Option Greeks – Theta

February 4, 2024August 19, 2021 by Akshit GUPTA

Option Greeks – Theta

This article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2019-2022) presents the technical subject of theta, an option Greek used in option pricing and hedging to deal with he passing of time.

Introduction

Theta is a type of option Greek which is used to compute the sensitivity or rate of change of the value of an option contract with respect to its time to maturity. The theta is denoted using the symbol (θ). Essentially, the theta is the first partial derivative of the price of the option contract with respect to the time to maturity of the option contract.

It is shown as:

Formula for the theta

Where V is the value of the option contract and T the time to maturity for the option contract.

Theoretically, as the option contract approaches maturity, the theta of on option contract increases and moves towards zero as the time value or the time value of the option decreases. This is referred to as “theta decay”.

For example, an option contract is trading at a premium of $10 and has a theta of -0.8. Thus, with theta decay, the option price will decrease to $9.2 after one day and further to $6 after five days.

The figure below represent the theta of a call option as a function of the time to maturity:

Figure 1. Theta of a call option as a function of time to maturity.

Source: computation by the author (Model: Black-Scholes-Merton).

Intrinsic and time value of an option contract

Essentially, the price of an option contract consists of two values namely, the intrinsic value and the time value (sometimes called extrinsic value). The intrinsic value in the price of an option contract is the real value or the fundamental value of an option based on the price of the underlying asset at a given point in time.

For example, a call option contract has a strike price of $10 and the underlying asset has a market price of $17. Theoretically, the buyer of a call option can execute the contract and buy the asset at $10 and sell it in the market for $17. He/she can make an immediate profit of $7 if they decide to exercise the option. Thus, the intrinsic value of the option contract is $7.

If the current call option price/premium is $9 in the market and the intrinsic value is $7, then the time value can be calculated as:

Time Value for the theta

Thus, the time value is $9-$7 is equal to $2. The $2 is the time value of an option contract which is determined by the factors other than the price of the underlying asset. As the option approaches maturity, the time value of the option contract declines and tends to zero. The price of an option contract which is at the money or out the money, it consists entirely of the time value as there is no intrinsic value involved.

For example, a call option contract with a strike price of $20, the underlying asset price of $15, and option premium of $3, has a time value equal to the option premium, $3, since the option is out of money.

Calculating Theta for call and put options

The theta for a non-dividend paying stock in a European call and put option is calculated using the following formula from the Black-Scholes Merton model:

Formula for the theta of a call and a put option

Where N’(d₁) represents the first order derivative of the cumulative distribution function of the normal distribution given by:

First_ derivative_Normal_distribution_d1

d₁ is given by:

Formula for d1

d₂ is given by:

Formula for d2

And N(-d₂) is given by:

Formula for -d2

Where S is the price of the underlying asset (at the time of valuation of the option), σ the volatility in the price of the underlying asset, T time to option’s maturity, K the strike price of the option contract and r the risk-free rate of return.

Excel pricer to calculate the theta of an option

You can download below an Excel file for an option pricer (based on the Black-Scholes-Merton or BSM model) which allows you to calculate the theta of a European-style call option.

Example for calculating theta

Let us consider a call option contract with the following characteristics: the underlying asset is an Apple stock, the option strike price (K) is equal to $300 and the time to maturity (T) is of one month (i.e., 0.084 years).

At the time of valuation, the price of the Apple stock (S) is $300, the volatility (σ) of Apple stock is 30% and the risk-free rate (r) is 3% (market data).

The theta of a call option is approximately equal to -0.2636 per trading day.

Using the above example, we can say that after one trading day, the price of the option will decrease by $0.2636 (approximately) due to time decay.

Useful resources

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 19 – The Greek Letters, 424–431.

Wilmott P. (2007) Paul Wilmott Introduces Quantitative Finance, Second Edition, Chapter 8 – The Black Scholes Formula and The Greeks, 182-184.

About the author

Article written in August 2021 by Akshit GUPTA (ESSEC Business School, Master in Management, 2019-2022).

Option Greeks – Vega

January 30, 2024August 19, 2021 by Akshit GUPTA

Option Greeks – Vega

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the technical subject of vega, the option Greek used in option pricing and hedging to take into account the volatility of the underlying asset.

Introduction

Vega is a type of option Greek which is used to compute the sensitivity or rate of change of the value of an option contract with respect to the volatility of the underlying asset. The Vega is denoted using the Greek letter (ν). Essentially, the vega is the first partial derivative of the value of the option contract with respect to the volatility of the underlying asset.

The vega formula for an option is given by

Formula for the gamma

Where V is the value of the option contract and σ is the volatility of the underlying asset.

If the Vega is a very high positive or a negative number, this means that the option price is highly sensitive to the volatility of the underlying asset. The Vega is maximum when the option price is at the money. For example, the strike of an option contract is €100, and the price of the underlying asset is €100. The option is at the money (ATM) and has an intrinsic value of zero. So, the option premium entirely consists of the time value of the option. Thus, the Vega is the highest for at the money option contract since the option value are mostly dependent on the time value (sometimes called the extrinsic value). An increase/decrease in volatility can change the option value significantly for at-the-money options.

Figure 1 below represents the vega of a call option as a function of the price of the underlying asset. The parameters of the call option are a maturity of 3 months and a strike of €100. The market data are a price of the underlying asset between €50 and €150, a volatility of the underlying asset of 40%, a risk-free interest rate of 3% and a dividend yield of 0%.

Figure 1. Vega of a call option as a function of the price of the underlying asset.

Source: computation by the author (Model: Black-Scholes-Merton).

Calculating the vega for call and put options

The vega for a European call or put option is calculated using the following formula:

Formula for the gamma

where

N’(d₁) represents the first order derivative of the cumulative distribution function of the normal distribution given by:

First_ derivative_Normal_distribution_d1

and d₁ is given by:

Formula for d1

where S is the price of the underlying asset (at the time of valuation of the option), σ the volatility in the price of the underlying asset, T time to option’s maturity, K the strike price of the option contract and r the risk-free rate of return.

Example for calculating vega

At the time of valuation, the price of the Apple stock (S) is $300, the volatility (σ) of Apple stock is 30% and the risk-free rate (r) is 3% (market data).

The vega of the call option is approximately equal to 0.3447963.

Using the above value, we can say that due to a 1% change in the volatility of the underlying asset, the price of the option will change approximately by $0.3447.

Excel pricer to calculate the vega of an option

You can download below an Excel pricer (based on the Black-Scholes-Merton or BSM model) to calculate the vega of an option (call or put).

Useful resources

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 19 – The Greek Letters, 424–431.

Wilmott P. (2007) Paul Wilmott Introduces Quantitative Finance, Second Edition, Chapter 8 – The Black Scholes Formula and The Greeks, 182-184.

About the author

Article written in August 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Option Greeks – Gamma

February 4, 2024August 8, 2021 by Akshit GUPTA

Option Greeks – Gamma

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the technical subject of gamma, an option Greek used in option hedging.

Introduction

Gamma is a type of option Greek which is used to compute the sensitivity or rate of change of delta (Δ) of an option contract with respect to a change in the price of the underlying in the option contract (S). The gamma of an option is expressed in percentage terms. Denoted by the Greek letter (Γ), the gamma is defined by

Formula for the gamma of an option

Where (Δ) is the delta of the option and S the price of the underlying asset.

Essentially, the gamma is the second partial derivative of the value of the option contract (V) with respect to the price of the underlying asset (S). It measures the convexity of the value of the option contract with respect to the price of the underlying asset. The gamma then corresponds to

Formula for the gamma of an option

Where V is the value of the option and S the price of the underlying asset.

The gamma of an option contract is at its maximum when the price of the underlying asset is equal to the strike price of the option (an at-the-money option). If the price of the underlying moves deeper in the money or out of the money, the value of the gamma approaches zero.

The gamma as a function of the price of the underlying asset for a call option is given below.

Figure 1. Gamma of a call option.

Source: computation by the author (Model: Black-Scholes-Merton).

Also, if the gamma of the option contract is small, it means that the delta of the option moves slowly with the price of the underlying asset.

Calculating gamma for call and put options

The gamma for European call or put options on a non-dividend paying stock is calculated using the following formula from the Black-Scholes-Merton model is:

Formula for the gamma of a call/put option

Where,N’d₁ represents the first order derivative of the cumulative distribution function of the normal distribution given by:

First_ derivative_Normal_distribution_d1

and d₁ is given by:

Formula for d1.png

Excel pricer to calculate the gamma of an option

You can download below an Excel file for an option pricer (based on the Black-Scholes-Merton or BSM model) which allows you to calculate the gamma of a European-style call option.

Delta-gamma hedging

A trader holding a portfolio of option contracts uses gamma hedging to offset the risks associated with the price movement in the underlying asset by buying and selling the option contracts to maintain a constant delta. Generally, the delta is maintained near or at the zero level to attain delta neutrality. The neutrality in the gamma for the option is required to protect the portfolio’s value against sharp price movements in the price of the underlying asset.

Formula for the gamma hedging of a call option

Limitations of gamma hedging

The limitation of gamma hedging includes the following:

Transaction cost – Gamma hedging requires constantly monitoring the markets and buying or selling the option contracts. Due to this practice of buying and selling frequently, the transaction costs are quite high to execute a gamma hedge. Thus, gamma hedging is an expensive strategy to practice.
Loosing delta neutrality – Whenever a trader executes a gamma hedge and trades in option contracts, it is often accompanied with a move in the portfolio’s delta. Thus, to achieve delta neutrality again, the trader must buy or sell additional quantities of the underlying asset, which is time consuming and comes with a transaction cost.

Useful resources

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 19 – The Greek Letters, 424–431.

Wilmott P. (2007) Paul Wilmott Introduces Quantitative Finance, Second Edition, Chapter 8 – The Black Scholes Formula and The Greeks, 182-184.

About the author

Article written in August 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Option Greeks – Delta

February 4, 2024August 5, 2021 by Akshit GUPTA

Option Greeks – Delta

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the technical subject of delta, an option Greek used in option pricing and hedging.

Introduction

Option Greeks are sophisticated financial metric used by trader to calculate the sensitivity of option contracts to different factors related to the underlying asset including the price of the underlying, its volatility, and time value. The Greeks are used as an effective tool to practice different hedging strategies and eliminate risks in a position. They also help to optimize the options positions at any point in time.

Delta is a type of option Greek which is used to compute the sensitivity or rate of change in price of the option contract with respect to the change in price of the underlying asset. It is denoted by the Greek letter (Δ). The formula for calculating the delta of an option contract is:

Formula for the delta of an option

Where V is the value of the option and S the price of the underlying asset.

For example, if an option on Apple stock has a delta of 0.3, it essentially means that a $1 change in the price of the underlying asset i.e., Apple stock, will lead to a change of $0.3 in the price of the option contract.

When a trader takes a position based on the delta sensitivity of any option contract, it is called delta hedging. The goal is to achieve a delta-neutral portfolio and eliminate the risks associated with movement in the prices of the underlying. Due to the complexity of the tool, delta hedging is generally practiced by professional traders in large financial institutions. In options, the delta of any call option is always positive whereas the delta of a put option is always negative.

Delta formula

Call option

According the Black-Scholes-Merton model, the formula for calculating the delta for a European-style call option on a non-dividend paying stock is given by:

Formula for the delta of a call option

Where N represents the cumulative distribution function of the normal distribution and d₁ is given by:

Formula for d1

Where S is the price of the underlying asset (at the time of valuation of the option), σ the volatility in the price of the underlying asset, T time to maturity of the option, K the strike price of the option, and r the risk-free rate of return.

Put option

According the Black-Scholes-Merton model, the formula for calculating the delta for a European-style put option on a non-dividend paying stock is given by:

Formula for the delta of a put option

Delta as a function of the price of the underlying asset

Call option

The delta as a function of the price of the underlying asset for a European-style call option is represented in Figure 1.

Figure 1. Delta of a call option.

Source: computation by the author (Model: Black-Scholes-Merton).

For a call option, the delta increases from 0 (out-of-the-money option) to 1 (in-the-money option).

Put option

The delta as a function of the price of the underlying asset for a European-style put option is represented in Figure 2.

Figure 2. Delta of a put option.

Source: computation by the author (Model: Black-Scholes-Merton).

For a put option, the delta increases from -1 (in-the-money option) to 0 (out-of-the-money option).

Excel pricer to calculate the delta of an option

You can download below an Excel file for an option pricer (based on the Black-Scholes-Merton or BSM model) which allows you to calculate the delta of a European-style call option.

Delta Hedging

A trader holding an option contract uses delta hedging to offset the risks associated with the price movement in the underlying asset by continuously buying and selling the underlying asset to achieve delta neutrality. This is used by option traders in financial institutions to manage their option book (the delta is computed at the option level and aggregated at the book level) and generate the margin the bank of the option writing activity.

The delta of an option contract keeps on changing as the prices of the underlying and the option contract changes. So, to maintain the delta neutrality the trader must constantly monitor the markets and execute trades to achieve neutrality. The process of continuously buying or selling the underlying asset is called dynamic hedging in options.

At the first order, the change of the value of a delta-hedged call option over the period from t to t+ δt would be equal to the risk-free rate (r) over the period:

Formula for the delta hedging of a call option

Limitations of delta hedging

Although delta hedging is a useful tool to offset the risks associated to the movement in the price of an underlying, it comes with some limitations which are:

Transaction cost

Since delta hedging requires constantly buying or selling the underlying asset, it comes with a high transaction cost. This makes delta hedging an expensive tool to optimize the portfolio against price risk. In practice, traders would adjust their option position from time top time.

Illiquid Markets

When the market for an asset is illiquid, it is difficult to practice delta hedging as the trader will not be able to constantly buy or sell the underlying asset to neutralize the price impact.

Example for calculating delta

At the time of valuation, the price of the Apple stock (S) is $300, the volatility (σ) of Apple stock is 30% and the risk-free rate (r) is 3% (market data).

The delta of a call option is approximately equal to 0.50238.

Using the above value, we can say that due to a $1 change in the price of the underlying asset, the price of the option will change by $0.50238.

Useful resources

Research articles

Black F. and M. Scholes (1973) The Pricing of Options and Corporate Liabilities The Journal of Political Economy, 81, 637-654.

Merton R.C. (1973) Theory of Rational Option Pricing Bell Journal of Economics, 4(1): 141–183.

Books

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 19 – The Greek Letters, 424 – 431.

Wilmott P. (2007) Paul Wilmott Introduces Quantitative Finance, Second Edition, Chapter 8 – The Black Scholes Formula and The Greeks, 182-184.

About the author

Article written in August 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Options

February 4, 2024June 20, 2021 by Akshit GUPTA

Options

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents an introduction to Options.

Introduction

Options is a type of derivative which gives the buyer of the option contract the right, but not the obligation, to buy (for a call option) or sell (for a put option) an underlying asset at a price which is pre-determined, and a date set in the future.

Option contracts can be traded between two or more counterparties either over the counter or on an exchange, where the contracts are listed. Exchange based trading of option contracts was introduced to the larger public in April 1973, when Chicago Board Options Exchange (CBOE)) was introduced in the US. The options market has grown ever since with over 50 exchanges that trade option contracts worldwide.

Terminology used for an option contract

The different terms that are used in an option contract are:

Option Spot price

The option spot price is the price at which the option contract is trading at the time of entering the contract.

Underlying spot price

The underlying spot price is the price at which the underlying asset is trading at the time of entering the option contract.

Strike price

Strike price is essentially the price at which the option buyer can exercise his/her right to buy or sell the option contract at or before the expiration date. The strike price is pre-determined at the time of entering the contract.

Expiration date

The expiration date is the date at which the option contracts ends or after which it becomes void. The expiration date of an option contract can be set to be after weeks, months or year.

Lot size

A lot size is the quantity of the underlying asset contained in an option contract. The size is decided and amended by the exchanges from time to time. For example, an Option contract on an APPLE stock trading on an exchange in USA consists of 100 underlying APPLE stocks.

Option class

Option class is the type of option contracts that the trader is trading on. It can be a Call or a Put option.

Position

The position a trader can hold in an option contract can either be Long or Short depending on the strategy. A Long position essentially means Buying the option and a short position means Selling or writing the option contract.

Option Premium

Option premium is the price at which the option contracts trade in the market.

Benefits of using an option contract

Trading in option contracts gives the traders certain benefits which can be categorised as:

Hedging Benefits

Hedging is an essential benefit of the option contract. For an investor or a trader holding an underlying stock, an option contract provides them with the opportunity to offset their risk exposure by buying or selling an option contract as per their market outlook. If an trader holding stocks of APPLE is bearish about the market and expects the market to fall, he/she can buy a PUT option which essentially gives him/her the right to sell the security at a pre-determined price and date. Such a contract protects the trader from significant losses which he/she might incur if the stock price for APPLE goes down significantly.

Cost Benefits

While buying an option contract, the traders benefits from the leverage effect which exchanges across the world provides. Leverage helps the traders to multiply the size of their holdings with lesser capital investment. This also helps them to earn higher profits by taking limited risks.

Choice Benefits

In traditional trading, traders have a limited degree of flexibility as they can only buy or sell assets based on their outlook. Whereas, Option contracts provides a great choice to the traders as they can take different positions in call and put options (Long and short positions) and for different strikes and maturities.
They can also use different strategies and spreads to execute and manage their positions to earn profits.

Types of option contracts

The option contracts can be broadly classified into two categories: call options and put options.

Call options

A call option is a derivative contract which gives the holder of the option the right, but not an obligation, to buy an underlying asset at a pre-determined price on a certain date. An investor buys a call option when he believes that the price of the underlying asset will increase in value in the future. The price at which the options trade in an exchange is called an option premium and the date on which an option contract expires is called the expiration date or the maturity date.

For example, an investor buys a call option on Apple shares which expires in 1 month and the strike price is $90. The current apple share price is $100. If after 1 month,
The share price of Apple is $110, the investor exercises his rights and buys the Apple shares from the call option seller at $90.

But, if the share prices for Apple falls to $80, the investor doesn’t exercise his right and the option expires because the investor can buy the Apple shares from the open market at $80.

Put options

A put option is a derivative contract which gives the holder of the option the right, but not an obligation, to sell an underlying asset at a pre-determined price on a certain date. An investor buys a put option when he believes that the price of the underlying asset will decrease in value in the future.

For example, an investor buys a put option on Apple shares which expires in 1 month and the strike price is $110. The current apple share price is $100. If after 1 month,
The share price of Apple is $90, the investor exercises his rights and sell the Apple shares to the put option seller at $110.
But, if the share prices for Apple rises to $120, the investor doesn’t exercise his right and the option expires because the investor can sell the Apple shares in the open market at $120.

Different styles of option exercise

The option style doesn’t deal with the geographical location of where they are traded. However, the contracts differ in terms of their expiration time when they can be exercised. The option contracts can be categorized as per different styles they come in. Some of the most common styles of option contracts are:

American options

American style options give the option buyer the right to exercise his option any time prior or up to the expiration date of the contract. These options provide greater flexibility to the option buyer but also comes at a high price as compared to the European style options.

European options

European style options can only be exercised on the expiration or maturity date of the contract. Thus, they offer less flexibility to the option buyer in terms of his rights. However, the European options are cheaper as compared to the American options.

Bermuda options

Bermuda options are a mix of both American and European style options. These options can only be exercised on a specific pre-determined dates up to the expiration date. They are considered to be exotic option contracts and provide limited flexibility to the option buyer to exercise his claim.

Different underlying assets for an option contract

The different underlying assets for an option contract can be:

Individual assets: stocks, bonds

Option traders trading in individual assets can take positions in call or put options for equities and bonds based on the reports provided by the research teams. They can take long or short positions in the option contract. The positions depend on the market trends and individual asset analysis. The option contracts on individual assets are traded in different lot sizes.

Indexes: stock indexes, bond indexes

Options traders can also trade on contracts based on different indexes. These contracts can be traded over the counter or on an exchange. These traders generally follow the macroeconomic trends of different geographies and trade in the indices based on specific markets or sectors. For example, some of the most known exchange traded index options are options written on the CAC 40 index in France, the S&P 500 index and the Dow Jones Industrial Average Index in the US, etc.

Foreign currency options

Different banks and investment firms deal in currency hedges to mitigate the risk associated with cross border transactions. Options traders at these firms trade in foreign currency option contracts, which can be over the counter or exchange traded.

Option Positions

Option traders can take different positions depending on the type of option contract they trade. The positions can include:

Long Call

When a trader has a long position in a call option it essentially means that he has bought the call option which gives the trader the right to buy the underlying asset at a pre-determined price and date. The buyer of the call option pays a price to the option seller to buy the right and the price is called the Option Premium. The maximum loss to a call option buyer is restricted to the amount of the option premium he/she pays.

Long Call

With the following notations:
   C_T = Call option value at maturity T
   S_T = Price of the underlying at maturity T
   K = Strike price of the call option

The graph of the payoff of a long call is depicted below. It gives the value of the long position in a call option at maturity T as a function of the price of the underlying asset at time T.

Payoff of a long position in a call option
Long call

Short Call

When a trader has a short position in a call option it essentially means that he has sold the call option which gives the buyer of the option the right to buy the underlying asset from the seller at a pre-determined price and date. The seller of the call option is also called the option writer and he/she receive a price from the option buyer called the Option Premium. The maximum gain to a call option seller is restricted to the amount of the option premium he/she receives.

Short call

With the following notations:
   C_T = Call option value at maturity T
   S_T = Price of the underlying at maturity T
   K = Strike price of the call option

The graph of the payoff of a short call is depicted below. It gives the value of the short position in a call option at maturity T as a function of the price of the underlying asset at time T.

Payoff of a short position in a call option
Short call

Long Put

When a trader has a long position in a put option it essentially means that he/she has bought the put option which gives the trader the right to sell the underlying asset at a pre-determined price and date. The buyer of the put option pays a price to the option seller to buy the right and the price is called the Option Premium. The maximum loss to a put option buyer is restricted to the amount of the option premium he/she pays.

Long Put

With the following notations:
   P_T = Put option value at maturity T
   S_T = Price of the underlying at maturity T
   K = Strike price of the put option

The graph of the payoff of a long put is depicted below. It gives the value of the long position in a put option at maturity T as a function of the price of the underlying asset at time T.

Payoff of a long position in a put option
Long put

Short Put

When a trader has a short position in a put option it essentially means that he has sold the call option which gives the buyer of the option the right to sell the underlying asset from the seller at a pre-determined price and date. The seller of the put option is also called the option writer and he/she receive a price from the option buyer called the Option Premium. The maximum gain to a put option seller is restricted to the amount of the option premium he/she receives.

Short Put

With the following notations:
   P_T = Put option value at maturity T
   S_T = Price of the underlying at maturity T
   K = Strike price of the put option

The graph of the payoff of a short put is depicted below. It gives the value of the short position in a put option at maturity T as a function of the price of the underlying asset at time T.

Payoff of a short position in a put option
Short put

Useful Resources

Academic research

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 10 – Mechanics of options markets, 235-240.

Business analysis

CNBC Live option trading for APPLE stocks

About the author

Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Forward Contracts

June 20, 2021 by Akshit GUPTA

Forward Contracts

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) introduces Forward contracts.

Introduction

Forward contracts form an essential part of the derivatives world and can be a useful tool in hedging against price fluctuations. A forward contract (or simply a ‘forward’) is an agreement between two parties to buy or sell an underlying asset at a specified price on a given future date (or the expiration date). The party that will buy the underlying is said to be taking a long position while the party that will sell the asset takes a short position.

The underlying assets for forwards can range from commodities and currencies to various stocks.

Forwards are customized contracts i.e., they can be tailored according to the underlying asset, the quantity and the expiry date of the contract. Forwards are traded over-the-counter (OTC) unlike futures which are traded on centralized exchanges. The contracts are settled on the expiration date with the buyer paying the delivery price (the price agreed upon in the forward contract for the transaction by the parties involved) and the seller delivering the agreed upon quantity of underlying assets in the contract. Unlike option contracts, the parties in forwards are obligated to buy or sell the underlying asset upon the maturity date depending on the position they hold. Generally, there is no upfront cost or premium to be paid when a party enters a forward contract as the payoff is symmetric between the buyer and the seller.

Terminology used for forward contracts

A forward contract includes the following terms:

Underlying asset

A forward contract is a type of a derivative contract. It includes an underlying asset which can be an equity, index, commodity or a foreign currency.

Spot price

A spot price is the market price of the asset when the contract is entered into.

Forward price

A forward price is the agreed upon forward price of the underlying asset when the contract matures.

Maturity date

The maturity date is the date on which the counterparties settle the terms of the contract and the contract essentially expires.

Forward Price vs Spot Price

Forward and spot prices are two essential jargons in the forward market. While the strict definitions of both terms differ in different markets, the basic reference is the same: the spot price (or rate according to the underlying) is the current price of any financial instrument being traded immediately or ‘on the spot’ while the forward price is the price of the instrument at some time in the future, essentially the settlement price if it is traded at a predetermined date in the future. For example, in currency markets, the spot rate would refer to the immediate exchange rate for any currency pair while the forward rate would refer to a future exchange rate agreed upon in forward contracts.

Payoff of a forward contract

The payoff of a forward contract depends on the forward price (F₀) and the spot price (S_T) at the time of maturity.

Pay-off for a long position

Long Position

Pay-off for a short position

Short Position

With the following notations:
N: Quantity of the underlying assets
S_T = Price of the underlying asset at time T
F₀ = Forward price at time 0

For example, an investor can enter a forward contract to buy an Apple stock at a forward price of $110 with a maturity date in one month.

If at the maturity date, the spot price of Apple stock is $120, the investor with a long position will gain $10 from the forward contract by buying Apple stock for $110 with a market price of $120. The investor with a short position will lose $10 from the forward contract by selling the apple stock at $110 while the market price of $120.

Figure 1. Payoff for a long position in a forward contract
long forward

Payoff for a short position in a forward contract
Short forward

Use of forward contracts

Forward contracts can be used as a means of hedging or speculation.

Hedging

Traders can be certain of the price at which they will buy or sell the asset. This locked price can prove to be significant especially in industries that frequently experience volatility in prices. Forwards are very commonly used to hedge against exchange rates risk with most banks employing both spot and forward foreign exchange-traders. In a forward currency contract, the buyer hopes the currency to appreciate, while the seller expects the currency to depreciate in the future.

Speculation

Forward contracts can also be used for speculative purposes though it is less common than as forwards are created by two parties and not available for trading on centralized exchanges. If a speculator believes that the future spot price of an asset will be greater than the forward price today, she/he may enter into a long forward position and thus if the viewpoint is correct and the future spot price is greater than the agreed-upon contract price, she/he will gain profits.

Risks Involved

Liquidity Risk

A forward contract cannot be cancelled without the agreement of both counterparties nor can it be transferred to a third party. Thus, the forward contract is neither very liquid nor very marketable.

Counterparty risk

Since forward contracts are not traded on exchanges, they involve high counterparty risk. In these contracts, either of the counterparties can fail to meet their obligation resulting in a default.

Regulatory risk

A forward contract is traded over the counter due to which they are not regulated by any authority. This leads to high regulatory risk since it is entered with mutual consent between two or more counterparties.

Useful Resources

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 1 – Introduction, 23-43.

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 5 – Determination of forward and futures prices, 126-152.

About the author

Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Futures Contract

June 20, 2021 by Akshit GUPTA

Futures

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) introduces Futures contracts.

Introduction

The last few decades have witnessed an incredible increase in international trade volume and business due to the globalization wave that has spread across the world causing unforeseeable and rapid fluctuations in financial assets’ prices, interest and exchange rates, and has made the corporate world vulnerable to rampant financial risk more than ever before. Thus, risk management is extremely essential for investors and firms to hedge against uncertainties in financial markets. Derivatives are efficient risk management tools and future contracts are one such derivative that have become an integral part of the modern financial system.

A futures contract is an agreement between a buyer and a seller wherein the seller agrees to deliver a specified quantity of any particular financial asset or commodity at a predetermined time in future, at a mutually agreed upon price. The parties involved in the contract are obligated to fulfil their respective terms specified in the contract. Future contracts are standardized by an exchange i.e., they can be only traded through designated markets under stringent financial safeguards. This provides them transparency, liquidity and also eliminates potential counterparty risks due to the guarantee provided by the clearing houses. In general, the underlying asset of futures can either be commodities like food grains, metals, vegetables, etc. or financial instruments like equity shares, market indices, bonds, etc.

Another essential feature of futures is that they are settled daily and not just at the maturity of the contract. That is, traders have an option to either close or extend their open positions without holding the contract to expiration. One of the defining features of the futures markets is daily. The final daily settlement price for futures is the same for everyone which is the mark-to-market (MTM) prices on all contracts established by the exchange. While different contracts may have different closing and daily settlement calculations, the methodology is entirely disclosed in the contract specifications and the exchange rulebook, hence the transparency.

Terminology used for a futures contract

Underlying asset

A futures contract is a type of a derivative contract. It includes an underlying asset which can be an equity, index, commodity or bond.

Spot price

A spot price is the current market price of the underlying asset when the contract is entered into.

Future price

A future price is the agreed upon future price of the underlying asset at the time of entering the agreement.

Maturity/Expiration date

The maturity date is the date on which the counterparties can settle the terms of the contract and the contract essentially expires.

Payoff

Formally the payoff function for a long position in a futures contract is given by:

Long Position

And, the payoff function for a short position in a futures contract is given by:

Short Position

With the following notations:
N: Quantity of the underlying assets
F_T = Futures price at maturity T
F₀ = Futures price at time 0

Note: the futures price at maturity T is equal or close to the price of the underlying asset (if there is no arbitrage).

Payoff of a long position in a futures contract
Long futures

Payoff of a short position in a futures contract
Short futures

Example

Consider a future contract on an Apple stock with a futures price of $50 and a maturity of one month.

If at the maturity date, the price of Apple stock is $60, the investor with a long position will gain $10 from the futures contract by buying Apple stock for $50 with a market price of $60. The investor with a short position will lose $10 from the forward contract by selling the apple stock at $50 while the market price of $60.

Underlying of futures contracts

There are different types of futures contracts based on the type of the underlying asset, a few main ones explored more below:

Commodity futures

They enable hedging against price fluctuations in various commodities including agricultural products, gold, silver, copper, crude and natural oil, petroleum etc. Speculators may also use them to bet on price movements. Commodity markets are highly volatile, and participants are generally large institutional firms, including private companies and governments. The initial margins are low in commodities and the upside potential is enormous, but the risks tend to be high as well.

Interest rate futures

These are futures based on interest rates i.e., the underlying assets are interest paying bonds like the US treasuries or T-bills (generally government bonds) and these contracts enable investors to hedge against changes in interest rates. Purchasing an interest rate futures contract thus allows the buyer to lock in the price of a debt security bearing an interest rate. The buyer can speculate or hedge against interest rate.

Currency futures

Also known as exchange rate or FX futures, these enable hedging against fluctuations in exchange rates of various currency pairs and thus limit risk exposure. The underlying asset is essentially currencies that can be traded at a predetermined exchange rate at a specific time in future.

Physical settlement and cash settlement

Physically settled futures contracts are known as ‘physical delivery’. Physical settlement means that at the expiration of the futures contract, the actual underlying asset will be exchanged between the counterparties at the pre-determined futures price. So, at the expiry of the futures contract, the short position holder will deliver the underlying asset to the long position holder. Most commodity futures, including commodity Futures, are physically settled while most non-physical asset futures such as index futures are cash settled.

Cash settlement means that at the end of a futures contract’s life, only the profit and loss are settled in cash between the long and the short with no exchange of the physical asset. In case of cash settlement (in case the contract has expired), there is no need for physical delivery of the contract. Instead, the contract can be cash-settled. When the contract expires, the trader’s margin account will be marked-to market for P&L on the final day of the contract. Cash settlement is a preferred option for most traders because of the savings in transaction costs.

Use of futures contracts

Futures contracts can be used as a means of hedging or speculation.

Hedging

Futures are very commonly used for hedging in equities, commodities and foreign exchange. In a futures currency contract, the buyer hopes the asset to appreciate, while the seller expects the asset to depreciate in the future. The futures are an efficient instrument to protect the buyer/seller of the contract from the risk involved in the severe price movement of the underlying asset.

Speculation

Futures contracts can also be used for speculative purposes. It is more common than a forward contract as the futures contracts are available for trading on centralized exchanges. If a speculator believes that the future spot price of an asset will be greater than the futures price today, she/he may enter into a long futures position and thus if the viewpoint is correct and the future spot price is greater than the agreed-upon contract price, she/he will gain profits.

Clearing houses

A clearing house is an agency or a separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin amounts, regulating delivery and reporting trading data. Clearing houses act as third parties to futures contracts and its purpose is to reduce the settlement risks like counterparty default risk by collecting collateral deposits (also called “margin deposits”) that can be used to cover losses, providing valuation of trades and collateral, monitoring the credit worthiness of the contract and ensuring that delivery of the underlying asset is consistent in terms of quality, quantity, size etc. thus providing a robust risk management framework for future contracts. The New York Stock Exchange (NYSE) and the NASDAQ are two renowned clearing houses in the United States. Options Clearing Corporation (OCC) is another specializing in equity derivatives clearing.

Mark-to-market

Mark to market mechanism is used to mark the value of an asset to its current market price. This essentially means that the price fluctuations in a forward contract are settled to record the absolute gains or losses happening at the end of every period which is pre-decided.
This is done to ensure that adequate margin is maintained by each counterparty on a rolling basis. This also reduces the probability of credit defaults by each counterparty.

Useful resources

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 1 – Introduction, 23-43.

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 5 – Determination of forwards and futures prices, 126-152.

Corporate Finance Institute: Futures contracts

▶ Gupta A. Forwards contracts

About the author

Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Option Trader – Job Description

February 16, 2025June 20, 2021 by Akshit GUPTA

Option Trader – Job description

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of an Option Trader.

Introduction

Options are a type of derivative contracts which give the buyer the right, but not the obligation, to buy (for a call option) or sell (for a put option) an underlying asset at a predetermined price and at a given date.

Option traders are generally hired by investment banks, investment firms, brokerage firms and commercial banks (for the trading of currencies on the foreign exchange).

Work of an option trader

An option trader is responsible to maximize trading revenue and use different hedging strategies to minimize the portfolio risk and prevent capital loss. He/she trades in two types of option contracts namely, call and put options by taking long or short positions (most of the time selling options to clients).

Trading in options is a highly complex work as the option pricing and risk exposure depend on a number of factors which includes the changes in prices of the underlying, volatility, interest rates, time value, etc. To manage his/her option book, an option trader also uses option Greeks, which are financial tools that measure the price sensitivity of option contracts.

These tools help the option traders to understand the market in a better sense and determine which options to trade and when. Option traders also use different quantitative models (such as the Black-Scholes-Merton model in continuous time and the binomial model in discrete time) to price different option contracts and manage their positions.

With whom does an option trader work?

Option traders work in coordination with several teams. These teams are responsible for providing the option traders with underlying data and market inputs. Some of the most common teams that an option trader works with are:

Sales

A sales analyst works with the retail or institutional clients of the firm to implement profit generating strategies on the client’s investments. An option trader also works with the sales team of the firm to execute trades based on the clients’ needs.

Portfolio managers

An option trader also works with the portfolio managers of the firm to manage portfolios of the firm’s clients by implementing hedging strategies based on option contracts.

Quants

An option trader also works with the quantitative analysts of the firm to utilise different quantitative models to price option contracts and implement hedging strategies.

Economists and Sector specialists

An option trader trading in indices, equities or currencies, works in tandem with the Economists or sector specialists to predict the macroeconomic trends and gather information about specific sectors and economies

Equity researchers

An option trader trading in equities work with the equity researchers of the firm to obtain financial and non-financial data about different equity underlying.

How much does an option trader earn?

The remuneration of an option trader depends on the type of role and organization he/she is working in. As of the writing of this article (2021), an entry level option trader working in a financial institution can earn an average salary of €65,000/year. The option traders also earn high bonuses and commissions which are based on a percentage of the total profits they have generated over the period.

What training to become an option trader?

In France, an individual who wants to work as an option trader is highly recommended to have a Grand Ecole diploma with a specialization in market finance. He/she should possess strong knowledge of financial markets, mathematics, and economics. He/she must understand financial and economic trends and have strong research skills and interpersonal skills.

The knowledge of coding languages like Python and VBA is also a very desirable skill to become an option trader. To work as an option trader, it is advised to start your career as an intern or an apprentice at a French financial institution while pursuing your diploma.

The Financial risk management (FRM) or Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job as an option trader.

Relevance to the SimTrade course

The concepts about option trading can be learnt in the SimTrade Certificate:

About theory

- By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.

By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

Useful resources

Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 10 – Trading strategies involving options, 276-294.

Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 8 – Mechanics of options markets, 235-240.

▶ Akshit GUPTA Market maker – Job description

▶ Akshit GUPTA Trader – Job description

▶ Akshit GUPTA Risk manager – Job description

About the author

Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

History of Options Markets

February 4, 2024June 20, 2021 by Akshit GUPTA

History of the options markets

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents an introduction to the History of the Options markets.

Introduction

Options are a type of derivative contracts which give the buyer the right, but not the obligation, to buy or sell an underlying security at a pre-determined price and date. These contracts can either be traded over-the-counter (OTC) through dealer or broker network or can be traded over an exchange in a standardized form.

A brief history

The history of the use of options can be dated back to ancient times. In early 4th century BC, a philosopher, and an astronomer, named Thales of Miletus calculated a surplus olive harvest in his region during the period. He predicted an increase in demand for the olive presses due to an increase in the harvest. To benefit from his prediction, he bought the rights to use the olive presses in his region by paying a certain sum. The olive harvest saw a significant surplus that year and the demand for olive presses rose, as predicted by him. He then exercised his option and sold the rights to use the olive presses at a much higher prices than what he actually paid, making a good profit. This is the first documented account of the use of option contracts dating back to 4th century BC.

The use of option contracts was also seen during the Tulip mania of 1636. The tulip producers used to sell call options to the investors when the tulip bulbs were planted. The investors had the right to buy the tulips, when they were ready for harvest, at a price pre-determined while buying the call option. However, since the markets were highly unstandardized, the producers could default on their obligations.
But the event laid a strong foundation for the use of option contracts in the future.

Until 1970s, option contracts were traded over-the-counter (OTC) between investors. However, these contracts were highly unstandardized leading to investor distrust and illiquidity in the market.

In 1973, the Chicago Board Options Exchange (CBOE)) was formed in USA, laying the first standardized foundation in options trading. In 1975, the Options clearing corporation (OCC) was formed to act as a central clearing house for all the option contracts that were traded on the exchange. With the introduction of these 2 important bodies, the option trading became highly standardized and general public gained access to it. However, the Put options were introduced only in 1977 by CBOE. Prior to that, only Call options were traded on the exchange.

With the advent of time, options market grew significantly with more exchanges opening up across the world. The option pricing models, and risk management strategies also became more sophisticated and complex.

Market participants

The participants in the options markets can be broadly classified into following groups:

Market makers: A market maker is a market participant in the financial markets that simultaneously buys and sells quantities of any option contract by posting limit orders. The market maker posts limit orders in the market and profits from the bid-ask spread, which is the difference by which the ask price exceeds the bid price. They play a significant role in the market by providing liquidity.
Margin traders: Margin traders are market participants who make use of the leverage factor to invest in the options markets and increase their position size to earn significant profits. But this trading style is highly speculative and can also lead to high losses due to the leverage effect.
Hedgers: Investors who try to reduce their exposure in the financial markets by using hedging strategies are called hedgers. Hedgers often trades in derivative products to offset their risk exposure in the underlying assets. For example, a hedger who is bearish about the market and has shares of Apple, will buy a Put option on the shares of Apple. Thus, he has the right to sell the shares at a high price if the market price for apple shares goes down.
Speculators: Speculative investors are involved in option trading to take advantage of market movements. They usually speculative on the price of an underlying asset and account for a significant share in option trading.

Types of option contracts

The option contracts can be broadly classified into two main categories, namely:

Call options

But, if the share prices for Apple falls to $80, the investor doesn’t exercise his right and the option expires because the investor can buy the Apple shares from the open market at $80.

Put options

For example, an investor buys a put option on Apple shares which expires in 1 month and the strike price is $110. The current apple share price is $100. If after 1 month,

The share price of Apple is $90, the investor exercises his rights and sell the Apple shares to the put option seller at $110.

But, if the share prices for Apple rises to $120, the investor doesn’t exercise his right and the option expires because the investor can sell the Apple shares in the open market at $120.

Different style of options

American options

European options

Bermuda options

Useful Resources

Chapter 10 – Mechanics of options markets, pg. 235-240, Options, Futures, and Other Derivatives by John C. Hull, Ninth Edition

Wikipedia Options (Finance)

The Street A Brief History of Stock Options

About the author

Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Quantitative Trader – Job Description

February 16, 2025May 23, 2021 by Akshit GUPTA

Quantitative Analyst – Job description

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Quantitative Analyst.

Introduction

Quantitative analysts or “quants” are professionals that work on designing, implementing, and analyzing algorithms based on mathematical or statistical models to help firms in taking financial decisions. With the advent of technology-based trading, the demand for quantitative analysts has seen a rise in the recent years. The analysts are generally employed at investment banks, hedge funds, asset management firms, brokerage firms, private equity firms, and data and information providers. They develop algorithms using programming knowledge of several languages like C++, Java, Matlab, Python, and R. Quantitative analysts possess strong knowledge of subjects like finance, mathematics, and statistics.

Quants create and apply financial models for derivative pricing, market prediction, portfolio analysis, and risk management. For example, quants develop pricing models for derivatives using numerical techniques for asset valuation (including Monte Carlo Methods and partial differential equation solvers) like the Black-Scholes-Merton model and more sophisticated models. Such models are used by traders and structurers in the trading rooms of investment banks. They design and develop decision-supporting analysis, tools and models that support profitable trading decisions. In risk management departments, quantitative models are used to assess the risks associated with the bank’s portfolios. Some popularly used techniques include Value-at-risk, stress testing and direct analysis of risky trades. Along with all this, quants are also responsible for regular back testing of the tools and models they develop, in order to maintain quality assurance and add improvements if any.

Types of Quantitative Analyst

The professionals working as quantitative analyst can be divided into two categories namely, front-office quantitative analysts and back/middle office quantitative analysts.

Front-office analysts

The front-office quants are employed at firms that are involved in sales and trading of financial securities which includes investment banks, asset management firms and hedge funds. The role of the analyst is to devise profitable strategies to trade in different financial securities by leveraging the use of algorithms to implement these investment strategies. They are also responsible for managing the risk of the firm’s investments by using quantitative models. With the advent of algorithm-based trading, the job of a quantitative analyst and a trader has mostly consolidated. The analysts in the front-office generally work on trading floors and deal with clients on a regular basis. The job of the front-office analysts is quite stressful as compared to the other quantitative analysts but on the upside, it provides them with better compensations.

Quantitative analysts in credit rating agencies and asset management firms develop quantitative models to predict the macroeconomic trends across different geographies.

Back-office and middle-office analysts

The analysts working in the back/middle office are generally employed by investment banks and asset management firms.

The analysts working in the back/middle office are primarily responsible to develop algorithms to validate the quantitative models developed by quants working in the front-office and to estimate the model risk.

After the financial crisis of 2008, the demand for risk managers has increased across all financial institutions. The quant analysts in the back/middle office also work as risk managers to manage the firm’s risk exposure.

Whom does a Quantitative Analyst work with?

A quantitative analyst depending on the type of office he/she is employed in, works in tandem with many internal and external stakeholders including:

Institutional clients of the firm – A quantitative analyst working in the front office deals with the institutional clients (or even wealthy retail customers) of the firm to implement profit generating strategies on the client’s investments.
Sales and Trading – A front office quantitative analyst also works with the sales and trading team of the firm to execute trades based on the quantitative models.
Portfolio managers – A front office quantitative analyst also works with the portfolio managers of the firm to manage portfolios based on the quantitative models.
Economists and Sector specialists – A back/middle office analyst developing models to predict the macroeconomic trends work with economists and sector specialists to gather information about specific sectors and economies
Legal Compliance – A quantitative analyst also works with the legal compliance team of the firm to maintain a proper check over different rules and regulations and prevent legal challenges
Equity researchers – The quantitative analyst developing models to predict the stock market developments also works with the equity researchers to obtain insights about financial and non-financial data about different companies

How much does a Quantitative Analyst earn?

The remuneration of a quantitative analyst depends on the type of role and organization he/she is working in. As of the writing of this article (2021), an entry level quantitative analyst working in a financial institution earns a median salary of €60,000 per year (source: Payscale). The analyst also avails bonuses and other monetary/non-monetary benefits depending on the firm he/she works at.

What training do you need to become a Quantitative Analyst?

An individual working as a quantitative analyst is expected to have a strong base in computer science, mathematics, and market finance. He/she should be able to understand and develop mathematical and statistical models using programming languages and possess knowledge of market finance. He or she must understand financial and economic trends and have strong research skills and interpersonal skills.

In France, a Grand Ecole diploma with a specialization in financial engineering, mathematics or market finance is highly recommended to get an entry level job as a quantitative analyst in a reputed bank or firm.

The Financial risk management (FRM) or Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job as a quantitative analyst.

In terms of technical skills, a quantitative analyst should be efficient in the use of programming languages like C++, Java, Matlab, Python, and R.

Relevance to the SimTrade course

The concepts about quantitative analysis can be learnt in the SimTrade Certificate:

About theory

By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.

By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

Useful Resources

Payscale

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Hedge funds

April 18, 2025May 2, 2021 by Akshit GUPTA

Hedge funds

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents the role and functioning of a Hedge fund.

Introduction

Hedge funds are actively managed alternative investment vehicles that pools in money from several investors and invest in different asset classes. Only accredited investors have the access to invest in hedge funds. Accredited investors refer to high-net worth individuals, financial institutions, retail banks, and large corporations who satisfy certain conditions to obtain a special status to invest in these high-risk funds.

The first hedge fund was started in 1949 by Alfred Winslow Jones, coined as the father of the modern hedge fund industry. He tried to eliminate the systematic risk in his portfolio by buying stocks and short selling equal amounts of stocks at the same time. So, his portfolio returns were dependent on the choice of stocks he bought and sold rather than the direction in which the market moved.

Hedge funds use complex investment techniques to generate absolute market returns that are generally higher than the market benchmarks. These funds are less rigorously regulated (by the SEC in the US or the AMF in France) as compared to mutual funds by asset management firms or insurance companies which empowers them with greater flexibility.
The types of strategies used by hedge funds are risky and can lead to huge losses (like Long Term Capital Management in 1998 or Archegos Capital Management in 2021). In terms of performance, hedge funds try to achieve a positive performance regardless the direction of the market (up or down).

Benefits of a hedge funds

Hedge funds provide their clients (investors) with tools and mechanisms that enable them to handle their investments in an efficient manner and optimize their portfolios with high returns and well managed risk. The hedge funds invest in a variety of assets, thus diversifying the clients’ portfolios and dispersing their absolute returns. So, asset management firms are often acknowledged as the alternative funds in the industry.

Fee structure

Hedge funds usually follow the 2 and 20 fees structure practice. Under this practice, the hedge funds usually charge 2% management fees on the total assets under management (AUM) for the investor and 20% incentive fees on the total profits generated on the investments over the hurdle rate. The hurdle rate is generally the minimum returns that investors expects on their investments. The minimum return is set by the hedge fund while making investment decisions.

For example, a hedge fund has AUM worth $100 million and by the end of the year the total portfolio size is $140 million. The management fee is 2% and the incentive charges are 20% for a hurdle rate of 10%.

So, the hedge fund will receive total fees equivalent to:
The total fees is the sum of the management fee and the Incentive charges
Thus, total fees is equal to $8 million

(Calculation for the management fee: $100 million (Initial investment) x 2% which is $2 million
Calculation for the incentive charge: $100 million x max.(40% – 10%; 0) x 20% which is $6 million
Here, 40% is the portfolio return and 10% is the hurdle rate)

Types of strategies used by hedge funds

Hedge funds follow several strategies to try to get returns higher than the market returns. Some of the actively employed strategies are:

Long/Short equities

Long/short Equity strategy involves taking a long position and a short position on underlying stocks. The aim of this strategy is to find stocks that are undervalued and overvalued by the market and take long and short positions in them respectively. The positions can be taken by trading in the underlying shares or by trading in derivatives that have the same underlying.
The funds maintain a net equity exposure which can be positive or negative depending on the size of the long and short positions.

Event driven strategy

Under this strategy, the hedge funds invest their money on assets in which the investment returns, and risks are associated with specific events. The events can include corporate restructuring, mergers and acquisitions, spin-offs, bankruptcies, consolidations, etc. The hedge fund managers try to capitalize on the price inconsistencies that exist due to such events and use their expertise to generate good returns.

Relative value strategy

Hedge funds use relative value arbitrage to benefit from the discrepancies that exist in the prices of related assets (can be related in terms of historical price correlation, company size, industry, volume traded or several other factors). One of the strategies used under relative value arbitrage is called pairing strategy where hedge funds take positions in assets that are highly correlated (like on-the-run and off-the-run Treasury bonds). Relative value arbitrage strategy can be used on different asset classes including, bonds, equities, indices, commodities, currencies or derivatives.
The hedge fund manager takes a long position in the asset that is underpriced and simultaneously takes a short position in the relative asset that is overpriced. The long positions are highly leveraged which helps the manager to generate absolute returns. But this strategy can also lead to losses if the prices move in the opposite direction.

Distressed securities

Under this strategy, the hedge funds invest in companies that are experiencing distress due to any reason including operational inefficiencies, changes in senior management, or bankruptcy proceedings. The securities of these companies are often available at deep discounts and the hedge funds may see a high probability of reversal. When the reversal kicks-in, the hedge funds exit their positions with high returns.

Major hedge funds in the world

Hedge funds are usually ranked according to their asset under management (AUM). Well-known hedge funds are:

Hedge funds major
Source: https://www.pionline.com/interactive/largest-hedge-fund-managers-2020

Risks associated with hedge funds

Although the investments in hedge funds can generate absolute performance, they also come with high risk which can lead to huge losses to the investors. Some of the commonly associated risks with hedge fund investments are:

High risk exposure – the hedge funds invest in several asset classes with highly leveraged positions which can multiply the number of losses by several times. This characteristic of hedge funds makes it a risky investment vehicle.
Illiquidity – Some hedge funds require a lock-in period of 2 to 3 years on the investments made by the accredited investors. This characteristic makes hedge funds illiquid to investors who plan to redeem their investments early.
High fees and incentive charges – Most of the hedge funds follow a 2 and 20 fees structure. This means 2% fees on the total assets under management (AUM) for an investor and a 20% incentive charge on the returns generated by the hedge funds over the initially invested amount.
Restricted access – The investments in hedge funds are highly restricted to investors who qualify certain conditions to be deemed as accredited investors. This characteristic of a hedge fund makes it less accessible to investors who are willing to take high risks and invest in these funds.

Useful resources

Lasse Heje Pedersen (2015) Efficiently inefficient – How smart money invests & market prices are determined. Princeton University Press.

▶ Youssef LOURAOUI Introduction to Hedge Funds

▶ Shruti CHAND Financial leverage

▶ Akshit GUPTA Initial and maintenance margins in stocks

About the author

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

Value investment strategy

February 16, 2025May 2, 2021 by Akshit GUPTA

Value investment strategy

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents the strategy of Value Investing.

Introduction

Value investment strategy is an investment style where investors look for shares that are undervalued by the market. In the companies that are undervalued, the current share price of that company is less than its intrinsic value. Intrinsic value refers to the stocks real value calculated using financial analysis metrics. The financial analysis is based on many factors including the company’s financial performance, free cash flows, future growth potential, historical performance, ratio analysis, market share and the quality of their management. The strategy is a part of fundamental investment style where investors actively seek capital appreciation and dividend returns and have a long-term investment plan.

The value investment strategy is the opposite of growth investment strategy and is considered to be a defensive strategy. A growth investment strategy is an investment style where investors look for companies, industries, sectors, or markets that are rapidly growing and have the future potential to grow at a higher-than-average rate compared to its market or industry average.

A defensive strategy involves buying quality – stocks that possess minimum risk and good returns. Dividend income is crucial for a value investor. A value investor holds onto his/her position in a company until the market realizes the true value of that company, and enjoys the stream of dividend income the company has to offer.

The investors practicing value investment strategy actively look for companies that have good long-term fundamental value. The idea behind the strategy is to buy undervalued stocks, hold the position till the stock prices reach their real or potential level and then exit the position.

Benjamin Graham is regarded as the father of value investment strategy. He is known for authoring many famous books on value investing including ‘The intelligent investor’ in the late 1940’s. He introduced the concepts such as the intrinsic value and the requirement of safety margin when investing in value stocks to the wide audience. Safety margin refers to the difference between the stock’s intrinsic value and the current market price. The more the difference between the two values, the higher the margin of safety the investor has. The high safety margin makes the investment less risky for the investor.

Indicators to practice value investment strategy

An investor practicing value investment style takes into consideration various financial and non-financial metrics based on the fundamentals of a company to compute the intrinsic value of the stock. The non-financial metrics largely depend on the investors experience and personal outlook. It can include management’s credibility, corporate strategy, focus on innovation, etc.

The most commonly used financial tools include:

Financial statements

For a value investor, it is important to study and analyze the financial statements of a company to compute different ratios to understand the company’s financial performance. The ratios that an investor looks for include:

Price- Earnings ratio: Price to earnings ratio is a fundamental analysis tool that helps an investor to determine how much the current market price of a company is compared to its current earnings per share. A value investor compares the price – to – earnings ratio of a company to the P/E ratio of other firms operating in the same sector to analyze if the stock is underpriced or not.
Price-book ratio: The P/B ratio is calculated by dividing the company’s current market price to its total book value. The book value of a company is equal to the company’s total assets minus its total liabilities. The P/B ratio of less than 1 means that the company’s current market price is less than its book value, thus the share is undervalued by the market.
P/E-growth ratio: Price/earnings to growth (PEG) ratio is calculated by dividing the price/earnings ratio of a company by its expected future growth rate. This ratio provides more comprehensive information about the company’s valuation. An PEG ratio of less than 1 signifies that the company’s current price is less than its future expected earnings growth rate. Such a company is considered as undervalued by the market.
Debt-assets ratio: Debt to assets ratios is calculated by dividing the company’s total debt by its total assets as per the balance sheet. The companies that have a ratio of less than 1 have a sound debt position in their balance sheet and have low chances of default. The company also possesses low risk which is an added advantage for the value investors.

DCF analysis

The value investors also carry out Discounted Cash flow (DCF) analysis to compute the present intrinsic value of the company based on their expected future cash flows. The value investors carry out this analysis since they believe that the present intrinsic value of a company is primarily dependent on its ability to generate good cash flows in the future. The DCF analysis takes into account the time value of money and is calculated by making projections about the free cash flows the company will have in the future and computing a discount rate which is usually the weighted average cost of capital.

Market efficiency

Market efficiency refers to the degree to which all the relevant information about an asset is incorporated in the market prices of that asset. Fama (1970) distinguished three forms of market efficiency: weak, semi-strong, and strong according to the set of information considered (market data, public information, and both public and private information).
In the strong form of the market efficiency hypothesis, the current market price of an asset incorporates all the publicly available information as well as the private or insider information.

The value investment strategy works against the efficient market hypothesis as the investors practicing this strategy always look for stocks that are undervalued or overvalued to execute trades. But value investors improve market efficiency by buying undervalued stocks (pushing the stock price up towards its fundamental value) and selling overvalued stocks (pushing the stock price down towards its fundamental value).

Example of value investors: Warren Buffet

Warren Buffet also referred to as ‘a man who values simplicity and frugality’, is a well-known believer and preacher of value investment strategy. He is a fellow student of Benjamin Graham and most of his investment decisions strongly focus on the principles of value investing and have a mid-term to long-term investment duration.

Some of the famous value stocks held by Warren Buffet, as of writing of this article (30/04/2021), includes:

Source: https://www.cnbc.com/berkshire-hathaway-portfolio/

Useful Resources

Investopedia article: Introduction to value investing

Corporate finance institute article: A guide to value investing

Relevance to the SimTrade Certificate

The concepts about value investment strategy can be understood in the SimTrade Certificate:

About theory

By taking the Trade orders course, you will know more about the different types of orders that you can use to buy and sell assets in financial markets.
By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

About the author

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

Portfolio manager – Job description

February 16, 2025April 25, 2021 by Akshit GUPTA

Portfolio manager – Job description

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Portfolio manager.

Introduction

A portfolio manager is an employee responsible for developing, implementing, analyzing, and managing the asset portfolios of the clients (institutional or retail investors) of the asset management firm he/she is working with. The aim of a portfolio manager is to understand the investment objective of his/her clients and provide good performance for his/her clients’ portfolios. The portfolio managed by the asset manager consists of different securities including equities, bonds, commodities, currencies, etc.

Types of portfolio managers

In general, a portfolio manager is responsible for advising or managing a client’s portfolio using various strategies which include top-down approach or bottom-up approach.

The top-down approach refers to studying the economic trends, sector analysis and looking for suitable asset classes (sectors and countries) to invest in.

Whereas, in bottom-up approach the manager majorly focuses on studying the financial information about different asset and then moves to sector and economic analysis.

The professional working as portfolio managers can be divided into two categories namely, buy side managers and sell side managers.

Buy-side portfolio managers

Buy-side managers generally work in asset management firms, investment funds, and trading firms. The managers receive financial and non-financial data of different asset classes from financial analysts.
They portfolio managers are responsible for designing and managing the portfolios of clients based on the financial analyst’s reports, client’s investment objectives and return expectations.
Buy-side managers are commonly more prestigious than sell-side managers. The competition is stiffer and entry into this job requires a knowledge of finance and a strong experience in the sector followed.

Sell-side portfolio managers

Sell-side managers are generally employed by the research division of investment banks, investment firms, brokerage houses and hedge funds. The managers are responsible for providing insights about the latest trends, developments, and financial projections about target companies. They generate reports on the basis of their analysis and provides recommendations for investment decisions to the firm’s clients.
The sell-side managers usually specialize in a particular sector or a geographical region and produce reports within that area.

Duties of a portfolio manager

Portfolio managers study the economic conditions, financial information pertaining to companies and investment strategies to manage the asset portfolio of their clients. More specifically, the important duties of a portfolio manager include the following:

Understanding client’s investment objectives – Different clients have different investment criteria based on their capital availability, duration of investments and financial position. A portfolio manager is responsible for understanding the clients’ needs, risk appetite and return expectations to design a suitable portfolio.

Studying market trends – Several economic, sector or asset-based factors affects the performance of a portfolio managed by a professional. A portfolio manager is responsible for studying and understanding the economic, sector and asset-based trends in a market.

Optimizing client’s portfolio – By studying and understanding the trends in the market, a portfolio manager should optimize the investments made for different clients. He should be able to understand different asset classes including fixed income, equities, commodities, and foreign currencies. The knowledge helps the manager to strategically allocate investments to different assets and maximize the returns for their clients.

Generating investment reports – A portfolio manager must generate and share investment reports with the clients at different time intervals. An investment report generally includes the portfolio’s value, asset performance and latest trends in the market based on the manager’s analysis.

With whom does a portfolio manager work?

A portfolio manager depending on the buy or sell side he/she is employed in, works in tandem with many internal and external stakeholders:

Retail or institutional clients of the firm- A portfolio manager works with the retail or institutional clients of the firm to design and manage their portfolios.
Sales and Trading – A portfolio manager works with the sales and trading team to execute trades based on the reports and information given by the financial analysts
Quants – to develop financial models to take decisions in terms of valuation and investment in different asset classes
Risk Managers – To manage and control the risk of the designed portfolios
Economists and Sector specialists – to gather information about specific sectors and economies
Legal Compliance – To maintain a proper check over different rules and regulations and prevent legal challenges
Equity researchers – To gather insights about financial and non-financial data about different companies

How much does a portfolio manager earn?

The remuneration of a portfolio manager depends on the type of role and organization he/she is working in. As of the writing of this article, an entry level portfolio manager working in a bank earns a base salary between €40,000–50,000 in the initial years of joining. The manager also avails bonuses and other monetary/non- monetary benefits depending on the firm he/she works at.
(Source: Glassdoor)

What training do you need to become a portfolio manager?

An individual working as a portfolio manager is expected to have a strong base in market and corporate finance. He/she should be able to understand the different financial statements, financial instruments, economic trends, and have strong research skills and interpersonal skills.

In France, a Grand Ecole diploma with a specialization in corporate or market finance is highly recommended to get an entry level portfolio manager position in a reputed bank or firm.

The Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job.

In terms of technical skills, a portfolio manager should be efficient in using MS Excel, Powerpoint and possess basic knowledge of programming languages like VBA.

Relevance to the SimTrade course

The concepts about portfolio management can be learnt in the SimTrade Certificate:

About theory

By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

About the author

Article written in April 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Sales analyst – Job description

February 16, 2025April 25, 2021 by Akshit GUPTA

Sales – Job description

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents the job description of a Sales analyst.

Introduction

Sales analysts are sell-side analysts that develop and pitch ideas to sell financial securities to the firm’s clients and build relationships with them. They are responsible for analyzing and monitoring market activities to develop trade ideas to suit the client’s needs. The job of a sales analyst involves looking for potential assets to invest in and making PowerPoint presentations to pitch ideas to already existing and new clients. These finance professionals are employed by financial institutions like investment banks, asset management firms, hedge funds and stock brokerage firms.

The sales and trading team forms the backbone of any investment bank or asset management firm. The job of a sales analyst and a trader goes alongside, as the sales analyst conveys ideas and opportunities to the firm’s clients and the trader executes trades as per the client’s demands.

Types of Sales Analyst

A financial institution like an investment bank asset management firm or a stock brokerage firm has different departments which can be product specific or client specific. As an institution deals in different types of financial securities, with different types of clients across different geographies, a sales analyst can be divided into different categories:

Product-specific sales analyst

As a financial institution deals in many financial product categories, a sales analyst cannot keep a track of all the securities. So, the analysts are divided amongst different types of financial securities which include,

Equities
The role of a sales analyst working in the equities division is to develop and pitch ideas about equity investments to the firm’s clients. The type of investments in equities can take several forms like investments in options, futures, structured products, emerging market equities or value/ growth investment equities.
Fixed Income
The role of a sales analyst working in the fixed income division is to develop and pitch ideas about fixed income investments to the firm’s clients. The type of fixed income investment includes investment in government or municipal bonds, investments in treasury bonds or mortgage-backed securities.
Foreign exchange
The role of a sales analyst working in the foreign exchange division is to develop and pitch ideas about investments in foreign exchanges to the firm’s clients.
Commodities
The role of a sales analyst working in the commodities division is to develop and pitch ideas about investments in different commodities (like gold, silver, or crude) and their futures to the firm’s clients.

Client-specific sales analyst

As a financial institution deals with different types of clients, a sales analyst can be categorized as per the clients they serve, which includes,

Institutional clients like sovereign funds, government agencies, pension, or insurance companies
Retail investors
High net worth individuals (Private banking)
Corporates

Duties of a Sales Analyst

As the sales and trading analysts is the lifeblood of an investment bank or an asset management firm, the sales analyst working must undertake a wide range of duties which includes,

Monitoring and analyzing the financial markets to develop trading ideas
Understanding the clients’ needs and developing solutions as per their expectations
Effectively communicate with the traders, portfolio managers, equity researchers and sector specialists to stay updated with the current market information
Build strong relationship with the clients
Researching and analyzing fundamental and technical information about different financial securities

Whom does a Sales Analyst work with?

Traders – A sales analyst primarily works with the traders on the floor to execute trades as per the client’s demand and suggest entry/exit positions
Retail or institutional clients of the firm- A sales analyst works with the retail or institutional clients of the firm to understand their needs and develop trade ideas.
Portfolio managers – The sales analyst works with the portfolio managers to stay updated with the current market information
Economists and Sector specialists – A sales analyst works with the economists and sector specialists to get insights about different sectors and formulate investment strategies
Legal Compliance – A sales analyst also works with the legal compliance team of the firm to maintain a proper check over different rules and regulations and prevent legal challenges
Equity researchers – A sales analyst also works with the equity researchers to obtain insights about financial and non-financial data about different companies

How much does a Sales Analyst earn?

The remuneration of a sales analyst depends on the type of role and organization he/she is working in. As of the writing of this article, an entry level sales analyst working in a financial institution earns a salary between €45,000-€55,000/year (Source: Glassdoor). The analyst also avails bonuses based on his/her performance and other monetary/non-monetary benefits depending on the firm he/she works at.

What training do you need to become a Sales Analyst?

An individual working as a sales analyst is expected to have a strong base in market finance. He/she must possess strong knowledge of different types of financial instruments and their dynamics and should also be able to understand the market and economic trends. Besides having a strong academic knowledge, a sales analyst is also expected to have strong research and interpersonal skills to effectively communicate with the clients and build relationships.

In France, a Grand Ecole diploma from a Business School with a specialization in market finance is highly recommended to get an entry level sales analyst position in a reputed investment bank or investment firm.

The Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job as a sales analyst.

Also, to gain industry experience as a sales analyst, students are advised to work as interns and apprentices before stepping into this domain as full-time employees.

Useful Resources

Corporate finance institute What does a Sales analyst do?

Wallstreetprep Ultimate guide to sales and trading

Relevance to the SimTrade course

The concepts about the work of a sales analyst can be learnt in the SimTrade Certificate:

About theory

By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

About the author

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

Short selling

April 25, 2021 by Akshit GUPTA

Short selling

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the trading strategy of Short Selling.

Introduction

Short selling refers to the act of selling a stock without actually owning it. By definition, an investor makes a short sell when he/she borrows a stock, then sells it and buys it later to return it to the lender.

The primary reason why investors choose to short sell is because they anticipate a drop in the price. The rationale behind the act is to make money when the investor actually sells the stock at a higher price and then buys the stock at a lower price when the market price of that asset falls.

This can be illustrated through an example:

If an investor shorts 10 shares of Apple currently priced at $100, then the investor will borrow 10 shares of Apple from his/her broker. Let’s say after 2 days, the stock price falls to $80, the investor will buy it back and make a profit of 10*(100-80) = $200.

In this case, the price of the stock decreased and hence, the investor could make money. Now in a contrasting scenario, the price of the stock can increase, in which case the investor will lose money.

In the above example, imagine that the investor goes short for 10 shares of Apple at $100 each and the price after 2 days increases to $150. In this case, the loss for the investor is 10*(150-100)= $500.

Since the price of the stock can keep increasing or decreasing in theory, short selling position can lead to huge losses or profits. Hence short selling comes with high risk and is usually used by hedge fund managers and institutional investors for speculation with high-risk appetite. Hedge funds are in fact the most active users of short selling positions to mitigate losses in a security or portfolio they already own.

Who short sells the most in the stock market?

Short selling can be practiced by any trader participating in the financial markets but due to the high risk involved and requirement of strong market understanding it is generally practiced by:

Hedgers: An investor who already is long in the market using options or futures contracts, will naturally short the underlying security. This is referred to as Delta Hedge.
Speculators: Speculative investors are involved in short selling to take advantage of market movements. They in fact account for a significant share of short activity.
Day Traders: These short term traders with a lot of risk exposure keep a close eye on the market movements and take short position from time to time for a very short term to hedge against their current positions.
Hedge funds: Active entities who manage funds for high net worth individuals, enterprises, or other market participants short sell on various stocks by betting on sectors, industries or companies where they expect a fall in value of the asset prices.

Mechanism of Short Selling

Since the short sell involves borrowing stock, an initial margin is required by the broker at the time the trade is initiated. For instance, this initial margin is set to 50% of the value of the short sale. This money is essentially the collateral on the short sale to protect the lender in the future against the default of the borrower.

Followed by this, a maintenance margin is required at any point of time after the trade is initiated. The maintenance is taken as 30% of the total value of the position. The short seller has to ensure that any time the position falls below this maintenance margin requirements, he/she will get a margin call and has to increase funds into the margin account.

Here is an example of a typical case of short selling and its margin mechanism:

▶ Akshit GUPTA Trader – Job description

▶ Akshit GUPTA Analysis of the Big Short movie

▶ Akshit GUPTA Analysis of the Margin call movie

▶ Akshit GUPTA Analysis of the Trading places movie

Useful resources

BusinessInsider article: What is short selling?

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Share buy-back

April 25, 2021 by Akshit GUPTA

Share buyback

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents an introduction of a Share buyback .

Definition

Share buyback or share repurchase refers to a financial transaction where a company buys a part of its outstanding shares that it issued earlier in the market. The repurchase of shares reduces the outstanding share capital of the company and increases the ownership rights of the continuing shareholders. The shareholders who are willing to subscribe to the share buyback program are paid in cash and lose their ownership in the company to the extent of their shares sold back. The shares bought back by the company are either held by it for issuance on a future date or cancelled depending on the company’s decision.

Share buyback programs are either funded using the cash of the company or by taking additional debt to fund the buyback program. Generally, if a company takes a debt to fund the share buyback programs, it sends a mixed signal (positive as well as negative, depending on how the market participant is affected by such a program) to the market participants as the company takes on more debt. The credit rating agencies also tend to downgrade the respective company’s ratings due to the increase in debt.

Share buyback mechanism

When a company executes a stock buyback program, the transaction reduces the company’s number of shares outstanding in the market. The transaction can be carried out using several methods, some of which are:

Buyback from open market
Under such a mechanism, the company informs its brokers to systematically buy the shares from the open market at the currently prevailing market price. The action generally leads to an increase in the market price of the shares due to the increase in demand for the share and positive investor outlook for the buyback. Also, a company buying back shares from open market doesn’t have any legal limitations in terms of the buyback program, which means the company can suspend or cancel the program at any given point.
Tender offer
Another way a company can execute stock buyback program is through issuance of tender offers to the investors. The company can either issue a fixed price tender offer or a Dutch style tender offer (such offers generally have a price range and the investors have the power to decide the ideal buyback price). The company provides a fixed window to complete the buyback program and such offers are generally carried out at a premium on top of the stock’s market price.

Reasons for a share buyback program

A company can execute a share buyback program for several reasons:

Undervalued stock price – If the company’s management think that the company’s share prices in the market are undervalued, they can go for a share buyback program to decrease the number of outstanding shares in the market and increase the share prices. If the share prices increase on a later date, the company can also re-issue the bought back shares at a better market price.
Availability of debt at lower cost – The cost of equity for a company generally exceeds the cost of debt. If a company has availability of debt at lower rates, they can buy back shares from the market by taking additional debt to support the funding.
Control dilution of ownership – Whenever a company wants to control the dilution of their ownership, they resort to share buyback programs which reduces the number of outstanding shares in the market and also increases the shareholder value. The issue of Employee stock options (ESOP) is generally followed by a share buyback program which helps the company to reduce the dilution of ownership and voting rights.
Improve financial statements and ratios – Share buyback programs improves the financial ratios for a company by improving the different financial statements for the company. Share buybacks help in reducing the number of outstanding shares of a company which increases the Earning Per Share (EPS). It leads to a higher Price/Earnings ratio without having an actual increase in the earnings.
Tax benefits – In certain countries, the tax rates on dividends and capital gains differ with a high margin. A company can execute a share buyback program which benefit the investors who will have to pay lower taxes for the capital gains earned through share buybacks.
For example, in most of the countries the share buybacks are taxed at a short/long term capital gain tax rate and dividends are taxed at the income tax rate. If the income tax rate is 35% and long-term capital gain tax rate is 25% in a country, the shareholders benefit from share buy- back programs by paying less taxes if they own the shares for more than 1 year.
Avoid hostile takeover attempts – The management of a company fearing a hostile takeover can also execute a share buyback program to reduce the number of outstanding shares in the market and protect themselves from takeover attempts in the marketplace. The shares are either held by the company in their treasuries for issuance in the future or cancelled by them.

Benefits of Stock buyback

The companies benefit from the share buy back in several ways which includes,

Reduction in dilution of ownership by cancelling the shares bought-back.
Share buy backs help the companies to improve their market price of shares by reducing the number of shares available in the open market.
The companies can utilize the excess cash during period of slow growth to buy back the shares from the market.
The companies can also benefit by selling the bought back shares at higher market prices (purchased at undervalued prices).

The shareholders entering share buyback programs can benefit in following ways,

The shareholders benefits from the tax benefits on the income generated by selling the shares back to the company.
The companies generally buy back shares at a premium over the prevailing market price. The shareholders also benefit from capital gains earned in the share buyback programs.

The shareholders who don’t prefer to enter the share buy-back programs also benefits from,

Increase in market price of shares post share buybacks.
Increase in shareholder value due to decrease in the dilution of ownership.
Increase in ownership and voting rights.

Example of share buyback programs

Microsoft (2019)

In September 2019, Microsoft announced a share buyback program worth $40 billion, giving a boost to the market prices of company’s shares and the investors also saw an increase in the dividends given by the company. The company has been using its cash resources to fund this share repurchase program.

Alphabet (2019)

Alphabet (the parent company of Google) allocated more than $18 billion to fund the share repurchase program over 2019. The company has been using its cash resources to fund the buyback program. Although the company has been continuously buying back shares from the market, its number of shares outstanding in the market remains the same due to an increase in share-based compensation to its employees.

Market reaction after the announcement of a stock buyback program

The market reaction of share buyback programs is different for different market participant. But in general, the program sends a positive signal to the market as the share buyback programs show companies strong financial health and the top management’s belief in their strengths. A company undertaking share buyback generally believes their share prices are undervalued by the market. So, such a program sends a positive signal to the market regarding company’s optimism and trust in their market value.
But, if the share buyback programs are funded by taking additional debt, it can also be perceived negatively by certain market participants. Credit rating agencies and some investors have a negative outlook for companies that have higher debts. So, such a program can lead to negative sentiments about the company for some participants.

Useful resources

Investopedia article: Introduction to share buyback
Harvard business review article: “Is a Share Buyback Right for Your Company?” by Justin Pettit
The Balance article: Benefits of the stock buy-back programs

About the author

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

Asset management firms

January 26, 2025April 25, 2021 by Akshit GUPTA

Asset management firms

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the role and functioning of an Asset management firm.

Introduction

Asset Management is one of the lucrative fields of the financial industry over the world. As the name suggests, it is essentially handling and management of assets and investments of a portfolio, on behalf of clients. These clients are generally corporate, institutional or government investors, third-party brokers, high net-worth individuals, or mutual funds among many others. Financial institutions that cater these services are referred to as Asset Management Firms.

For entities with large portfolios comprising of multiple and diverse tangible and intangible assets, maintenance is a genuine concern. Business requires a robust asset management framework to not only grow the valuation of clients’ portfolios, but also keep track of the operations, compliance and risks related to the assets. This is where Asset Management firms come into picture.

Benefits of an asset management firm

The asset management firms provide the clients with tools and mechanisms that enable them to handle their assets in an easy and efficient manner and optimize their businesses with maximum returns and minimum risk.
They are also responsible for managing their client’s portfolios and provide risk-adjusted returns. Thus, Asset Management firms are often acknowledged as the ‘money managers’ in the industry.

Types of products offered by asset management firms

Asset management firms offer many different products to their clients:

Mutual funds – These are a form of asset management firms that invest in less risky financial products and provide stabilized risk adjusted returns.
Index funds – Index funds are an investment funds that comprise of a portfolio of stocks (present in a market index) and tries to mimic the performance of the index.
Exchange-traded funds – ETFs are investment funds that can comprise of different stocks, bonds or indices and are traded on exchanges.
Hedge funds – Also called speculative funds, hedge funds are asset management firms that pool in money from several retail or high net worth individuals to invest in different financial products which generally provide high returns. They practice high risk investment strategies that can generate high returns.
Private equity funds – these funds pool in money from different investors and invest in private companies by taking share ownerships
Structured products – These are investment products that generally comprise of a mix of assets with interest payouts and derivatives.

Types of roles provided by asset management firms

Financial Analysts – A financial analyst is a finance professional who is responsible for making financial and investment decisions for a company. The work involves a broad area of expertise and a financial analyst generally works in corporate and investment roles.
Quants – Quants are finance professionals that work on designing, implementing, and analyzing algorithms based on mathematical or statistical models to help firms in taking financial decisions.
Economists – Economists are finance professionals who study and examine market activities in different geographical zones, economic sectors, and industries.
Sales Analyst – Sales analysts are sell-side analysts that develop and pitch ideas to sell financial securities to the firm’s clients and build relationship with them.
Portfolio Managers – A portfolio manager is a finance professional responsible for developing, implementing, analyzing, and managing the asset portfolios of the clients (institutional or retail investors) of the asset management firm he/she is working with.
Risk managers – A risk manager is a finance professional responsible to control and manage the risks arising from different financial activities that a financial institution undertakes.

Services provided by asset management firms

Some of the major services provided by asset management firms are as follows:

Financial Investing: One of the major goals of the companies is to earn returns on the assets owned by the client. They do so by the conventional trading and investment strategies approach. Firms may also introduce their own financial products such as ETFs, mutual funds, index funds, retirement pension plans etc. to cater to a wider array of clients and serve their needs.
Tracking of Assets: Another service provided by the asset management firms is to keep a track of the tangible fixed investments (like real estate or commodities) made by their clients. These services include, maintaining records of the market value, amortization and tracking of returns on these assets.
Risk Management: The asset management firms also provide risk management services to their clients on the portfolios managed by the firm. The risk managers working in the firm continuously looks for solutions to optimize the client’s portfolio and provide good returns.
Transaction Support: The asset management firms provide transaction support to their clients for executing positions in the capital markets which forms an integral part of implementing important financial decisions.

Fee structure

The business model of asset management firms is largely based on pooling in money from several investors and investing in a wide class of assets ranging from real estate to equities. The revenues generated by the firms are in form of advisory services, investment management fees, maintenance fees, commissions on transactions and incentive charges on the portfolios managed by them. The compensations can differ among different firms, products, and services. Some may even charge other commissions and transaction fees.

Generally, an asset management firm charges a management fees which is varying for different firms but generally range between 15 bps to 200 bps. Also, the firms charge incentive charges which is a percentage of the profits generated on a portfolio. These incentive charges are normally charged on the excess returns of the portfolio over the set hurdle rate.

The hurdle rate is generally the minimum returns that an investor expects on his investments. The minimum return is set by the asset management firms while making investment decisions.

Major asset managers in the world

Asset management firms are usually ranked according to their asset under management (AUM). Well-known asset management firms are:

BlackRock: BlackRock is the global leading Asset Management Firm with 6,704,235 million USD AUM (Assets under Management) as of 2020. In FY2020, they earned a total revenue of 16.2 billion USD of which nearly 80% of came from investment management services they offer their clients. The world largest provider of ETFs(Exchange Traded Funds) ‘iShares’ listed on exchanged like NYSE, LSE, SEHK, BATS etc, is a creation of BlackRock.
Vanguard Group: With 6.7 trillion USD worth AUM, Vanguard is BlackRock’s biggest competition and dominates the mutual funds market while holding a solid position in ETFs too. Vanguard funds are popular among investors not just because of their performance, but also comparatively lower fees which they manage because the group is not owned by external shareholders.
Amundi: If you are French or even European, Amundi is a familiar name. Resulting from a merger between the asset management subsidiaries of Credit Agricole Group and Société Générale in 2010, Amundi is one of the fastest growing firms with almost 1.7 trillion USD AUM leading the European Asset Management Market and among top 10 globally. They majorly deal in UCITS (Undertakings for the Collective Investment in Transferable Securities), ETFs and funds in real estate and structured products.

▶ Akshit GUPTA Trader – Job description

▶ Akshit GUPTA Financial Analyst – Job description

▶ Akshit GUPTA Economist – Job Description

▶ Akshit GUPTA Sales analyst – Job description

▶ Akshit GUPTA Portfolio Manager – Job Description

Useful resources

The balance: what is asset management?

The balance: Top 10 asset management firms in 2020

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Growth investment strategy

April 25, 2021 by Akshit GUPTA

Growth Investment strategy

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the strategy of Growth Investing.

Introduction

Growth investment strategy is an investment style where investors look for companies, industries, sectors, or markets that are rapidly growing and have the future potential to grow at a higher-than-average rate compared to its market or industry average. It is a part of a fundamental investment style where investors look for stocks that can provide short/long term capital appreciation on their investments rather than mere dividend earnings.

The growth investment style is the opposite of value investment style and is considered to be an offensive strategy. Value investment strategy is an investment style where investors look for shares that are undervalued by the market. It is rather a defensive strategy where the investors are conservative in approach ad have low risk appetite. An offensive strategy refers to an investment style where investors are actively looking to build up their portfolios by capital appreciations and earn higher than average returns.

A growth investor is not affected by the company’s current or historical earnings but strictly takes into consideration the company’s future growth potential before investing his/her money.

In general, growth investing is less concerned about dividend payments or stable cash inflows and is not preferred by investors who have a low-risk appetite. The income generated by companies having more-than-average growth rates are reinvested in the business to expand their growth potential and are not distributed as dividends to the shareholders. So, the growth investors look for capital appreciations over the period rather than having stable cash inflows.

For example, a growth investor Mr. X maintains a portfolio A of high growth stocks. The companies that Mr. X target are generally young companies with small market capitalization (between $300 million to $2 billion) and which have the potential to grow exponentially over the coming years. The minimum return expectation of Mr. X hovers around 15%-20% p.a.

However, the portfolio generated an annual return of 22% while the benchmark index saw an annual return of 14%. When the rate is compounded annually, a growth investor expects to double his/her money in a period of 5-6 years.

Indicators to practice Growth investment strategy

Although there is no certain set of indicators that can help an investor judge a company’s future growth potential, an investor practicing growth investment style looks for certain fundamental factors of a company before investing his money. Some of the most commonly used growth investment indicators are:

Projected future earnings – A growth investor pay close attention to the projected future earning potential of a company rather than focusing on the current or historical earnings. The aim of a growth investor is to buy stocks of a company which presents strong future growth which is generally higher than the average market growth rate.
Return on Equity – Return on equity is a good fundamental analysis tool that helps growth investors to determine how efficiently a company is using the shareholder’s equity to generate profits. The ROE multiple is calculated by dividing the company’s net profits after tax by the total shareholders equity. A growth investor prefers a company with a ROE multiple which is at least stable or increasing and generally higher than the industry or market average.
Earnings per share – The earnings per share (EPS) is an important fundamental analysis tool that is calculated by dividing the company’s earnings by the total number of shareholders. A growth investor prefers a company which has seen a steady increase in the EPS growth over the years.
Price/Earnings ratio – Price to earnings ratio is a fundamental analysis tool that helps an investor to determine how much the current market price of a company is compared to its current earnings per share. A growth investor compares the price – to – earnings multiple of a company to the average industry P/E multiple to understand the growth potential of a company compared to its industry’s growth.
Price/Earnings to Growth ratio – Price/earnings to growth (PEG) ratio is calculated by dividing the price/earnings ratio of a company by its expected future growth rate. This multiple provides more comprehensive information about the company’s future potential.

In the current era, startups are considered to be a very hot space for investors practicing growth investment strategy on their portfolios. Although, the current earnings of the startups might be zero or negative, they hold true growth potential and can provide exponential returns on the investments made by growth investors.

Some of the typical industries that growth investors prefer to invest in include technology and healthcare services. Both the sectors have the power to provide revolutionary and cutting-edge products to the market. The prices for stocks of such companies can sharply rise in a short period of time, making them a trending place for growth investors.

Useful Resources

Corporate finance institute A guide to growth investing

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Risk Manager – Job description

February 16, 2025April 25, 2021 by Akshit GUPTA

Risk Manager – Job Description

This article written by Akshit Gupta (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Risk Manager.

Introduction

Ever since the financial crisis of 2008, new rules and regulations have been put into place by different regulatory authorities across the world. These rules and regulations demand strict monitoring of a financial institution’s risk exposure and compliance with them. They have emphasized the practice of risk management in almost all the financial institutions and companies across the world.

Risk management practices involve setting up policies and procedures in place to assess, analyze, control, and manage different risks that an institution is exposed to.

Within the scope of finance, a risk manager is responsible to control and manage the risks arising from different financial activities that a financial institution undertakes. The risk manager does his/her job by setting up policies and procedures to analyze and mitigate the risk inherent in these day-to-day activities. Different banks and institutions have specifics models in place to monitor and quantify their risk exposure.

Types of risk managers

To analyze and mitigate the risk present across the organization, risk managers are appointed across different departments and their field of expertise includes the following categories:

Credit risk manager

The job of a credit risk manager involves analyzing and mitigating the risk arising from,

default on different loans a bank has given to its clients (total credit exposure)
Or, counterparty risk which may arise if the other party to the investment or trading transaction (futures, options, or swaps) may not fulfil their obligation

The most important factor when working as a credit risk manager involves evaluating, controlling, and managing the risk of default by the clients to whom loans have been extended to or counterparties. A credit risk manager uses quantitative models to assess credit risk. For retail customers, credit risk is often assessed with scoring methods. For the securities issued by firms (commercial paper and bonds for example), credit rating agencies also play a major role in assigning ratings based on the counterparty’s financial conditions.

Market risk manager

The job of a market risk manager involves analyzing and mitigating the risks of loss of an institution’s capital arising from its operations in financial markets. Banks, investment and trading firms have several portfolios comprising of financial instruments including stocks, bonds, derivatives, commodities, currencies, or interest rates. The performance of these instruments is monitored of a continuous basis. A market risk manager is responsible for monitoring the financial markets on a real time basis and implement appropriate measures to protect the institution’s capital. Different quantitative models like VaR and stress tests are used to analyze and control an institution’s exposure to market risk. (For example, in a trading firm, an market risk can arise from fluctuations in international commodity prices, interest rates, foreign exchange rates, or in equity shares that a firm trades in.)

Operational risk manager

The job of an operational risk manager involves analyzing and controlling the internal risk of an institutions arising from lack of rules and regulations or human errors. The risk can be due to human errors which can include corruption, internal frauds or malpractices followed by employees. (For example, a trader at an investment firm can take a trading position with leverage in excess to the approved amount. Such a position can put the firm in a difficult position if the market moves in an un-favorable direction leading to heavy losses to the firm.) An operational risk manager is responsible for setting up internal checks and controls to monitor an institution’s risk exposure related to its internal operations. He should ensure implementation and monitoring of procedures and methods by employees to ensure proper compliance to internal and external regulations.

(For example, a trader at an investment firm can take a trading position with leverage in excess to the approved amount. Such a position can put the firm in a difficult position if the market moves in an un-favorable direction leading to heavy losses to the firm.)

With whom does a risk manager work?

In a financial institution, the risk management departments are generally present in the middle office, overlooking the functioning of the back, middle and front office. The risk managers take inputs from the front office, which has the most significant trading activities and client interactions, to manage credit or market risks.

Since the job of a risk manager covers a wide area of activities, he/she works in coordination with different teams to ensure smooth functioning of an institution. (For example, the sales and trading team provides the risk managers with financial and transactional inputs which helps the risk managers to make statistical models and mitigate the counterparty or market risk arising from any transaction.) Some of the other most common teams a risk manager works with are:

Sales and trading team
Quants
Legal compliance
External regulatory bodies
Sector specialists and economists
Portfolio managers

How much does a risk manager earn?

The openings for the job of a risk manager have been increasing ever since the financial crisis of 2008. The remuneration of a risk manager depends on the type of role and organization he/she is working in. As of the writing of this article, an entry level risk manager working in a bank earns between €40,000–50,000 in the initial years of joining (source: Emolument).

As the analyst grows in experience, he/she earns an average salary of €70,000–80,000 including bonuses and extra benefits.

What training do you need to become a risk manager?

An individual working as a risk manager is expected to have a strong base in market finance and mathematics. He/she should be able to understand financial statements issued by firms (for credit risk) and statistical models (for market risk). As the risk manager talks to different employees, he/she should show strong interpersonal skills.

In France, a Grand Ecole diploma with a specialization in market finance is highly recommended to get an entry level risk manager position in a reputed bank or firm. The
Financial Risk Management (FRM) certification also provides a candidate with an edge over the other applicants while hunting for a job.

Useful resources

Efinancemanagement article: Introduction to financial risk

Relevance to the SimTrade course

The concepts about risk management can be learnt in the SimTrade Certificate:

About theory

By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants, and grasp the concept of market efficiency.

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Economist – Job description

April 3, 2021 by Akshit GUPTA

Economist – Job Description

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents the job description of an Economist.

Introduction

Economists are finance professionals who study and examine market activities in different geographical zones, economic sectors, and industries. They are primarily hired by commercial and investment banks, asset management firms, rating agencies, consultancy firms, central banks and other state agencies. In such institutions, economists are responsible for analyzing market and socioeconomic trends, devising statistical models to predict future trends (economic forecasting) and preparing economic reports.

In commercial banks, the work of economists will be used to manage credit risk and to prevent corporate credit default. In investment banks, economists will help traders to anticipate the economic events during the day like the publication of an economic indicator (inflation, GDP, unemployment, etc.). In asset management firms, economists will help portfolio managers to optimize their portfolios based on the current economic conditions and future scenarios. In other contexts, economists work on studying and assessing the economic situation to support investment decisions.

Duties of an economist

More specifically, the important duties of an economist include the following:

Analyze economic and market trends – An economist is responsible for researching, collecting data, and analyzing information pertaining to socio-economic, financial, political and market trends in different geographies and sectors.
Develop economic models – After analyzing the different trends, an economist is responsible for making econometric models to compute the numerical impact of different trends and make future predictions.
Prepare economic reports – The economist is responsible for preparing economic reports based on the statistical analysis to present technical insights about an economic situation. The reports are used to advise banks, investment firms, government agencies to take calculated investment decisions.
Communicate data – The reports prepared by the economists are effectively communicated by them to banks or agencies by ways of presentations, media releases or publication in journals.

Whom does an economist work with?

An economist depending in the sector he/she is employed in, works in tandem with many internal and external stakeholders including:

Retail or institutional clients of the firm – A economist works with the retail or institutional clients of the firm to communicate the different economic or market trends and policies.
Sales and Trading – An economist works with the sales and trading team to advise them on the investment decisions across sectors and geographies based on the economic reports.
Sector specialists – An economist works with the sector specialists to assess and quantify the economic opportunities and risks posed by different sectors and industries
Portfolio managers – An economist works with portfolio managers to advise and help them optimize their portfolios as per the current economic and market trends.
Legal compliance – To maintain a proper check over different rules and regulations and prevent legal challenges
Media – To give insights from technical and non-technical economic reports about different sectors and present future forecasts

How much does an economist earn?

The remuneration of an economist depends on the type of role and organization he/she is working in. As of the writing of this article, an entry level economist working in an investment bank earns a base salary between €40,000–50,000 in the initial years of joining. The economist also avails bonuses and other monetary/non-monetary benefits depending on the firm he/she works at. (Source: Glassdoor)

What training do you need to become an economist?

An individual working as a economist is expected to have a strong base in economics and mathematics (statistics, econometrics). He/she should be able to understand micro and macro-economic trends, devise different mathematical models, prepare reports and have strong research skills and interpersonal skills.

In France, a Grand Ecole diploma with a specialization in economics/mathematics is highly recommended to get an entry level economist position in a reputed bank, government agency or investment firm.

A bachelor degree coupled with an master degree in economics provides a candidate with an edge over the other applicants while hunting for a job.

In terms of technical skills, an economist should be efficient in using word processing, spreadsheet, presentation tool, and possess good understanding of database management and programming languages like VBA, R, Python, Mathlab, etc.

Example of an economist’s report – BNP Paribas

BNP Paribas – Economic Research Report

Useful Resources

All About Careers

Relevance to the SimTrade certificate

The concepts about the job of an economist can be understood in the SimTrade Certificate:

About theory

By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

About the author

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

Option Greeks – Theta

Introduction

Intrinsic and time value of an option contract

Calculating Theta for call and put options

Excel pricer to calculate the theta of an option

Example for calculating theta

Related Posts on the SimTrade blog

Useful resources

About the author

Option Greeks – Vega

Introduction

Calculating the vega for call and put options

Example for calculating vega

Excel pricer to calculate the vega of an option

Related posts ont he SimTrade blog

Option pricing and Greeks

Useful resources

About the author

Option Greeks – Gamma

Introduction

Calculating gamma for call and put options

Excel pricer to calculate the gamma of an option

Delta-gamma hedging

Limitations of gamma hedging

Related posts in the SimTrade blog

Useful resources

About the author

Option Greeks – Delta

Introduction

Delta formula

Call option

Put option

Delta as a function of the price of the underlying asset

Call option

Put option

Excel pricer to calculate the delta of an option

Delta Hedging

Limitations of delta hedging

Transaction cost

Illiquid Markets

Example for calculating delta

Related posts on the SimTrade blog

Option pricing and Greeks

Useful resources

Research articles

Books

About the author

Options

Introduction

Terminology used for an option contract

Option Spot price

Underlying spot price

Strike price

Expiration date

Lot size

Option class

Position

Option Premium

Benefits of using an option contract

Hedging Benefits

Cost Benefits

Choice Benefits

Types of option contracts

Call options

Put options

Different styles of option exercise

American options

European options

Bermuda options

Different underlying assets for an option contract

Individual assets: stocks, bonds

Indexes: stock indexes, bond indexes

Foreign currency options

Option Positions

Long Call

Short Call

Long Put

Short Put

Related posts on the SimTrade blog

Useful Resources