BOM :- A bill of materials (BOM) is a comprehensive inventory of the raw materials, assemblies,

subassemblies, parts and components, as well as the quantities of each, needed to manufacture a
product.

In a nutshell, it is the complete list of all the items that are required to build a product. A BOM is
sometimes also referred to as a product structure, assembly component list or production recipe
(in process manufacturing industries).

 Single-level bill of materials, which is a relatively simple list for a product. In this type,
each assembly or subassembly is shown only once, with the corresponding quantity
required of each to make the product. Though easy to develop, this type of BOM is
unsuitable for complex products because it does not specify the relationship between
parent and child parts or between assemblies and subassemblies. If the product fails, a
single-level BOM makes it difficult to determine which part needs to be replaced or
repaired.
 Multilevel bill of materials, which takes more work to create but offers greater details
and specificity on the parent and child parts in the product. In a multilevel BOM, the total
material required is shown. Additionally, the product structure is indented to show the
relationship between the parent and child product, as well as assemblies and
subassemblies

Manufacturing bill of materials. A manufacturing BOM (MBOM) includes a structured list of all the
items or subassemblies required to make a manufactured, shippable finished product. An MBOM, in
addition to the information on individual parts, also includes information on the parts that require
processing prior to assembly and explains how various components relate to one another in a
product. The information in the MBOM is then shared with all the integrated business systems
involved in ordering and building the product, including enterprise resource planning (ERP), material
requirements planning (MRP) and, in some cases, a manufacturing execution system (MES).

Engineering bill of materials. An engineering BOM (EBOM) defines assemblies or parts as designed
by the engineering department. Showing the component structure from a functional perspective, an
EBOM, for example, will consist of a mechanical or technical drawing of a product. An EBOM is
typically developed by engineers using computer-aided design (CAD) or electronic design
automation (EDA) tools, and it is common to have more than one EBOM for a product as the design
undergoes a series of revisions.

Sales bill of materials. A sales BOM (SBOM) defines a product in the sales stage, meaning details of
the product prior to assembly. In an SBOM, the list of finished products and the components
required to develop it appear separately in the sales order document. Here, the finished product is
managed as a sales item instead of an inventory item.

Leasing: Definitions, Types, Merits and Demerits!

A “lease” is defined as a contract between a lessor and a lessee for the hire of a specific asset for a
pecific period on payment of specified rentals.

The maximum period of lease according to law is for 99 years. Previously land or real resate, mines
and quarries were taken on lease. But now a day’s plant and equipment, modem civil aircraft and
ships are taken.

Definition:
(i) Lessor: The party who is the owner of the equipment permitting the use of the same by the other
party on payment of a periodical amount.

(ii) Lessee: The party who acquires the right to use equipment for which he pays periodically.
Lease Rentals:
This refers to the consideration received by the lessor in respect of a transaction and includes:
(i) Interest on the lessor’s investment;

(ii) Charges borne by the lessor. Such as repairs, maintenance, insurance, etc;

ADVERTISEMENTS:

(iii) Depreciation;

(iv) Servicing charges.

At present there are many leasing companies such as 1st Leasing Company, 20th Century Leasing
Company which are doing quite a lot of business through leasing, It has become an important
financial service and a lucrative avenue of making sizable profits by leasing companies.

Types of Leases:
The different types of leases are discussed below:
1. Financial Lease: This type of lease which is for a long period provides for the use of asset during
the primary lease period which devotes almost the entire life of the asset. The lessor assumes the
role of a financier and hence services of repairs, maintenance etc., are not provided by him. The
legal title is retained by the lessor who has no option to terminate the lease agreement. The
principal and interest of the lessor is recouped by him during the desired playback period in the form
of lease rentals. The finance lease is also called capital lease is a loan in disguise. The lessor thus is
typically a financial institution and does not render specialized service in connection with the asset.

2. Operating Lease: It is where the asset is not wholly amortized during the non-cancellable period,
if any, of the lease and where the lessor does not rely for is profit on the rentals in the non-
cancellable period. In this type of lease, the lessor who bears the cost of insurance, machinery,
maintenance, repair costs, etc. is unable to realize the full cost of equipment and other incidental
charges during the initial period of lease. The lessee uses the asset for a specified time. The lessor
bears the risk of obsolescence and incidental risks. Either party to the lease may termite the lease
after giving due notice of the same since the asset may be leased out to other willing leases.

3. Sale and Lease Back Leasing: To raise funds a company may-sell an asset which belongs to the
lessor with whom the ownership vests from there on. Subsequently, the lessor leases the same asset
to the company (the lessee) who uses it. The asset thus remains with the lessee with the change in
title to the lessor thus enabling the company to procure the much needed finance.

4. Sales Aid Lease: Under this arrangement the lessor agrees with the manufacturer to market his
product through his leasing operations, in return for which the manufacturer agrees to pay him a
commission.

5. Specialized Service Lease: In this type of agreement, the lessor provides specialized personal
services in addition to providing its use.

6. Small Ticket and Big Ticket Leases: The lease of assets in smaller value is generally called as small
ticket leases and larger value assets are called big ticket leases.

7. Cross Border Lease: Lease across the national frontiers is called cross broker leasing. The recent
development in economic liberalisation, the cross border leasing is gaining greater importance in
areas like aviation, shipping and other costly assets which base likely to become absolute due to
technological changes.
Merits of Leasing:
(i) The most important merit of leasing is flexibility. The leasing company modifies the arrangements
to suit the leases requirements.

(ii) In the leasing deal less documentation is involved, when compared to term loans from financial
institutions.

(iii) It is an alternative source to obtain loan and other facilities from financial institutions. That is
the reason why banking companies and financial institutions are now entering into leasing business
as this method of finance is more acceptable to manufacturing units.

(iv) The full amount (100%) financing for the cost of equipment may be made available by a leasing
company. Whereas banks and other financial institutions may not provide for the same.

(v) The ‘Sale and Lease Bank’ arrangement enables the lessees to borrow in case of any financial
crisis.

(vi) The lessee can avail tax benefits depending upon his tax status.

Demerits of Leasing:
(i) In leasing the cost of interest is very high.

(ii) The asset reverts back to the owner on the termination of the lease period and the lesser loses
his claim on the residual value.

(iii) Leasing is not useful in setting up new projects as the rentals become payable soon after the
acquisition of assets.

(iv) The lessor generally leases out assets which are purchased by him with the help of bank credit. In
the event of a default made by the lessor in making the payment to the bank, the asset would be
seized by the bank much to the disadvantage of the lessee.
Products in Derivatives Market
Forwards
It is a contractual agreement between two parties to buy/sell an underlying asset at a
certain future date for a particular price that is pre‐decided on the date of contract.
Both the contracting parties are committed and are obliged to honour the transaction
irrespective of price of the underlying asset at the time of delivery. Since forwards are
negotiated between two parties, the terms and conditions of contracts are customized.
These are Over‐the‐counter (OTC) contracts.
Limitations :-

 Liquidity Risk
 Counterparty Risk

Futures
A futures contract is similar to a forward, except that the deal is made through an Organized
and regulated exchange rather than being negotiated directly between two parties. Indeed,
we may say futures are exchange traded forward contracts.
Options
An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying
on or before a stated date and at a stated price. While buyer of option pays the premium and
buys the right, writer/seller of option receives the premium with obligation to sell/ buy the
underlying asset, if the buyer exercises his right.
 Call Options :- Option, which gives buyer a right to buy the underlying asset, is called
Call option
 Put options :- option which gives buyer a right to sell the underlying asset, is called Put
option

Swaps
A swap is an agreement made between two parties to exchange cash flows in the future
according to a prearranged formula. Swaps are, broadly speaking, series of forward contracts.
Swaps help market participants manage risk associated with volatile interest rates, currency
exchange rates and commodity prices.

Market Participants
Hedgers
They face risk associated with the prices of underlying assets and use derivatives to reduce
their risk. Corporations, investing institutions and banks all use derivative products to hedge
or reduce their exposures to market variables such as interest rates, share values, bond prices,
currency exchange rates and commodity prices.
Speculators/Traders
They try to predict the future movements in prices of underlying assets and based on the
view, take positions in derivative contracts. Derivatives are preferred over underlying asset
or trading purpose, as they offer leverage, are less expensive (cost of transaction is generally
ower than that of the underlying) and are faster to execute in size (high volumes market).
Arbitrageurs
Arbitrage is a deal that produces profit by exploiting a price difference in a product in two
different markets. Arbitrage originates when a trader purchases an asset cheaply in one
location and simultaneously arranges to sell it at a higher price in another location. Such
opportunities are unlikely to persist for very long, since arbitrageurs would rush in to these
transactions, thus closing the price gap at different locations.
Positions in derivatives market

Long position
Outstanding/ unsettled buy position in a contract is called “Long Position”. For instance,
if Mr. X buys 5 contracts on Sensex futures then he would be long on 5 contracts on
Sensex futures. If Mr. Y buys 4 contracts on Pepper futures then he would be long on 4
contracts on pepper.
Short Position
Outstanding/ unsettled sell position in a contract is called “Short Position”. For instance,
if Mr. X sells 5 contracts on Sensex futures then he would be short on 5 contracts on
Sensex futures. If Mr. Y sells 4 contracts on Pepper futures then he would be short on 4
contracts on pepper.
Open position
Outstanding/ unsettled either long (buy) or short (sell) position in various derivative
contracts is called “Open Position”. For instance, if Mr. X shorts say 5 contracts on
Infosys futures and longs say 3 contracts on Reliance futures, he is said to be having
open position, which is equal to short on 5 contracts on Infosys and long on 3 contracts
of Reliance. If next day, he buys 2 Infosys contracts of same maturity, his open position
would be – short on 3 Infosys contracts and long on 3 Reliance contracts.

Pay off Charts for Options

Long on option
Buyer of an option is said to be “long on option”. As described above, he/she would
have a right and no obligation with regard to buying/ selling the underlying asset in the
contract. When you are long on equity option contract:
 You have the right to exercise that option.
 Your potential loss is limited to the premium amount you paid for buying the
option.
 Profit would depend on the level of underlying asset price at the time of
exercise/expiry of the contract.

Short on option
Seller of an option is said to be “short on option”. As described above, he/she would
have obligation but no right with regard to selling/buying the underlying asset in the
contract. When you are short (i.e., the writer of) an equity option contract:
 Your maximum profit is the premium received.
 You can be assigned an exercised option any time during the life of option contract
(for American Options only). All option writers should be aware that assignment is a
distinct possibility.
Long Call :- If Nifty closes at 6100, you will NOT exercise the right to buy the underlying (which
youhave got by buying the call option) as Nifty is available in the market at a price lower than
your strike price. Why will you buy something at 6200 when you can have the same thing at
6100? So you will forego the right. In such a situation, your loss will be equal to the premium
paid, which in this case is Rs. 118.35.
If Nifty were to close at 6318.35, you will exercise the option and buy Nifty @ 6200 and
make profit by selling it at 6318.5. In this transaction you will make a profit of Rs. 118.35, but
you have already paid this much money to the option seller right at the beginning, when you
bought the option. So 6318.35 is the Break Even Point (BEP) for this option contract. A general
formula for calculating BEP for call options is strike price plus premium (X + P).
If Nifty were to close at 6700, you will exercise the option and buy Nifty at 6200 and sell
it in the market at 6700, thereby making a profit of Rs. 500. But since you have already
paid Rs. 118.35 as option premium, your actual profit would be 500 – 118.35 = 381.65.

Short Call :- If the maximum loss for a long call position is equal to the premium paid, it
automatically means that the maximum gain for the short call position will be equal to the
premium received. Similarly, if maximum gain for long call position is unlimited, then even
maximum loss for the short call position has to be unlimited. Lastly, whenever, the long call
position is making losses, the short call position will make profits and vice versa.

Long Call :- On October 1, 2010, Nifty is at 6143.40. You buy a put option with strike price of
6200 at a premium of Rs. 141.50 with expiry date October 28, 2010. A put option gives the
buyer of the option the right, but not the obligation, to sell the underlying at the strike Price.
In this example, you can sell Nifty at 6200. When will you do so? You will do so only when
Nifty is at a level lower than the strike price. So if Nifty goes below 6200 at expiry, you will
buy Nifty from market at lower price and sell at strike price. If Nifty stays above 6200, you will
let the option expire. The maximum loss in this case as well (like in long call position) will be
equal to the premium paid; i.e. Rs. 141.50.
What can be the maximum profit? Theoretically, Nifty can fall only till zero. So maximum
profit will be when you buy Nifty at zero and sell it at strike price of 6200. The profit in this
case will be Rs. 6200, but since you have already paid Rs. 141.5 as premium, your profit will
reduce by that much to 6200 – 141.5 = 6058.5.
Breakeven point in this case will be equal to strike price – premium (X – P). In our example
breakeven point will be equal to 6200 – 141.5 = 6058.5. Thus when Nifty starts moving below
6058.5, will you start making profits.

Short Put :- When long put makes profit, short put will make loss. If maximum loss for long
put is the premium paid, then maximum profit for the short put has to be equal to the
premium received. If maximum profit for long put is when price of underlying falls to zero at
expiry, then that also will be the time when short put position makes maximum loss.

Thus there are five fundamental parameters on which the option price depends:
1) Spot price of the underlying asset
2) Strike price of the option
3) Volatility of the underlying asset’s price
4) Time to expiration
5) Interest rates
Option Strategies

Straddle :- This strategy involves two options of same strike prices and same maturity. A
long straddle position is created by buying a call and a put option of same strike and same
expiry whereas a short straddle is created by shorting a call and a put option of same strike
and same expiry.

 Long Straddle :-
 Short Straddle :-

Covered Put :- This strategy is used to generate extra income from existing holdings in the
cash market. If an investor has bought shares and intends to hold them for some time, then
he would like to earn some income on that asset, without selling it, thereby reducing his cost
of acquisition. So how does an investor continue to hold on to the stock, earn income and
reduce acquisition cost?