Cash Conversion Cycle

Definition The cash conversion cycle measures the period of time in days from the moment inventories are paid until the moment accounts receivable is collected. In other words, it is the duration of working capital… Read more

Put Option

Definition A put option is a contract between two parties. It gives the buyer (also referred to as holder) the right but not the obligation to sell to the writer (also referred to as seller)… Read more

Call Option

Definition A call option is a contract that can be traded in both exchange and the over-the-counter (OTC) market. The buyer (also referred to as holder) of a call option gets the right but not… Read more

Interest Rate Parity

Definition The interest rate parity theorem implies that there is a strong relationship between the spot exchange rate and the forward exchange rate based on the interest rate differential between two countries. As a result,… Read more

Forward Rate Agreement, FRA

Definition The forward rate agreement or FRA is an over-the-counter (OTC) cash-settled interest rate derivative. It is a contract between two parties who want to hedge themselves against interest rate risk. Under this agreement, two… Read more

Purchasing Power Parity

Definition The theory of purchasing power parity or PPP claims that the currency exchange rate between two countries adjusts to changes in the price of a basket of the same goods and services in both… Read more

Stock Repurchase

Definition Stock repurchase or buyback is a way to return cash to investors, which is an alternative to dividend payout. In other words, a corporation offers to buy current stockholders’ shares. There are several reasons… Read more

Stock Splits

Definition Stock split is a corporate action usually taken when the management of a company believes that the stock price is too high for investors. There are several reasons why a split is made. To… Read more

Stock Dividends

Definition Stock dividends payout does not cause a cash outflow. It is the distribution of additional shares among current stockholders. This may happen when management of a corporation does not intend to spend cash for… Read more

Tax Preference Theory

Definition The tax preference theory of dividends was developed by Robert H. Litzenberger and Krishna Ramaswamy. This theory claims that dividend policy affects investor behavior due to the difference in taxation of dividends and capital… Read more