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Swap
Definition of Swap
A swap is a financial agreement between two parties. They exchange cash flows or liabilities, mostly to manage risk. Common examples of swaps include currency swaps or interest rate swaps. For instance, one party may swap a fixed interest payment for a floating one to hedge against changes in interest rates. A swap helps both parties involved manage exposure and optimize financing costs.
Related Terms
Payback Period
The Payback Period is a capital budgeting metric that calculates the amount of time it takes for a project or investment to pay back its initial cost. It is one of the simplest methods for evaluating potential investments. The formula is: Payback Period = Initial Investment/Annual Cash Flow. A shorter payback period is usually preferred as it means a faster return of capital and less risk. However, it is a limited metric, as it does not take into account the time value of money and the cash flows generated after the initial investment is recovered.
Delivery Date
The delivery date of a cash or derivative contract refers to the final day and time on which the underlying asset should be delivered to the contract holder to fulfil the terms and obligations of the contract.
Plowback Ratio
The Plowback Ratio (or Retention Ratio) is the ratio of the net income of a company that is retained by the company to be reinvested in the company's business operations and growth (rather than paid out as dividends). The formula is: Plowback Ratio = (Net Income - Dividends Paid) / Net Income. High-growth companies in the IT or manufacturing sector often have a high plowback ratio as they see higher benefit in re-investing their profits to fuel expansion. A low plowback ratio indicates that a company is mature and returns a larger portion of its earnings to its shareholders.
Identifiable Asset
An identifiable asset is a tangible or intangible asset that be assigned a fair value at any point in time. This concept is important during acquisitions and mergers as not all assets on a company’s balance sheet can easily be valued.
Simple examlpeps of identifiable assets include machinery. You can easily identify machinery as a separate entity and assign it a value based on various factors.
Simple examlpeps of identifiable assets include machinery. You can easily identify machinery as a separate entity and assign it a value based on various factors.
Dividend Stripping
Dividend stripping is a strategy of buying a company’s stock days before it announces a dividend and then selling the same stock at a lower price once the current holder is entitled to get the dividend previously announced.
The resulting loss in capital gains is generally offset by the profits from dividends. Dividend stripping was once non-taxable, which made the strategy lucrative for smart investors. However, dividends in India are now subject to tax.
The resulting loss in capital gains is generally offset by the profits from dividends. Dividend stripping was once non-taxable, which made the strategy lucrative for smart investors. However, dividends in India are now subject to tax.
After Hours Trading
After hours trading means buying and selling securities after the end of regular market hours. In India, the stock market is open for regular trade from 9.15 AM to 3.30 PM.
After hours trading is allowed from 3.40 PM to 4 PM. Around the world, stocks are known to suffer from a lack of liquidity during after hours trading.
After hours trading is allowed from 3.40 PM to 4 PM. Around the world, stocks are known to suffer from a lack of liquidity during after hours trading.
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