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Finance GlossaryDerivatives Market
Derivatives Market
Definition of Derivatives Market
The derivatives market is a place where financial contracts like futures, options, forwards, and swaps are traded. It is a complex market that is a subset of the stock market, commodity market, currency market, and others depending on the underlying asset that’s a part of the derivative contract.
Related Terms
Depository Participant
A depository participant is a financial institution that acts as a bridge between a depositories like NSDL/CDSL and investors. Moreover, a depository participant is responsible for holding shares in the Dematerialized format in a Demat account.
At the same time, a depository participant gives traders and investors access to an online trading account that can be used to buy and sell securities. The right depository participant will also ensure that your securities are safe.
At the same time, a depository participant gives traders and investors access to an online trading account that can be used to buy and sell securities. The right depository participant will also ensure that your securities are safe.
Beta Coefficient
Beta coefficient is used to measure the volatility of stocks in relation to changes in the market. Basically, Beta helps investors understand the risks associated with a stock compared to the market.
The formula to calculate the Beta coefficient is:
Beta (β) = Covariance (Ri, Rm) / Variance (Rm)
Where:
The formula to calculate the Beta coefficient is:
Beta (β) = Covariance (Ri, Rm) / Variance (Rm)
Where:
- Ri = a stock's return
- Rm = overall market's return
- Covariance = ups & downs of stock returns versus ups & downs of market returns
- Variance = the difference between market returns and its average
Generally, Beta values are of four types:
- Beta < 1.0: stock less volatile than the market
- Beta = 1.0: stock just as volatile as the market
- Beta > 1.0: stock more volatile than the market
- Negative Beta: stock shares inverse relation with the market
Quick Ratio
The Quick Ratio, also known as the acid-test ratio, measures a company’s ability to meet short-term liabilities using its most liquid assets. It is calculated as (Current Assets - Inventory) divided by Current Liabilities, excluding less liquid inventory from current assets. A Quick Ratio above 1 indicates a company's strong liquidity to cover obligations without selling inventory, helping investors evaluate financial stability and short-term solvency.
Convertible Arbitrage
A convertible arbitrage is a trading strategy that involves buying convertible securities - most commonly bonds and preferred stock - and a short option on the common stock of the same company.
Because of this combination of purchases, a convertible arbitrage strategy is known as a neutral strategy designed to profit from the supposed inefficiencies that lie in the pricing of convertible securities.
Because of this combination of purchases, a convertible arbitrage strategy is known as a neutral strategy designed to profit from the supposed inefficiencies that lie in the pricing of convertible securities.
Paid-Up Capital
Paid-Up Capital is the amount of money that the company has received from its shareholders in exchange for the company's stock. It is thus the portion of the authorised capital which has actually been subscribed by the investors and paid for. Paid-up capital of the company appears in the balance sheet.
Long Strangle
A long strangle is an options strategy involving the purchase of both a call option and a put option on the same underlying asset with the same expiration date. The strike price of the call option is typically higher than the current market price, while the strike price of the put option is lower. Long strangles are used to generate a profit regardless of the underlying’s price direction.
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