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What Is an Alternative Investment?

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

KEY TAKEAWAYS

  • An alternative investment is a financial asset that does not fall into one of the conventional equity/income/cash categories.
  • Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.
  • Most alternative investments are unregulated by the SEC and tend to be somewhat illiquid.
  • While traditionally for institutional investors and accredited investors, alternative investments have become feasible to retail investors via alt funds, ETFs and mutual funds.

Currency is a medium of exchange for goods and services. In short, it’s money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment.

Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services.

In the 21st century, a new form of currency has entered the vocabulary, the virtual currency. Virtual currencies such as bitcoins have no physical existence or government backing and are traded and stored in electronic form.

Understanding Currency

Currency in some form has been in use for at least 3,000 years. Money, usually in the form of coins, proved to be crucial to facilitating trade across continents.

KEY TAKEAWAYS

  • Currency is a generally accepted form of payment, usually issued by a government and circulated within its jurisdiction.
  • The value of any currency fluctuates constantly in relation to other currencies. The currency exchange market exists as a means of profiting from those fluctuations.
  • Many countries accept the U.S. dollar for payment, while others peg their currency value directly to the U.S. dollar.

Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity.

The market in which shares are issued and traded, either through exchanges or over-the-counter markets.

IPO or Initial Public Offer is a way for a company to raise money from investors for its future projects and get listed to Stock Exchange.

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In finance, a Bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity.

Derivative is a product whose value is derived from the value of it’s under lying assets. This underlying entity can be an Equity trading, Commodity trading, Currency trading and Interest rate. It can be used for hedging, speculation and arbitrage opportunities.

Know the types of Derivatives
Futures: futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.
Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.

Future Contract

– Futures are derivative contracts to buy or sell a specified quantity or underlying assets at an agreed price, on or before a specified time without ownership of Underlying asset.

– They are standardized forward contracts.

– Derivative market is a leverage market since Investor/Trader has to pay only fraction of total value of the contract as a margin to his broker.

– Currently in India at NSE F&O segment, we have 3 Expiry contracts available for trading. On last Thursday of each month these contracts expires and settled at the closing price of underlying cash market. (One day prior to the same if any exchange holiday on last Thursday)

Example:

Margins involved in Future contract
Initial Margin: Needs to pay at the time of entry of the particular contract.
Mark to mark margin: One has to pay, to maintain the position and a traders needs to understand the mechanism of M To M to get in Derivatives trading.
Margins are depended at VAR (Value at risk). Two types of margins: Span margin and Exposure margin.

Options
Call Options

A call option gives the buyer, the right to buy a specified quantity of the underlying asset at a strike price on or before expiry date. The seller however, has the obligation to sell the underlying asset if the buyer decides to exercise his option to buy.
Put Options
A Put Option gives the buyer, the right to sell a specified quantity of the underlying asset at a strike price on or before expiry date. The seller however, has the obligation to buy the underlying asset if the buyer decides to exercise his option to sell.

Option Pricing: Intrinsic value + Time Value
 
Strike Prices

In-the-Money: Option with Intrinsic value

At-the-Money: Exercise price= Market price

Out-of-the-Money: No intrinsic value, Only time value

Know the difference between Option Buyer & Option Seller
Option Buyer

Pays premium

Has the right to exercise resulting in a long position in the underlying

Time decay works against buyer

Risk limited, Reward unlimited

Option Seller

Collects premium

Has obligation if assigned, resulting in a short position in the underlying

Time decay works in favor of seller

Know the difference between Futures and Option Trading

Strategies to be used depending upon the market view

Bullish: Long future, Long call, Short put, Bull call spread, Bull put spread, Covered call put hedge

Bearish: Short future, Long put, Short call, Bear put spread, Bear call spread, Call hedge covered put

Range Bound: Short straddle, Short strangle, Long butterfly, Short strip, Short strap, Long condor

Volatile: Long straddle, Long strangle, Short butterfly, Long strip, Long strap, Short condor

Derivative Indicators
Open Interest

It is an important indicator that can help one in ascertaining the flow of funds. If the open interest rises with rise in price it is a bullish indication. If open interest rises and prices fall it is a bearish indication. If open interest falls and prices rise it is a sign of short covering by bears. If open interest falls and prices also fall it is a sign of profit booking by bulls or liquidation of positions.
Put Call Ratio
It helps in gauging the future direction of the market. If the Put call ratio rises then there is hope of higher prices in the near future. If the Put call ratio falls it is a sign of weakness in the market. Generally put call ratio is read along with volatility. PCR can be calculated by total out-standing open interest positions in puts and calls
Volatility
There are two types of volatility – historic volatility and implied volatility. Historic volatility is based on historic prices of the futures and implied volatility is based on the volatility calculated from options i.e. volatility implied by premiums in options. If volatility rises and PCR falls, it has bearish implications. If volatility falls and PCR rises, it has bullish implications.
Rollover
There are basically 3 contract Months available – Current, Next, Far Month. Each contract expires on its expiry day (Last Thursday of the respective month).

Rollover Trends

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