recapitalisation

When a company changes its capital structure (the proportion of equity to debt), This may occur, for instance, as part of a debt restructuring, when a creditor exchanges an outstanding loan for a stake in the company (debt for equity swap). While the aim of a recapitalisation is normally to improve a company's debt/equity ratio, it can also be used to fend off a hostile takeover - in which case the company makes itself unattractive by increasing the level of debt in its capital and using the funds to pay special dividends to shareholders.

dividend yield
The yield a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price. For example, if a stock pays out $2 in dividends over the course of a year and trades at $40, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.

Derivatives 101
August 05 2010 | Filed Under » Alternative Investments , Derivatives , Investing Basics , Portfolio Management Email Print Reprints Feedback Investing has become much more complicated over the past decades as various types of derivative instruments become created. But if you think about it, the use of derivatives has been around for a very long time, particularly in the farming industry. One party agrees to sell a good and another party agrees to buy it at a specific price on a specific date. Before this agreement occurred in an organized market,

the bartering of goods and services was accomplished via a handshake. Derivatives have numerous uses as well as various risks associated with them. see The Barnyard Basics Of Derivatives. Leverage can be greatly enhanced by using derivatives. which is the price at which it may be exercised. For more information. The perceived risk of the underlying asset influences the perceived risk of the derivative. futures and forward contracts. High volatility increases the value of both puts and calls. Pricing is also a rather complicated variable. Finally. Many investors watch the Chicago Board Options Exchange Volatility Index (VIX) which measures the volatility of the S&P 500 Index options. if the stock price rises you gain because you own the shares and if the stock price falls. The type of investment that allows individuals to buy or sell the option on a security is called a derivative. (Follow this tale of a fictional chicken farm to learn how derivatives work in the market. Some are traded over-the-counter (OTC) while others are traded on an exchange. When referring to fixed income derivatives. there may also be a call price which is the price at which an issuer can convert a security. but he makes a bet on the direction of the price movement of the underlying asset via an agreement with another party. specifically options are most valuable in volatile markets. For instance. In this case. who is responsible for the other side of the trade. For example if you own shares of a stock and you want to protect against the chance that the stock's price will fall. Derivatives are types of investments where the investor does not own the underlying asset. There are many different types of derivative instruments. Each derivative has an underlying asset for which it is basing its price. The potential loss from holding the security is hedged with the options position. but are generally considered an alternative way to participate in the market. How Derivatives Can Fit into a Portfolio Investors typically use derivatives for three reasons: to hedge a position. swaps. When the price of the underlying asset moves significantly in a favorable direction. Derivatives. then you may buy a put option. to increase leverage or to speculate on an asset's movement. you gain because you own the put option. risk and basic term structure. there are different positions an investor can take: a long position means you are the buyer and a short position means you are the seller. Because options offer investors the ability to leverage their positions. then the movement of the option is magnified. OTC derivatives are contracts that are made privately between parties such as . large speculative plays can be executed at a low cost Trading Derivatives can be bought or sold in two ways.) A Quick Review of Terms Derivatives are difficult to understand partly because they have a unique language. Hedging a position is usually done to protect against or insure the risk of an asset. including options. The pricing of the derivative may feature a strike price. Speculating is a technique when investors bet on the future price of the asset. many instruments have counterparty.

Many times a swap will occur because one party has a comparative advantage in one area such as borrowing funds under variable interest rates. but three common ones are: Advertisment . As the long call holder. while another party can borrower more freely as the fixed rate. Short Put If you believe the stock's price will increase. Investors typically will use option contracts when they do not want to risk taking a position in the asset outright. The largest difference between the two markets is that with OTC contracts. NTRR On Verge of Breakout Types There are three basic types of contracts-options. swaps and futures/forward contracts. you will sell or write a put. There are many different option trades that an investor can employ. but if the stock rises more than the exercise price plus the premium. while the exchange derivatives are not subject to this risk due to the clearing house acting as the intermediary. then the writer will lose money. the payoff is equal to the premium received by the buyer of the call if the stock's price declines.Article continues below. but if the stock price falls below the exercise price minus the premium. but they want to increase their exposure in case of a large movement in the price of the underlying asset. Short Call If you believe a stock's price will decrease. There are many different types of swaps. . As the long put holder. . A "plain vanilla" swap is a term used for the simplest variation of a swap. This market is the larger of the two markets and is not regulated. Derivatives that trade on an exchange are standardized contracts.swap agreements. Swaps are derivatives where counterparties to exchange cash flows or other variables associated with different investments. then the writer will lose money. you will buy the right (long) to buy (call) the stock. You give up the control as the short or seller. you will sell or write a call. As the writer of the call. the payoff is positive if the stock's price exceeds the exercise price by more than the premium paid for the call. As the writer of the put. there is counterparty risk since the contracts are made privately between the parties and are unregulated. Long Put If you believe a stock's price will decrease.with variations of each. then the buyer of the call (the long call) has the control over whether or not the option will be exercised. Options are contracts that give the right but not the obligation to buy or sell an asset. the payoff is positive if the stock's price is below the exercise price by more than the premium paid for the put. If you sell a call. the payoff is equal to the premium received by the buyer of the put if the stock price rises. you will buy the right (long) to sell (put) the stock. but the most common are:     Long Call If you believe a stock's price will increase.

Forwards and futures contracts differ in a few ways. then that party may enter into a swap with another party and exchange fixed rate for a floating rate to match liabilities. A swaption gives the owner the right but not the obligation (like an option) to enter into the swap.  Currency Swaps One party exchanges loan payments and principal in one currency for payments and principal in another currency. These contracts are typically used to hedge risk as well as speculate on future prices. The difference between the spot price at time of delivery and the forward or future price is the profit or loss by the purchaser. check out Tips For Getting Into Futures Trading. Similar to a futures contract.associated with the derivative. Forward and future contracts are contracts between parties to buy or sell an asset in the future for a specified price.com/articles/optioninvestor/10/derivatives101. If one party has a fixed rate loan but has liabilities that are floating. To learn more. Interest Rate Swaps Parties exchange a fixed rate for a floating rate loan. There is a burgeoning basket of derivatives to choose from. but the key to making a sound investment is to fully understand the risks counterparty. but these explanations and strategies will help you trade like a pro.investopedia.) The Bottom Line The proliferation of strategies and available investments has complicated investing. speculate or increase leverage. price and expiration . Interest rates swaps can also be entered through option strategies.  Commodity Swaps This type of contract has payments based on the price of the underlying commodity.asp?partner=pitm021412#ixzz1mZcns692 . Investors who are looking to protect or take on risk in a portfolio can employ a strategy of being long or short underlying assets while using derivatives to hedge. Read more: http://www. Futures are standardized contracts that trade on exchanges whereas forwards are non-standard and trade OTC. (The futures markets can seem daunting. underlying asset. These contracts are usually written in reference to the spot or today's price. The use of a derivative only makes sense if the investor is fully aware of the risks and understands the impact of the investment within a portfolio strategy. a producer can ensure the price that the commodity will be sold and a consumer can fix the price which will be paid.

Depreciation also means that foreign currency becomes relatively more expensive for you to buy. leading to an increase in imports. o o The home currency becomes relatively more expensive for foreigners to buy. your goods will be cheaper to foreigners.  If prices in both countries remain the same. As a result. o . your goods will be more expensive to foreigners. Appreciation also means that foreign currency becomes relatively cheaper for you to buy. even if prices remain the same. They will buy more of your goods and exports will rise.  If prices in both countries remain the same. an appreciation will make foreign goods relatively cheaper to you. If the exchange rate today were e = 0. leading to a fall in imports. It also means that. your country's net exports will fall.9 €/$ the dollar has appreciated. 2008 was e = 0. depreciation will make foreign goods relatively more expensive to you.Appreciation and Depreciation key terms Mouse-over a link for a quick definition or click to read more in-depth! currency aggregate demand appreciation depreciation net exports  appreciation: An increase in the exchange rate.645 €/$.  This change to net exports causes a rightward shift of the aggregate demand curve curve.  Example Example: The exchange rate for the dollar with the euro on June 12. As a result.  Let's say I was interested in importing Belgian chocolates that cost 1 € each.  depreciation: A decrease in the exchange rate. your country's net exports will increase.  If I took $100 to the exchanger today I would have gotten 90 € and could have bought 90 chocolates! The home currency becomes relatively cheaper for foreigners to buy.  This change to net exports causes a leftward shift of the aggregate demand curve.  If I took $100 to the exchanger on June 12th I would have gotten 65 € and could have bought 65 chocolates. It also means that. even if prices remain the same. They will buy less of your goods and exports will fall.

5 €/$ the dollar has depreciated.o Example: The exchange rate for the dollar with the Euro on June 12.  If I took $100 to the exchanger today I would have gotten 50 € and could have bought 50 chocolates! The price of Belgian chocolates did not change. . 2008 was e = 0. but because the dollar depreciated they become more expensive to you – so you import less.   Let’s say I was interested in importing Belgian chocolates that cost 1 € each  If I took $100 to the exchanger on June 12th I would have gotten 65 € and could have bought 65 chocolates.645 €/$. If the exchange rate today were e = 0.

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