Different Strategies of Arbitrage

The way to get about the differences in the absolute economies through standardization, with a continuous process of buying and selling of securities, assets and to gain from the price differences with an element of risk attached is the Arbitrage clause attached in any financial profit and loss strategy.

Statistical Arbitrage

A set of quantitatively driven strategies which exploit the relative price dynamics of many such financial instruments mainly analyzing their pricing patterns and differential pricing to generate profits is how trading firms take advantage. Thought they are prominent in the markets however they are not in the high-frequency trading radar for investors and institutions.

Different Concepts

Mathematical models and pricing patterns of thousands of investment strategies are used to study and derive the best strategy to suit investors and trading fraternity. Different short-term and different holding patterns not only form the pricing data but from the corporate activity, lead and lag effects are used to determine the Statistical Arbitrage model to suit industry specific operation. The various concepts used are:

  • Time Series Analysis
  • Auto Regression and co-relation
  • Volatility Modeling
  • Principal Component Analysis
  • Efficient Frontier Analysis
  • Pattern finding Analysis

Types

  • Market Neutral Arbitrage involves taking a long position undervalued assets and a short position on assets which are overvalued simultaneously, which causes the long position to appreciate the value and depreciate in value for short position.
  • Cost Market Arbitrage seeks to exploit the price difference of similar assets across different markets, the assets are purchased during low valued market and sold during high valued markets
  • Cross Assets Arbitrage is based on the price discrepancies in the stock index futures and depends on the future value of underlying assets.
  • ETF Arbitrage which forms cross-asset arbitrage identifying the differences in the pricing between the ETF and the underlying assets

In the event stock to stock deal, the arbitrageur usually buys the share of the target company and then sells shares of the acquiring company with a ratio of the transaction similar to that of the proposed trading transactions. With cash to the stock deal, the money is borrowed to finance the stock buying and the shares are acquired from the newly acquired M & A which is bought at a lesser rate of the acquisition company. With many strategies which are at times workable for a particular situation may not be the time-tested the pairing options could be used to with the time series concepts analyzed.

 

 

 

Hedging – The Risk Dilution Factor!

Introduction:

Every business is coined with the risk of operation it could be at any level or any means that can be detrimental to the business. One part of such risk which can hit the business strongly is the financial risk. The owners must be vigilant to check out all the possibilities of such kind of risk and make ways to prevent it and manage it. This will help in the proper and smooth functioning of business without much hindrance.

The investors also need to understand the risk of putting their money into the business before they decide on the firms in which they invest and also understand the level of risk management by these companies. This is when the need for the strategies to manage the risk arises. Some of the common ones which we may have heard are arbitrage and hedging which are the most common financial risk management strategies.

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Meaning:

Hedging can be defined as the reduction of uncertainty when there is price change in any asset. It is simply the bearing of loss from an investment. One best example for a quick understanding is the life insurance policy we take which may help our family at the time of our death. Hence that which helps to bear an unforeseen event can be termed as hedging in financial terms.

Hedging can be of use in the areas like

  • Commodities – this may include agricultural industry products, energy industry or metals.
  • Securities: investing in shares and equities
  • Currencies: the dealing in foreign exchange between currencies
  • Interest rates: lending and borrowing rates could be risky when they are not in favor of the person.
  • Weather: interesting to note that even weather is an area where there is hedging.

Hedging Types:

The types of hedging can be in terms of futures, forwards or money markets.

  • A future contract is that which deals with buying or selling a product at an agreed price and is a standardized contract.
  • A forward contract is an unstandardized contract which deals with the buying and selling of products at an agreed price and specified date.
  • The money market is the essential criteria where there is short-term buying, selling, lending and borrowing take place in the duration of one year.

Hedging Strategies:

The hedging strategy is the method to reduce the severity of risk in any business. There is no standard strategy in this as it has to be modified according to the situation in the business.but the very common strategies are :

  • Hedging through asset allocation
  • Hedging through structures like making portfolio choices to reduce risk
  • Hedging through options.

 

 

 

Mergers And Acquisitions- An introduction

If you are a business-inclined person and wake up hearing the business news of the day I bet you hear this term Merger and Amalgamation or acquisition every day!Yes, it is one such concept which requires top-rated mention in the business sense. It happens with many companies and hence it is an everyday affair.

Finding the meaning of such a common word is the task we take up in this article and bring to you the simple version of what really happens with the majority of companies and their functioning.

Meaning:

Though the words mergers and acquisitions are used together there are slight differences in what they actually mean. A Merger is when one company decides to join hands with another company to enjoy the benefits of business from both the company’s profits. This happens for the reason to accumulate higher profits by combining the two companies together. On the other hand, an acquisition means when a company which is doing better at business decides to take over another company which may require help to survive and supports financially. Thus this is the difference between the two technical terms of business.

The mission of M &A

The mission of companies together requires being accomplished in the full sense. For this various criteria will be considered and the synergy which means the method of enhancing the efficiency of the new business and the reason for why the new combination was made is found.

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Some of the implications of an M &A are the following:

  • Economies of scale: it becomes easy to buy supplies like stationery when the company is huge in size. It also helps them to negotiate with their suppliers easily.

Even for the bigger purchases the bigger size of the company plays a better role.

  • Staff reduction; in order to improve the working and efficiency of the company in general, the staff is reduced from every department. This is also to cut down the resource cost and enhance proper functioning of the company.
  • New technology acquiring: when a big company merges with a smaller one with better technology and unique features, it becomes a successful deal for both of the companies.
  • More wide market reach: now it is easier to capture a better market in the sense that the customers of both the companies come together to get the benefits from the new merged one.

So it can be seen that the mergers and acquisition is something which promotes a business and takes the company to an all new level or working.

 

 

 

 

 

Reasons for Business valuation

Performance evaluation is a requisite for every person. A college or school student has to go through exams and then only he is declared proficient in his field of study and given a certificate and that provides a value in terms of grades or experience. Similarly, every person working in the corporate sector has to go through a performance evaluation very often to check the way the employee performed the tasks given to him. Whether he should be retained or let go or should be provided with some training; whether he deserves a salary increase or bonus, all these questions need answers and can be derived from a performance evaluation.

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These periodic evaluations are critical to all businesses and place of work and education. Similarly, there are times the business itself needs to be evaluated to decide a value or its worth. Just like a person a company can also be quantified in terms of finance, that includes the value of all tangible and intangible assets and liabilities. There are many reasons why this valuation is critical.

  1. If the business needs to be sold for any reason. Of course, the founders work hard to create a business from scratch, but there comes a time when they need to retire may be due to old age or due to health reasons.
  2. Due to a divorce, the business may have to be sold.
  3. The business may have to be sold for family reasons when it is a family owned company and then there are differences between the various members and they all want to separate.
  4. If for family reasons you need to move away from the area.
  5. Due to death of the owner or one of the partners.
  6. If there are plans for expansion and the existing value has to be determined.
  7. For taking a loan or for mortgaging some part of the business assets.
  8. If there are more shareholders joining or you want to change the shareholding pattern.
  9. If one shareholder wants to exit and the others want to buy him out.

Regardless of the reasons, a company may decide to go in for valuation and then the business can find out its worth in financial terms. There are certain international standard methods that are accepted everywhere and bigger companies prefer to go to a reputed company and accept their valuation results. So hire a professional and then ensure that your business gets the best assessment possible.

 

Aspects That Complicate Business Valuation

Business valuation is a complex process and requires expert assessment and many different approaches. In spite of experts adapting a combination of methods, there are times when it becomes very complicated to accept their conclusions and both the buyer and seller, or one of them may disagree with the same. There are many aspects that may affect the values as these may change with time and change in perspectives. Value of a business changes with time, the person evaluating it and the purpose of evaluation.

Personal and professional assets

It is always easy to assess a large corporation. They have a certain share value, reputation, and a brand value. Most of the personal and professional assets are distinct and can be easily assessed separately and they have a history of records or financial records that can be easily verified. In a small family company or in startups the situation is completely opposite and it is very complicated to differentiate between the assets and the present and future loyalty and brand value. In a startup especially, past records may not be available, and that makes the valuation for future very difficult and based on assumed sales and revenues.

In many take-oversaw sale processes, a clause of non-competition added. This may become a bone of contention and some of the problems may include:

  1. When the current business has a certain amount of goodwill and the seller joins a new business after selling the original one then the loyal customers may also migrate with him. No one wants to buy a business in such conditions.
  2. The seller may start a new enterprise and use his old recipes or programs or take away the loyal clientele by badmouthing the buyers.

To prevent such a scenario, a non- competition clause is added to the agreement that may change the valuation process and the ultimate price of the company. This may forbid the seller from starting a similar business in the same area. Alternatively, a time period of some years may be prescribed before which the new business can be started.

Apart from this concept, discounts are considered for various factors like for lack of control, lack of marketability etc. On the other hand, there are times when premiums are paid for acquiring a bigger control. The valuation depends upon many such factors and that can be understood and applied only by experienced professional evaluators.The buyer can decide, the method that he would like to use. He can also decide the other factors that he is ready to accept that help to decide the final price of the company.