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1. The composition of the global financial market: instruments, participants, sources of information A financial market can be domestic or international.

The global financial market is a collection of all the financial markets present in different countries of the world. The global financial market deals with buying and selling of financial security instruments like stocks and bonds, commodities like precious metals (gold and silver) and cereals, and other tradable or exchangeable items on an international basis. The global financial market functions as an important device for bringing increased liquidity. The global financial market can be categorized into the following types: Commodity Markets Money Markets Derivatives Markets: Futures Markets Insurance Markets Foreign Exchange Markets Capital Markets: Stock markets and Bond markets The global financial market forms a major part of the global economy. It facilitates the businesses in many ways, such as: It helps the companies regarding financing of capital in capital markets It helps international commerce and trade in the foreign exchange markets It helps to transfer risks in the derivative markets The different theories that are applied in the analysis of global financial markets include the following: Technical Analysis Fundamental Analysis Index Momentum Analysis Securities Momentum Analysis Securities Chart Analysis Securities Market Analysis The global stock markets constitute an important segment of the global financial market. The leading stock exchanges of the world include the following: The New York Stock Exchange or NYSE (merged with Euronext) London Stock Exchange Euronext (merged with NYSE) Tokyo Stock Exchange The Bombay Stock Exchange (BSE) Hong Kong Stock Exchange NASDAQ or National Association of Securities Dealers Automated Quotations Frankfurt Stock Exchange Toronto Stock Exchange Shanghai Stock Exchange Madrid Stock Exchange Australian Securities Exchange Financial market instruments: Classification: The classification deals with financial markets instruments traded in the following markets: markets for interest rate instruments; equity markets; markets for investment and money market

funds shares/units foreign exchange markets; and other financial markets. Derivatives with more than one underlying instrument should be allocated to the main underlying instrument or, if this is not feasible, be classified in the risk-type category which is highest in the following list. Credit Commodity Equity Investment and money market funds Foreign exchange Interest rate

2. Risky assets and portfolio optimization problem An investment with a return that is not guaranteed. Assets carry varying levels of risk. For example, holding a corporate bond is generally less risky than holding a stock. Government bonds are generally not considered risky assets. A risky asset should not be confused with a risk asset. Asset Classifications, Defined Classification 1 Assets not classified under Classification 2,3 or 4 Classification 2 Assets perceived to have an above-average risk of uncollectibility Classification 3 Assets for which final collection or asset value is very doubtful and which pose a high risk of incurring a loss Classification 4 Assets assessed as uncollectible or worthless Risk-weighted asset is a bank's assets weighted according to credit risk. Some assets, such as debentures, are assigned a higher risk than others, such as cash or government securities/bonds. Since different types of assets have different risk profiles, weighing assets based on the level of risk associated with them primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution, and is regulated by the Local Central Banks or other National financial regulators. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR. A document was written in 1988 by the Basel Committee on Banking Supervision, which recommends certain standards and regulations for banks. The main recommendation of this document is that in order to lower credit risk, banks should hold enough capital to equal at least 8% of its risk-weighted assets. Most countries have implemented some version of this regulation. The portfolio optimization model calculates the optimal capital weightings for a basket of financial investments that gives the highest return for the least risk. The unique design of the model enables it to be applied to either financial instrument or business portfolios. The ability to apply optimization analysis to a portfolio of businesses represents an excellent framework for driving capital allocation, investment, and divestment decisions 3. Types of banks and their role in the international financial market Whether commercial or public, government or private - there are numerous types of banks, each serving its own specific role. There are several types of banks in the world, and each has a specific role and function - as well as a domain - in which they operate. In broad strokes, banks may be divided into several groups on the basis of their activities and these include investment banks, retail, private, business, and also corporate banks. Many of the larger banks have multiple divisions covering some or all of these categories. Business banks provide services to businesses and other organizations that are medium sized, whereas the clients of corporate banks are usually major business entities. Ivestment banks provide services related to financial markets, such as mergers and acquisitions. Another way in which banks may be categorised is on the basis of their ownership. They might either be privately held or publicly owned banks. Privately owned banks are motivated by profit in their business operations. Publicly owned banks are held by the state governments of the individual countries and they serve as a nations

centralized bank, as well as an economic backbone for that particular country. They are also known as central banks. Publicly owned banks, which are controlled by the government, have numerous responsibilities pertaining to the banking sector of the country, such as administering various activities for the commercial banks of that country. They also determine the rates of interest offered by banks doing business in that country, as well as playing a major role in maintaining liquidity in the banking sector. There are several types of notable retail banks. These include the offshore, community and savings banks, as well as the community development banks, building societies, postal savings banks, ethical banks and Islamic banks. Offshore banks operate in areas of reduced taxes, as compared to the country in which the investor lives in. This is why most offshore banks are private banks. Community banks are monetary organizations operated on a local basis, while community development banks cater to the populations, or markets, that have typically not been served properly. Postal savings banks are basically savings banks that operate in conjunction with the national postal systems of that country. Building societies where traditionally mutually owned by their customers. They provide a full range of retail banking services, but with a particular focus on mortgages. Ethical banks do their business based on their own code of conduct. They only accept investments that they perceive to be useful from a social and environmental point of view. The Islamic Banks perform their business operations as per the Sharia law, the Islamic code of law. In particular, this means that they operate sans interest. There are two types of investment banks - the investment banks that perform underwriting activities, and the merchant banks, a traditional form of banking, that performs trade-financing activities. 4. International Diversification: Investing in different markets. International Diversification Investment of one's portfolio in securities that are traded in various countries. This is done to reduce risk, often political risk. For example, if one country's government announces a larger than normal budget deficit, or the central bank raises interest rates, this may affect security prices in one country, but not necessarily in other countries that did not take equivalent steps. Likewise, if a whole industry fails in one country but thrives in another, investing in the same industry in both countries hedges one's risk. Some analysts argue that international diversification is less effective in an era of globalization, but other analysts dispute that. CAPM and MPT Theories of Finance Two well-known theories in the finance literature, the Capital Asset Pricing Model (CAPM) and the Modern Portfolio Theory (MPT), suggest that individual and institutional investors should hold a well-diversified portfolio to reduce risk. An institutional investor can achieve a well-diversified portfolio because the amount of funds in the portfolio is large enough for in-house diversification. Individual investors with limited wealth will have to find another way that does not require substantial funds to diversify their portfolios. Mutual funds offer a quick and relatively inexpensive way to diversify for small investors and others. It is also argued that since differences exist in levels of economic growth and timing of business cycles among various countries, international portfolio diversification can be used as a means of reducing risk. In fact, the 1990s witnessed an explosion of international portfolio investment, especially among emerging markets. Mutual fund companies such as Janus and Templeton

achieved phenomenal rates of return on their investments during the mid to late 1990s. It should be made clear that while performances of these mutual funds over the long haul vary, it is still true that diversification reduces risk at a given level of return. Market Integration Influences National economies have recently become more closely linked, not only because of growing international trade and investment flows, but also due to terms of international financial transactions. Influences contributing to an increased general level of correlation among markets and markets integration include the following: 1. Development of global and multinational companies and organizations, 2. Advances in information technology, 3. Deregulation of the financial systems of the major industrialized countries, 4. Explosive growth in international capital flows, and 5. Abolishment of foreign exchange controls. While some controversy exists among investment professionals regarding the benefits and costs of international portfolio investment, there is agreement that international equity portfolio diversification recommendations are based on the existence of low correlations among national stock markets. On the other hand, if it is true, as some recent studies have shown, that cross-country correlation is increasing, due perhaps to the growing interdependence among the international markets, then benefits of international portfolio diversification may be overstated. In this article we aim to shed light on international equity market interdependence by utilizing data from three major equity markets for a relatively short time period. In examining the co-movements of American, Japanese, and German equity markets, we seek to identify diversification opportunities for international investors with the aim of lowering the investment risk. We also investigate the stability of the relationships among the markets after an unexpected, exogenous event. 5. The global equities market: size, indicators, principles of organization A stock market or equity market is a public (a loose network of economic transactions, not a physical facility or discrete) entity for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion at the start of October 2008.[1] The total world derivatives market has been estimated at about $791 trillion face or nominal value,[2] 11 times the size of the entire world economy.[3] The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value.Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto Stock Exchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Brse (Frankfurt Stock Exchange). In Africa, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV. Participants in the stock market range from small individual stock investors to large hedge fundtraders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity

exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery. A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds. The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronextindices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment. 6. Securitization: creation of ABSs, participants and functions, securitizations impact and risks, regulators concrens Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities, while those backed by other types of receivables are asset-backed securities. Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding source with an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3.455 trillion in the US and $652 billion in Europe.[2] WBS (Whole Business Securitization) arrangements first appeared in the United Kingdom in the 1990s, and became common in various Commonwealth legal systems where senior creditors of an insolvent business effectively gain the right to control the company. An asset-backed security is a security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can include common payments from credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie revenues. Home equity loans Securities collateralized by home equity loans (HELs) are currently the largest asset class within the ABS market. Investors typically refer to HELs as any nonagency loans that do not fit into either the jumbo or alt-A loan categories. While early HELs were mostly second lien subprime mortgages, first-lien loans now make up the majority of issuance. Subprime mortgage borrowers have a less than perfect credit history and are required to pay interest rates higher than what would be available to a typical agency borrower. Auto loans

The second largest subsector in the ABS market is auto loans. Auto finance companies issue securities backed by underlying pools of auto-related loans. Auto ABS are classified into three categories: prime, nonprime, and subprime: Prime auto ABS are collaterized by loans made to borrowers with strong credit histories. Nonprime auto ABS consist of loans made to lesser credit quality consumers, which may have higher cumulative losses. Subprime borrowers will typically have lower incomes, tainted credited histories, or both. Credit card receivables Securities backed by credit card receivables have been benchmark for the ABS market since they were first introduced in 1987. Credit card holders may borrow funds on a revolving basis up to an assigned credit limit. The borrowers then pay principal and interest as desired, along with the required minimum monthly payments. Because principal repayment is not scheduled, credit card debt does not have an actual maturity date and is considered a nonamortizing loan. Student loans ABS collateralized by student loans (SLABS) comprise one of the four (along with home equity loans, auto loans and credit card receivables) core asset classes financed through asset-backed securitizations and are a benchmark subsector for most floating rate indices. Stranded cost utilities Rate reduction bonds (RRBs) came about as the result of the Energy Policy Act of 1992, which was designed to increase competition in the US electricity market. To avoid any disruptions while moving from a non-competitive to a competitive market, regulators have allowed utilities to recover certain "transition costs" over a period of time. These costs are considered non by passable and are added to all customer bills. A significant advantage of asset-backed securities for loan originators (with associated disadvantages for investors) is that they bring together a pool of financial assets that otherwise could not easily be traded in their existing form. By pooling together a large portfolio of these illiquid assets they can be converted into instruments that may be offered and sold freely in the capital markets. The tranching of these securities into instruments with theoretically different risk/return profiles facilitates marketing of the bonds to investors with different risk appetites and investing time horizons. Asset backed securities provide originators with the following advantages, each of which directly adds to investor risk: Selling these financial assets to the pools reduces their risk-weighted assets and thereby frees up their capital, enabling them to originate still more loans. Asset-backed securities lower their risk. In a worst-case scenario where the pool of assets performs very badly, "the owner of ABS (which is either the issuer, or the guarantor, or the re-modeler, or the guarantor of the last resort) might pay the price of bankruptcy rather than the originator." This risk is measured and contained by the lender of last resort from time to time auctions and other Instruments that are used to re-inject the same bad loans held over a longer time duration to the appropriate buyers over a period of time based on the instruments available for the bank to carry out its business as per the business charter or the licensings granted to the specific banks. The risk can also be diversified by using the alternate geographies, or alternate vehicles of investments and alternate division of the bank, depending on the type and magnitude of the risk. "The financial institutions that originate the loans sell a pool of cashflow-producing assets to a specially created "third party that is called a special-purpose vehicle (SPV)". The SPV (securitization, credit derivatives, commodity derivative, commercial paper based temporary capital and funding sought for the running, merger activities of the company, external funding in the form of venture capitalists, angel investors etc. being a few of them) is "designed to insulate investors from the credit risk (availability as well as issuance of credit in terms of assessment of bad loans or hedging of the already available good loans as part of the practice) of the originating financial institution".

7. GDP as an indicator of economic results of macroeconomic system Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living. Gross domestic product is related to national accounts, a subject in macroeconomics. GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes. Example: the expenditure method: GDP = private consumption + gross investment + government spending + (exports imports), or GDP can be contrasted with gross national product (GNP) or gross national income (GNI). The difference is that GDP defines its scope according to location, while GNP defines its scope according to ownership. In a global context, world GDP and world GNP are therefore equivalent terms. GDP is product produced within a country's borders; GNP is product produced by enterprises owned by a country's citizens. Gross national income (GNI) equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world. Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the information required (especially information on expenditure and production by governments). Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector are seen as production and value added and are added to GDP. 8. The functions of the international financial organizations (IMF, WB, BIS) The International Monetary Fund (IMF) is an intergovernmental organization that oversees the global financial system by following[clarification needed] the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. Its objectives are to stabilize international exchange rates and facilitate development through the encouragement of liberalising economic policies[1] in other countries as a condition of loans, debt relief, and aid.[2] It also offers loans with varying levels of conditionality, mainly to poorer countries. Its headquarters is in Washington, D.C.The IMFs relatively high influence in world affairs and development has drawn heavy criticism from some sources i) promote international monetary cooperation ii) expansion and balanced growth of international trade iii) promote exchange rate stability iv) help establish multilateral system of payments and eliminate foreign exchange restrictions v) make resources of the Fund available to members vi) Shorten the duration and lessen the degree of disequilibrium in international balances of payments The World Bank is an international financial institution that provides loans[2] to developing countries for capital programmes. The World Bank's official goal is the reduction of poverty. By law, all of its decisions must be guided by a commitment to promote foreign investment, international trade and facilitate capital investment.[3]

The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more:[4]International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a different but collaborative role in advancing the vision of inclusive and sustainable globalization. The IBRD aims to reduce poverty in middle-income and creditworthy poorer countries, while IDA focuses on the world's poorest countries. Together, we provide low-interest loans, interest-free credits and grants to developing countries for a wide array of purposes that include investments in education, health, public administration, infrastructure, financial and private sector development, agriculture and environmental and natural resource management. The World Bank, established in 1944, is headquartered in Washington, D.C. We have more than 10,000 employees in more than 100 offices worldwide. The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks. The BIS fulfils this mandate by acting as: a forum to promote discussion and policy analysis among central banks and within the international financial community a centre for economic and monetary research a prime counterparty for central banks in their financial transactions agent or trustee in connection with international financial operations Established on 17 May 1930, the BIS is the world's oldest international financial organisation. As its customers are central banks and international organisations, the BIS does not accept deposits from, or provide financial services to, private individuals or corporate entities 9. Classification and comparative characteristics of derivatives. We usually can mention eight main classes of derivatives. These are: Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: - Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. - Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver

swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating. 10. The international debt securities types and organization. Securities are traditionally divided into debt securities and equities Debt securities may be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and certain other characteristics. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that is not senior is "subordinated". Corporate bonds represent the debt of commercial or industrial entities. Debentures have a long maturity, typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated check with a maturity of not more than 270 days. Money market instruments are short term debt instruments that may have characteristics of deposit accounts, such as certificates of deposit, and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly liquid. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. They include eurobonds and euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source of finance for governments. U.S. federal government bonds are called treasuries. Because of their liquidity and perceived low risk, treasuries are used to manage the money supply in the open market operations of non-US central banks. Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent the debt of state, provincial, territorial, municipal or other governmental units other than sovereign governments. Supranational bonds represent the debt of international organizations such as the World Bank, the International Monetary Fund, regional multilateral development banks and others.

11. Methods of fund management. Three main portfolio techniques form the basis of fund management. The most conservative involves long-term investment in indexes. Slightly more aggressive fund management adds the element of quantitative, structured or strategic trading to balance and maintain diversification in your portfolio. The most aggressive technique involves active trading, including long- and shortterm trend trading or market timing, and day trading. Index Investing A conservative method of managing your investment portfolio is by long-term investment via dollar cost averaging in one or more stock market indexes using index mutual funds or index ETFs. The theory is that over time the indexes will always trade higher, so if you maintain a long-

term outlook and disciplined regular purchases your portfolio will increase in value. Of course, that works if you are not continuing to invest during a long-term bear market. Balance And Diversification A diversified fund invests in stocks in a variety of companies from a variety of industries, market sectors and indexes. This method uses a technique called Modern Portfolio Theory, which applies quantitative analysis to regularly re-balance your portfolio by selling out positions that have lost money, lost market momentum or significantly appreciated in value and, using the money raised, invest in other stocks or sectors that may be more promising in terms of future returns on investment. This reduces sector risk and cycle risk but is vulnerable to market risk. Active Trading Rule-based day trading is a more organized form of active trading that attempts to control risk by following pre-defined methods, but the most risky form of fund management involves what professional traders jokingly refer to as "Got a hunch? Buy a bunch!" trading and, although not a true formal technique, may be the most often-employed fund management technique across all markets. 12. Mortgage-backed securities: mechanism of issuance, the role in the international financial crisis of 2007-2009. Most agency bonds are mortgage-backed securities, which are investments in pools of mortgages. Their maturities range from one to 50 years and denominations vary from $1,000 to $50,000. Here are three agencies that issue mortgage-backed securities: The Federal National Mortgage Association (FNMA, or Fannie Mae), which finances mortgages for the Federal Housing Administration and the Veterans Administration; The Federal Home Loan Mortgage Corporation (Freddie Mac), which finances mortgages lent by thrift institutions; and The Government National Mortgage Association (GNMA, or Ginnie Mae), which finances construction of housing projects. The process of securitization is complicated. The basics are: 1. Mortgage loans (mortgage notes) are purchased from banks and other lenders and assigned to a trust 2. These loans are assembled into collections, or "pools" 3. These trusts securitize the pool and issue mortgage-backed securities, with documentation that identifies the underlying loans The US subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backing said mortgages. Approximately 80% of U.S. mortgages issued to subprime borrowers were adjustable-rate mortgages. After U.S. house sales prices peaked in mid-2006 and began their steep decline forthwith, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher interest rates, mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

13. Foreign Direct Investments: Joint Ventures, wholly owned Subsidiaries. Joint Venture is the cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise. Forming a joint venture is a good way for companies to partner without having to merge. JVs are typically taxed as a partnership. Other reasons for forming a JV are: reducing 'entry' risks by using the local partner's assets inadequate knowledge of local institutional or legal environment access to local borrowing powers perception that the goodwill of the local partner is carried forward in strategic sectors, the county's laws may not permit foreign nationals to operate alone access to local resources through participation of national partner

influence of local partners on government officials or 'compulsory' requisite


access by one partner to foreign technology or expertise, often a key consideration of local parties (or through government incentives for the mechanism) again, through government incentives, job and skill growth through foreign investment, and incoming foreign exchange and investment. Wholly owned Subsidiary is a subsidiary whose parent company owns 100% of its common stock. In other words, the parent company owns the company outright and there are no minority owners. The pros of a wholly owned subsidiary is that it has the backing of parent company. They utilize the resources of their parent company such as technical knowledge and expertise. The cons are there are no freedom or creativity involved. All orders come from the parent company. 14.Money market. The demand for money and supply Money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities. It provides liquidity funding for the global financial system. Money market is primarily a market for short term funds. Generally the maturity is within an year and more commonly it is overnight. Purposes of the Money Market Individuals will invest in the money market for much the same reason that a business or government will lend or borrow funds in the money market: sometimes the need for funds does not coincide with having them. For example, if you find you have a certain sum of money that you do not immediately need (to pay down debt, for example), then you may choose to invest those funds temporarily, until you need them to make some other, longer-term investment, or a purchase. If you decide to hold these funds in cash, the opportunity costthat you incur is the interest that you could have received by investing your funds. If you do invest your funds in the money market, you can quickly and easily secure this interest. The major attributes that will draw an investor to short-term money market instruments are superior safety and liquidity. Money market instruments have maturities that range from one day to one year, but they are most often three months or less. Because these investments are associated with massive and actively-traded secondary markets, you can almost always sell them prior to

maturity, albeit at the price of forgoing the interest you would have gained by holding them until maturity. The secondary money market has no centralized location. The closest thing the money market has to a physical presence is an arbitrary association with the city of New York; although, the money market is accessible from anywhere by telephone. Most individual investors participate in the money market with the assistance (and experience) of their financial advisor, accountant or banking institution. The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits. It can refer to the demand for money narrowly defined as M1 (non-interestbearing holdings), or for money in the broader sense of M2 orM3. Money in the sense of M1 is dominated as a store of value by interest-bearing assets. However, money is necessary to carry out transactions; in other words, it provides liquidity. This creates a trade-off between the liquidity advantage of holding money and the interest advantage of holding other assets. The demand for money is a result of this trade-off regarding the form in which a person's wealth should be held. In macroeconomics motivations for holding one's wealth in the form of money can roughly be divided into the transaction motive and the asset motive. These can be further subdivided into more microeconomically founded motivations for holding money. The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future. The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money: the transactions, the precautionary, and the speculative motives. Transactions motive. The transactions motive for demanding money arises from the fact that most transactions involve an exchange of money. Because it is necessary to have money available for transactions, money will be demanded. The total number of transactions made in an economy tends to increase over time as income rises. Hence, as income or GDP rises, the transactions demand for money also rises. Precautionary motive. People often demand money as a precaution against an uncertain future. Unexpected expenses, such as medical or car repair bills, often require immediate payment. The need to have money available in such situations is referred to as the precautionary motive for demanding money. Speculative motive. Money, like other stores of value, is an asset. The demand for an asset depends on both its rate of return and its opportunity cost. Typically, money holdings provide no rate of return and often depreciate in value due to inflation. The opportunity cost of holding money is the interest rate that can be earned by lending or investing one's money holdings. The speculative motive for demanding money arises in situations where holding money is perceived to be less risky than the alternative of lending the money or investing it in some other asset Many factors influence our total demand for money balances. The four main factors are the level of prices the level of interest rates the level of real national output (real GDP) the pace of financial innovation

Money supply is the total amount of money available in an economy at a particular point in time.Money supply is considered to be an important instrument for controlling inflation by those economists who say that growth in money supply will only lead to inflation if money demand is stable. In order to control the money supply,regulators have to decide which particular measure of the money supply totarget. The broader the targeted measure, the more difficult it will be to control that particular target. However, targeting an unsuitablenarrow moneysupply measure may lead to a situation where the total money supply in the country is not adequately controlled 15. Government bond market: size, composition, significance. The bond market (also known as the credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets. Corporate Government & agency Municipal Mortgage backed, asset backed, and collateralized debt obligation Funding Bond market participants Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Participants include: Institutional investors Governments Traders Individuals Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals. Bond market size

Amounts outstanding on the global bond market increased 10% in 2009 to a record $91 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder. The US was the largest market with 39% of the total followed by Japan (18%). Mortgage-backed bonds accounted for around a quarter of outstanding bonds in the US in 2009 or some $9.2 trillion. Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds. In Europe, public sector debt is substantial in Italy (93% of GDP), Belgium (63%) and France (63%). Bond market influence Bond markets determine the price in terms of yield that a borrower must pay in able to receive funding. In one notable instance, when President Clinton attempted to increase the US budget

deficit in the 1990s, it led to such a sell-off (decreasing prices; increasing yields) that he was forced to abandon the strategy and instead balance the budget. Importance:Governments need to borrow money. They borrow money through selling bonds to the private sector. Usually, investors are quite happy to buy government bonds. They are seen as a safe investment (governments usually don't default) and the investor gets a guaranteed rate of interest in return. Russian bond market.The Russian bond market has a relatively short history. Having emerged in the mid-nineties as mostly a sovereign bond market, it faced a hard landing in August 1998, when Russia defaulted on its local GKOs. Then it stayed almost dead for a few months and re-emerged in 1999. From the year 2000 onwards, the market has experienced a period of sensational growth with almost no defaults until late 2007. As of today the Russian bond universe is represented by approximately 1200 issues from over 630 different names and an aggregate market cap of USD 300bn. This volume is almost equally split between local currency papers (trading mostly on the local stock exchange) and foreign currency bonds (mostly Euroclearable and based on the English law). An average Eurobond issue is larger than a local bond issue, while the local bond market is more granulated with a larger variety of names and issues available 16.Capital structure A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its own benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk / reward payoff for shareholders.Let's look at each in detail: Equity Capital: This refers to money put up and owned by the shareholders (owners). Typically, equity capital consists of two types: 1.) contributed capital, which is the money that was originally invested in the business in exchange for shares of stock or ownership and 2.) retained earnings, which represents profits from past years that have been kept by the company and used to strengthen the balance sheet or fund growth, acquisitions, or expansion. Many consider equity capital to be the most expensive type of capital a company can utilize because its "cost" is the return the firm must earn to attract investment. A speculative mining company that is looking for silver in a remote region of Africa may require a much higher return on equity to get investors to purchase the stock than a firm such as Procter & Gamble, which sells everything from toothpaste and shampoo to detergent and beauty products.

Debt Capital: The debt capital in a company's capital structure refers to borrowed money that is at work in the business. The safest type is generally considered longtermbonds because the company has years, if not decades, to come up with the principal, while paying interest only in the meantime 17. Credit Risk and its management. Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk. Investor losses include lost principal and interest, decreased cash flow, and increased collection costs, which arise in a number of circumstances: A consumer does not make a payment due on a mortgage loan, credit card, line of credit, or other loan A business does not make a payment due on a mortgage, credit card, line of credit, or other loan A business or consumer does not pay a trade invoice when due A business does not pay an employee's earned wages when due A business or government bond issuer does not make a payment on a coupon or principal payment when due An insolvent insurance company does not pay a policy obligation An insolvent bank won't return funds to a depositor A government grants bankruptcy protection to an insolvent consumer or business Types of credit risk Default risk Credit spread risk Downgrade risk Assessing credit risk Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor's, Moody's Analytics, Fitch Ratings, and Dun and Bradstreet provide such information for a fee. Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property. Credit scoring models also form part of the framework used by banks or lending institutions grant credit to clients. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions presented within the contract (as outlined above). Credit risk has been shown to be particularly large and particularly damaging for very large investment projects, so-called megaprojects. This is because such projects are especially prone to end up in what has been called the "debt trap," i.e., a situation where due to cost overruns, schedule delays, etc. the costs of servicing debt becomes larger than the revenues available to pay interest on and bring down the debt.

18.Sovereign risk and its management. Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality. Five macroeconomic variables that affect the probability of sovereign debt rescheduling are: Debt service ratio Import ratio Investment ratio Variance of export revenue Domestic money supply growth The probability of rescheduling is an increasing function of debt service ratio, import ratio, variance of export revenue and domestic money supply growth. Frenkel, Karmann and Scholtens also argue that the likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Saunders argues that rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors. 19.Market risk and management Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The associated market risks are: Equity risk, the risk that stock prices and/or the implied volatility will change. Interest rate risk, the risk that interest rates and/or the implied volatility will change. Currency risk, the risk that foreign exchange rates and/or the implied volatility will change. Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change. Interest Rate Risk Management To achieve the objective of protecting the Bank from changes in market interest rates, the Bank matches the sensitivity of its assets and liabilities. The Banks strategy for implementing the desired matching is to divide the balance sheet into the two broad types of interest rate sensitive assets and liabilities (floating rate and fixed rate) and to align the interest rate profiles of each balance sheet component to the appropriate benchmark. Currency Risk Management The agreement establishing the Bank explicitly prohibits it from taking direct currency exchange exposures by requiring liabilities in any one currency (after swap activities) to be matched with assets in the same currency. As the Banks net assets are denominated in Units of Account (UA), which are equivalent to the SDR, the Bank has a net asset position that is potentially exposed to translation risk when currency exchange rates fluctuate. The Bank seeks to minimize potential fluctuation of the value of its net worth in UA by matching to the extent possible the currency composition of its net assets with the currency basket of the SDR. Liquidity Risk Management As a long-term development lender, the Bank holds sufficient liquid assets to enable it continue normal operations even in the unlikely event that it is unable to obtain fresh resources from the capital markets for an extended period of time. The Banks policy requires maintaining a

prudential minimum of liquidity based on projected net loan transfers, contingent liabilities and debt service payments. Equally, the Banks policy permits the increase of liquid resources up to an operating level based on the minimum in addition to taking into account undisbursed and irrevocable commitments to take advantage of low cost funding opportunities as they arise 20. Financial risk and its management Financial risk is an umbrella term for any risk associated with any form of financing. Risk may be taken as downside risk, the difference between the actual return and the expected return (when the actual return is less), or the uncertainty of that return. Risk related to an investment is often called investment risk. Risk related to a company's cash flow is called business risk. Credit risk Credit risk, also called default risk, is the risk associated with a borrower going into default (not making payments as promised). Investor losses include lost principal and interest, decreased cash flow, and increased collection costs. Investment risk has been shown to be particularly large and particularly damaging for very large, one-off investment projects, so-called "megaprojects". This is because such projects are especially prone to end up in what has been called the "debt trap," i.e., a situation where due to cost overruns, schedule delays, etc. the costs of servicing debt becomes larger than the revenues available to pay interest on and bring down the debt.[1] Market risk This is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices: Equity risk is the risk that stock prices and/or the implied volatility will change. Interest rate risk is the risk that interest rates and/or the implied volatility will change. Currency risk is the risk that foreign exchange rates and/or the implied volatility will change, which affects, for example, the value of an asset held in that currency. Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change. Liquidity risk This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). There are two types of liquidity risk: Asset liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of market risk. This can be accounted for by: o Widening bid-offer spread o Making explicit liquidity reserves o Lengthening holding period for VaR calculations Funding liquidity - Risk that liabilities: o Cannot be met when they fall due o Can only be met at an uneconomic price o Can be name-specific or systemic Operational risk Reputational risk Legal risk IT risk Reputational risk Legal risk IT risk Diversification

Most of the forms of risk that we concern ourselves with, financial risk, market risk, and even inflation risk, can at least partially be moderated by forms of diversification. For example, a person investing $10,000.00 for one year may desire a gain of $1,000.00, or a 10% return, providing a total investment of $11,000 after one year. In reality, investing, as opposed to saving, rarely provides such a neat solution. For example, the average annual compound return of the broad American stock market over the time period from 1926 to 2006 was just over 10% per year. During that eighty year period though, there were more than a few times when massive declines in market value were experienced by investors in that same stock market. From early in the year 2000 through the fall of the year 2002 for example, the broad measures of market valuation, such as the S&P 500 Stock Index fell over 50%. For an investor in 2006 to have seen that average compounded 10% return in the S&P 500 Index, he or she would have had to invest in 1994. At least the investor in a S&P 500 index fund has some degree of assurance that if he or she waits long enough a positive return is very likely to occur. The investor who elected to invest everything in Enron is left only with the assurance that the investment was a complete loss. Enron, as a stock issue, was a part of the S&P 500, and its loss did have a temporary effect on that index, but the effect was not permanent or, in the long run, of any significance. That is the value of diversification. Further diversification away from the large capitalization stocks that make up the S&P 500 Index has historically tended to further reduce market and financial risk. Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them. Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk. In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks 21. Functional risk and its management = Operational risk risk arising from execution of a company's business functions = the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates. It also includes other categories such as fraud risks, legal risks, physical or environmental risks The term Operational Risk Management (ORM) is defined as a continual cyclic process which includes risk assessment, risk decision making, and implementation of risk controls, which results in acceptance, mitigation, or avoidance of risk. ORM is the oversight of operational risk, including the risk of loss resulting from inadequate or failed internal processes and systems; human factors; or external events Four Principles of ORM Accept risk when benefits outweigh the cost. Accept no unnecessary risk. Anticipate and manage risk by planning. Make risk decisions at the right level. Three Levels of ORM 1) In Depth

In depth risk management is used before a project is implemented, when there is plenty of time to plan and prepare. Examples of in depth methods include training, drafting instructions and requirements, and acquiring personal protective equipment. 2) Deliberate Deliberate risk management is used at routine periods through the implementation of a project or process. Examples include quality assurance, on-the-job training, safety briefs, performance reviews, and safety checks. 3) Time Critical Time critical risk management is used during operational exercises or execution of tasks. It is defined as the effective use of all available resources by individuals, crews, and teams to safely and effectively accomplish the mission or task using risk management concepts when time and resources are limited. Examples of tools used includes execution check-lists and change management. This requires a high degree of situational awareness Benefits of ORM 1. Reduction of operational loss. 2. Lower compliance/auditing costs. 3. Early detection of unlawful activities. 4. Reduced exposure to future risks.

22. Liquidity risk and its management Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit) Types of Liquidity Risk Asset liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of market risk. This can be accounted for by: Widening bid/offer spread Making explicit liquidity reserves Lengthening holding period for VaR calculations Funding liquidity - Risk that liabilities: Cannot be met when they fall due Can only be met at an uneconomic price Can be name-specific or systemic Causes of liquidity risk Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade that asset. Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade. Manifestation of liquidity risk is very different from a drop of price to zero. In case of a drop of an asset's price to zero, the market is saying that the asset is worthless. However, if one party cannot find another party interested in trading the asset, this can potentially be only a problem of the market participants with finding each other. This is why liquidity risk is usually found to be higher in emerging markets or low-volume markets. Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity.

Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too will default. Here, liquidity risk is compounding credit risk. A position can be hedged against market risk but still entail liquidity risk. This is true in the above credit risk examplethe two payments are offsetting, so they entail credit risk but not market risk. Another example is the 1993 Metallgesellschaft debacle. Futures contracts were used to hedge an Over-the-counter finance OTC obligation. It is debatable whether the hedge was effective from a market risk standpoint, but it was the liquidity crisis caused by staggering margin calls on the futures that forced Metallgesellschaft to unwind the positions. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk do not exist. Certain techniques of asset-liability management can be applied to assessing liquidity risk. A simple test for liquidity risk is to look at future net cash flows on a day-by-day basis. Any day that has a sizeable negative net cash flow is of concern. Such an analysis can be supplemented with stress testing. Look at net cash flows on a day-to-day basis assuming that an important counterparty defaults. Analyses such as these cannot easily take into account contingent cash flows, such as cash flows from derivatives or mortgage-backed securities. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. A general approach using scenario analysis might entail the following high-level steps: Construct multiple scenarios for market movements and defaults over a given period of time Assess day-to-day cash flows under each scenario. Because balance sheets differ so significantly from one organization to the next, there is little standardization in how such analyses are implemented. Regulators are primarily concerned about systemic and implications of liquidity risk. Managing Liquidity Risk Liquidity-adjusted value at risk Value at risk specific risk measure of the risk of loss on a specific portfolio of financial assets Liquidity at risk management of foreign exchange reserves. A country's liquidity position under a range of possible outcomes for relevant financial variables (exchange rates, commodity prices, credit spreads, etc.) should be considered. Scenario analysis-based contingency plans Contingency funding plans should incorporate events that could rapidly affect an institutions liquidity, including a sudden inability to securitize assets, tightening of collateral requirements or other restrictive terms associated with secured borrowings, or the loss of a large depositor or counterparty Diversification of liquidity providers If several liquidity providers are on call then if any of those providers increases its costs of supplying liquidity, the impact of this is reduced. The credit issuer should have an appropriately high credit rating to increase the chances that the resources will be there when needed. Derivatives five derivatives created specifically for hedging liquidity risk.: Withdrawal option: A put of the illiquid underlying at the market price. Bermudan-style return put option: Right to put the option at a specified strike. Return swap: Swap the underlying's return for LIBOR paid periodicially.

Return swaption: Option to enter into the return swap. Liquidity option: "Knock-in" barrier option, where the barrier is a liquidity metric.

23. Exchange-traded derivatives: types, functions, mechanism of trading. Exchange-traded derivatives are listed for trading on public exchanges and consist mostly of - options - futures contracts, compared to OTC derivatives like credit-default swaps that are traded privately. The derivatives exchange acts as an intermediary to all transactions and acts as a guarantor, using pooled initial margin from both sides of the trade. Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive. The world's top three derivatives exchanges are the Korea Exchange, Eurex, and CME Group. 24.Inflation, its types and methods of measurement. Factors and consequences of inflation. Anti-inflationary policies. In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary

policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements Measures Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer".The inflation rate is the percentage rate of change of a price index over time. For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is

The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007. Other widely used price indices for calculating price inflation include the following: Producer price indices (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index. Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee. Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy. Other common measures of inflation are: GDP deflator is a measure of the price of all the goods and services included in gross domestic product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure. Regional inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US. Historical inflation Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology. Asset price inflation is an undue increase in the prices of real or financial assets, such as stock (equity) and real estate. While there is no widely accepted index of this type, some central bankers have suggested that it would be better to aim at stabilizing a wider general price level inflation measure that includes some asset prices, instead of stabilizing CPI or

core inflation only. The reason is that by raising interest rates when stock prices or real estate prices rise, and lowering them when these asset prices fall, central banks might be more successful in avoiding bubbles and crashes in asset prices Effects General An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. For example, with inflation, lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments. Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature (e.g. loans and bonds). Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate (approximately). For example if you take a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that you are paying for the loan is 3%. It would also hold true that if you had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% you would have a real interest rate of -14%. Banks and other lenders adjust for this inflation risk either by including an inflation premium in the costs of lending the money by creating a higher initial stated interest rate or by setting the interest at a variable rate. As the rate of inflation decreases, this has the opposite (negative) effect on borrowers. Negative Cost-push inflation High inflation can prompt employees to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a wage spiral. In a sense, inflation begets further inflationary expectations, which beget further inflation. Hoarding People buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods. Social unrest and revolts Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the 20102011 Tunisian revolution[33] and the 2011 Egyptian revolution,[34] according to many observators including Robert Zoellick,[35] president of the World Bank. Tunisian president Zine El Abidine Ben Ali was ousted, Egyptian President Hosni Mubarak was also ousted after only 18 days of demonstrations, and protests soon spread in many countries of North Africa and Middle East. Hyperinflation If inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply goods. Hyperinflation can lead to the abandonment of the use of the country's currency, leading to the inefficiencies of barter. Allocative efficiency

A change in the supply or demand for a good will normally cause its relative price to change, signaling to buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, price changes due to genuine relative price signals are difficult to distinguish from price changes due to general inflation, so agents are slow to respond to them. The result is a loss of allocative efficiency. Shoe leather cost High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed in order to carry out transactions this means that more "trips to the bank" are necessary in order to make withdrawals, proverbially wearing out the "shoe leather" with each trip. Menu costs With high inflation, firms must change their prices often in order to keep up with economy-wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, or implicitly. Business cycles According to the Austrian Business Cycle Theory, inflation sets off the business cycle. Austrian economists hold this to be the most damaging effect of inflation. According to Austrian theory, artificially low interest rates and the associated increase in the money supply lead to reckless, speculative borrowing, resulting in clusters of malinvestments, which eventually have to be liquidated as they become unsustainable. Causes Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. Consequently, there is now broad agreement among economists that in the long run, the inflation rate is essentially dependent on the growth rate of money supply. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.[24] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian economists. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trend-line. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy. Controlling inflation A variety of methods have been used in attempts to control inflation. Monetary policy Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping the federal funds lending rate at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy. There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both

monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand). Fixed exchange rates Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. Under the Bretton Woods agreement, most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Bretton Woods agreement broke down in the early 1970s, countries gradually turned to floating exchange rates. However, in the later part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation was used in many countries in South America in the later part of the 20th century (e.g. Argentina (1991-2002), Bolivia, Brazil, and Chile). Gold standard Under a gold standard, paper notes are convertible into pre-set, fixed quantities of gold. The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself has no innate value, but is accepted by traders because it can be redeemed for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver. The gold standard was partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton Woods system broke down in 1971, causing most countries to switch to fiat money money backed only by the laws of the country. Economies based on the gold standard rarely experience inflation above 2 percent annually. Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output. Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining, which some believe contributed to the Great Depression. Wage and price controls Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. More successful examples include the Prices and Incomes Accord in Australia and the Wassenaar Agreement in the Netherlands. In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term.

Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed (see creative destruction). 25. The audit process and audit report Audit report is a formal opinion issued by either an internal auditor or an independent external auditor as a result of evaluation performed on a legal entity or subdivision. The report is provided to a user (individual, a group of persons, a company, a government, or even the general public) as an assurance service in order for the user to make decisions based on the results of the audit 1) Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. Brings a systematic, disciplined approach to evaluate and improve the effectiveness of: Risk management Control Governance processes Steps in internal audit 1. Establish and communicate the scope and objectives 2. Develop an understanding of the business area under review. objectives, measurements, and key transaction types 3. Describe the key risks facing the business activities 4. Identify control procedures 5. Develop and execute a risk-based sampling and testing approach 6. Report problems identified and negotiate action plans with management to address the problems. 7. Follow-up on reported findings at appropriate intervals. Audit report = 5 Cs Condition: What is the particular problem identified? Criteria: What is the standard that was not met? Cause: Why did the problem occur? Consequence: What is the risk/negative outcome because of the finding? Corrective action: What should management do about the finding? What have they agreed to do and by when? 2) External audit The report is only an opinion on whether the info presented is correct and free from material misstatements, whereas all other determinations are left for the user to decide Unqualified Opinion The companys financial condition, position, and operations are fairly presented in the financial statements Qualified Opinion report The financial statements are fairly presented with a certain exception which is otherwise misstated Ex: Single deviation from GAAP (Depreciation misstatement); Limitation of scope (Some areas couldnt be verified)

Adverse Opinion report Information contained is materially incorrect, unreliable, and inaccurate in order to assess the financial position and results of operations Ex: Financial statements differ from GAAP Disclaimer of Opinion report The auditor tried to audit an entity but could not complete the work due to various reasons and does not issue an opinion Ex: The auditee hides or refuses to provide evidence and information in significant areas of financial statements 26. Generally Accepted Auditing Standards and Code of Professional Conduct Generally Accepted Auditing Standards or GAAS are sets of standards against which the quality of audits are performed and may be judged. Several organizations have developed such sets of principles, which vary by territory. US GAAS US GAAS are ten auditing standards, developed by the Auditing Standards Board of American Institute of Certified Public Accountants General Standards The auditor must have adequate technical training & proficiency to perform the audit. The auditor must maintain independence (in fact and appearance) in mental attitude in all matters related to the audit. The auditor must exercise due professional care during the performance of the audit and the preparation of the report. Standards of Field Work The auditor must adequately plan the work and must properly supervise any assistants. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The auditor must not accept any gifts nor favors from any member of the organization. Standards of Reporting The auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report. ISAs

International Standards on Auditing are developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants. Derivatives of ISAs are used in the audit of several other jurisdictions, including the United Kingdom. Code of Professional Conduct (employee ethics) A code of conduct is a document designed to influence the behavior of employees. They set out the procedures to be used in specific ethical situations, such as conflicts of interest or the acceptance of gifts, and delineate the procedures to determine whether a violation of the code of ethics occurred and, if so, what remedies should be imposed. The effectiveness of such codes of ethics depends on the extent to which management supports them with sanctions and rewards. Violations of a code of conduct may subject the violator to the organization's remedies which can under particular circumstances result in the termination of employment. 27. Options: concept, types, strategies for using Option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset. An option which conveys the right to buy something is called a call; an option which conveys the right to sell is called a put. The reference price at which the underlying may be traded is called the strike price or exercise price. The process of activating an option and thereby trading the underlying at the agreed-upon price is referred to as exercising it. Most options have an expiration date. If the option is not exercised by the expiration date, it becomes void and worthless. In return for granting the option, called writing the option, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised. An option can usually be sold by its original buyer to another party. Many options are created in standardized form and traded on an anonymous options exchange among the general public, while other over-the-counter options are customized ad hoc to the desires of the buyer, usually by an investment bank. Types Exchange-traded options o Exchange-traded options (also called "listed options") are a class of exchange-traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange-traded options include: stock options, commodity options, bond options and other interest rate options stock market index options or, simply, index options and options on futures contracts callable bull/bear contract Over-the-counter

o Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include: interest rate options currency cross rate options, and options on swaps or swaptions. Other option types o Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options. Option strategies Combining any of the four basic kinds of option trades (possibly with different exercise prices and maturities) and the two basic kinds of stock trades (long and short) allows a variety of options strategies. Simple strategies usually combine only a few trades, while more complicated strategies can combine several. Strategies are often used to engineer a particular risk profile to movements in the underlying security. For example, buying a butterfly spread (long one X1 call, short two X2 calls, and long one X3 call) allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large loss. An Iron condor is a strategy that is similar to a butterfly spread, but with different strikes for the short options offering a larger likelihood of profit but with a lower net credit compared to the butterfly spread. Selling a straddle (selling both a put and a call at the same exercise price) would give a trader a greater profit than a butterfly if the final stock price is near the exercise price, but might result in a large loss. Similar to the straddle is the strangle which is also constructed by a call and a put, but whose strikes are different, reducing the net debit of the trade, but also reducing the risk of loss in the trade. One well-known strategy is the covered call, in which a trader buys a stock (or holds a previouslypurchased long stock position), and sells a call. If the stock price rises above the exercise price, the call will be exercised and the trader will get a fixed profit. If the stock price falls, the call will not be exercised, and any loss incurred to the trader will be partially offset by the premium received from selling the call. Overall, the payoffs match the payoffs from selling a put. This relationship is known as put-call parity and offers insights for financial theory.
28. Globalization and the polarization in the modern world economy.
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation technologies and services, mass migration and the movement of peoples, a level of economic activity that has outgrown national markets through industrial combinations and commercial groupings that cross national frontiers, and international

agreements that reduce the cost of doing business in foreign countries. Globalization offers huge potential profits to companies and nations but has been complicated by widely differing expectations, standards of living, cultures and values, and legal systems as well as unexpected global cause-andeffect linkages.

Globalization is a difficult term to define because it has come to mean so many things. In general, globalization refers to the trend toward countries joining together economically, through education, society and politics, and viewing themselves not only through their national identity but also as part of the world as a whole. Globalization is said to bring people of all nations closer together, especially through a common medium like the economy or the Internet. In our world, there are few places a person cant get to within a day of travel, and few people a person cant reach via telephone or Internet. Because of modern modes of travel and communication, citizens of a nation are more conscious of the world at large and may be influenced by other cultures in a variety of ways. Time and space matter less, and even language barriers are being overcome as people all over the world communicate through trade, social Internet forums, various media sources, and a variety of other ways. Arguments for globalization include the following:

It is reducing poverty worldwide. It is allowing access to technology in developing countries. It promotes world peace. It has benefited women and childrens rights. It raises life expectancy.

The polarization of the world economy happens in four ways. First: structural changes are reducing the importance of commodity exporters that played significant roles in the last century. Many developing countries have failed to adapt to these changing structures. Latin America's share of world trade has dropped by half since World War II, from 10% in the 50's to 5% at present. The share of developing countries' exports was one third less in 1986 than in 1980. As the twentieth century approaches its final decade, many countries are falling back in the world economy because of their incapacity to adapt to new situations and to provide for future needs. The second threat of polarization is technological. Insufficient investment in human and fixed capital reduces the chances of absorbing new technologies. One indicator of this kind of polarization is the distribution of semiconductor consumption around the world. In 1986, 91% of worldwide semiconductor sales of $31 billion were concentrated in the U.S., Japan and Europe. With nearly two-fifths of world consumption, Japan has the highest per capita use of chips ($100), more than twice that of the U.S. ($43) and nearly five times Europe's ($22). By contrast, the $2.9 billion chip market in the rest of the world is divided among many countries. Korea absorbs $255 million and Brazil $190 million, together taking 1,5% of all other countries' consumption. Per capita use is below $6 for Korea and $1.50 for Brazil. In poorer countries, semiconductor consumption is negligible. The third kind of polarization is financial. As liquid assets multiply rapidly in the more developed financial markets, the share of poorer countries in total financial wealth diminishes. This is a long-term trend that has accelerated in recents years thanks both to the proliferation of financial assets in the rich countries and to capital-flight and interest payments from poorer countries. Measuring this trend must be rough,for lack of data. The IMF, however estimates that the share of deposits from developing countries in all cross-border bank deposits shrank from 27% to 21% in the five years after 1981. The fourth way in which the world economy is polarizing is through the inability of many nation-states to mobilize sufficient resources to ensure their survival. This inability has led to

the deterioration of infrastructure in many poor countries, rightly leading President Sarney to observe recently "the Brazilian State has reached a point of exhaustion in which it lacks resources with which to mananage and meet the basic needs which are the State's responsibility in the areas of health, education, and other public services. It has no resources available for large scale investments."
29. Types of institutional investors and their role in the global financial markets.
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.

Institutional investor types


Pension fund Mutual fund Investment trust Unit trust and Unit Investment Trust Investment banking Hedge fund Sovereign wealth fund Endowment fund Insurance companies

30. Futures: concept, types, strategies for using.

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long

or short using futures. There are two main types of futures trading contracts: Futures contracts which are traded for physical delivery, known ascommodities and include sugar, corn and cocoa. Futures contracts which end with a cash settlement, known asfinancial instruments. They can include underlying assets in equities, bonds and indices. Futures based on equities allow you to gain exposure to specific shares, in particular to the most traded European blue chips. Stock market indices futures enable you to take positions in European or international stock markets with leverage. An example: promoted by NYSE Liffe, NYSE Euronexts international derivatives market, FTSE 100 Index Futures allow you to gain exposure to the FTSE 100 Index which tracks the performance of the UK top 100 blue chip companies 31. Swaps: concept, types, strategies for using In finance, a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (or coupon) payments associated with the bonds. Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price. The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties. Consequently, swaps can be in cash or collateral. Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. Types of swaps interest rate swaps o The most common type of swap is a plain Vanilla interest rate swap. It is the exchange of a fixed rate loan to a floating rate loan. The life of the swap can range from 2 years to over 15 years. The reason for this exchange is to take benefit from comparative advantage. Some companies may have comparative advantage in fixed rate markets while other companies have a comparative advantage in floating rate markets. When companies want to borrow they look for cheap borrowing i.e. from the market where they have comparative advantage. However this may lead to a company borrowing fixed when it wants floating or borrowing floating when it wants fixed. This is where a swap comes in. A swap has the effect of transforming a fixed rate loan into a floating rate loan or vice versa. For example, party B makes periodic interest payments to party A based on a variable interest rate of LIBOR +70 basis points. Party A in return makes periodic interest payments based on a fixed rate of 8.65%. The payments are calculated over the notional amount. The first rate is called variable, because it is reset at the beginning of each interest calculation period to the then current reference rate, such as LIBOR. In reality, the actual rate received by A and B is slightly lower due to a bank taking a spread. currency swaps

o A currency swap involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency. Just like interest rate swaps, the currency swaps also are motivated by comparative advantage. Currency swaps entail swapping both principal and interest between the parties, with the cashflows in one direction being in a different currency than those in the opposite direction. credit swaps o A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occur. Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure. commodity swaps o A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a fixed price over a specified period. The vast majority of commodity swaps involve crude oil. equity swaps An equity swap is a special type of total return swap, where the underlying asset is a stock, a basket of stocks, or a stock index. Compared to actually owning the stock, in this case you do not have to pay anything up front, but you do not have any voting or other rights that stock holders do 32. The major functions of international banking: international trade financing, participation in the interbank foreign exchange and Eurocurrency markets, international investment banking services, and sovereign lending. International trade financing Letters of Credit a commercial bank guarantee of either payment by the buyer or performance by the seller. Purposes Guarantees payment by the buyer (letter of credit) or to guarantee performance by seller (standby letter of credit. Once letter of credit is issued, the seller can use instrument to finance production of goods. Functions of Letters of Credit Payment Instrument In absence of letter of credit, sight or time drafts used. No Guarantee of Payment. Letters of Credit Involves Bank in Transaction. Performance Guarantee In Documentary Transaction no guarantee of performance. Payment by bank would not be released until goods and document conforms to specifications on letter of credit. Finance Instrument Seller can use letter of credit as collateral to finance production and exportation of good. Types of Letters of Credit Irrevocable Letter of Credit-bank cannot revoke letter of credit. To change letter of credit, must get written agreement. Most Popular in International Commercial Transaction

Revocable Letter of Credit-bank can revoke letter of credit. Very Seldom Used. Letter of Credit Transaction After formation of contract, buyer arranges for bank to open letter of credit. Buyers bank prepares irrevocable letter of credit. Buyers bank sends irrevocable letter of credit to a US bank for confirmation. US bank prepares a letter of confirmation to exporter along with irrevocable letter of credit Exporter arranges for freight forwarded to deliver goods. Freight Forwarder prepares documents. Exporter presents document to Bank indicating full compliance. Bank bound by rule of strict compliance Bank reviews documents and authorizes payment Uniform Customs and Practices for Documentary Credits-provisions Description of the Goods should be clear and brief as possible. In the listing of documents, should list the contents of each document. Transportation Documents must be clear. Insurance Documents must be clear. Time periods for presentation of documents must be specified. Title of Letter of Credit should specify irrevocable. Applicant must specify clearly whether the letter of credit will be available for partial shipment. The letter of credit should provide transport details Under rule of strict compliance, banks are authorized to reject documents if there are any discrepancies. Standby Letter of Credit is a letter of credit that represents an obligation to the beneficiary on the part of the issuer International Standby Practices Standby Letters of Credit secures contractual obligations in construction contracts, service contracts, warranties, counter-trade trade obligations, secures international loans and supplies. Alternative Methods of Guaranteeing Performance Types Performance Bond-a guarantee from an insurance company to pay insured in case of default. Bid Bond-insure against the risk that a bidder may not honor its bid. Credit Surety-guarantees the repayment to a bank or lender who finances an export transaction or development project. Exim Bank of World Bank Retention Fund-in large or government projects, a percentage is deducted from each payment due to the supplier or contractor and is retained in a fund pending completion of project. Demand Guarantee secures performance of a non-monetary obligation. SOURCES OF TRADE FINANCE Commercial Banks Export Financing Borrowing against trade documents Factoring-exporter transfers title to its account receivable to a factoring company at a discount. Forfaithing-selling at a discount, of longer term receivables or promissory notes to a foreign buyer.

Transferable Credit-suppliers accept part of the letter of credit that seller receives from buyer in export transaction. Back to Back Letter of Credit-buyer makes arrangements with third bank to make loan. Government Assistance Programs Eximbank in United States Arranges loans, guarantees, working capital and insurance Foreign Corporation Insurance Agency Protects against default on exports sold under open accounts Overseas Private Insurance Corporation Offers performance bonds Small Business Administration Revolving line of credit

Participation in the interbank foreign exchange and Eurocurrency markets About 90% of foreign exchange trading is in the Interbank part of the market. Provides continuous information on the foreign exchange market Talking with traders at other banks. Observing prices (exchange rates) being quoted. Growth of the International Capital Market The removal of barriers to private capital flows across countries borders has contributed to rapid growth in the international capital market. A policy trilemma refers to three available options: Fixed exchange rate Monetary policy oriented toward domestic goals Freedom of international capital movements Offshore Banking and Offshore Currency Trading Offshore banking The business that banks foreign offices conduct outside of their home countries Banks operate offshore though any of three types of institution: Agency office Subsidiary bank Foreign branch Offshore currency trading Trade in bank deposits denominated in currencies of countries other than the one in which the bank is located It is referred to as Eurocurrency trading. Eurodollars Dollar deposits located outside the U.S. Eurobanks Banks that accept deposits denominated in Eurocurrencies Eurocurrency is a time deposit in an international bank located in a country different than the country that issued the currency. For example, Eurodollars are U.S. dollar-denominated time deposits in banks located abroad. Euroyen are yen-denominated time deposits in banks located outside of Japan. The foreign bank doesnt have to be located in Europe. Most Eurocurrency transactions are interbank transactions in the amount of $1,000,000 and up. Common reference rates include LIBOR the London Interbank Offered Rate PIBOR the Paris Interbank Offered Rate

SIBOR the Singapore Interbank Offered Rate A new reference rate for the new euro currency EURIBOR the rate at which interbank time deposits of are offered by one prime bank to another. Eurocredits are short- to medium-term loans of Eurocurrency. The loans are denominated in currencies other than the home currency of the Eurobank. Often the loans are too large for one bank to underwrite; a number of banks form a syndicate to share the risk of the loan. Eurocredits feature an adjustable rate. On Eurocredits originating in London the base rate is LIBOR. Forward Rate Agreements - An interbank contract that involves two parties, a buyer and a seller. The buyer agrees to pay the seller the increased interest cost on a notational amount if interest rates fall below an agreed rate. The seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate. Euronotes are short-term notes underwritten by a group of international investment banks or international commercial banks. They are sold at a discount from face value and pay back the full face value at maturity. Maturity is typically three to six months.

Eurocurrency trading has grown for three reasons: Growth in world trade Evasion of financial regulations like reserve requirements Political concerns The Growth of Eurocurrency Trading London is the leading center of Eurocurrency trading. The early growth in the Eurodollar market was due to: Growing volume of international trade Cold War New U.S. restrictions on capital outflows and U.S. banking regulations Federal Reserve regulations on U.S. banks (e.g., the Feds Regulation Q) Move to floating exchange rates in 1973 Reluctance of Arab OPEC members to place surplus funds in American banks after the first oil shock Trade financing is the complex of actions and instruments for financing of international trade operations of the clients when banks attract credit resources from international financial markets. Export credit is an international loan given by the bank or by the export credit agency (ECA) to the bank of the importing country, or through the bank of the exporting country for making investment projects. Terms: 2-5 years; the sum covers 85% of the contract; price is LIBOR +2-3%; reduction of risk is made by the usage of letter of credit or bank guarantee. Main function is to give guarantee and promote international trade. Guidelines for Officially Supported Export Credits is the main document regulating export credits. ECA is an official organization that gives export loans, exercises financing and insurance of export transactions, or only specializes on giving guarantees for the export loans. These companies can be either departments of the ministry of finance (UK, Swiss), or state+private. The most famous ones are Coface in France, Sace in Italy, Euler Germes in Germany and Atradius in Netherlands.

33. International banking the structure and operational function, the services offered, and measures to improve the efficiency and effectiveness of the international banking organization International banking operations are essentially to facilitate the movement of goods across the political boundary of countries. Banking system came along with the development of money as an institution.As civilization narrowed down the social distances and mankind learned about the benefits of exchanging commodities across political boundaries, the present-day international trade developed.The transaction of commodities across countries required financial intermediation in the international level and thus international banking business was born. What started with movement of gold and silver across country-borders became ultimately an efficient institution of international transfer of not only yellow metal but the currencies of sovereign countries. In this way the emergence and growth of international banking is closely interwoven with the development of international trade and international capital movement. Structure and operational functions The major way that banks become involved in cross-border operations is through correspondent relationships, banks in different countries facilitate inter-national financial transactions for each others clients. For example, a bank in Country A may ask its correspondent in Country B to remit funds from an importer in Country B to an exporter in Country A. A bank may have several correspondent banks m the different countries where it wants to do business,or it may operate through a key bank. Banks may also increase their influence abroad through establishing branches. A branch is a legal form of operation that is an extension of the parent bank. It is not a separate corporation where the parent owns stock, like a subsidiary. A branch is used to gain access to local capital or Eurocurrencies, and it is often established to eliminate relying on correspondent relationships. Branches are also being used to gain access to local clients. The bank that has the largest global spread is Citicorp, the large U.S. bank that placed twelfth in The Bankers 1989 list of top-1000 banks. Citicorp has total assets of over $207 billion, offices in 90 countries, and is expanding even yet. It is the only bank that has offices in each OECD country where foreign banks are allowed to establish offices, and it has the broadest network of any bank in Europe. The total number of domestic and overseas branches, offices, subsidiaries, and affiliates is almost 3300.27 A consortium bank occurs when several banks from different countries pool their resources to form another bank that engages in international transactions. This enables the banks to draw on the strengths of their partners, such as foreign-currency deposits, branches in different countries, or expertise in specific types of banking transactions. Domestic U.S. banks can also establish Edge Act corporations in different cities in the United States in order to get involved in international transactions. By law, a bank is allowed to establish an Edge Act company in different cities outside of its home state, as long as the Edge Act bank is involved in international and not domestic banking activities. A final major type of operation for U.S. banks is the International Banking Facility. IBFs were created in the United States to allow U.S. banks to engage in Eurodollar-type operations. There are currently IBFs m 20 states, at 150 banks and 328 agencies and branches, mostly in New York. Although the dollar deposits in the IBFs are not exactly Eurodollars, they are almost identical in terms of interest rates, etc. The IBFs have lower costs due to the absence of reserve requirements and state income taxes. U.S. companies can obtain access to IBF funds through their foreign subsidiaries, and they must prove that the funds are being used to support international operations. The IBFs are not exactly separate

physical facilities but are simply an accounting separation of activities engaged in by international banks. Measures to improve the efficiency and effectiveness of the international banking Important Dimensions of International Banking International banks must face a wide variety of issues, and a large number of key developments have taken place in recent years; we will focus here on the following areas that have an impact on MNEs and their operations worldwide: the expansion of services, market access and changing market conditions, and profitability. Expansion Of Services The market for financial services has virtually skyrocketed for banks in recent years. The major functions that are especially suited for the international banks are: 1. export and import financing; 2. foreign-exchange trading; 3. debt and equity financing in domestic and Euromarkets; 4. international cash management, especially electronic funds transfer across national borders; 5. financial engineering for corporate clients; and 6. the supply of information and advice to clients. Although there are at least these six areas in which banks can offer services for corporate clients, banks do not necessarily excel in every area. Where they cannot provide services themselves, they must operate through correspondent banks at home and abroad. For example, many of the regional banks in the United States attempt to provide export and import financing and foreign-exchange trading for their local clients, but they usually work through large money center banks to effect the trades. Banks also attempt to establish niches where they feel they can develop a comparative advantage. Financial engineering is a term that has surfaced in recent years as a result of the creative design of financial instruments by the international banks. Since the stock-market crash of 1987, there has been significant volatility in the financial markets. Foreign exchange, bonds, equities, and commodities are underlying transactions that have seen big swings in prices and returns, especially over the past few years. As a result, banks have developed the derivatives market, a market designed to protect underlying transactions. Examples of derivatives are forward contracts, futures, options, and swaps. Vanilla derivatives are simple uses of the derivatives to hedge exposure. However, banks have developed complex, custom-tailored derivatives and applied them to unique situations for the firms. Thus the financial-engineering dimension of commercial and investment banks is one of creativity and flexibility. It has become an important element in the strategy of large banks such as Bankers Trust and Citicorp 34. Acquisitions and Mergers in Banking and finance. Takeover The transfer of control from one ownership group to another. Acquisition The purchase of one firm by another Merger The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction. Amalgamation A genuine merger in which both sets of shareholders must approve the transaction

Requires a fairness opinion by an independent expert on the true value of the firms shares when a public minority exists Friendly Acquisition The acquisition of a target company that is willing to be taken over. Usually, the target will accommodate overtures and provide access to confidential information to facilitate the scoping and due diligence processes. Hostile Takeovers A takeover in which the target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information. The acquirer usually has already accumulated an interest in the target (20% of the outstanding shares) and this preemptive investment indicates the strength of resolve of the acquirer. Classifications Mergers and Acquisitions 1. Horizontal A merger in which two firms in the same industry combine. Often in an attempt to achieve economies of scale and/or scope. 2. Vertical A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Often in an attempt to control supply or distribution channels. 3. Conglomerate A merger in which two firms in unrelated businesses combine. Purpose is often to diversify the company by combining uncorrelated assets and income streams 4. Cross-border (International) M&As A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company. The primary motive should be the creation of synergy. Synergy value is created from economies of integrating a target and acquiring a company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms. Operating Synergies 1. Economies of Scale Reducing capacity (consolidation in the number of firms in the industry) Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) Geographic synergies (consolidation in regional disparate operations to operate on a national or international basis) 2. Economies of Scope Combination of two activities reduces costs 3. Complementary Strengths Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another. Efficiency Increases New management team will be more efficient and add more value than what the target now has. The combined firm can make use of unused production/sales/marketing channel capacity Financing Synergy Reduced cash flow variability Increase in debt capacity

Reduction in average issuing costs Fewer information problems Tax Benefits Make better use of tax deductions and credits Use them before they lapse or expire (loss carry-back, carry-forward provisions) Use of deduction in a higher tax bracket to obtain a large tax shield Use of deductions to offset taxable income (non-operating capital losses offsetting taxable capital gains that the target firm was unable to use) New firm will have operating income to make full use of available CCA. Strategic Realignments Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills, connections to markets or people, and new products/services.

35. Banking Regulation and globalization: functions of central banks, the main tools and instruments of monetary policy, banking supervision under the Basel Agreement on International Capital Standards Accord, unresolved regulatory issues Functions of a central bank: implementing monetary policy determining Interest rates controlling the nation's entire money supply the Government's banker and the bankers' bank ("lender of last resort") managing the country's foreign exchange and gold reserves regulating and supervising the banking industry setting the official interest rate used to manage both inflation and the country's exchange rate and ensuring that this rate takes effect via a variety of policy mechanisms Monetary policy. Central banks implement a country's chosen monetary policy. At the most basic level, this involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency, currency board or a currency union. A central bank may use another country's currency either directly (in a currency union), or indirectly (a currency board). When a country has its own national currency, this involves the issue of it. Policy instruments: The main monetary policy instruments available to central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount, and credit policy (often coordinated with trade policy). While capital adequacy is important, it is defined and regulated by the Bank for International Settlements, and central banks in practice generally do not apply stricter rules. To enable open market operations, a central bank must hold foreign exchange reserves (usually in the form of government bonds) and official gold reserves. It will often have some influence over any official or mandated exchange rates, some exchange rates are managed, some are market based (free float) and many are somewhere in between ("managed float" or "dirty float"). Interest rates: A typical central bank has several interest rates or monetary policy tools it can set to influence markets. Marginal lending rate a fixed rate for institutions to borrow money from the central bank. (In the USA this is called the discount rate). Main refinancing rate the publicly visible interest rate the central bank announces. It is also known as minimum bid rate and serves as a bidding floor for refinancing loans. (In the USA this is called the federal funds rate). Deposit rate the rate parties receive for deposits at the central bank.

These rates directly affect the rates in the money market, the market for short term loans. Open market operations are: Temporary lending of money for collateral securities ("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed maturity loans (of 1 week and 1 month for the ECB) are auctioned off. Buying or selling securities ("direct operations") on ad-hoc basis. Foreign exchange operations such as forex swaps. All of these interventions can also influence the foreign exchange market and thus the exchange rate. Reserve requirement: the minimum reserves each bank must hold to demand deposits and banknotes; the emphasis has moved toward capital adequacy, and in many countries there is no minimum reserve ratio. Goal is liquidity. Exchange requirements: to influence the money supply, some central banks may require that some or all foreign exchange receipts (generally from exports) be exchanged for the local currency. The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. Capital requirements (Basel II) Capital/Assets The Bank for International Settlements Basel Committee on Banking Supervision influences each country's capital requirements 1988 - a capital measurement system commonly referred to as the Basel Capital Accords All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the central bank or the banking supervisor. For international banks, including the 55 member central banks of the Bank for International Settlements, the threshold is 8% (Basel Capital Accords) of risk-adjusted assets, whereby certain assets (such as government bonds) are considered to have lower risk and are either partially or fully excluded from total assets for the purposes of calculating capital adequacy. The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline. The Basel I accord dealt with only parts of each of these pillars. The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. The second pillar provides a framework for dealing with all the other risks a bank may face (systemic risk, pension, concentration, strategic). The third pillar aims to promote greater stability in the financial system (sharing of information facilitates assessment of the bank by others including investors, analysts, customers, other banks and rating agencies). Banking supervision tools: capital and reserve requirement, financial reporting, corporate governance (to encourage the bank to be well managed, have a certain structure), credit rating. Unresolved issues: single supervisor or multiple (only central bank or different agencies), central banks rate of independence. 36. Bank Financial Management: the nature, major principles, strategic context and managerial functions of financial management in banks, and other financial services firms Bank financial management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting).Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital Ten Principles of financial management: 1: The risk-return tradeoff - we won't take additional risk unless we expect to be compensated with additional return. 2: The time value of money - a dollar received today is worth more than a dollar received in the future. 3: Cash -- Not Profits - In measuring value we will use cash flows rather than accounting profits because it is only cash flows that the firm receives and is able to reinvest. 4: Incremental cash flows - it's only what changes that count. In making business decisions we will only concern ourselves with what happens as a result of that decision. 5: In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits=>profitable projects can only be found through product differentiation or by achieving a cost advantage. 6: Efficient Capital Markets - The markets are quick and the prices are right. 7: The agency problem - managers won't work for the owners unless it's in their best interest. The agency problem is a result of the separation between the decision makers and the owners of the firm=>managers may make decisions that are not in line with the goal of maximization of shareholder wealth. 8: Taxes bias business decisions. 9: All risk is not equal since some risk can be diversified away and some cannot. The process of diversification can reduce risk, and as a result, measuring a projects or an asset's risk is very difficult. 10: Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance. Ethical behavior is important in financial management. Strategic context

long-term course of actions, or strategy specifies monetary and physical resources required to achieve a predetermined objective. It should always involve: Search for investment opportunities and selection of the most profitable Determination of the optimal mix of internal and external funds to finance these opportunities System of financial controls governing the acquisition and use of funds Analysis of financial results for future decisions 37. The global debt securities market: composition, organization Debt vs. Equity securities: equity securities (e.g. common stocks) represent ownership of the business, debt securities (bonds, banknotes and debentures) = loan to the business, a bond holder holds debt of the business but has no equity ownership. Stocks are without time, bonds have a specific maturity. Debt securities will be worth their face value at maturity. Risk includes the bankruptcy of the company or its disability to pay the debt. Investors generally buy them for income and stability of principal. Debt securities are subject to company risk, credit risk and interest rate risk. The bond market (also known as the credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion. A large part of daily trading volume takes place between broker-dealers and large institutions in a decentralized, overthe-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges. Five types of bond markets. Corporate Government & agency Municipal Mortgage backed, asset backed, and collateralized debt obligation Funding The bond market is the market for debt securities in the form of bonds where buyers and sellers determine their prices and therefore their accompanying interest rates. It is also known as the fixed-income or debit or credit market. In purchasing a bond you are effectively lending money to a government, corporation, or municipality, known as the issuer, which agrees to pay you a certain rate of interest during the lifetime of the bond and repay its principal or face value when it matures or becomes due. Since 2000, the international bond market has doubled in size as a result of the activity of big multinational companies. The individual government bond markets have a high level of liquidity and considerable sizethese are included in the international bond market. They are noted for their low credit risk and are unaffected by interest rates. Trading generally takes place over the counter (known as OTC) between broker dealers and big institutions. The stock exchanges list a small number of bonds too. The largest centralized bond market is the New York Stock Exchange (NYSE), which mainly represents corporate bonds. In contrast to this, most governments have bond markets that lack centralization, mostly due to the fact that bond issues vary widely and there is a large choice of different securities by comparison. Most outstanding bonds are in the hands of institutions: pension funds, mutual funds, and banks. This is because individual bond issues are so specific and a large number of smaller issues lack liquidity. The volatility of the bond market is in direct proportion to the monetary and economic policy of the country of the participant.

The main difference between corporate and government bonds is that the latter are guaranteed and thus carry a low risk of investment, albeit at a lower rate of return. Corporate bonds generally offer a higher rate of return on investment, but carry more riskif the company fails, the bondholder risks losing their investment Participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. Participants include: Institutional investors Governments Traders Individuals Size Amounts outstanding on the global bond market increased 10% in 2009 to a record $91 trillion. The US was the largest market with 39% of the total followed by Japan (18%). Mortgagebacked bonds accounted for around a quarter of outstanding bonds in the US in 2009 or some $9.2 trillion. The sub-prime portion of this market is variously estimated at between $500bn and $1.4 trillion. Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds. In Europe, public sector debt is substantial in Italy (93% of GDP), Belgium (63%) and France (63%). The total market value of the worlds bond markets are about 50% larger than the worlds equity markets. The U.S. dollar (42%), the euro(30%), the pound sterling(4%), and the yen(11%) are the four currencies in which the majority of domestic and international bonds are denominated. Volatility For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes. A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Barclays Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Moodys and Standard & Poors sell credit rating analysis. Focus on default risk, not exchange rate risk. Types of instruments Straight Fixed Rate Debt (bonds with a specified coupon rate and maturity and no options attached) Floating-Rate Notes (Just like an adjustable rate mortgage) Equity-Related Bonds (There are two types of equity-related bonds: convertible bonds and bonds with equity warrants. A convertible bond issue allows the investor to exchange the bond for a predetermined number of equity shares of the issuer. Bonds with equity warrants allow the holder to keep his bond but still buy a specified number of shares in the firm of the issuer at a specified price) Zero Coupon Bonds (Zeros are sold at a large discount from face value because there is no cash flow until maturity) Dual-Currency Bonds (A straight fixed-rate bond, with interest paid in one currency, and principal in another currency) Composite Currency Bonds (Denominated in a currency basket, like the SDRs or ECUs instead of a single currency) Structure The structure of the international bond market means convenience when trading, because everything is done electronically. This market trades in a large number of bond types each day, and is separated into two distinct markets, the primary market and the secondary market. The primary bond market is where debt securities are issued by the entity and then sold to lenders, including the public. The secondary bond market is where the investors who have bought bonds

from the issuing entity go to sell these bonds, and where buyers looking for these bonds go. The stock market is small compared to the international bond market, even though the stock market is more well known to the public. 38. OTC derivatives. SWAPS. Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is US$684 trillion (as of June 2008). Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counter-party. Therefore, they are subject to counter-party risk, like an ordinary contract, since each counter-party relies on the other to perform. For derivatives contracts are usually governed by an International Swaps and Derivatives Association agreement. This segment of the OTC market is occasionally referred to as the "Fourth Market." A swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (or coupon) payments associated with the bonds. Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price. The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps. The value of a swap is the net present value (NPV) of all estimated future cash flows. A swap is worth zero when it is first initiated, however after this time its value may become positive or negative. There are two ways to value swaps: in terms of bond prices, or as a portfolio of forward contracts. 39. Trade finance: collection orders Seller or exporter's order that accompanies a demand draft or time draft (with shipping and other collection documents) and instructs the collecting and remitting banks on interest charges, demurrage charges, case of need, protest. For example: In a collection, party in the buyer's country who is designated by the seller to advise and/or give instructions in the event of problems or disputes. The collection order will specify whether the case of need is authorized to instruct the bank 40. Trade finance: letters of credits A letter of credit is a financial instrument used to secure payment to a specified party on production of specified documents that evidence the shipment of goods. Letters of credit are typically required by overseas suppliers in an attempt to mitigate some of the risks associated with trading on open account terms.

Although they can also be used in trade within one company in some circumstances. The letter of credit also gives some element of reassurance to the buyer that they will not be payment for product that has not been shipped or does not meet the terms of their order. The letter of credit is issued by a bank and will typically name the business that will be the beneficiary (typically the supplier), specify the documents that are required to be presented (see below), specify the sum to be paid and the expiry date of the letter of credit (often abbreviated to an LC). 41. Trade finance and the role of banks. Trade financing is the provision of any form of financing that enables a trading activity to take place and which may be made directly to the supplier, to facilitate procurement of items for immediate sale and/or for storage for future activities,or it could be provided to the buyer, to enable him meet contract obligations. Role of Banks:1)Provide Information to buyers and sellers (advisory role); 2)Settlements for Trade Transactions; 3)Provide Financing ; 4)Manage currency risks; 5)Take market risks Banks get their money through business checking or deposit accounts, service fees and by issuing certificates of deposit (CD) and banker's acceptances--money market instruments that are collateralized by letters of credit (LOC) used in trade finance--and commercial paper. Commercial banks offer services such as trade finance, project finance, payroll, foreign exchange transactions and trading, lock boxes for collecting payments and general corporate finance. Companies involved with trade finance include importers and exporters, financiers, insurers and other service providers. 42 Types of bank guarantees. A guarantee is an obligation of a bank to respond to the obligations of a customer. There are rules and regulations for guarantees. First rules were adopted in 1960s. The initiators were French banks; through Trade Chambers the rules were suggested. Types: tender guarantee, the guarantee of the execution of an order, an advance payment guarantee. Tender guarantee is issued to bid for delivery of services and products in a tender arranged by a beneficiary The purpose of tender guarantee is to secure any claims by the party inviting the tender on the tenderer in the event of withdrawal of the bid before its expiry date or if the bid is modified unilaterally or if the tenderer, upon being awarded the contract, refuses to sign the contract or provide further guarantees on request. Covers 5% of the project, period is 6 months. The following associated risks should not be underestimated: changes in the market, changes in the price structure, inflation. The purpose of an advance payment guarantee is to secure any claims by the buyer on the seller for reimbursement of the buyer's advance payment on the contract price before delivery of the goods (or advance payment of the full contract price) in the event that the seller has failed to meet his or her contractual delivery obligations in full. The guarantee covers either the 80% of the period or the whole period. The guarantee is issued by the bank of the exporter or supplier. Performance bond is the guarantee of an execution of the order. The purpose is to secure any claims by the buyer on the seller arising from default in delivery or performance of the terms of the contract (e.g. construction). For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract, the client is guaranteed compensation for any monetary loss up to the amount of the performance bond. It covers 10 % of the volume of the contract. The guarantee is very expensive.

43 PPP and its role in the modern economy Publicprivate partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period. The purpose of PPP is to achieve more efficient fulfillment of the public sector tasks. Broadly PPP could be understood as an opportunity to involve private sector in the sphere of state responsibility. It is no profit project. Possible models of PPP: 1.concessions (BOT- build-operate-transfer: a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract); 2.co-financing; 3.BOOT (build own operate transfer: the private entity owns the works); 4.sale and lease-back and arrangements lease; 5.participation in the share capital of the project company. Advantages of the concession model: 1.clear legal framework for the implementation of infrastructure projects; 2.providing guarantees to concessionaires in case of change of law as well changes in the rates at which concessionaire renders service to consumers; 3.regulated tender procedure. Drawbacks: 1.no transfer of ownership to the private sector; 2. expenses and time-consuming tender procedures; 3.impossibility to ensure the fulfillment of contractual obligations by the grantor; 4. international commercial arbitration is not available; 5. mandatory template concession agreements. PPP main risks: currency risk, termination payment, security and step-in rights, dispute resolution, Russian law on concession agreement. Since the onset of the financial crisis in 2008, estimates suggest that the number of PPP deals closed has fallen more than 40 percent. These difficulties have placed significant strains on governments that have come to rely on PPPs as an important means for the delivery of long-term infrastructure assets and related services. Moreover, this has occurred precisely at a time when investments in public-sector infrastructure are seen as an important means of maintaining economic activity during the crisis, as was highlighted in a European Commission communication on PPPs. As a result of the importance of PPPs to economic activity, in addition to the complexity of such transactions, the European PPP Expertise Centre (EPEC) was established to support public-sector capacity to implement PPPs and share timely solutions to problems common across Europe in PPPs. 44 Financial centers in global economy. Moscow as a financial center An international financial centre is a non-specific term of reference usually meant to designate a city as a major participant in international financial markets for the trading of cross-border assets. An international financial centre will usually have at least one major stock market as well as other financial markets, as well as being subject to a significant presence of international banks and financial services companies. In a globalised and interdependent world economy the dynamics of international competitiveness have become increasingly important for domestic policy makers. Cities that are financial centers face greater competitive forces than most, for the financial services industry is at the heart of the global economy, acting as the facilitator of world trade and investment. Successful financial centres fulfill one or more of five different roles: Global financial centres there are two cities that can claim to fulfill this role, London and New York; International

financial centres such as Hong Kong that conduct a significant volume of cross-border transactions; Niche financial centres that are worldwide leaders in one sector, for example Zurich in private banking; National financial centres that act as the main centre for financial services within one country. Toronto, for example, is the national financial centre of Canada; Regional financial centres that conduct a large proportion of regional business within one country. Chicago, as well as being an international centre is also a regional one. Formation of international financial center in Moscow is a continuous social and historical process inseparably linked with the economic development of the world and Russia as its integral part. Development of international financial center in Russia must correspond to the countrys economic requirements. There is a need to diversify sources of financing of state and private sector development needs in Russia. Objectives of development: Development of environment for meeting demand for top quality financial cervices from Russian and foreign companies; Formation (on the base of clients demand) of an institutional cluster consolidating stock exchanges, banks, legal firms and other institutions shaping necessary infrastructure for provision of financial services; Provision of services not only to those who intend to enter the Russian market and raise the Russian capital, but also to those who plan to invest in Russia; Formation in Russia a center for transnational financial operations (at the first stage with countiesmembers of CIS). Preconditions for Development of Financial Center: 1.Sound financial system, including: Liquid market and absence of man-made barriers between various market segments; Absence of protection barriers and discrimination of foreign market participants and as the result wide presence of international financial companies. 2. Adequate financial governance and control. 3. High quality human capital in financial field. 4. Advanced telecommunications. 5. Modern and constantly developing IT infrastructure capable of meeting growing demands of global financial companies, requirements of trading platforms etc. 6. Dynamically developing national (regional) economy generating demand for top-quality financial services. 45 Role of banks in preventing money laundering Money laundering is the practice of disguising the origins of illegally-obtained money. The money involved can be generated by any number of criminal acts, including drug dealing, corruption, accounting and other types of fraud, and tax evasion. The first defense against money laundering is the requirement on financial intermediaries to know their customersoften termed KYC know your customer requirements. Know your customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Knowing one's customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators of laundering. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology. Many Companies provide software and databases to help perform these processes. Bank and corporate security directors play an important role in fighting money laundering. Banks are required to maintain a BSA/AML (Bank Secrecy Act/ Anti-Money Laundering) compliance program comprised of: (i) a system of internal controls to ensure ongoing compliance; (ii) daily coordination and monitoring of compliance; (iii) adequate training for compliance and other appropriate personnel; and (iv) independent testing of the compliance function by internal auditors or an outside party. In recent years due to growing intolerance towards drug traffickers, organized criminal syndicates and terrorism, a number of anti-money laundering initiatives have been

evidenced, at both governmental and institutional level. Banks play a prior role for illegal transactions in the process of money laundering. Banks act as gatekeepers for the legitimate financial system and it is only through their vigilance that the system can be protected from providing organized criminals or terrorists with a mechanism for concealing the proceeds of illegal and corrupt activity. 46. Banks products and services. Price shadule. A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank," a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity). Banking services The primary operations of banks include: Keeping money safe while also allowing withdrawals when needed Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business) Issuance of credit cards and processing of credit card transactions and billing Issuance of debit cards for use as a substitute for checks Allow financial transactions at branches or by using Automatic Teller Machines (ATMs) Provide wire transfers of funds and Electronic fund transfers between banks Facilitation of standing orders and direct debits, so payments for bills can be made automatically Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account. Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly. Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check. Notary service for financial and other documents Other types of bank services Private banking - Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.[3] Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks.[4] Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products. Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.[citation needed] Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers". Foreign exchange services are provided by many banks around the world. Foreign exchange services include: Currency exchange - where clients can purchase and sell foreign currency banknotes. Foreign Currency Banking - banking transactions are done in foreign currency. Wire transfer - where clients can send funds to international banks abroad. [edit] Investment services

Asset management - the term usually given to describe companies which run collective investment funds. Also refers to services provided by others, generally registered with the Securities and Exchange Commission as Registered Investment Advisors. Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately $100 trillion

47. Structure of the banking institution. A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities: A central bank circulates money on behalf of a government and acts as its monetary authority by implementing monetary policy, which regulates the money supply. A commercial bank accepts deposits and pools those funds to provide credit, either directly by lending, or indirectly by investing through the capital markets. Within the global financial markets, these institutions connect market participants with capital deficits (borrowers) to market participants with capital surpluses (investors and lenders) by transferring funds from those parties who have surplus funds to invest (financial assets) to those parties who borrow funds to invest in real assets. A savings bank (known as a "building society" in the United Kingdom) is similar to a savings and loan association (S&L). They can either be stockholder owned or mutually owned, in which case they are permitted to only borrow from members of the financial cooperative. The asset structure of savings banks and savings and loan associations is similar, with residential mortgage loans providing the principal assets of the institution's portfolio.

The ordinary departments, classified as to group, may be described as follows: Paying Teller's Department (Teller): Pays or certifies checks. In charge of the signature book or cards bearing the authorized signatures of all depositors. Ships currency. In charge of the vault cash and reserves. Receiving Teller's Department (Teller): Receives deposits. Distributes checks to bookkeepers and other departments. Prepares exchanges for clearing house. Turns cash over to the paying teller at end of day. Note Teller's Department (Teller): Collects notes and drafts due at the bank or elsewhere in the city. Usually in charge of the runners or messenger department, which is a subdivision.

Collection Department (Teller): Collects notes, drafts, and other "time" items when payable out of town. Credits accounts of depositors when collections are advised paid. Transit Department (Teller): This is a subdivision of the receiving teller's department and may be known by other terms, such as correspondence, foreign check, miscellaneous check or country check department. Assorts checks payable out of town, endorses them and lists them on letters addressed to other banks. Gives totals of outgoing or remittance letters to general ledger bookkeeper at end of day. Loan or Discount Department (Executive): Receives notes submitted for discount or makes loans. Figures discount and interest. Has charge of collateral securing loans. Credit Department (Executive): Secures and collects information relating to borrowers. Checks statements submitted by them. In charge of credit files which contain information as to the reliability, business habits and financial strength of borrowers. Analysis or Statistical Department (Executive): Usually found in city banks. Analyzes the accounts of depositors to determine which are profitable and which are losing accounts. Makes monthly reports to officers. In charge of statistics relating to the bank's accounts. Individual Ledger Department (Bookkeepers): Keeps the records of the balances of individual depositors. May be subdivided as to kind of accounts (savings, dealers), in addition to ordinary alphabetical division. May balance pass-books or there may be a separate department for this purpose using the statement system. Figures interest on accounts. General Ledger Department (Bookkeepers): Keeps the general or control accounts of the bank. Makes up the bank's statement of condition. Country Bank Account Department (Bookkeepers): Confined to city banks. Keeps the accounts of other banks, usually consisting of reserve accounts. Auditor's Department (Executive): Responsible for the settlement of the various departments. Reconciles the accounts with other banks. Certifies interest calculations. In addition to these departments, there are others to be found either in very large banks or even in small banks operating special features. Among the first might be noted the coupon department, exchange department, purchasing department, filing department, interest department, new business department, etc., all of which terms are self-explanatory. Among special departments may be mentioned the bond department, safety deposit department, special deposit department (securities and valuables stored with the bank, but not placed in private boxes). In trust companies there is the trust department which may have a complete independent organization of its own, with officers, bookkeepers and other clerks. This department has charge of the trust accounts. All these various departments will be explained in more detail in separate chapters 48. Risk management in banking. 1 In the course of their operations, banks are invariably faced with different types of risks that may have a potentially negative effect on their business. Risk management in bank operations includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank. Banks are therefore required to form a special organizational unit in charge of risk management. Also, they are required to

prescribe procedures for risk identification, measurement and assessment, as well as procedures for risk management. 2 The risks to which a bank is particularly exposed in its operations are: liquidity risk, credit risk, market risks (interest rate risk, foreign exchange risk and risk from change in market price of securities, financial derivatives and commodities), exposure risks, investment risks, risks relating to the country of origin of the entity to which a bank is exposed, operational risk, legal risk, reputational risk and strategic risk. 3 Liquidity risk is the risk of negative effects on the financial result and capital of the bank caused by the banks inability to meet all its due obligations. 4 Credit risk is the risk of negative effects on the financial result and capital of the bank caused by borrowers default on its obligations to the bank. 5 Market risk includes interest rate and foreign exchange risk. 6 Risks relating to the country of origin of the entity to which a bank is exposed (country risk) is the risk of negative effects on the financial result and capital of the bank due to banks inability to collect claims from such entity for reasons arising from political, economic or social conditions in such entitys country of origin. Country risk includes political and economic risk, and transfer risk. 7 Operational risk is the risk of negative effects on the financial result and capital of the bank caused by omissions in the work of employees, inadequate internal procedures and processes, inadequate management of information and other systems, and unforeseeable external events. Managing credit risk 8 Limits and safeguards policy, process and procedures. 9 Credit approval authorities and transaction approval process. 10 Aggregating exposure limits by customer, sector and correlated credits. 11 Credit mitigation techniques: collateral; termination clauses, re-set clauses, cash settlement, netting agreements. 12 Documentation: covenant packages, ISDA and CSA and other collateral agreements. 13 Portfolio techniques 14 Portfolio management objectives: balancing the risk appetite and diversification to maximise risk adjusted returns. 15 Diversification, granularity and correlation concepts. 16 Techniques to spread risk: syndication, sub-participation, whole loan sales, credit derivatives, securitisation. MARKET RISK Identifying and quantifying the risk 1 Portfolio versus transaction approach. 2 Trading Book v Banking Book. 3 Value at Risk (VaR): holding periods, confidence levels and disclosure. 4 Volatility of trading profits. 5 Systems and procedures for aggregating exposures. Managing the risk 1 Risk appetite and capital requirements. 2 Capital treatment of market risk under Basel I and II. 3 Key sensitivities to and interest rate and/or FX positions. 4 Setting and monitoring transaction and portfolio limits. Identifying, defining and quantifying the risk 1 2 LIQUIDITY RISK 3 Types of liquidity risk: funding and transactional. 4 Gap management: interest, currency, and maturity mismatches. 5 Concepts of cash capital. Managing the risk

1 Asset and liability management techniques: gap limits and regulatory requirements. 2 Contingency liquidity. 3 Use of securitisation: impact on capital, credit quality and liquidity. OPERATIONAL RISK Identifying, defining and quantifying the risk 1 Examples of operational risk failures in financial institutions. 2 Best practice systems and management procedures. 3 Evidence of lack of integrity features of institutions where fraud has occurred. 4 Know Your Customer, money laundering and ultra vires issues. 5 Statistical challenge of high value, low frequency losses. 6 Capital requirements under Basel II: standardised versus models based approaches. 7 8 49. Evolution of the global finance. 9 In the early 19th century, international finance was, in many respects, a fairly direct descendant of its 17th-century predecessor and was still dominated by London and Amsterdam. Institutionally, the more or less laissez-faire attitudes that had prevailed since 1688 allowed these markets to mature. But the volume of capital remained small and was confined mostly to finance within Europe, and technological progress was slow. However, this was all to change in a matter of a few decades,with the development of a global financial market and its assorted handmaidensthe telegraph and other improvements in transportation and communications; the increasing rate of growth of European settlement; and the arrival, through imposition or imitation, of institutional modernization. Of particular importance for the story we tell was the emergence of the classical gold standard as an international monetary regime. The world economy of 1913 was vastly different from the early 19th-century one. But this economy imploded under the strain of the two world wars and he Great Depression, as well as under the political-economy tensions that accompanied this era of unprecedented upheaval. By the mid-1930s, the free flow of goods, people, and capital was almost at a standstill. The better part of the 20th centuryat least since 1929 and perhaps since 1913is a tale of radical experimentation in political economy and monetary policy that naysayers, beginning with economic historian Karl Polanyi, predicted would doom economic integration for good. For many decades, they appeared to be right. Enter John Maynard Keynes and Harry Dexter White, architects of the postwar economic order known as the Bretton Woods system, with the IMF as one of its foundations. The IMF embodied a new macroeconomic paradigm, with currency pegs and capital controls as cornerstones. 10 Because the role of free capital flows in the crises of the 1930s had come under suspicion, the IMF espoused capital con- trols. Similarly, floating rates were associated with speculation and instability and, hence, the disruption of trade. These fears motivated the choice of fixed (albeit adjustable) parities. This blueprint makes it clear why, even after 1945, global capital markets took so long to recover. Only after the Bretton Woods system unraveled under the strain of balance of payments pressures in the late 1960s and early 1970s did a new order begin to coalesce, and, even then, it did so only fitfully. The unraveling began when it became clear that for trade to be sustained at a volume that would deliver meaningful economic benefits, large payments transactions would need to be allowed.And, in response to political economy tensions, the currency peg was being adjusted with some regularity. In many ways, the 19th century was a relatively simple context in which to build an international financial architecture for the first era of globalization. Democratic politics were still distant; the powerful sway of financial orthodoxy coupled with elite-led governance speeded the creation of a global capital market; institutions like the gold standard and the extension of Empire made the ride even smoother. From the interwar period until the past few decades, global capital markets almost shrank from sight. But they have proved more resilient than many observers had expected. Still, the rebirth of globalization should not cause us complacently to consider that the dust has settled once again. Echoes of past crises and policy failures still reverberate, and all

countries should heed the message to learn from, rather than repeat, past mistakes. As governments begin to comprehend the limits to autonomyin every sense and the gains from integration, the whole world stands to benefit.

50)International financial institutions and their role in modern economy International financial institutions (IFIs) are financial institutions that have been established (or chartered) by more than one country, and hence are subjects of international law. Their owners or shareholders are generally national governments, although other international institutions and other organisations occasionally figure as shareholders. The most prominent IFIs are creations of multiple nations, although some bilateral financial institutions (created by two countries) exist and are technically IFIs. Many of these are multilateral development banks. The best-known IFIs were established after World War II to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global financial system (Cf. Bretton Woods system). They include the World Bank, the IMF, and the International Finance Corporation. The IMF is responsible for ensuring and encouraging international financial stability while the World Bank is charged with the economic and social development of member countries and the fight against poverty. The regional development banks (African Development Bank, Asian Development Bank,Inter-American Development Bank) are modelled on the structure of the World Bank. The difference is that the member states of the regional institutions have the majority of the equity shares and thus have greater control. The regional development banks finance projects and programmes exclusively in the region of the member countries. As with the World Bank their main goal is fighting poverty and promoting sustainable economic and social development. Bilateral development banks are financial institutions set up by individual countries to finance development projects in developing countries and emerging markets. Examples include:
the Netherlands Development Finance Company FMO,[1] Headquarters in The Hague; one of the largest bilateral development banks worldwide. the DEG German Investment Corporation or Deutsche Investitions- und Entwicklungsgesellschaft,[2] a Development Bank.

Several regional groupings of countries have established international financial institutions to finance various projects or activities in areas of mutual interest. The largest and most important of these is the European Investment Bank. Roles: First, international financial institutions provide financingusually loans but also, in some cases, a significant grant elementto help the country's authorities attain objectives agreed upon in consultation with the former. The financing may support

specific investmentsin, for example, infrastructure and capacity buildingor it may be part of a sector-specific or economy-wide adjustment program. Second, international financial institutions support national authorities' efforts to design policies to achieve specific economic and social targets. Third, international financial institutions encourage the development, dissemination, and adoption of internationally accepted standards and codes of good practice in economic, financial, and business activities. The adoption and implementation of such standards and codes contribute to the development and improved functioning of domestic institutions, which, in turn, can help countries better integrate themselves into the world economy and benefit from growing globalization. Fourth, international financial institutions provide training on a multitude of topics. This training can take place within the framework of a specific project that a country implements with the support of an international financial institutionfor example, projects calling for reform of public enterprises, the civil service, tax administration, or the financial sector. It can also be provided in courses, workshops, and seminars offered by the training institutions of international financial institutions. And, fifth, international financial institutions collaboratein Africa and other regionswith regional training and research institutions (including the African Capacity Building Foundation and the African Economic Research Consortium) to facilitate knowledge transfer; train economic analysts, officials, and "trainers"; and support economic research. 51)IMF and its problems

There is broad consensus around the idea that the International Monetary Fund is currently a problematic institution. A brief enumeration of the principal, commonly perceived problems would, at the very least, include the following: 1) the institution is no longer fulfilling the functions it used to fulfil, nor is there a clear vision of any new functions for it; 2) due to a drastic pruning of its loan operations, it is not receiving enough revenue to cover its operating costs; 3) the IMF has not played a notable role in the debate about global imbalances, even though this issue is

at the very heart of its institutional remit; 4) it is suffering a crisis of legitimacy, with its power structure questioned by many members; 5) there is a lack of confidence, from quite different perspectives, in its intellectual orientation and the quality of its policy recommendations. 1 This list brings together problems of quite different kinds. It would probably be helpful to consider each of them in greater detail in order to establish whether they have significant implications for the international financial system. For example, the problem of financial resources in item 2) is a consequence of item 1). True enough, the IMF has stopped doing what it used to do, but its shaky finances derive from its failure to define a new role for itself. Both of these points certainly reflect difficulties that the institution is currently facing, but they have no direct impact on the proper functioning of the international financial system. In that respect, they do not seem to beg an urgent solution. On the other hand, there is that lack of confidence in the Funds intellectual orientation and recommendations raised by item 5). This lack of confidence in the IMFs orientation and recommendations has been around a long time, but its present magnitude is primarily the legacy of its last major operations before entering the slippery slope where it now finds itself: the programmes it applied in response to the crises in Asia, Russia and Argentina in the late nineties and earlier this decade. These activities prompted new critical voices, alongside the challenges that had emanated for many years from progressive quarters, and some of these criticisms reflect conservative positions. This mass of criticism has not been silenced, although it should be noted that it does not take issue with current albeit infrequent IMF operations. Its focus is the future, and a concern that the IMF should not repeat the strategy and recommendations that first elicited these objections. It is directed towards any potential activity the IMF might undertake if its significance is ever restored. The third reference, summarised in item 4), is to the legitimacy crisis provoked by the institutions power structure. Challenges to the legitimacy of

IMF governance also date back a long way, but they are louder than ever before, probably because of shifts in the relative influence and roles of a number of developed countries (in Europe, for example) and newly industrialising economies (such as China and other Asian countries) that have occurred during the latest stages of globalisation. Nevertheless, this conflict is more or less latent, given that no really big issues are currently being resolved at the IMF. This latent conflict would acquire greater urgency if the institution were to start playing a major role again. This leaves the final point, the IMFs absence from the most important debate in international finance today, the matter raised in item 3). It is hard to think of any topic more appropriate for the IMF to deal with than global imbalances, given the mission assigned to the institution when it was originally founded. If we think about it, this is a different kind of issue from the ones outlined above. Those of us who regard this absence as a problem are actually articulating a complaint. Something that ought to be a natural theme for the IMF as a multilateral forum is not being addressed, there or in any other international institution. The explanation is obvious: it seems clear that the United States administration has no intention of putting this question, in which it is a principal player, to the consideration of the multilateral institution, despite the voting power and right of veto that the United States and the other developed countries enjoy.