Basis trading means futures trading strategies that use the difference between the spot price and the futures contract price of a stock or commodity.

The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:

• Short the basis : Done if the price difference or basis is expected to reduce


• Long the basis :Done if the price difference or basis is expected to increase

A cash flow statement is used to present the amount of money that has been earned and spent by a business over a specific period of time. There are three sections or parts to a cash flow statement:

• Operating Activities: cash flows from the core activities of a business that generate income as well as cash equivalents (current assets & liabilities)
• Investing Activities: cash flows from investments or sales of long term assets
• Financing Activities: an action or activity that brings a change in a business’ equity capital and/or borrowings

Government bonds are debt instruments that allow the central banks to raise capital to finance operations. The types of government bonds are:

• Treasury Bills
• Fixed Rate Bonds
• Floating Rate Bonds
• State Development Loans
• Sovereign Gold Bonds
• Zero Coupon Bonds

Every government bond has a credit rating that’s based on the financial health of the country. The government is the apex institution of any country, which is why their credit rating is the high.

In India, you’ll notice government bonds with the credit rating SOV. This is known as a sovereign rating.

Beta coefficient is used to measure the volatility of stocks in relation to changes in the market. Basically, Beta helps investors understand the risks associated with a stock compared to the market.

The formula to calculate the Beta coefficient is:

Beta (β) = Covariance (Ri, Rm) / Variance (Rm)

Where:

• Ri = a stock's return
• Rm = overall market's return
• Covariance = ups & downs of stock returns versus ups & downs of market returns
• Variance = the difference between market returns and its average

Generally, Beta values are of four types:

• Beta < 1.0: stock less volatile than the market
• Beta = 1.0: stock just as volatile as the market
• Beta > 1.0: stock more volatile than the market
• Negative Beta: stock shares inverse relation with the market

Cash Reserve Ratio (CRR) is the amount of liquid cash a bank has to deposit with the Reserve Bank of India (RBI), calculated as a percentage of the total deposit of the bank. The latest Cash Reserve Ratio in India is 4.5%.

There are two important uses of CRR:

• It acts as a reserve or collateral because banks borrow money from the RBI
• The RBI decides the interest rate for borrowing based on the CRR
  
  

These two pointers become extremely important during high inflation as the RBI can hike interest rates with the assurance of having collateral from banks.