Finance Explained

What should your investment strategy be going into 2021? It's been an incredible year for investing with record daily falls as well as rises, a pandemic, a US Election and of course Brexit still yet to be resolved with the end of year deadline looming and as yet no deal. If ever there was a year for hindsight this was it. The opportunities were endless both to short the falls and ride the highs, but it was a brave investor that sought them, let alone timing them right.  However, some clear trends were in play. As the pandemic spread, the fear-based pricing built into markets was always likely to lead to a readjustment and in the same way when word of a potential vaccine grew a sharp rebound was probable. As ever, fortunes were made and lost. Going forward is, as ever, tricky. The long term effects on economies and particularly unemployment will remain in place in 2021, even if we get the record bounce that many are predicting as the world slowly gets back to normal.  But what ...

It is a tricky time for investors at the moment to say the least. After one of the longest bull markets in history, the pandemic crisis caused huge disruption with sweeping share movements affecting individual stocks and sectors alike. There were some significant losers, including a swathe of high street closures, but also some dramatic gainers as the impact of Covic shook all parts of the marketplace and workforce. The biggest risers In terms of the biggest risers, let's look at the data from the FTSE-All Share from January to March 2020 as the first lockdown kicked in. Suppliers of the basic commodities and services fared best in the markets as society slipped down Maslow's Hierarchy of Needs towards the essentials. The world retreated inwards and once the supply chain could be secured the market reacted accordingly. Top of the sectors according to the IFS (Institute for Fiscal Studies) were the Food & Drink retailers, followed by Personal Goods, Medicines, Gas & Wate...

There are no two ways about it - 2020 has been an incredibly turbulent year for the markets. A pandemic, a US election and an uncertain Brexit still looms large to cap the year. So, what approach should you take in the current situation? Markets - emotion and fundamentals Markets have both their fundamentals and a human-led emotional bias.  In terms of emotional bias, there is a tendency to overreact to both bad news and good news, hence the huge swings when the prospect of lockdown loomed and the huge spike when news of a vaccine broke even though the impact will be medium term at the least. There are contract investors who invest when the market suffers a huge dip and sell when the market is peaking. Of course, it's impossible to pick those peaks and troughs accurately.  While it may be tempting to keep all your money under your mattress in 2020, it is worth having a look at the history of markets and then to see the opportunities available. The history of markets strongly s...

In mathematical finance, the Greek is a quantity that represents the ability to change the underlying parameters on which the value of an instrument or portfolio of financial instruments depends. The name is used because the most common sensitivities are referred to by the Greek letter, as are other financial measures. Greeks are an important tool in risk management and are used as a measure of a financial instrument's sensitivity to changes in value.   For this reason, the Greeks who are best suited to hedging are well defined to measure price, time and volatility changes, and this is a measure of the underlying parameters of a financial instrument's sensitivity to changes in the value of that instrument or portfolios of financial instruments. Greece in a black money model is calculated and the measure you want to hedge your portfolio against an unfavorable change in market conditions. Component risk can be treated in isolation and the portfolio can be rebalanced accordingly t...

Because risk - free interest - can be freed, other investment risks must have higher returns to encourage investors to hold them. In practice, market participants often choose maturity and yield risk as the primary criteria for excluding bonds issued by sovereigns in the same currency whose default risk is so low that it is negligible.   This is inspired by Irving Fisher's concept of inflationary expectations, described in his Theory of Interest (1930), which is based on the theoretical costs and benefits of holding a currency. As Malcolm Kemp points out, the free interest rate means different things to different people (a model of calibration in imperfect markets), and there is no clear consensus on how to measure it directly.  Expected productivity gains should encourage investors to prefer future incomes to current consumption. The expected increase in the money supply should lead investors to prefer future incomes to future consumption, and vice versa. An expected increase...

In finance, volatility (usually referred to as  σ ) is the historical volatility measured by a time series of past market prices. Implicit volatility looks to the future and is derived from trading in derivatives on the market. It is usually measured as a standard deviation of logarithmic returns and considers past and future.   This is because over time, the probability increases that the price of the instrument will be further removed from the original price. Volatility increases linearly, and fluctuations are expected to equalize, so that the most likely deviation (twice as high this time) is not twice as large as the distance from zero. Gaussian random path (Vienna process), which follows the prices of financial instruments.  This can lead to the price of the instrument rising or falling in the future.  In today's markets, it is also possible to trade in volatility, but it does not measure the direction of price change. Volatility is measured only by the margin b...

In finance, the exercise price of an option is the fixed price at which the holder of the option may buy or sell the underlying security or commodity (in the case of a call) at a fixed price, or in this case sell it as a put. Alternatively, it may be set at a discount or premium, or it may be determined by the spot price above or below the market price of an underlying security or commodity currency on the day the options are excluded. The price exercised is a fixed discount/premium and is subject to a number of factors, including market conditions, interest rates and other factors.  Money is the value of a financial contract when the contract is executed financially, and trading is based on contracts requiring delivery to the underlying instrument.  In options trading, terms such as money, money and money - money describe the moneyworthiness of an option. More specifically, it is the value of the underlying option security or the price of that security in monetary terms....

PIN risk occurs when the underlying security of an option (e.g. the PIN number) is close to the exercise price of the option. In this situation the underlay is said to have struck or been "hit."   It may be that the price of the subtenant develops disadvantageous, which leads to an unexpected loss for the author. The author can end up with a loss of profit and therefore cannot secure his position exactly. The risk for authors and sellers of options is that they cannot predict with certainty whether the option will be exercised or not. Option positions lead to a higher risk of loss than other options (e.g. high - risk, low - reward options).   Sellers of option contracts often hedge their option contracts to create a delta-neutral portfolio. The aim is to minimise the risk of below-average price developments and at the same time implement the strategy that led to the sale of the option in the first place.   In order to counteract the price changes of undervalued securities...

In finance, a credit spread (or net credit spread) is an option strategy that involves buying one option and selling another option in the same class. It is designed to make profits when the spread between the two options is narrowed, and investors want that spread to narrow before they run out of profit. The investor must pay to receive the risk premium, but gets the net credits to enter the position.  In this context, a narrowing means that the options sold by the trader are in the money at the end of the run, the net premium he receives, in which case the trade is profitable, and the maximum that would be realised before the option premium expires is worthless. A bullish option strategy is used when option traders expect the underlying share price to go up. Moderately bullish option traders usually set a price target for a bull run and use the bull premium to lower costs. Before deciding on the optimal trading strategy, one must estimate how high share prices can rise and in wha...