APJ Inc. launches new financial instruments!

Leadership worries, shrinking market share in the PJ market, and falling share prices - APJ Inc. has seen it all. And so have its original promoters – Mr and Mrs Jain, who founded APJ Inc. in April 1985. After the successful run APJ Inc enjoyed over the last 22 years in Mumbai, little had they thought that shifting headquarters to Lucknow would see the fortunes slide.

The CEO’s recent Mumbai visit and reports of fresh help from the original promoters have brought APJ Inc in the news again. The original promoters are investing heavily raising the share prices from 63 kg to 66 kg in just 5 trading days.

Amidst this healthy share performance, APJ Inc has launched a line of new financial instruments called ‘Relationship Derivatives’. The 3 most popular derivatives include Forwards, Futures and Options.

Relationship Forwards: A contract between two parties to enter into a transaction (relationship/engagement) on a specified future date is called a forwards contract. An important characteristic of this contract is that only the two parties are involved in the contract without recourse to their original promoters (parents).

Relationship Futures: A contract between two parties to enter into a transaction on a specified future date involving not only the two participating concerns but also their promoters is called a Futures transaction. The promoters here act as regulatory bodies ensuring the execution of the contract on the said future date and rejecting any transactions appearing fraud or unsafe for the participating concerns. The permission of promoters is mandatory for entering into a futures contract, and due to promoters from both sides being involved in the transaction, the riskiness of the contract reduces.

Relationship Options: A relationship option is a contract involving two parties – option writer and the option receiver. In this contract, the option writer ‘proposes’ to enter into a contract with the option receiver on a future date. However, it then depends upon the decision of the option receiver- whether to exercise the option or not. If the option receiver agrees to the proposal and exercises the option, the two parties enter into a transaction, else if the receiver chooses not to exercise the option, the transaction does not materialise. Hence, the option receiver has the right but not the obligation to exercise the option.

An important feature of options is that an option receiver may receive proposals from multiple option writers; however, it may exercise only one of them. Similarly, in case of rejection by one option receiver, the option writer may approach other option receivers.

Another important parameter in option trading is the duration of the option. The option remains valid till either of the two parties – the writer or the receiver – does not enter into an agreement with a third party. If even one of the parties ‘engages’ itself in a transaction with a third party, the option expires.