3.3.3. Funds
The primary purpose of investment funds is the acceptance of money from investors for the creation of collective investments in diverse financial instruments on the specific basis of diversification in line with the specified investment strategy of the funds (Cao et al., 2011; McNeil et al., 2005). The distinguishing characteristics between these funds primarily rest in their authorisations for investments (Cao et al., 2011; McNeil et al., 2005). These funds are always liable for redemption and holders of units can thus request to redeem their holdings at any time of their convenience (Cao et al., 2011; McNeil et al., 2005). Management companies can also establish professional investment funds that do not accept money from the public (Chavaet al., 2013; Altman et al., 2005). With there being very few legal constraints on the monies invested in such funds, investments are thus significantly riskier compared to other funds (Chavaet al., 2013; Altman et al., 2005). Investments in funds expose owners to specific risks, including risks on sale and redemption, leveraging rights of participation, investment strategies, evaluation, underlying assets and management (Chavaet al., 2013; Altman et al., 2005).
3.3.4. Derivatives
A derivative essentially constitutes an agreement; wherein settlement clauses are primarily based on changes in specific factors during specific periods, like for example interest and exchange rates, prices of securities, prices of commodities and securities indices (ForrerAcie&Forrer Donald, 2015). Such derivatives provide investors with specific rights to purchase or sell specific underlying assets or ask for cash settlements (ForrerAcie&Forrer Donald, 2015). The valuation of these agreements depends upon the development of specific underlying factors from the date of contract to the date of settlement (Gianiodiset al., 2014; Corsiet al., 2016). Investments in derivatives are frequently leveraged in order to ensure that a nominal alteration in the valuation of underlying assets can result in proportionately significant effect on the valuation of the derivative agreement with accompanied good or bad outcomes for relevant investors (Gianiodiset al., 2014; Corsiet al., 2016). Such agreements are essentially temporary and become worthless on expiration if prices do not move in accordance with investor anticipation (Gianiodiset al., 2014; Corsiet al., 2016).
Some examples of derivative contracts are forward contracts, options, financial contract for differences, swap agreements and derivatives outside the regulated market for securities (Dai et al., 2007; Arnaboldi&Rossignoli, 2015). Forward contracts lay down the obligations of the concerned parties for the purchase or sale of specific assets at particular prices and predetermined times (Dai et al., 2007; Arnaboldi&Rossignoli, 2015). Such contracts are very risky particularly because investors frequently need to contribute a portion of invested amount and thus take a loan for the difference (Domeheret al., 2015; Kolb &Overdahl, 2009). This implies that a slight alteration in underlying asset prices can lead to a significantly greater impact on agreement value and consequently enhance or reduce its market value (Domeheret al., 2015; Kolb &Overdahl, 2009). An option constitutes a contract wherein the buyer obtains the right, but not the obligation for the purchase or sale of particular assets at predetermined prices within specific time boundaries or on a specified time (Jarrow & Yu, 2001; Zhao et al., 2009). The seller, as consideration for such a right is provided with a specific fee that is determined by the option’s mar
