dividend signalling

Dividend is a term that most of people might have heard about even if those are not engaged with finance. For those who was or is studying or working in investment banking they might be exposed to many types of dividend payment forms. companies may have dividend reinvestment plans which takes all dividends that are supposed to be distributed to shareholders to reinvest for the continues business the company is undertaking. Doubtlessly, shareholders have the right rather than obligation to contemplate whether or not to reinvest their dividends into a new project that seems not as good as evaluated. most companies would offer bonus share plans also dividend reinvestment plans. The distinction between these two is that the later is treated as though they have received the case dividend and then reinvested it, so the investor is liable for tax on it. The good new, however, is that they can receive franking credit for the dividend, which means pay less tax than it is supposed to be.

The critical point here is that why'd companies continue paying dividends as usual?  Even many of them would pay dividends by borrowing more debts, which can change the leverage or we would say the changing structure of capital. By paying dividends on the continuous basis investors would not be signalled any change for the company. Nonetheless, when investors are informed the dividend is not going to be paid for the next dividend payment date, share price definitely would go down as shares are   sold out by investors. 

A more stronger point of view from dividend signalling is that some investors know how managers behave and would interpret dividend changes as signal about future prospects.

Yet dividend signalling are believable but costly unfortunately, high payout policy would be costly to companies if CFs do not support it. 

Next time we will further mentioning about dividend from other perspective. "Why dividend policy is irrelevant".

SWAPS for hedging

Swap contract is a type of means to hedge risk for companies. Suppose there are two companies whose they want to hedge the interest rate for borrowing as they are afraid of the rate is gonna go up at the maturity date. Also different markets may have vary rates for borrowing, which that's why we would be  mentioned comparative advantages.

swaps can be used for currency hedging as well. Let's take a example to illustrate.

Two companies A and B are offered fixed  rates in Australian dollars and pounds. Provided company A wants to borrow sterling and B wants to borrow dollars

The difference between the in rate facing the two companies in dollars market is 2%(10%-8%) and the difference between the rate facing them in the currency of pounds market is 0.4%(12%-11.6%).

Therefore the net gain is 1.6% (2-0.4)%.

As the diagram has been set up, we may see company A can be 0.6% pa better than if went directly to dollar markets because 11.6% is higher than 11%. Whereas the company B can be better off of 0.6% as well because less expensive than went directly to sterling markets, which can be borrowed at 9.4% rather than 10%

Thus, the intermediary of financial institution can gain 0.4% in this case as the total gain is 1.6% and less the gains for two parties with 0.6% respectively.

profit patterns involved option strategies

the most common patterns we might have seen for options trading could be the following patterns. when an investor conduct a portfolio which consists of a long position in a stock plus a short position in call option. we simply call is as writing a covered call. more of concepts would not be mentioned here as have been available either textbooks or online dictionary.

As can be seen to the following diagrams. from(a), investors do not have to consist of a single portfolio by conducting a short put position. Instead, go long a stock and short call also can get the similar effect for the trading of investment. Similarly, for (b), long call+short stock=long put, (c) long put+long stock=long call. (d) short stock+short put=short call.

 

Additionally, a more sophisticated strategies would be illustrated as following. (bull spreads by using call or put options, bear spreads created by using put or call options. box spreads, butterfly spreads calendar spreads diagonal spreads, straddle, stripes and straps strangles)

As it may take quite a long while to go through all of them, here i am gonna introduce some of them that are regarded as most valuable tips when involved trading.

Initially, for a box spread, it is a combination of a bull call spread with strike price K1 and K2 and a bear put spread with the same two strikes prices. why'd be valuable to be mentioned here as an arbitrage opportunity can be shown if trading with European options.

Butterfly spread, on the other hand, can create a more aggressive trading for investors. A butterfly spread involves positions with three different strike prices. An investor reckon the stock price is gonna be stayed close at K2 which means that the price does not change dramatically, it can be created by buying a call option with a relatively low strike price K1, buying a call option with a relatively high strike price K3 and selling two call options with strike price k2 which halfway between K1 and K3. However, it would lead to small loss if the price move significantly in either direction.

When an investor believe there is a significant movement the share price, it can be simply to conducting a butterfly spread of put options. By buying two puts with strike price K2, one with a low strike price K1 and one with a high strike price K3 can be exposed to mega profits if the share price goes up sharply.