Types of Derivative Contracts
There are multiple types of derivative contracts that are classified as forward commitments or contingent claims. Within the forward commitment universe, we find forward contracts, futures contracts, and swaps. On the other side of the spectrum, options (calls and puts),…
Purpose and Controversies of Derivative Markets
The primary purpose behind derivative contracts is the transfer of risk without the need to trade the underlying. This allows for more effective risk management within companies and the broader economy. In addition, the derivatives market plays a role in…
The Role of Arbitrage
In well-functioning markets with low transaction costs and a free flow of information, the same asset cannot sell for more than one price. If the same asset trade at a higher price in one place and a lower price in…
Call & Put Option Profits and Payoffs
Call and put options have basic formulas for determining the value, profit, and break-even point at expiration, dependent on whether the investor has bought or sold the option. Using these basic characteristics, more complex option strategies can be evaluated. Standard…
Covered Calls and Protective Puts
Call and put options can be used to manage risk for holders of the underlying risk. Two common strategies are to reduce exposure by using a covered call (selling a call option) or to use a protective put (buying a…
Dividend Payment Chronology
Dividend chronology describes the timeline for a series of events which take place after a company decides to pay dividends to its shareholders. Included in this chronology are the declaration date, ex-dividend date, record date and payment date, in that…
Share Repurchase Methods
Share repurchase is one of the two methods that can be employed by a company in the distribution of cash to its shareholders. Dividend payment is the other method. In a share repurchase or buyback, a company buys back its…
Effects of a Share Repurchase on EPS
A company may choose to carry out its share repurchase program using surplus cash that it has. Alternatively, it may choose to borrow money and use debt to finance the repurchase. Either method will impact the company’s earnings per share…
Effect of a Share Repurchase on Book Value Per Share
Book value per share (BVPS) refers to a company’s total shareholders’ equity divided by the total number of outstanding shares. A share repurchase can impact a company’s BVPS. It is important to note what the impact of BVPS is given…
Cash Dividends and Share Repurchases
Under the assumption of “all else being equal”, i.e. the information content and taxation for a share repurchase and cash dividend are the same, a share repurchase is considered to be equivalent to a cash dividend payment of the same…
