Derivatives and secondary market

aniket.valsangkar
Good Student
Posts: 10
Joined: Thu May 15, 2014 12:55 pm

Derivatives and secondary market

Postby aniket.valsangkar » Wed May 28, 2014 3:03 pm

1) How are long and short postions defined in call and put options....and why?
2)how currency swap can help prevent against financial turmoil for a country beset by liquidity crisis?
3)After the initial capital is raised by a company by issuing stocks in an ipo the issuing company has no role....so does this mean that if the stock prices go up the issuing company gets no money after these stocks are bought by investors....? And if the issuing company gets the money then how?
4) "Derivatives improves market efficiancy....eg: supose a share is undervalued in stock market as compared to in the futures market , an investor can buy stock directly and short them in futures market, therby adjusting the short and futures price"..can u give the exapmple of this and detailed explanation

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Derivatives and secondary market

Postby edupristine » Thu May 29, 2014 2:15 pm

1) Long position is the call/put option is position of a person
who buys the option i.e. the purchaser of the option, & the short position is the writer of the option who gets a premium for writing the option.
2) Currency swaps are agreements which helps to obtain foreign currency at the cost of domestic currency, hence a country in financial turmoil can have access to foreign currency at a low cost with the help of currency swaps.
3) First of all the company only gets money when it first issues the IPO. Later on the changes in monetary value of stock results in the profit/loss of the traders & not the company.
Now the question arises, why does company focuses on stock prices then. There are a lot of reasons for companies focusing on stock prices:
i) Stock prices reflect the company's health, if stock price of a company is rising then it means company is progressing and generating returns for the shareholders, hence the credit rating of the company improves which inturn effect the cost of debt & cost of equity.
ii) Normally company's management owns a high percentage of stocks which in turn affects their money balances.
iii) Many company provides compensation to their employees in the form of stocks.
iv) An analyst if wants to judge the performance of the company normally does that with the company's history of stock prices.
4) Futures prices are based upon the continuous flow of information. It reflects what a trader perceives thee stock price to be some period down the line. Now suppose for stock A the price is $50, where as in the futures market the price is $60. Hence what happens is the traders of stock market thinks that the stock is undervalued, hence they start buying the stock which in turn increases the price of the stock, whereas the traders of futures feels that the stock is overvalued, hence they start selling the stock to take a short position. This happens till the price in the markets are same say $55.


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