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How can we reduce inflation?Well, low inflation is very hard to fight. We have to reduce domestic demand without generating a large recession. That, by definition, is an extremely hard task. However, when a country has low inflation one more point (or one less point) is not a huge deal. The central bank can deal with the labor market pressures slowly.

High inflations are, on the other hand, the easiest ones to reduce. The main reason is the dollarization. As was mentioned before, in Dollars the inflation rate is the US one. So, if the Central Bank introduces a new currency (the Rigobonian) fixed to the Dollar, then the inflation rate in the new currency should be low. However, if the main cause of the monetary expansion was an irresponsible government and the fiscal policy does not change after the introduction of the new currency, agents know that the fixed exchange rate will be abandoned in the future. This means that there is an expected devaluation of the Rigobonian, and therefore, the inflation rate will be larger than in US Dollars. The lack of credibility generates the problem of not being able to reduce inflation. The question is then how we deal with the problem of credibility?

Medium inflation rates are the hardest ones to control. There are two main reasons:

inertia and relative price disequilibrium.

First, the inertia is the result that current inflation rate highly depends on the previous year inflation rate. This is the result of both the behavior of the agents and the institutionalization of the inertia in wage contracts. For example, there is a clause that says that current wage increases will recover the real wage lost in the previous year. This is a backward looking indexation, generating inertia in the contracts. The stabilization program in this case, not only requires the same ingredients of the high inflationary programs but also needs institutions that can break the existing inertia in the contracts. These institutions have to be extremely credible in order to achieve its goal.

Second, when there is medium inflation, prices in domestic currency increase in a non-coordinating way (not all of them increase at the same time). For example, assume that shoes' prices increase in odd months, while socks' prices increase in even months. There is no coordination between the industries. If suddenly prices are stopped at the middle of an odd month, the price of shoes is relatively too high with respect to the price of socks. The reason is that shoes have just adjust their price, and socks is just going to do it (note that this does not happen in hyperinflation, when the prices are set in dollars and therefore the relative price is equal to the international relative price. This is equivalent of having price increases every day). This disequilibrium cannot be maintained. What happens? Well, the relative price has to move, and the usual way is that the good that is relatively too cheap increases its price. In other words, there is some inflation rate that occurs because relative prices have to adjust. This takes a couple of months, after that inflation should be small.

1. Hold the liabilities of traditional intermediaries, such as banks, thrifts, and insurance companies. This means holding savings accounts, money market deposit accounts (MMDAs), and so forth.

2. Hold securities directly, such as stocks and bonds purchased directly through brokers and other intermediaries.

3. Hold securities indirectly, through mutual funds and pension funds.

Investors always have direct investing as an option, making their own buy and sell decisions, typically through a brokerage account.If an investor has the time and ability, he/she can make the decisions in terms of managing the portfolio. With direct investing, individual makes the decisions about his/her own investment.
Most of the many investor don't have enough funds to invest, don't have enough time and expertise to make ongoing changes in the portfolio, making the necessary selling and buying decision based on current market information. Pension funds and mutual funds are the type of indirect type of investment options for people who lack in funds, time and expertise.

What is Mutual fund ?
A mutual fund is an investment company that pools the money of various investors and buys and manages a diversified portfolio of securities. The investors, or shareholders, buy shares of he mutual fund, representing ownership in all of the fund's securities. Investors share in the success, or lack of success, of the mutual fund they buy in direct proportion to the amount of the mutual fund shares they own.

Mutual funds can be classified into four groups:

• Equity funds (hold stocks of various corporations)

• Bond funds (hold debt securities of various issuers, such as governments and corporations)

• Hybrid funds (hold a combination of stocks and bonds and sometimes other securities)

• Money Market Funds (hold short-term, very safe assets such as Treasury bills and bank certificates of deposit)

ADVANTAGES OF MUTUAL FUNDS:

1. Professional Management: The basic advantage of mutual funds is that they are professionally managed by well qualified professional. Investor does not have time or the expertise to manage their portfolio. So mutual funds are less expensive to make and monitor their investments.
2. Diversification: Mutual funds invest in a number of companies across a broad cross-section of industries and sectors. So by purchasing mutual funds, risk is spread out and minimized to certain extent as the loss in any particular investment is minimized by gains in others.
3. Convenient Administration: Investing in a mutual fund reduces paper work and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.
4. Return Potential: Over a medium to long term, mutual funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
5. Low costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investor.
6. Liquidity: In open ended scheme, you can get your money back promptly at net asset value related prices from the Mutual fund itself. With closed- ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.
7. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund managers investment strategy and outlook.
8. Flexibility: You can systematically invest or withdraw funds according to your needs and convenience.
9. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
10. Well Regulated: All mutual funds are registered with SEBI and they function with the provision of strict regulations designed to protect the interest of investors. The operations of mutual Funds are regularly monitored by SEBI.
11. Tax Benefits: There is a 100% Income Tax exemption on all mutual fund dividends.

More updates will come soon...

Economic thinking is often divided into two categories—positive and normative.

Positive economics is that branch of economic inquiry that is concerned with the world as it is rather than as it should be. It deals only with the consequences of changes in economic conditions or policies. A positive economist suspends questions of values when dealing with issues suck as crime or minimum wage laws. The object is to predict the effect of changes in the criminal code or the minimum wage rate—not to evaluate the fairness of such changes.

Normative economics is that branch of economic inquiry that deals with value judgments—with what prices, production levels, incomes, and government policies ought to be. A normative economist does not shrink from the question of what the minimum wage rate ought to be. To arrive at an answer, the economist weighs the results of various minimum wage rates on the groups affected by them—the unemployed, employers, taxpayers, and so on. Then, on the basis of value judgments of the relative need or merit of each group, the normative economist recommends a specific minimum wage rate. Of course, values differ from one person to the next. In the analytical jump from recognizing the alternatives to prescribing a solution, scientific thinking gives way to ethical judgment.

Original Link :- "Business management Theory"

A Business Management Theory is akin to the general concept of management which refers to directing and controlling a group of people for the achievement of a collective objective which is beyond the scope of individual effort. A Business Management Theory is a study of the principles and practices of a business to attain its desired organizational goals conducting effective management. Business Management Theory is a range of approaches including the principles of accounting, public relations, operations, labor relations, time management, investment and corporate governance to improve the performance of a business in some measurable or otherwise provable manner. Business management theory encompasses the deployment and manipulation of human, financial, technological and natural resources and their effective allocation for the optimum level of output for the business.

Business management theory is closely related with the concept of business management strategy and it deals with the steps that are taken by the collective decision of the managerial authority of the business as well as the workers for the attainment of the desired objective. It should be noted in this context that decision-making plays a key role in the process of management which rests on the principles of planning, organizing, directing and controlling in the business. While planning and organizing deals with strategically formulating the long term goals the business seeks to attain which is generally taken by the top level management of the company, the operational business processes involving the day-to-day activities of the business is also a part of business management theory. Controlling refers to the evaluation of the performance towards the desired objective; directing, being a part of the business management theory refers to the supervision such that the workers work towards the accomplishment of organizational goals.
Business management theories undergo testing in the real world circumstances and the theories are continuously evaluated and evolutes after every 5-10 years. One of the major cornerstones of the modern business management theory is the theory of games, otherwise considered to be branch of economic analysis.

In the last twenty five years game theory has addressed some of the key issues related to antitrust analysis and monetary policy, the design of auction institutions to patent wars to dispute resolutions between warring business firms. Game Theory is now being incorporated into business management theory which gives a meaningful insight into the way business decisions can be modeled and analyzed. Business management theories covering the issues of finance, accounting, strategies and organizational design can be dealt with in detail by applying the principles of game theory or industrial organization. The specific application areas of the theories of business management including market competition, bargaining, competitive bidding to auctions involving the situation where a number of economic agents in pursuit of their respective self interests take actions is a fundamental area of concentration of game theory.

Game theory proves to be a compelling guide for any business strategy even in the case of imperfect markets where cooperative and non-cooperative game theoretic approaches can be used. The “balance of power” between the firm, its buyers and suppliers is what makes it a basic tool for understanding business management theory and strategy which are basically the all inclusive steps that the businesses should follow to attain its long-term objectives so as to achieve the highest rates of growth and profits in the long run. As already mentioned, business strategy based on the industrial organization approach is based on economic theory and deals with issues such as competitive rivalry, resource allocation and the economies of scale. Strategy formulations mainly include self evaluation and competitor analysis which determines the objectives and the planning strategies are devised according to them.

Deflation is reduction in the level of national income and output, usually accompanied by a fall in the general price level.

Deflation is opposite of inflation.A decrease in the personal investment and spending of the government can also lead to deflation. As a result of deflation, the economy can witness increased unemployment as the demand for goods and services in the economy falls.

Causes of Deflation

• Decrease in Money supply
• Increase in goods supply
• Fall in Demand

Nature of Deflation: Deflation is viewed as a continuous process of decrease in some of the normally-followed collective indicator of price movements, like the GDP deflator or the Consumer Price Index (CPI). In general cases, a one-time reduction in the price levels does not necessarily hints at the initiation of Deflation. In fact, for Deflation to affect an economy, there must be a persistent fall in the prices for more than a year's time.

Effects of Deflation: Under Deflation, when the price fall persists, it normally creates a spiral of negative attributes comprising accelerative defaults on loan, reduction in incomes and increase in unemployments, downturn of profits and closing down of factories and manufacturing units.

What is FDI? / what is Foreign Direct Investment?
Foreign direct investment is the investment in which the invester invest in a company, which is in a different nation distinct from the investor's country of origin
FDI relationship has two sides, one is the bussiness enterprise and other is its foreidn affiliate. Bussiness enterprise and foreign affiliate together comprise an MNC. Investor enterprise through its foreign direct investment efforts seek to exercise substantial control over the foreign affiliate company.
Ownership share of the investor is categorized as FDI only if investor holds 10% or more shares or access to voting rights, otherwise the investment is termed as portfolio investment

Classification of Foreign Direct Investment
FDI can be classified as Inward or Outward. Inward FDI is the investment of foreign capital in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants. The idea behind this is that, the long run gains from such a funding far outweighs the disadvantage of the income loss incurred in the short run. Flow of inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard.

Foreign direct investment, which is outward, is also referred to as “direct investment abroad”. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country. Outward FDI flourishes under government backed insurance at risk coverage.

Outward FDI faces following restrictions

• Tax incentives or the lack of it for firms, which invest outside their country of origin or on profits, which are repatriated.

• Industries related to defense are often set outside the purview of outward FDI to retain government's control over the defense related industrial complex.

• Subsidy scheme targeted at local businesses.

• Lobby groups with vested interests possessing support from either inward FDI sector or state investment funding bodies.

• Government policies, which lend support to the phenomenon of industry nationalization.

Future, as the name indicates, is a trade whose settlement is going to take place in the future. However, before we take a look at futures, it will be beneficial for us to take a look at forward rate agreements.

A forward rate agreement is one in which a buyer and a seller enter into a contract at a specified quantity of an asset at a specified price on a specified date.

An example for this is the exporters getting into forward rate agreements on currencies with banks. But there is always a risk of one of the parties defaulting. The buyer may not pay up or the seller may not be able to deliver. There may not be any redressal for the aggrieved party as this is a negotiated contract between two parties.

What is a future?

A future is similar to a forward rate agreement, except that it is not a negotiated contracted but a standard instrument. A future is a contract to buy or sell an asset at a specified future date at a specified price. These contracts are traded on the stock exchanges and it can change many hands before final settlement is made. The advantage of a future is that it eliminates counterparty risk. Since there is an exchange involved in between, and the exchange guarantees each trade, the buyer or seller does not get affected with the opposite party defaulting.

Futures	Forwards
Futures are traded on stock exchange	Forwards are non tradable, negotiated instruments
Futures are contracts having standard terms and conditions.	Forwards are contracts customized by the buyer and seller.
No default risk as the exchange provides a counter guarantee.	High risk of default by either party.
Exit route is provided because of high liquidity on the stock exchange.	No exit routes for these contracts.
Highly regulated with strong margining and surveillance.	No such systems are present in a forward market.

What is an Option?

Every exchange-traded option is either a call option or a put option. The owner of a call option has the right to purchase the underlying good at a specific price, and this right lasts until a specific date. The owner of a put option has the right to sell the underlying good at a specific price, and this right lasts until a specific date. In short, the owner of a call option can call the underlying good away from someone else. Likewise, the owner of a put option can put the good to someone else by making the opposite party buy the good. To acquire these rights, owners of options buy them from other traders by paying the price, or premium, to a seller.

Options are created only by buying and selling. Therefore, for every owner of an option there is a seller. The seller of an option is also known as an option writer. The seller receives payment for an option from the purchaser. in exchange from payment received, the seller confers rights to the option owner. Ther seller of a call option receives payment and, in exchange, gives the owner of a call option the right to purchase the underlying good at a specific price with this right lasting for a specific time. The seller of a put option receives payment from the purchaser and promises to buy the underlying good at a specific price for a specific time, it the owner of the put option so chooses.

In these agreements, all rights lie with the owner of the option. in purchasing an option, the buyer makes payments and receives rights to buy or sell the underlying good on specific terms. In selling an option, the seller receiver payment and promises to sell or purchase the underlying good on specific temrs- at the discretion of the option owner. With put and call options the buyers and sellers, four basic positions are possible. Notice that the owner of an option has all the rights. After all, that is what the owner purchases. The seller of an option has all the obligations, because the seller undertakes obligations in exchange for payment.

Every option has an underlying good.The call writer gives the purchase the right to demand the underlying good from the writer. However, the writer of a call need not own the underlying good when he or she writes the option. If a seller writer a call and does not own the underlying good, the call is a naked call. If the writer owns the underlying good, he has sold a covered call. When a trader writes a naked call, he undertakes the obligation of immediately securing the underlying good and delivering it if the purchaser of the call chooses to exercise the call.

An option Example

Consider an option with a share of XYZ stock as the underlying good. Assume that today is March 1 and that XYX share trade at $110. The market, we assume, trades a call option to buy a share of XYZ at $100 with this right lasting until August 15 and the price of this option being $15. In this example, the owner of a call must pay $100 to acquire the stock. This $100 price is called the exercise price or the striking price. The price of the option, or the option premium, is $15. The option expires in 5.5 months, which gives 168 days until expiration.

If a trader buys the call option, he pays $15 and receives the right to purchase a share of XYZ stock by paying an additional $100, it he/she so chooses, by August 15. The seller of the option receives $15, and he/she promises to sell a share of XYZ for $100; if the owner of the call chooses to buy before August 15. Notice that the price of the option, the option premium, is paid when the option trades. The premium the seller receives is his/hers to keep whether or not the owner of the call decides to exercise the option. If the owner of the call exercises his option, he will pay $100 no matter what the current price of XYZ stock may be. If the owner of the option exercises his option, the seller of the option will receive the $100 exercise price when hi/she delivers the stock as he/she promised.
At the same time, puts will trade on XYZ. Consider a put with a striking price of $100 trading on March 1 that also expires on August 15. Assume that the price of the put is $5. If a trader purchases a put, he/she pays $5. In exchange, he/she receives the right to sell a share of XYZ for $100 at any time until August 15. The seller of the put receives $5, and he/she promises to buy the share of XYZ for $100 if the owner of the put option chooses to sell before August 15.

In both the put and call examples, the payment by the purchases is gone forever at the time the oprtion trades. The seller of the option receives the payment and keeps it, whatever the owner of the option decides to do. If the owner of the call exercises his/her option, then hi/she pays the exercise price as an additional amount and receives a share. Likewise, if the owner of the put exercises his.her option, then he/she surrenders the share and receives the exercise price as an additional amount. The owner of the option may choose never to exercise; in that case, the option will expire on August 15. The payment the seller receives is his/hers to keep whether or not the owner exercises. If the owner chooses not to exercise, the seller has a profit equal equal to premium received and does not have to perform under the terms of the option contract.

What is Moneyness?