A91
What are the other XVA risks like interest rates, counterparty risk, and volatility? How do traders hedge them under the XVA framework?
XVA Risks
XVA (X-Value Adjustment) refers to the different types of valuation adjustments related to derivative contracts. XVA deals with the Black-Scholes pricing model. It adjusts the frame of the model to account for risks that it does not capture.
Besides XVA associated risks such as interest rates, counterparty risks, and volatility, other hazards include credit risk, risks of the cost of funding valuation adjustments alongside capital valuation adjustment. Traders usually mitigate the risks, as mentioned above, under the XVA framework through one or the integration of several methods. To illustrate, traders with the inclusion of banks may adjust the derivative value for a counter party’s risk and one’s default risks. Moreover, traders may opt to fund collateral to price a portfolio of trading.
A92
From where should I prepare the financial and insurance market awareness section for LIC AAO?
Insurance Market
An insurance market is a sector which is made up of companies that are involved in buying and selling of insurance contracts. A company that is insured pays a small premium to the company selling the insurance in exchange for that protection on that uncertain occurrence in the future.
It is from the financial newspaper daily such as mint and the business standard that one can prepare the financial and insurance market awareness section for LIC AAO. Importantly, some guidelines to follow in preparation of the financial and insurance market awareness section for LIC AAO are as follows. Initially settling down and instituting a study schedule under the daily routine, the plan of study was target-based as opposed to time-based. Secondly, it is undertaking online tests frequently. Thirdly, is striking a balance for each section, regular studying, and finally applying discipline into the study.
A93
What legislative change and financial innovations occurred after 1979 that changed MI from representing a pure medium of exchange to also representing a store of value? Why would this change in MI break the short-run link between money and inflation?
Financial Innovations
Financial innovation refers to the process of creating new products in the market with the aid of technology. Innovation enables an organization to remain relevant in the market through the production of diversified products.
The legislative change that happened after 1979 that changed MI from representing a pure medium of exchange to additionally representing a store of value was the change in monetary policy. The transition was marked with Fed targeting quantity of money, especially un-lent reserves contrary to the pre-1979, where Fed’s target was the price of bank reserves. The above change was believed to be effective in controlling inflation, which had skyrocketed before 1979. Comparatively, the marked financial innovation after 1979 was the increasing populism of money market mutual funds as a substitute for interest rate limits on all deposit accounts apart from demand deposits. As seen in the above transitions, MI would henceforth exhibit large fluctuations in growth unapparent to the related economic environment, thus breaking the short-run link between money and inflation.
A94
What are the issues surrounding too big to fail? Is it possible for congress to simply outlaw TBTF institutions? Why or why not? Summarize the five major provisions of the Dodd-Frank Act, in terms of the impact on the operating performance of financial institutions, and the efficiency of financial markets.
TBTF Institutions?
TBTF institutions refer to the organization, mostly financial institutions that are so large and supported by the government when they face failure. The failure of these institutions is disastrous to the economy. An example of a TBTF is the Bank of America Corporation.
The issues surrounding it are too big to fail the possibilities of a disastrous failure of individual financial institutions to the broader economic system. Resulting from the conceptual idea, it sounds necessary for the government to support such institutions on the verge of potential collapse. Congress cannot outlaw TBTF institutions mainly because the large institutions play a prudential role at ensuring the stability of an economy due to the institution’s interconnectedness with an economy. Instead of outlawing the institutions, congress should enforce market discipline to cause the firm’s stakeholders to manage risk-taking at the TBTF institutions. The provisions of the Dodd-Frank Act in terms of impact on financial institutions’ operating performance and financial market provisions are as follows. First is the creation of an enhanced regulatory regime governed by the Federal Reserve’s non-bank financial firms. Lastly is the establishment of the Orderly Liquidation Authority, which is a resolution regime under the control of Federal Deposit Insurance Corporation tasked with the duty of receivership of failing TBFT firms.
A95
What is the approximate bad debt rate for a credit card/subprime credit card?
debt rate
The debt rate refers to the ratio, which measures the extent of a company’s leverage. The debt rate is the ratio of total assets to the total debts and expressed as percentages or decimals. It is also part of the assets in a company that is financed by debt.
The credit card bad debt rate, also known as the charge-off rate, is primarily a measure showing the percentage of credit card reminder fees that are defaulted compared to the total outstanding credit amount. Typically, the bad debt rate for a credit card stands at 3.64%. Fundamentally, the rate is computed when companies are evaluating the performance of credit card loans; hence, the bad debt rate results when a company has failed to obtain minimum payment in over six months of operations.
A96
Comment the following statement: “If you want to teach people a new way of thinking, don’t bother to teach them. Instead, give them a tool, the use of which will lead to a new of thinking”.
Thinking
Thinking is the process of reasoning about a thing and considering it or the flow of ideas. When one is engaged in problem-solving, they reason and make decisions through the act of thinking. Thinking manipulates information to form concepts.
The statement is wholesomely true. Richard Buckminster Fuller was greatly inspired to write the above quote as it implies a lot, especially to the open-minded personalities who are motivated with the spirit of imparting knowledge. In my view, I feel the statement is true since, for one to embrace a new idea or opinion, it becomes crucial to show a justifiable cause for the foreign way of acting. Arising from the fact is due to the human mind being inclined to embracing tangible aspects that will lead to grasping an abstract transition of action. I would also relate the statement with an adage that states, “You can’t make a change unless you are convinced of the change itself.”
A97
How does someone who earns, say, 1 lakhs rupees per month manage their money? What is the split-up they plan for the month ahead, also for investments for tax benefits?
tax benefits
Tax benefits refer to the allowed deduction on the tax return, which is meant to lower the taxpayer’s burdens when supporting commercial activities. This allows the adjustment which benefits the taxpayer’s tax liabilities. Examples of these benefits are supported in resources like fire-fighters, maintenance of the roads, parks, and libraries.
A person who earns one lakh rupees per month could manage their money by starting a SIP for 10k monthly so that one can evade paying a vast sum of cash at the year-end. The split-up they plan for a month ahead, including tax benefit investments, appears as follows. Vehicle loans at 15k monthly and a new household purchased item at around 10k per month. With the investment for tax benefits are mortgage loans of about 2-3 lakhs and personal finance loans of 20lakhs annually. By investing in the above means, a tax amounting to 50-100k will be owed by year-end.
A98
Discuss a scenario where it would be appropriate to use one of the present value of cash flow techniques for the valuation.
cash flow techniques
Cash flow techniques are ways used to monitor the cash inflow and outflow, including the expenses and reducing the debts to be paid, making the company’s financial position easy and sound. The techniques monitor how the company manages its money and how it makes money to pay the debts and operating expenses.
When making an investment decision, a firm may opt to capitalize production of a particular commodity whose demand is presumed to be high. In this method, it will be assumed that all the probable cash flow of the future is more valuable than the stock’s current price. Thus, an investor would consider the potential cash flows and determine the worth of the future cash flows based on their present value. To elaborate, an investor could, for instance, measure a cash flow technique such as spending on assets to estimate the profitability of a specific investment. The above parameter can be used to determine a company’s ability to pay interest, debt, or dividends based on its present value of cash flows.
A99
What is the current dollar amount of “bad debt provision” in the balance sheets of the ten largest banks in the USA, as of August 2012?
bad debt provision
A bad debt provision is an estimation of the debts a company is owed, which will go bad in the future. The future loss of liability is recorded as soon as it is recognized. This causes damage to the organization as they are losing money.
The current dollar amount of “bad debt provision” in the balance sheets of the ten largest banks in the USA, as of August 2012, was $7411billion. Of the above total amount, 4.11% are non-current, representing $350 billion. Moreover, the US’s giant banks have a 60% ratio coverage demonstrative of the bank’s small loan loss reserve percentage. The above is compared to $183 billion worth of loans that are non-performing held by FDIC banking insured institutions.
A100
What is a realistic bankroll for market investing to make $200 per day, and what would be the ratios of investment in three specific financial/equity arenas?
Bankroll
A bankroll is the money one possesses or providing financial resources to a person, organization, or project. An organization that has a large amount of money can fund or finance a project. It is also a platform that helps the investor’s access to investing opportunities.
The realistic bankroll for market investing to make $ 200 per day is the US $2 million. However, for an investor eying to divest resources, it is necessary to do so away from the US equity because the country’s interest rate had been suppressed by the Federal Reserve for nearly ten years. The ratios of investment in three equity arenas would be 9:1, which means that reliable companies are expected to produce (5-6) percent dividends to meet the portfolio’s criteria. It further implies that no stock should be greater than 5% of the portfolio.
A101
- Discuss some of the major issues to consider when choosing between an active or passive exporting strategy. 2. You work for a small company that has an innovative low-cost production method for high-capacity jump drives. A Japanese firm approaches your CEO to license the technology for use in Japan. Write a report to your CEO detailing the risks and potential benefits of this deal.
exporting strategy
Exporting strategy refers to the decisions taken to access a product’s export potential, the value of planning the process, and exporting approaches. The transactions, costs market demand, and methods of payment are some of the things which are considered when deciding on shipping an item.
- Some of the significant issues to consider when choosing between an active or passive exporting strategy include the following. First is the adaptation and preparation level of the product aimed to be exported. The step is crucial to consider since the criteria for preparing the export product vary from passive to active. For instance, inactive exporting, the company undertakes serious research to determine the products that fit in the new market and which should undergo small adaptations and changes to become competitive. On the contrary, in passive exporting, the product is shipped without any considerations. Secondly, are the export regulations of a specific country wherein passive exporting, there are fewer regulations involved unlike in active exporting hence the difference in the preparation process in both strategies.
- By consenting to the deal, our company would be exposed to many capital risks, including a loss of competitive advantage attributable to the innovative low-cost production method. Secondly, there would be a drastic drop in output sales owing to the scarce production resource, technology. Lastly, the company would face an extrapolated operational downfall as a compounded effect, possibly leading to closure. Conversely, the deal would lay bare the potential benefit of coming up with new ideas to foster advanced multi-industrial functions that would result in overall operational efficiency.
A102
How much have the shares of UB group companies fallen in a year or so? How can I compare that with the performance of the benchmark Sensex/Nifty over the same period?
Benchmark
Benchmark to the point of reference in which organizations are compared to other similar players in the economy. Something serving as a standard is compared to other things of the same type. For example, a standard business is benchmarked and compared to other businesses of the same kind.
The shares of UB group companies in about one year have fallen to 3% following antitrust raids. The antitrust raids were part of scrutiny into the price-fixing allegation and featured between two international rivals, India’s United Breweries and Denmark’s Carlsberg. Over the same period, the performance of the benchmark Sensex/Nifty has sharply dropped by 19.83%, thus eroding a significant portion of investor’s wealth compared to UB group companies. Therefore, both performances are notably incomparable.
A103
Describe the dilemma of securities firms that serve as underwriters for Facebook’s, IPOs when attempting to satisfy Facebook and the institutional investors that invest in Facebook’s stock.
Securities firms
Securities firms are investment companies, banks, and brokerage firms that serve as intermediaries between sellers and buyers. They place securities issued by government agencies or firms. Some of the securities provided are bonds, stocks, and money.
The dilemma is that when Facebook needs funds, it takes Initial Public Offering when in IPO, the firm incurs some costs of the transaction. However, the greatest challenge in the IPO of Facebook is the hardship of flipping shares, which only allows potential investors to invest in IPO to explore the short term benefit. Individually, after investing in the IPO, investors sell off shares at a higher price at the IPO’s closure. Thus, there is a downward pressure in the share’s value, consequently declining the prices. Therefore, to overcome the dilemma, underwriters are directly engaged in the
A91. Components and configuration of the gas station, fast-food drive-thru, and highway toll station.
Components
A component refers to a part of a portion of a big thing or element. A component is independent, and it may require some input, or it can give some output. Components can be the parts when joined together form one big item. For example, in an organization, the management and the stakeholders are included in various components that make it up.
The selling of engine lubricants and oils used by vehicles is conducted in the gas station. Its components include fuel dispensers, air compressors, convenience stores with electricity sockets for plug-in cars, and selling snacks, soft drinks, and some grocery products. The clients are served in the forecourt, which has drainage systems in case there is oil spillage. Fast food drive-through is a business offering take out services. Its components are microphones, carhop, client’s queuing lanes, and drive-thru lane signs. Microphones are used by clients to make orders, received by an attendant at the window, and the food is delivered to the client by a carhop. A toll highway is a controlled private or public road allowing passage after a toll or fee is paid. Its component includes electronic communication equipment, metal barriers, and deposit machines. Toll amounts vary depending on the weight, axle number, and type of the vehicle. The restrictions prohibit passage until the right amount of toll is paid.
A92. Similarities and differences of major money center and small, local community income statements and bank’s balance sheet.
Income statements and balance sheets and are financial statements of a profit or non-profit making organization. They have some similarities and differences between the significant money banks such as world bank and the local community banks. Some of the similarities are listed below. First, they are prepared and updated throughout the accounting period. They are both used by investors and the government to make decisions concerning the country’s economy. Lastly, they are prepared depending on the generally accepted accounting principles. Some of the differences include the financial statement of major money centers prepared in different periods due to the various time zones existing among continents in contrast to the local banks’ financial statements prepared at the end of every accounting period.
A93. Matsusaka (1995) reasons for less government growth in states with voter initiative provision.
Voter Initiative
Voter initiative is a type of election carried out by the people, whose aim is to allow the electorate to solve questions were the elected representatives fail to do so or refuse to agree with a change that the public wants. It is the legal way in which voters can propose a law.
Voter initiative is a form of government in some states allowing citizens to approve and propose laws directly without the assistance of elected representatives. It leads to reduced government growth, as argued by Matsusaka (1995) due for the following reasons. First, the initiative states depend on the direct charging of people making use of government resources to raise most of the revenue. Besides, the states with voter initiative provision transfer the expenditure to the local government in contrast to the state government. Lastly, the initiative leadership leads to the reduced government in the state.
A94. Futures contract risk reporting implications and recommendations.
Risk Reporting
Reporting risks is a method of communicating business and project risks to the people who need to know. In an organization, the project risks are tracked regularly, allowing them to respond to the arising situations. Risk reporting helps the stakeholders access the risk profile of a company and to reduce market disorientation.
A futures contract is a legal agreement between two parties to sell or buy an asset at a specific future date and set price. There are various risks associated with the futures contract, and their reporting adversely affects the users of financial information and the parties involved. Liquidity risk, for example, arises when a buyer or a seller of security closes the derivative trade before the maturity date. Inadequate reporting about the liquidity risk will lead to investors and firms incurring huge losses. Researching specific market conditions about liquidity and reporting on time will ensure that people are well aware of prevailing conditions; hence, they will adjust more easily to different market conditions in case of change.
A95. “Revenue” and “market cap” – which financial entity is bigger for a public/private company? Is it sector-specific?
Revenue
Revenue refers to the total income generated from a business when they sell goods and services to the customers. It comprises of the discounts and deductions from the returned products and services. Revenue can be received from royalties and interest. Revenue accounts are credited when services are done, and thus they have credit balances.
Market capitalization measures its worth in open market operations as it displays the company’s total value of stock shares. It helps investors in making rational decisions on the relative size of different companies. Revenue, on the other hand, is the total cash inflows earned by a business or organization in a particular period after the deduction of all expenses. Market capitalization is the more significant financial entity for both public and private companies as it indicates the current company’s net worth. The company attracts more customers if it’s market worth is significantly high as it boosts their confidence with the company. The market cap is not sector-specific.