Education

For the asking: FCCB redemption premium

Updated on: Mar 20, 2011

What is redemption premium in the context of FCCB?

Riddhi Bhatt, e-mail

It is the extra amount payable by a company issuing foreign currency convertible bonds on redemption of bonds in terms of the issue documents. In case the FCCB has been converted into shares fully in terms of the agreement, there is no scope for such premium. Such premium may have to be paid by companies with weak financials or goodwill.

Weather futures

Are weather futures the same as say wheat futures?

Karuna Shanbag, Mumbai

No. Weather futures are purely speculating on the weather in terms of rainfall, cold or heat at a given future point of time. Wheat futures are to protect oneself against increase in prices from the baker's point of view and from reduction in prices from the farmer's point of view. A speculator, of course, can make money from both though.

Options vs futures

Why options market the world over is growing and not futures?

Manisha Shetty, Mumbai

Options are like insurance. The upfront premium paid on call or put options, the right to buy and sell respectively, is like insurance premium. An insurance premium does not give bang for bucks unless a mishap takes place. Similarly, an option might not be exercised if the future events do not conform to the option buyer's expectations. For example, one might agree to buy 1,000 shares of Reliance Industries at Rs 1,000 each one month hence by paying a premium of Rs 10 per share. He would exercise this option only if the scrip quotes above Rs 1,000 one month hence. If he does not exercise his option, he would have lost Rs 10,000 paid as premium. Option therefore has become an admirable instrument to leverage one's profit if he has strong reasons to believe that his information would be borne out.Futures are not so simple to deal with. One has to honour his commitments whereas under options one has the right, but not the obligation, to go through with the right given by the option. Moreover, there is a system of margin and marked-to-market on a daily basis involving daily settlements.

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Published on March 20, 2011

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