...Cds- First American Bank First Questions: 1. What is a default swap? How does it work? A credit default swap (CDS) is a credit derivative which provides insurance against the risk of default by a specific company or reference entity. This is an agreement between two parties stating that the buyer of the CDS, who is taking a short position in the credit event risk, will make a series of payments (known as the spread) to the seller for the full extent of the CDS life or until a credit event occurs, in exchange for a payoff if the underlying loan defaults. The spread of a CDS is the total amount paid per year to buy protection A higher CDS spread is considered to be more likely to default, and thus a higher fee is charge to receive protection against the company. Again, if a default occurs, the seller receives possession of the defaulted loan and the buyer is compensated with the notional amount or face value of the loan. The settlement in the event of defaults involves either physical delivery or a cash payment. Let’s use our case to illustrate how a default swap works. Using a credit default swap, CBI would make a periodic fee payment to First American Bank in exchange for receiving credit protection. First American Bank would assume the credit risk of the additional loan to CapEx Unlimited (CEU) by guaranteeing a payment to CBI if CEU defaulted on its debt. Banks are generally going to be the net buyers of credit protection while insurance companies tend to be selling...
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...default swap (CDS) is a credit derivative which provides insurance against the risk of default by a specific company or reference entity. This is an agreement between two parties stating that the buyer of the CDS, who is taking a short position in the credit event risk, will make a series of payments (known as the spread) to the seller for the full extent of the CDS life or until a credit event occurs, in exchange for a payoff if the underlying loan defaults. The spread of a CDS is the total amount paid per year to buy protection A higher CDS spread is considered to be more likely to default, and thus a higher fee is charge to receive protection against the company. Again, if a default occurs, the seller receives possession of the defaulted loan and the buyer is compensated with the notional amount or face value of the loan. The settlement in the event of defaults involves either physical delivery or a cash payment. Let’s use our case to illustrate how a default swap works. Using a credit default swap, CBI would make a periodic fee payment to First American Bank in exchange for receiving credit protection. First American Bank would assume the credit risk of the additional loan to CapEx Unlimited (CEU) by guaranteeing a payment to CBI if CEU defaulted on its debt. Banks are generally going to be the net buyers of credit protection while insurance companies tend to be selling these contracts. Hedge funds are other big players in this type of derivative and utilize CDS to speculate...
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...Measuring Service Quality Using SERVQUAL |Introduction |Measuring the quality of a service can be a very difficult exercise. Unlike product where there | | |are specific specifications such as length, depth, width, weight, colour etc. a service can have| | |numerous intangible or qualitative specifications. In addition there is there expectation of the| | |customer with regards the service, which can vary considerably based on a range of factors such | | |as prior experience, personal needs and what other people may have told them. | |SERVQUAL – a methodology for |As a way of trying to measure service quality, researchers have developed a methodology known as| |measuring service quality |SERVQUAL – a perceived service quality questionnaire survey methodology. SERVQUAL examines five | | |dimensions of service quality: | | |Reliability | | |Responsiveness | | |Assurance; ...
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...Assignment 5 What is a credit default swap (CDS)? How does it work? Do you think it contributed to the 2008 financial crisis? Should it be banned in the market? Basically, credit default swap is a credit derivative which its function is like insurance contract between two counterparties on one or more companies' loan or bond. One party who buys the protection called "protection buyer" has to pay a periodic premium to another party called "protection seller" until expiry of the contract, in return for protection against a credit event (financial difficulty such as bankruptcy, failure to pay or restructuring) of a known reference entity (company). The protection buyer receives protection in form of the right to sell bonds issued by a particular company for their face value or receives principal amount of loan if the company defaults. An example from the case, Charles Bank International (CBI) wanted to lend $50 million to CapEx Unlimited (CEU) company. However, if the amount was lend to CEU, the bank would have high risk exposure to the company and the risk exceeded CBI's risk guidelines. Thus, CBI bought a CDS on CEU company from First American Bank (FAB), these method would mitigate the extra credit risk for CBI from the new $50 million loan. CBI had to pay a periodic fee to FAB until the CDS expired. In this case, if CEU company defaulted before the contract expired, FAB would pay the principal loan amount. The settlement in the event of default involves either "physical...
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...mainly located in big industrial and commercial centers. • Volume of Call Money to be Transacted: The volume of call loans depends on the extent of deposits accrual, the possibility of quick investment in and liquidation of other money market instruments, timing of advance tax payments and seasonal fluctuations in demand for credit etc. • Risk: This includes the flexibility of call money rate. As it is volatile in accordance with the difference in Trading Centers & Bank Rate so any removal of ceiling in these centers, the call money rate is supposed to be fluctuated widely. Beside these, the large amount of borrowings by banks an certain dates to meet CRR requirements, overextended credit position of some banks, sudden withdrawal of funds by financial institutions and business companies, illiquidity in money market and forex market instability are the major factors behind this riskiness. • Participants: Simply, all the scheduled & non-scheduled commercial banks, brokers, dealers and other financial institutions with good financial reputations that may fall short...
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...for the Global Manager 1) $1 US = .80 Euros Won: 1,000,000 Euros $ 800,000.00 Won in US $ If the lotto winnings were exchanged from Euros to US dollars right away, the winner would receive $800,000.00 US. 2) Irish Bank 4% 1 yr CD US Bank 2% 1 yr CD $ 1,040,000.00 After 1 yr in Irish Bank CD $ 832,000.00 Exchanged to US dollars at .80 Euro = $1 US $ 816,000.00 After 1 yr in US Bank CD If the lotto winnings were left in an Irish Bank CD for 1 year with a 4% rate, the winner would receive 1,040,000.00 Euros, and after being exchanges into US dollars at .80 Euro equaling $1 US the winner would receive $832,000.00 US. If the lotto winnings were taken to a US Bank CD for a 1 year with a 2% rate, the winner would receive $816,000.00 US. The winner would do better off in the Ireland Bank CD. 3) $1 US = .85 Euros in Irish Bank 4% 1 yr CD $ 1,040,000.00 After 1 yr in Irish Bank CD $ 850,000.00 US If the exchange rate changed to $1 US = .85 Euros and the lotto winning were left in the Irish Bank CD for 1 year with a 4% rate, the winner would receive $1,040,000.00 in the Irish Bank CD and exchanged to $850,000.00 US. The winner would do better off in the Ireland Bank CD. 4) Banks use “covered interest arbitrage” to protect themselves when they make international financial investments by borrowing currency then converting it to a second currency to invest it. Then the currency can be sold against the initial currency...
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...Asset and Liability Management Pada Bank Komersil Hinsa Siahaan [1] Abstraksi Risiko tingkat bunga adalah salah satu masalah tradisionil yang sangat penting diperhatikan dalam ALM (Assets and Liability Management). Meskipun risiko tingkat bunga merupakan masalah klasik tetapi masih tetap sangat krusial dalam manajemen aktiva dan kewajiban bank. Mengapa ? Oleh karena risiko tingkat bunga adalah sangat memengaruhi kinerja sebuah bank. Sebagaimana kita ketahui sasaran akhir atau The Ultimate Goal of the ALM adalah “memaksimumkan tingkat pengembalian bank setelah disesuaikan dengan risiko yang diterima oleh pemegang saham dalam jangka panjang (atau the maximization of the risk-adjusted returns to shareholders over the long run).[2] Tujuan tulisan ini adalah membahas adanya saling hubungan pencapaian tujuan bank dengan manajemen risiko tingkat bunga, apakah ada suatu posisi tingkat bunga sensitif sehingga membuat pencapaian tujuan bank menjadi optimal ? Apabila memang ada bagaimanakah cara melihatnya ? Tulisan ini juga membahas masalah identifikasi goal, definisi parameter tujuan sebuah bank, dan alternatif strategi pembiayaan yang mungkin dipilih guna mengoptimalkan pencapaian tujuan bank. Setelah selesai membaca tulisan ini, para pembaca diharapkan mampu; • menjelaskan adanya tiga perkiraan bank dengan multi dimensi yang tidak dapat dimaksimalkan secara simultan melainkan harus dioptimalkan, karena tujuan peningkatan ketiga perkiraan bertentangan satu sama...
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...ACFI 2005 Finance. 3. A customer has approached your commercial bank seeking to invest funds for a period of six months. The customer is particularly worried about risk following the GFC and the market volatility that continues to characterise world financial markets. Explain the features of call deposits, term deposits and CDs to the customer and provide advice on risk-reward trade-offs that might be associated with each product. Answer: Commercial banks are the main type of financial institution operating in all major international financial systems. They control a significant proportion of the financial asset within the financial system. Recently, the majority of developed economies have significantly reduced the level of bank regulation and there has therefore been a considerable growth in the commercial bank sector. Following the GFC, this deregulatory phase was criticised for having contributed to the crisis. Thus, it is natural for the customer to be worried about risk following the GFC and the market volatility that continues to characterise world financial markets. Since the core function of commercial banks is to gather savings from depositors and investors and use those funds in the provision of loans to customers this customer’s approached towards our commercial bank seeking to invest funds for a period of six months can be recognised. Call deposits- call or demand deposits are funds held in a savings account that can be withdrawn on demand. Features of call...
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...rates. Usually done by companies having high credit worthiness and rating Call money/Notice money/term money The money market primarily facilitates lending and borrowing of funds between banks and entities like Primary Dealers (PDs). Banks and PDs borrow and lend overnight or for the short period to meet their short term mismatches in fund positions. This borrowing and lending is on unsecured basis. ‘Call Money’ is the borrowing or lending of funds for 1day. Where money is borrowed or lend for period between 2 days and 14 days it is known as ‘Notice Money’. And ‘Term Money’ refers to borrowing/lending of funds for period exceeding 14 days. Tbills Treasury bills are circulated by the primary as well as the secondary markets. The maturity periods for treasury bills are respectively 91,182, 364 days. The price with which treasury bills are issued comes separate from that of the face value, and the face value is achieved upon maturity. On maturity, one gets the interest on the buy value as well. To be specific, the buy value is determined by a bidding process, that too in auctions. Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at pae Certificate of Deposit Certificate of Deposit (CD) is a negotiable...
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...BANGLADESH FINANCE AND INVESTMENT COMPANY LIMITED Baitul Hossain Building (2nd Floor), 27, Dilkusha C/A, Dhaka‐1000 Balance Sheet As at 31 March 2011 Provisional & Un‐audited Note PROPERTY AND ASSETS Cash Cash in hand Balance with Bangladesh Bank Balance with other Banks and Financial Institutions Inside Bangladesh Outside Bangladesh Money at call and short notice Investment in Securities Government Others Lease, Loans and Advances In Bangladesh Outside Bangladesh Fixed Assets including Premises, Furniture and Fixtures Other Assets Non Banking Assets Total Assets LIABILITIES AND CAPITAL Liabilities Financing (Borrowings) from other Banks financial Institutions and Agents Deposits and other Accounts Term Deposits Other Deposits Bills Payable Other Liabilities Total Liabilities Capital/ Shareholders' Equity Share Capital Statutory Reserve General Reserve Revaluation Surplus on Land & Building Retained earnings Total Shareholders' Equity Total Liabilities & Shareholders' Equity 3 ‐ 582,162,375 582,162,375 4 2,973,703,798 ‐ 2,973,703,798 199,507,329 637,734,997 ‐ 4,577,669,191 2,956,524,869 ‐ 2,956,524,869 200,670,584 116,267,219 ‐ 4,398,727,414 ‐ 489,369,077 489,369,077 31‐Mar‐11 Taka 31‐Dec‐10 Taka 1 40,477...
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...Stanford Financial Group Scandal HARD WORK, CLEAR VISION, and VALUE for the CLIENT were the leading slogans for the former jet-setting Texas tycoon Robert Allen Stanford’s business, Stanford Financial Group (Brear). Stanford Financial Group provided a wide variety of services ranging from brokerage and investment advisory, private and commercial banking, investment advisory, trust, real estate investment services, and investment banking services (Businessweek.com). This eight billion dollar Ponzi scheme came to a halt in 2009 when the SEC noticed an abundance of red flags. The fraudulent success of Stanford Financial Group did not happen overnight, nor did it occur without major help from the lack of independent auditors. Robert Allen Stanford was born on March 24, 1950 in the little town of Mexia, Texas. As a kid, family and friends said it became apparent he had an entrepreneur mindset and was destined for something, whether good or bad (chron.com). In 1974, he graduated Baylor University with a BA in finance. After college, he opened a chain of athletic clubs in Waco, which went bankrupt by 1982 (Blodget). He soon shifted his business strategy from an unprosperous gym owner to a flourishing banking tycoon. Stanford Financial Group can be traced back to an insurance company started by his grandfather in 1932. While the new business had nothing to do with insurance, he used the name and contacts to start the new Stanford business. His primary contact and new boss in...
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...Greek CDS drama holds lessons for investors It’s over. The long-running drama over Greek credit default swaps finally came to end with a $2.5bn pay-out for those who had bought protection against default by Athens. Yet, while market disorder was avoided, there remain concerns that CDS are flawed. Market participants insist lessons need to be learned from the Greek debt restructuring deal and bond exchange, or these insurance-like instruments, untested in a sovereign restructuring before Greece and which are used as a protection against losses on bonds, could lose their appeal. An auction held by 14 banks set a market-wide payout of $2.5bn, or 78.5 per cent of the $3.2bn of net outstanding CDS as of March 9, when a so-called “credit event” was declared by the International Swaps & Derivatives Association, the industry body that rules on pay-outs. The payout was considered fair value by many strategists and investors. But these same strategists and investors said that this was more down to luck than design as the Greek debt exchange, under which private sector holdings of Greek debt were written down by about €100bn, failed to consider the potential negative fallout for CDS. Michael Hampden-Turner, credit strategist at Citi, says: “I would like to see the market look very closely at how CDS works in the event of future sovereign restructurings. We had a lucky break with Greece in that the process went smoothly, but it might not do so the next time round.” Portugal could...
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...market." Instead it is an informal network of banks and traders linked by telephones, fax machines, and computers. Money markets exist both in the United States and abroad. The short-term debts and securities sold on the money markets—which are known as money market instruments—have maturities ranging from one day to one year and are extremely liquid. Treasury bills, federal agency notes, certificates of deposit (CDs), eurodollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are examples of instruments. The suppliers of funds for money market instruments are institutions and individuals with a preference for the highest liquidity and the lowest risk. The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis. In essence the market acts as a repository for short-term funds. Large corporations generally handle their own short-term financial transactions; they participate in the market through dealers. Small businesses, on the other hand, often choose to invest in money-market funds, which are professionally managed mutual funds consisting only of short-term securities. Although securities purchased on the money market carry less risk than long-term debt, they are still not entirely risk free. After all, banks do sometimes fail, and the fortunes of companies...
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...2.2 Stylized facts 20 Section III: Empirical analyses 26 3.1 Effect of rating events on investors’ behavior 27 3.2 Effect of business cycles on investors’ behavior surrounding rating events 33 Conclusion 46 Reference list 48 Appendix 52 Section I: Rating symbols & definitions 52 Section II: Tables 54 Section III: Figures 56 Section IV: Extended theory 57 Section V: Graphs 59 Section VI: Data 67 Section VII: Testing classical assumptions 71 Abstract Firstly, this paper investigates if investors react to changes in sovereign credit ratings. Hereby rating changes for European, Non-European and European Union countries are considered for the period: 1990-2011. Using both bond spreads and credit default swap (CDS) spreads as measures for investors’ behavior, analysis shows that changes in sovereign credit ratings significantly affect these spreads. Furthermore evidence is found that a rating downgrade of a sovereign country has a bigger impact on the spreads than a rating upgrade. Secondly, it is theoretically...
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...3. A customer has approached your commercial bank seeking to invest funds for a period of six months. The customer is particularly worried about risk following the GFC and the market volatility that continues to characterise world financial markets. Explain the features of call deposits, term deposits and CDs to the customer and provide advice on risk-reward trade-offs that might be associated with each product. Answer Call deposits or demand deposits are funds held in a savings account that can be withdrawn on demand. Features of call deposits are: • They are held in accounts other than a cheque account where the funds are available on demand. These types of accounts are generally referred to as savings account. • They may take the form of the traditional passbook account, whereby the depositor holds a physical passbook that provides a record of all transactions and funds held. • Call deposit account holders usually receive interest payments, but the return on funds invested is low. Term deposit: A deposit held at a financial institution that has a fixed term. These are generally short-term with maturities ranging anywhere from a month to a few years. When a term deposit is purchased, the lender (the customer) understands that the money can only be withdrawn after the term has ended or by giving a predetermined number of days notice. The features of term deposits are: • The main purpose of fixed deposit account is to enable the individuals to earn...
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