be the market capitalisation or the market share ;specific or as a whole.

Capital Style when taken to be in different contexts as the base & lift off as the predicaments or presuppossitions rather than as assumptions or presumptions.

Presumptious ; when taken as the capital style , is more taken to be rather than processed as a system.

Capital style as taken to be decisive to approach the indecisiveness , indecisiveness being on the humane side or error presupposed directly categorizing it into the very section of Behavioural Finance than behavioural economics. Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient.

When we talk more on this capital Style this takes us to the behavioural skills which is the application. THE APPLICATION.

Behavioral skills are the skills you use to successfully interact with others.

Capital Style & portfolio management can be a theory of relativity study or an application as taken to be for the purpose of the very study.

Capital Style presumed to be the Runway, the establishment , the operative efficacy, nintendo hitherto.

Capital Market – Derivatives

Derivatives

What are derivatives?
Derivatives are financial contracts, which derive their value off a spot price time-series, which is called “the underlying”. The underlying asset can be equity, index, commodity or any other asset. Some common examples of derivatives are Forwards, Futures, Options and Swaps.

Derivatives help to improve market efficiencies because risks can be isolated and sold to those who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can be managed independently. From a market-oriented perspective, derivatives offer the free trading of financial risks.

What is the importance of derivatives?
There are several risks inherent in financial transactions. Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks. The fundamental risks involved in derivative business includes:

  • Credit Risk

This is the risk of failure of a counterparty to perform its obligation as per the contract. Also known as default or counterparty risk, it differs with different instruments.

  • Market Risk

Market risk is a risk of financial loss as a result of adverse movements of prices of the underlying asset/instrument.

  • Liquidity Risk

The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. A firm faces two types of liquidity risks

  1. Related to liquidity of separate products
  2. Related to the funding of activities of the firm including derivatives.

  • Legal Risk

Derivatives cut across judicial boundaries, therefore the legal aspects associated with the deal should be looked into carefully.

What are the various types of derivatives?
Derivatives can be classified into four types:

  • Forwards
  • Futures
  • Options
  • Swaps

Who are the operators in the derivatives market?

  • Hedgers – Operators, who want to transfer a risk component of their portfolio.
  • Speculators – Operators, who intentionally take the risk from hedgers in pursuit of profit.
  • Arbitrageurs – Operators who operate in the different markets simultaneously, in pursuit of profit and eliminate mis-pricing.

Source : http://www.capitalmarket.com

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The Options Strategies » Collar

Buying the put gives you the right to sell the stock at strike price A. Because you’ve also sold the call, you’ll be obligated to sell the stock at strike price B if the option is assigned.

You can think of a collar as simultaneously running a protective put and a covered call.. Some investors think this is a sexy trade because the covered call helps to pay for the protective put. So you’ve limited the downside on the stock for less than it would cost to buy a put alone, but there’s a tradeoff.

The call you sell caps the upside. If the stock has exceeded strike B by expiration, it will most likely be called away. So you must be willing to sell it at that price.

Many investors will run a collar when they’ve seen a nice run-up on the stock price, and they want to protect their unrealized profits against a downturn.

Some investors will try to sell the call with enough premium to pay for the put entirely. If established for net-zero cost, it is often referred to as a “zero-cost collar.” It may even be established for a net credit, if the call with strike price B is worth more than the put with strike price A.

source: http://www.optionsplaybook.com

Understanding the Four Measures of Volatility By Scott Rothbort

Updated from 3/8/2007 at 2:15 p.m. EST

“Volatility” is a term that is increasingly interjected into financial market commentary by the press and professionals. In fact, Bloomberg Radio has a daily “Volatility Report.” While the term is being thrown around with a seemingly high degree of expertise, I find that the concept is not well understood by most commentators and the average investor. This module of TheStreet University will cover the four main types of volatility measures:

◾historical volatility;
◾implied volatility;
◾the volatility index; and
◾intraday volatility.

Type 1: Historical Volatility

Volatility in its most basic form represents daily changes in stock prices. We call this historical volatility (or historic volatility) and it is the starting point for understanding volatility in the greater sense. Historic volatility is the standard deviation of the change in price of a stock or other financial instrument relative to its historic price over a period of time. That sounds quite eloquent but for the average investor who does not command an intimate knowledge of statistics, the definition is most overwhelming.

Think of a Pendulum

To help you visualize the concept of volatility, think of a pendulum like in the picture below. The pendulum is constructed from a steel ball, attached to a rope and then suspended from a ceiling.

http://www.thestreet.com/content/image/38564.include

The pendulum starts at the resting state when our ball is at point 2 (the mean). If you raise the ball to point 1 and let it go, the ball would then swing from point 1 to point 3. Over time that ball will swing back and forth always passing though point 2. If this were a stock, the difference in distance from point 1 to point 2 or from point 2 to point 3 represents the volatility in the movement of the stock price.

So as not to get into any trouble with physicists out there, the formulas for standard deviation and movement of a pendulum are different and I am not equating the two from a statistical perspective. Rather, I am only using the pendulum as a visual aide. Stocks with a swing that is greater from point 1 to point 2 vs. that of another stock will have a higher volatility than the other stock.

Now imagine a wind hitting the metal ball. The force of that wind will increase a stock’s volatility. Market corrections, increases in uncertainty or other causal factors of risk will be the wind that shifts volatility higher. Say that there is no wind, but rather calm over the markets. Since there is no outside force to apply motion to the pendulum, the arc of the movement from point 1 to point 3 will decrease. This is when volatility declines. Some call this complacency, but it is generally viewed as a market with low or declining volatility.

Source : http://www.thestreet.com

TERRAINS@Atv006kiranraj

T- Trade
E-Execute
R-Review
R-Rate
A- Analyse
I-Indulge
N-Nudge
S-Sacrament

Terrain , this encourages me to take up this training initiative for StockMarkets, to operate as a consultant, to work on development as a trader, on trades & trade offs.

discuss on log about leverage, per se quid pro quo.

Ms KiranRaj SP
Sole Proprietor / owner / Director

Adventure Terrain Ventures.

Risk-Based Testing and Metrics [article] Risk Analysis Fundamentals and Metrics for Software Testing By TechWell Contributor – July 19, 2001

Summary:

Risk-based testing is reviewed and presented as a case study using it on a system test for a retail banking application with complex test requirements. Test documentation produced prior to test execution was kept to a minimum with responsibility passed to the individual tester. To support this approach, progress tracking metrics were used to track actual progress made and to calculate the resources required to complete the test activities.

Risk-based testing is reviewed and presented as a case study using it on a system test for a retail banking application with complex test requirements. Test documentation produced prior to test execution was kept to a minimum with responsibility passed to the individual tester. To support this approach, progress tracking metrics were used to track actual progress made and to calculate the resources required to complete the test activities.

Asset Managers Pose Systemic Risk — It’s Time To Recognize It By Colin McLean, FSIP

Asset Managers Pose Systemic Risk — It’s Time To Recognize It | Enterprising Investor

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Is printing money creating new systemic risks for the world economy?

As stock markets move to new highs, asset managers are booming, with vast inflows into bond and equity funds alike. The IMF has pointed out the potentially systemic risks created by concentrated pools of inflated and increasingly correlated assets. It is now time for regulators around the world to recognize the risks inherent in asset managers and funds that are too big to fail.

The financial crisis highlighted risks in banks and insurance, but other areas have been overlooked until now. Finally, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) are beginning to recognize risks in the investment sector and are turning their attention to some of the largest managers. In Washington, D.C., this month, European Central Bank (ECB) vice president Vítor Constâncio warned of the build-up of leverage and the growing exposure to illiquid assets in the asset management sector. But there seems no hurry to plug the gaps.

More Urgency Is Needed

The risks in big bond, equity income, and emerging market funds must be addressed. Asset managers reject any suggestion that they might represent a threat to the financial system and are quick to point the finger at banks. But globally, the top 10 asset managers have a market share of almost 30% of their sector, much more than the top 10 banks represent in banking. Assets managed globally are estimated to exceed $80 trillion. Looking at it another way, BlackRock (the world’s largest asset manager) managed roughly $4.7 trillion in assets at the end of 2014, while the Industrial and Commercial Bank of China (the world’s largest bank) had “only” $3.28 trillion in assets on its balance sheet.

Quantitative easing (QE) has spurred growth in the investment sector since the crisis, contrasting with shrinkage in banking. Asset managers might not have leveraged balance sheets, but they are globally interconnected. The IMF noted this month that “correlations among major asset classes have risen markedly since 2010. Worryingly, concentration is not decreasing as the industry grows. Yet central banks seem unaware they might have exacerbated risks, creating asset bubbles with easy money policies. Why have regulators been slow to act?

Might the regulatory burden itself be a key driver of these concentration risks? The industry is being forced to improve its offerings for consumers, but there is little sign that competition itself is increasing. Cost and security seem to have become priorities for investors and their advisers, even above performance. Large funds offer apparent ease of dealing — in terms of investor subscriptions and redemptions — but underlying portfolio liquidity is likely to be deteriorating as they grow.

Undoubtedly financial advisers believe they are opting for safety. The virtuous cycle of success and fund growth gets regulatory encouragement. Many advisers find that larger funds reduce the compliance burden, in addition to being easier to explain to retail clients. Name recognition, perceived liquidity, and cost have become bigger factors than performance.

But in Aggregate, Systemic Risk May Be Growing

Overall stock market trading volumes are declining, with less capital now involved in market making. Big portfolio positions might be liquid enough for normal day-to-day dealing, but could be left stranded if investors make any significant rush for an exit. Regulation directs advisers to look at the apparent liquidity and security benefits of scale, but what is missing is a test of how this might work in a crisis.

New factors have been driving this fund concentration. Some star managers have attracted an enormous following, encouraged by the emphasis on brands and personality. The industry has always enjoyed good operating leverage, but strategy now seems focused almost entirely on scale. Scale offers great commercial advantage, with profitability improving as funds grow. Fortunately there are incentives for the best managers to limit fund growth to a level that still leaves opportunities for genuine performance.

But, increasing concentration points to the dominance of scale as a factor.

The recent acceleration in scale and concentration has, to date, seen only limited tests. Moves of star managers, such as Bill Gross, CFA, have triggered significant but orderly fund flows. Yet, it is possible in some less liquid asset classes — such as emerging markets and corporate bonds — for investor liquidity demands to exceed realistic liquidity in a sell-off. A fund’s scale can create an illusion of safety that may not be understood by private investors.

The regulatory problem is that managers are typically required only to test liquidity on open-ended funds at the margin — whether subscriptions and redemptions over a period of weeks should be at bid or offer prices. They must consider whether fund inflows or outflows might compromise fairness for ongoing fund investors. And, if mutual funds are very small, managers must consider an orderly plan for protecting residual investors and ensuring orderly liquidation.

No Symmetry

While regulators worry about investors in small funds, there is no symmetry in the approach to the risks of the largest funds. Managers should be required to demonstrate the implications of a significant withdrawal: how they might achieve price discovery and liquidity. If their only plan is gating investors, the systemic risk could simply be pushed elsewhere. Investors would scramble for liquidity in other assets if their largest investments were locked-in for a period.

The FSB, chaired by Governor Mark Carney of the Bank of England, recently warned that it would move to address any too-big-to-fail problems among entities that are neither banks nor insurers. But it is still consulting and has not yet spelled out what new rules are necessary. There is an urgent need for research and analysis to develop a working definition of systemic risk. And, it would be best if this were harmonized globally so that global asset managers know where they stand.

Together, the FSB and IOSCO aim to look at the potential for size, complexity, and interconnectedness to impact the wider financial system through disorderly failure. The new consultation will likely focus on managers with AUM exceeding $1 trillion and funds of over $100 billion, but it is easy to see that smaller funds than this could raise systemic issues, particularly when considering that some may employ leverage. The asset managers likely to be affected have not yet been named, and this consultation will continue until 29 May 2015.

This approach may not capture risks to individual national or regional finances. If concentration might be a risk globally in asset managers, the risk to individual exchanges and asset classes should surely also be looked at. National regulators should ask managers to be more explicit in explaining the risks of scale to investors. More detailed attention to funds below $100 billion that might dominate their asset classes is needed. And a broader set of policy tools is necessary to address the risks stemming from financial firms at large.

It is time for regulators to move from their narrow focus on banks and insurers to recognize wider systemic risk.

Why do countries trade?

Why do countries trade?

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Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources, countries can produce a surplus, and trade this for the resources they need.

Clear evidence of trading over long distances dates back at least 9,000 years, though long distance trade probably goes back much further to the domestication of pack animals and the invention of ships. Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialised world.

Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet it is the world’s fourth largest consumer of oil, and must import all it requires.

The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18th Century (in The Wealth of Nations, 1776), these being the division of labour and specialisation.

Division of labour

In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently. When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets. For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.

Specialisation

Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product. Hence, specialisation can generate further benefits in terms of efficiency and productivity.

Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries. International specialisation is increased when countries use their scarce resources to produce just a small range of products in high volume. Mass production allows a surplus of good to be produced, which can then be exported. This means that goods and resources must be imported from other countries that have also specialised, and produced surpluses of their own.

When countries specialise they are likely to become more efficient over time. This is partly because a country’s producers will become larger and exploit economies of scale. Faced by large global markets, firms may be encouraged to adopt mass production, and apply new technology.  This can provide a country with a price and non-price advantage over less specialised countries, making it increasingly competitive and improving its chances of exporting in the future.

The advantages of trade

International trade brings a number of valuable benefits to a country, including:

  1. The exploitation of a country’s comparative advantage, which means that trade encourages a country to specialise in producing only those goods and services which it can produce more effectively and efficiently, and at the lowest opportunity cost.
  2. Producing a narrow range of goods and services for the domestic and export market means that a country can produce in at higher volumes, which provides further cost benefits in terms of economies of scale.
  3. Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus.
  4. Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms.
  5. The quality of goods and services is likely to increases as competition encourages innovation, design and the application of new technologies. Trade will also encourage the transfer of technology between countries.
  6. Trade is also likely to increase employment, given that employment is closely related to production. Trade means that more will be employed in the export sector and, through the multiplier process, more jobs will be created across the whole economy.

The disadvantages of trade

Despite the benefits, trade can also bring some disadvantages, including:

  1. Trade can lead to over-specialisation, with workers at risk of losing their jobs should world demand fall or when goods for domestic consumption can be produced more cheaply abroad. Jobs lost through such changes cause severe structural unemployment. The recent credit crunch has exposed the inherent dangers in over-specialisation for the UK, with its reliance on its financial services sector.
  2. Certain industries do not get a chance to grow because they face competition from more established foreign firms, such as new infant industries which may find it difficult to establish themselves.
  3. Local producers, who may supply a unique product tailored to meet the needs of the domestic market, may suffer because cheaper imports may destroy their market. Over time, the diversity of output in an economy may diminish as local producers leave the market.