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Options, Derivatives, Hedge Funds



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Options are valued and assessed using complex calculations and it is possible to predict how options will behave under certain conditions. These are an increasingly popular form of low cost investment obtaining market exposure while reducing capital outlay.

Globally, Hedge Funds now manage one trillion (a thousand billion) pounds worth of funds. It is important to understand this new form of asset. They have grown in size and influence on the public securities and private investment markets.


Today, an increasingly popular method of investment, Options and Derivatives allow low cost investment in a security or index, for example the FTSE All Share Index. In order to reduce capital outlay it is possible to buy (or sell) at a pre-specified future price. Click here for an example of an Option


As Final Salary Pension Schemes decline, a more popular method of rewarding staff is by using share options. Qualifying staff are entitled to the proceeds of the sale of a fund of the company’s shares. The option can only be exercised at a future date, usually 3 or 5 years. For some schemes the employee has to contribute, some are "free".

The value of the benefit depends on the future movement of the share price. As the price moves up, the option becomes progressively more valuable. However if the price falls, the option may become worthless.

Generally, the greater the volatility of the share price, the greater the value of the option. Option valuations can be required for several purposes: assessing an individual’s assets in a valuation for divorce, and assessing the effect of a company's share price movements. We can calculate individual values using a variety of techniques, both mechanised and theoretical.