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What is the difference between p & l ac and income & expenditure statement?

P&L A/c is prepared by trading organizations to find out the net profit or loss from
business operations. Income and expenditure A/c is prepared by non-trading
organizations to find out whether they have enough income to meet the expense or not
there may be surplus or deficiency.
What is the difference between JOURNAL ENTRY & LEDGER?
A journal is also called as a book of prime entry. Transactions occurred are first entered in
this book to show. Which accounts should be debited and which should be credited.
On the basis of entries made in the journal, accounts are prepared; the book which
contains the accounts is called a ledger. Transactions entered in the journal are classified
according to their nature and posted in their respective accounts in ledger. It is also called
as book of final entry.
Journal is a book of original entry. It is a book where all the transactions of company
have been recorded relating to that particular financial year. It is also known as the
mother of the ledger. Here all the accounts are divided into two parts according to the
rules of debit and credit.
Whereas the ledger means, the book which contains all the specified accounts in
separated manner taken from the original book of journal. It is also called as child of
Journal is book of accounts which occurred in daily transactions and it is a systematic
record. Ledger is separate the accounts based on the journal accounts which aspect of
debit or credit maintaining the individual transaction accounts.
What is Bull Market?
Bull market is that market where stock value are expected rise and people will have
tendency to sell their stock so as to earn profit out of it. Thus sudden push from the
suppliers will gradually neutralize the market.
What is Discount Cash Flow Management?
The DCF for an investment is calculated by estimating: the cash that you will have to pay
out, and the cash which you expect to receive back. The timeframes that you expect to

receive the payments must also be estimated. Each cash transaction must then be
recalculated, by subtracting the opportunity cost of capital between now and the moment
when you will pay or receive the cash.
Those cash flows which have considering the time factors of money in respect on cost of
capital are known as discounted cash flow.
What is money market?
A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded. The money market is used by participants as a means for
borrowing and lending in the short term, from several days to just under a year. Money
market securities consist of negotiable certificates of deposit (CDs), bankers
acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and
repurchase agreements (repos).
The money market is a component of the financial markets for assets involved in shortterm borrowing and lending with original maturities of one year or shorter time frames.
Trading in the money markets involves Treasury bills, commercial paper, bankers'
acceptances, certificates of deposit, federal funds, and short-lived mortgage- and assetbacked securities.[1] It provides liquidity funding for the global financial system. Money
markets and capital markets are parts of financial markets.
Being the finance manager being of a company how will you make finance forecasting?
First I will review the previous year's financial statements to get an Idea about the
financial operations. Then will discuss with the management about the current year's
targets (viz. sales / services) & their growth expectations. Based on that will prepare
provisional P&L acct & Balance sheet. I also will check whether there is any possibility
in cost cutting and make the adjustments accordingly to arrive at expected profit.
What is the entry for deprecation?
It is the permanent and gradual decrease in the value of an asset due to usage of it, lapses
of time and wear and tear of assets
Profit & Loss a/c Dr
To deprecation a/c

Depreciation a/c Dr
To assets a/c
What is Secondary Market?
Secondary market refers to market where securities are traded after being initially offered
to the public in the primary market and/or listed on the stock exchange.
Why do you want to do MBA in Finance? How will the combination of B.Com degree
support you?
Doing MBA after B.com is a very good idea for career development as one has basic
accounting knowledge in finance which will definitely help in solving various complex
problems for any Financial Company.

What is the difference between costing and cost accounting?

Costing is the process of ascertaining costs whereas cost accounting is the process of
recording various costs in a systematic manner, in order to prepare statistical date to
ascertain cost.
What is the difference between asset management and invest management?
Investment and asset are really close in meaning. Investment is when you put your money
in stock, bond or other financial instruments. Whereas Asset is what you own generally
referred to land, proprietorship, factory, etc.
Investment is also known as assets. Both terms are two sides of coin. But in practice life
whenever we heard the name assets, it means a assets in which can be seen, like Land &
building, Plant & Machinery, computers, power backups, Vehicle etc. and investment
mean's Investment in Stock, Bonds, Insurance etc.
Why would a company distribute its earnings through dividends to common stockholders?

Regular dividend payments are signals that a company is healthy and profitable. Also,
issuing dividends can attract investors (shareholders). Finally, a company may distribute
earnings to shareholders if it lacks profitable investment opportunities.
A stockholder may buy shares to get profit so if he will not get the return he can switch
over to other company's share. It is bad for the company.
By issuing dividends to the shareholders increases the goodwill to the company.
Everyone invests the money where they earn the profits periodically
Shareholder expects reasonable returns on their investment by way of Dividend Company
fulfill their expectations.
What is insider trading and why is it illegal?
Undergraduates may get this question as feelers of their business knowledge. Insider
trading describes the illegal activity of buying or selling stock based on information that
is not public information. This is to prevent those with privileged information (company
execs, I-bankers and lawyers) from using this information to make a tremendous amount
of money unfairly.
What is meant by Take Over?
In business, a takeover is the purchase of one company by another.
In business, a takeover is the purchase of one company (the target) by another (the
acquirer, or bidder). In the UK, the term refers to the acquisition of a public company
whose shares are listed on a stock exchange, in contrast to the acquisition of a private
Hostile takeovers are when another company, often using leverage (loans from banks and
investment houses that add power to buy the company in question) try to buy enough
shares in the company to control it. "Hostile" simply means it is against the wishes of the
What is EPS?
Earnings per share thats portion of companys profit..
EPS is the profit after tax is divided by the total no. of outstanding shares of a company
in simple word it show that what is the earning of company per equity share, here share

means those shares which are available in market for buy and sell in the market.it is
calculated by following formula
EPS = *Profit available for equity shareholders / No. of equity shareholders
Earnings per share are generally considered to be the single most important variable in
determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio.
What is capital structure? What are the principles of capital structure management?
Capital structure is a term which is referred to be the mix of sources from which the long
term funds are required for business purposes which are raised to improve the capital of
the company. To fund an organization plan this capital structure is required which is the
combination of debt and equity. The management ensures the capital structure accesses
which are needed to fund future growth and enhance financial performance. The
principles of capital structure management which are essentially required are as follows:1.

Cost Principle
Risk Principle
Control Principle
Flexibility Principle
Timing Principle

What is composite cost of capital? Explain the process to compute it?

Composite cost of capital is also known as weighted average cost of capital which is a
measurable unit for it. It also tells about the component costs of common stock, preferred
stock, and debt. Each of these components is given weightage on the basis of the
associated interest rate and other gains and losses with it. It shows the cost of each
additional capital as against the average cost of total capital raised. The process to
compute this is first computing the weighted average cost of capital which is the
collection of weights of other costs summed together. The formula is given as:-

WACC=WeKe + WrKr+ WpKp + WdKd

(Weight or Proportion of Equity x Cost of Equity) + (Weight or Proportion of Reserves &
Surplus x Cost of Reserves & Surplus) + (Weight or Proportion of Preference shares x
Cost of Preference shares) + (Weight or Proportion of Debt x Cost of Debt)
In this the cost of debt is calculated in the beginning and it is used to find out the cost of
capital and other weights of cost is been calculated after the calculation each and every
individual weight of the component is added and then it gives the final composite cost.
Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying
salary, taxes, etc., do not create any asset, and instead instantly create an expense on the
income statement that reduces equity via retained earnings?

Capital expenditures are capitalized because of the timing of their estimated benefits?
The lemonade stand will benefit the firm for many years. The employees work, on the
other hand, benefits the period in which the wages are generated only and should be
expensed then. This is what differentiates an asset from an expense.
What is a deferred tax asset and why might one be created?
Deferred tax asset arises when a company actually pays more in taxes to the IRS than
they show as an expense on their income statement in a reporting period.
Differences in revenue recognition, expense recognition (such as warranty expense), and
net operating losses (NOLs) can create deferred tax assets.

Walk me through a cash flow statement.

Cash flow means movement of cash in and out of non-cash items. Receipt of cash from a noncash item is termed as cash inflow while cash payment in respect of such items as cash outflow.
Cash Flow Statement shows:
The cash generated and utilized by a company.
It shows changes in cash position from one period to another.
It shows inflow and outflow of cash and cash equivalents from various activities of a
company during a specific period.
As-3 Accounting standard -3 divides Cash Flow Statement into three categories:
Cash flow from Operating Activities: Operating activities represent the principal revenueproducing activities of the company.
Cash inflow from Operating Activities:
Cash receipt from the sale of goods and rendering of services.
Cash receipts from royalties, fees, commission and other revenues
Cash receipts of an insurance enterprise for premiums and claims, annuities and
other policies benefits

Cash refunds of income taxes unless they can be specifically identified with
financing activities.
Cash outflow from Operating Activities:
Cash payment to suppliers for goods and services
Cash payment to and on behalf of employees
Cash payment to insurance enterprise for premiums and claims
Cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities
Cash flow from Investing Activities: Investing activities relate to purchase (acquisition)
and sale (disposal) of long term assets or fixed assets such as plant, machinery, furniture,
land and building and transactions related to long term investments
Cash flow from Financing Activities: Financing activities relate to long term funds or
capital of an enterprise. These activities result in the changes in the size and composition
of the share capital and borrowings of the company. Repayment / Reissue of Debt / Loans
/ Equity Share Capital paying dividends
Adding cash flows from operations, cash flows from investments, and cash flows from financing
gets you to total change of cash.
Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash
What are the various systems of Accounting? Explain them.
Cash System of Accounting: This system records only cash receipts and payments. This
system assumes that there are no credit transactions. In this system of accounting,
expenses are considered only when they are paid and incomes are considered when they
are actually received. This system is used by the organizations which are established for
nonprofit purpose. But this system is considered to be defective in nature as it does not
show the actual profits earned and the current state of affairs of the organization.
Mercantile or Accrual System of Accounting: In this system, expenses and incomes are
considered during that period to which they pertain. This system of accounting is
considered to be ideal but it may result into unrealized profits which might reflect in the
books of the accounts on which the organization have to pay taxes too. All the company
forms of organization are legally required to follow Mercantile or Accrual System of
What are deferred tax assets and liabilities? Why they should be created?
Deferred Assets: They arise when a company actually pays more in taxes than they
show as an expense on their income and expenditure list in a reporting period. They
should be created for recognition of revenue, expenses and operating losses. It is good
way to keep track of all these

Deferred Liabilities: They are expenses which are reported on a companys income and
expenditure list which are not actually paid but they are expected to be paid in near future
This should be created to keep track of the difference between the companys books and
IRS reporting or financial reporting.
What is capitalization? How important is it?
It is a term with diverse meanings in both financial and accounting contexts. In
accounting, it means the cost to buy any assets which is included in price of asset. But in
terms of finance, it is the cost which is required to buy an asset; it includes the price of
asset with the retained earnings of the company. Capitalization is very important aspect in
determining the value of the company in the market.
I buy a piece of equipment; walk me through the impact on the 3 financial statements
Initially, there is no impact (income statement); cash goes down, while PP&E goes up
(balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement)
Over the life of the asset: depreciation reduces net income (income statement); PP&E
goes down by depreciation, while retained earnings go down (balance sheet); and
depreciation is added back (because it is a non-cash expense that reduced net income) in
the cash from operations section (cash flow statement).
What is working capital?
That portion of companys capital invested in short term or current assets to carry on its
day to day operations smoothly, is called the working capital.
It refers to a firms investment in short term assets like
Marketable securities,
Debtors and
So it refers to all items of current assets and current liabilities.
It is defined as the excess of current assets over current liabilities.
Current Assets - Current Liabilities = Working capital. To explain further, it is a financial
statement which tells the user how much cash is being spent in the business, on various
items needed for routine business.
What are the different types of expenditures considered for the purpose of accounting?
Capital Expenditure: Capital Expenditure is an amount incurred for acquiring the long
term assets such as land, building, equipments which are continually used for the
purpose of earning revenue. These are not meant for sale. These costs are recorded in
accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread

over several accounting years. E.g. Interest on capital paid, Expenditure on purchase or
installation of an asset, brokerage and commission paid.
Revenue Expenditure: Revenue Expenditure is the expenditure incurred in one
accounting year and the benefits from which is also enjoyed in the same period only. This
expenditure does not increase the earning capacity of the business but maintains the
existing earning capacity of the business. It included all the expenses which are incurred
during day to day running of business. The benefits of this expenditure are for short
period and are not forwarded to the next year. This expenditure is on recurring nature.
E.g.: Purchase of raw material, selling and distribution expenses, Salaries, wages etc.
Deferred Revenue Expenditure: Deferred Revenue Expenditure is a revenue
expenditure which has been incurred during an accounting year but the benefit of which
may be extended to a number of years. And these are charged to profit and loss account.
E.g. Development expenditure, Advertisement etc.

What are adjustment entries? Why are they passed?

Adjustment entries are the entries which are passed at the end of each accounting period
to adjust the nominal and other accounts so that correct net profit or net loss is indicated
in profit and loss account and balance sheet may also represent the true and fair view of
the financial condition of the business.
It is essential to pass these adjustment entries before preparing final statements.
Otherwise in the absence of these entries the profit and loss statement will be misleading
and balance sheet will not show the true financial condition of the business
What is goodwill?
Goodwill is an asset which is cannot be touched, but it has a wider value than it appears.
It captures excess of the purchase price over the fair market value of any business
What are limited liability companies? What are its two types?
The limited liability company (LLC) is a business structure combining both the
characteristics of a corporate and of partnership. As a corporate entity it protects its
owners against personal liability on the other hand for tax purposes it is treated as a noncorporate business organization. A limited liability company enjoys various benefits like
owners or members of the company have limited liability due to the companys separate

legal existence, system of profit distribution is very flexible. Unlike a corporate

organization it does not have to keep minutes or resolutions and is easier to operate. Tax
advantage is the important benefit which a limited liability company enjoys as all the
profits, losses and expenses are shared by the individual members. Thus the double
taxation of paying corporate tax and individual tax is avoided. With all the above benefits
limited Liability Company has few disadvantages also as the company comes to an end
after the expiry or insolvency of its members.
Explain Balanced Capitalization.
Capitalization is a collection of share capital, loans, reserves and debentures. It represents
permanent investment in companies and it also removes the need of long-term loan plans.
It is used to show the reality of the industry by promoting competition, development,
profit and investment between individuals, companies and businesses. Balance
capitalization is part of this Capitalization only where it is compared to the relative
importance, value and other things to make it proportionate in every sense. In balance
capitalization debits and credits should be equal on both sides and the share should be
shared among all in equal proportions.

What is cost accountancy? What are the objects of Cost Accountancy?

Cost accountancy is the application of costing and cost accounting principles, methods and
techniques to the science, art and practice of cost control and the ascertainment of profitability as
well as the presentation of information for the purpose of managerial decision making.
Following are the objects of Cost Accountancy:

Ascertainment of Cost and Profitability

Determining Selling Price
Facilitating Cost Control
Presentation of information for effective managerial decision
Provide basis for operating policy
Facilitating preparation of financial or other statements

Equity means capital contributed by Debt means a sum of money that is
owners promoters
borrowed, owed or due
share capital
Debentures, Loans, Deposits
Dividends, Bonus shares
Lifetime of the company
Short term, medium term, long term
Voting right
No voting right
Ownership has given
No Ownership has given
Dilutes the ownership

Meaning of share
A share is share in the share capital in the company
Explain share capital & reserves and surpluses.

Share Capital is that portion of a companys equity that has been obtained by issuing share to a
shareholder. The amount of share capital increases as new shares are sold to public in exchange
for cash.
Reserves and Surpluses indicate that portion of the earnings, receipt or other surplus of the
company appropriated by the management for a general or specific purpose other than provisions
for depreciation or for a known liability. Reserves are classified as: Capital Reserve and Capital
Redemption Reserve.
What is Equity Capital?
Equity capital is the capital which doesn't have the preferential rights over the preference share
capital of the organization. Instead of preferential rights the equity shareholders gets bonus
shares, voting rights in the meetings etc. the equity capital is more risky than any other capital.
What is Preference Capital?
Preference Capital is the capital which carries preference over Equity capital at the time of
Payment of dividend and at the time of winding up of the company.
Preference capital is the capital invested by public and company issue fixed interest rate and risk
is very low. Some companies issuing preference shares..
What are debentures?
Debentures are the Certificates issued by the companies to the public for raising funds to run
their business by optimally utilizing the raised funds. Its freely transferable from person to
person. These certificates r also called bonds if its issued by govt.
Certificate carries an undertaking that debenture holder will get back their principle amount with
fixed rate of interest at the maturity date.
Debenture is a certificate of indebtedness issued by a company under seal with an obligation to
pay a fixed rate of interest & pay the principal to the holder @ maturity.
Debenture is a certificate issued by the company under its seal acknowledging a debt due by it to
its holder and debentures are freely transferable.
What is authorized Capital?

Authorized capital is the maximum capital that a company is authorized to raise in the lifetime of
the company. Share capital of the company stated in the memorandum of association and
approve by the registered of the company
Authorized capital means when company decided to start a business for running then company
estimated how much capital required along with share value. In other words authorized capital is
estimated capital.
What is Issued Capital?
It is the part of authorized capital which is issued to the public through initial public offering and
later on seasoned offerings
What is Unissued Capital?
It is the part of authorized capital which is not issued to the public
What is Subscribed Capital?
It is the part of issued capital which is subscribed by the public through application money
What is Unsubscribed Capital?
It is the part of issued capital which is unsubscribed by the public
What is Called Up Capital?
It is the part of subscribed capital which is called up by the company and paid by the public
What is Uncalled Up Capital?
It is the part of subscribed capital which is not called up by the company
If any amount has been called by the company either as allotment or call money and a
shareholder has not paid that money, this is known as callas in arrears. One such calls in arrears,
if the company directors want and there is a provision in the articles of Association, the company

can change interest @ 5 % for the period for which such amount remained in arrear from the
Similarly, if any call has been made but while paying that call, some shareholders paid the
amount of the rest of calls also, then such amount will be called as calls in advantage and will be
credited to a separate account known as callas in advance account by passing the flowing entry.
Bank Account Dr
To Calls in Advance (A/c)
Calls in Advance Account is shown on the liabilities side of the Balance Sheet separately from
the paid up capital. Generally interest is pain on such calls according to the provision of the
Articles of Association but such rate should not exceed 6% per annum. Calls in advance are not
entitled for any dividend declared by the company.

Explain derivatives in terms of capital markets?

A derivative is an instrument whose value depends on, or is derived from, the value of another
asset. The underlying asset can be securities, commodities, bullion, currency, livestock or
anything else.
Derivatives are generally used as an instrument to hedge risk, but can also be used for
speculative purposes.
The most common underlying assets include stocks, bonds, commodities, currencies, interest
rates and market indexes. Most derivatives are characterized by high leverage.
Derivatives are mainly classified as


What is Forward Contract?

It is an agreement to buy or sell an asset at a certain time for a certain price. Forward contract are
traded in OTC market.
What is Futures?
It is an agreement between two parties to buy and sell an asset at a certain time in the future for a
certain price. Futures are traded in exchange.

Forward Contract vs. Futures Contract


Structure & Purpose

Forward Contract
A forward contract is an
agreement between two parties to
buy or sell an asset (which can be
of any kind) at a pre-agreed future
point in time at a specified price.

Market regulation

Customized to customer needs.

Usually no initial payment
required. Usually used for
Negotiated directly by the buyer
and seller
Not regulated

Institutional guarantee

The contracting parties

High counterparty risk

Transaction method

Futures Contract
A futures contract is a standardized
contract, traded on a futures
exchange, to buy or sell a certain
underlying instrument at a certain
date in the future, at a specified
Standardized. Initial margin
payment required. Usually used for
Quoted and traded on the
Government regulated market (the
Commodity Futures Trading
Commission or CFTC is the
governing body)
Clearing House
Low counterparty risk


Contract Maturity

Expiry date
Method of pretermination

Contract size


No guarantee of settlement until

the date of maturity only the
forward price, based on the spot
price of the underlying asset is
Forward contracts generally
mature by delivering the
Depending on the transaction
Opposite contract with same or
different counterparty.
Counterparty risk remains while
terminating with different
Depending on the transaction and
the requirements of the
contracting parties.
Primary & Secondary

Both parties must deposit an initial

guarantee (margin). The value of
the operation is marked to market
rates with daily settlement of
profits and losses.
Future contracts may not
necessarily mature by delivery of
Opposite contract on the exchange.



What is Options?
Options give investors the right but no obligation to trade securities, like stocks or bonds,
at predetermined prices, within a certain period of time specified by the option expiry
date. A call option gives its buyer the option to buy an agreed quantity of a commodity or
financial instrument, called the underlying asset, from the seller of the option by a certain
date (the expiry), for a certain price (the strike price). A put option gives its buyer the
right to sell the underlying asset at an agreed-upon strike price before the expiry date.
The party that sells the option is called the writer of the option. The option holder pays
the option writer a fee called the option price or premium. In exchange for this fee, the
option writer is obligated to fulfill the terms of the contract, should the option holder
choose to exercise the option. For a call option that means the option writer is obligated
to sell the underlying asset at the exercise price if the option holder chooses to exercise

the option. And for a put option, the option writer is obligated to buy the underlying asset
from the option holder if the option is exercised.
What is Put Option?
A "Put option" gives the holder the right but not obligation to sell an asset by a certain
date for a certain price.
Put option is nothing but a financial contract which gives the holder the right but not the
obligation to sell an underlying asset.
What is Call Option?
Calls give the buyer the right but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before a given future date.
Call option gives the buyer the right but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before, depending upon the type of option
(American/European) at given future date
A 'Call Option' is an agreement between the buyer and the writer(seller) of such option,
where the buyer enjoys the right but not an obligation to buy the underlying asset(s) at a
given price at an agreed quantity and at a given future date (depending on the option type
- European/American)
Call Option vs. Put Option




Call Option
Buyer has the right, but is not required,
to buy an agreed quantity by a certain
date for a certain price (the strike price).
Premium paid by buyer
Seller (writer of the call option)
obligated to sell the underlying asset to
the option holder if the option is
Increases as value of the asset increases
Security deposit allowed taking
something at a certain price if the
investor chooses.

Put Option
Buyer has the right, but is not
required, to sell an agreed quantity by
a certain date for the strike price.
Premium paid by buyer
Seller (writer of a put option)
obligated to buy the underlying asset
from the option holder if the option is
Decreases as value of the underlying
asset increases
Insurance protected against a loss
in value.

What is Swaps?
It is an agreement in which two counterparties agree to exchange one stream of cash
flows against another stream. These streams are called the legs of the swap. The swap
agreement defines the dates when the cash flows are to be paid and the way they are
Interest rate swap: The most common type of swap is a plain Vanilla interest rate
swap. It is the exchange of a fixed rate loan to a floating rate loan. The life of the swap
can range from 2 years to over 15 years. The reason for this exchange is to take benefit
from comparative advantage. Some companies may have comparative advantage in fixed
rate markets, while other companies have a comparative advantage in floating rate
Currency swap: A currency swap involves exchanging principal and fixed rate interest
payments on a loan in one currency for principal and fixed rate interest payments on an
equal loan in another currency. Just like interest rate swaps

What is Swaption?
Swaption is basically an option on the forward Swap. Similar to a Call and Put option, a
Swaption is of two kinds: a receiver Swaption and a payer Swaption. While on one hand,
in case of a receiver Swaption there is an option wherein you can receive fixed and pay
floating, a payer swaption on the other hand is an option to pay fixed and receive floating.
What is Over the Counter Market?
A decentralized market of securities not listed on an exchange where market participants
trade over the telephone, facsimile or electronic network instead of a physical trading
floor. There is no central exchange or meeting place for this market. In the OTC
market, trading occurs via a network of middlemen, called dealers, who carry inventories
of securities to facilitate the buy and sell orders of investors, rather than providing the
order matchmaking service seen in specialist exchanges such as the BSE/NSE

What is Exchange traded market?

A derivatives exchange is a market where individuals trade standardized contracts that
have been defined by the exchange. Main task of the Exchange is to standardize the
quantity and qualities of the Grain that were traded.
What is hedging?
Hedging is a tool to minimize the risks. It is thus like an 'insurance' where one pays a
premium but gets an assured amount in case of some uncertain event to the extent of the
loss actually suffered on an equally opposite position for which the hedge was done.
Thus, hedger is different from arbitrageur and speculators, as the intention here is not to
maximize the profit but to minimize the loss.
Done by parties who seek to offset their existing risks by entering into a derivatives
transaction. Existing risks could be an investment portfolio, price changes in oil for a
petroleum mining company or perhaps investments in a foreign country.
E.g. In Capital Markets, suppose an investor has an equity portfolio of Rs.2 lacs and the
portfolio consists of all the major stocks of NIFTY. He thinks the market will improve in
the long run but might go on a downside in the short run. NIFTY today stands at 4300. To
minimize the risk of downfall, he enters into an option contract by buying NIFTY-PUT of
strike 4300 at a premium of, say, Rs.100. Thus, the actual amount paid is Rs.5,000(lot
size of NIFTY is 50). Also, the number of NIFTY-PUTs to be bought will vary on the
beta of the portfolio so as to completely hedge the position.
Distinguish between speculator and hedger?
The main difference lies in the motive of the two parties. The main motive of the hedger
is to hedge (minimize) the risk from the occurrence of some events.
The motive of the speculator is to gamble in the market in order to make the profit by
buying/selling the derivative products.
Hedger is a risk avoider and speculator is risk lover.
Speculator is high riskier in market, it is short term, hedger is minimizing risk from
occurrence of some events.
What is Arbitrage?

Arbitragers work at making profits by taking advantage of discrepancy between prices of

the same product across different markets. Practitioners working within risk finance or
Quantitative finance often develop models to price various assets being traded across the
markets. Upon finding price discrepancies, one can make use of a specific combination of
derivatives in order to make a risk less profit.
What is Beta?
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison
to the market as a whole. It is the sensitivity of the asset with regards to its market.
Say, if it is 2..that means if market go up by 5%, that asset will go up by 10%, it can even
be negative, which is known as negative correlated, where asset will perform inverse to
that of market.
The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It
measures the part of the asset's statistical variance that cannot be removed by the
diversification provided by the portfolio of many risky assets, because of the correlation
of its returns with the returns of the other assets that are in the portfolio.

Forward Price: The forward price for a contract is the delivery price that would be applicable to
the contract if were negotiated today (i.e., it is the delivery price that would make the contract
worth exactly zero). The forward price may be different for contracts of different maturities (as
shown by the table)
Spot Price: current market price.
The Assets: Stocks, commodities, currencies etc. whichever listed in exchange for trading
Contract Size: Contract size specifies the No. of the assets that has to be delivered under one
Delivery Arrangement: - Delivery arrangement means where to deliver and how to deliver
when there is no exchange in particular place what will be the extra costing.

Price Quotes: Price of every per unit asset can be demand/ ask up to two decimal only.
Example- crude oil per barrel price is $68.05. Crude oil per barrel price is $68.225. it not
Price Limit: Exchange decides the highest % change in a single day for every asset. If any assets
price does higher/ lower than the limit price exchange stops the trading of that asset. It is called
price circuit
Position Limit: Are the maximum number of contract that a speculator may hold.
News Paper Quotes: News Paper Quotes gives the details of trades of all major assets of every
exchange regarding open, close, high low price volume previous day.
Cash settlement: The discharge of an obligation by payment or receipt of a net cash amount
instead of delivery by both parties.
Orders: Securities and commodities trading: Investor's instructions to a broker or dealer to buy
or sell the item in a specified manner.
Limit Order: The order can be executed only at particular price specified by trader .
Stop order: it is order which placed to stop the losses . stop order is executed if price reaches
to your loss bearing capacity for buy/sell order.
Market order: it is a request to trade immediately at the best price available in the market
Open order: An order to buy or sell securities that has not been executed (usually because some
requirement, such as a specified price, has not been met) or canceled
Hedge funds
Hedge funds are not subject to the same rules as mutual funds and cannot offer their securities
Mutual funds must disclose investment policies; makes shares redeemable at any time, limit use
of leverage take no short positions. Hedge funds are not subject to these constraints.

Hedge funds use complex trading strategies and are big users of derivatives for hedging,
speculation and arbitrage