First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
Financial intermediaries exist because of transaction costs, information asymmetries, and risks in financial markets that intermediaries help address. The roles and importance of different financial intermediaries have changed significantly over time due to regulatory changes, innovations, and the rise of institutional investors. While banks have lost some importance, they still play important roles in lending to individuals and small businesses.
Financial markets play a vital role in connecting individuals and firms with surplus funds (savers) to those with a need for funds (borrowers). They do this through the issuance and trading of financial instruments. There are various types of financial markets that facilitate the exchange of different financial assets, including primary markets for new issues, secondary markets for existing assets, money markets for short-term debt, and capital markets for longer-term debt and equity. Financial markets provide important benefits such as directing funds to their most productive uses, providing liquidity to savers, and stimulating both savings and borrowing.
Japanese firms rely more heavily on bank financing and internal cash flows, while U.S. firms rely more on external financing through public debt and equity markets. This difference stems from Japan's main bank system where long-term relationships between firms and banks facilitate internal financing, compared to the U.S. where arm's-length capital markets play a larger role in corporate financing. As financial systems globalize, the differences in financing practices between countries have narrowed to some degree.
This document discusses various methods for financing international trade transactions, including letters of credit, standby letters of credit, and performance guarantees. It provides details on the functions and types of letters of credit, the Uniform Customs and Practices for Documentary Credits, standby letters of credit, and alternative financing methods for buyers and sellers through commercial banks and government assistance programs.
Bonds tend to have less risk than stocks, but at the cost of less return. However, a proper use of certain kinds of bonds may temper the risk of your overall portfolio using diversification.
Blog post scheduled for 9 Sep 2015
http://wp.me/p2Oizj-CR
This document discusses how exotic financial instruments like CMOs, POs, IOs, and CDS contributed to the 2007-2009 financial crisis. CMOs and MBS fueled demand for mortgages, leading to lower credit standards and risky subprime loans. POs and IOs allowed investors to bet on or hedge against mortgage prepayments but increased exposure to default risk. CDS were used like insurance on MBS but sellers failed to reserve properly against losses. Together these instruments obscured risk and spread it widely, facilitating the growth of a mortgage bubble that burst and caused the financial crisis when subprime loans defaulted.
This document provides an overview of credit derivatives and their role in credit risk management. It defines credit derivatives as instruments that insure against adverse movements in a borrower's credit quality. Various credit derivative products are examined, including total return swaps, credit default swaps, credit linked notes, collateralized debt obligations, and collateralized loan obligations. The growth and decline of these markets leading up to and during the global financial crisis is also discussed. The document aims to explain how credit derivatives can be used to transfer and manage credit risk.
First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
Financial intermediaries exist because of transaction costs, information asymmetries, and risks in financial markets that intermediaries help address. The roles and importance of different financial intermediaries have changed significantly over time due to regulatory changes, innovations, and the rise of institutional investors. While banks have lost some importance, they still play important roles in lending to individuals and small businesses.
Financial markets play a vital role in connecting individuals and firms with surplus funds (savers) to those with a need for funds (borrowers). They do this through the issuance and trading of financial instruments. There are various types of financial markets that facilitate the exchange of different financial assets, including primary markets for new issues, secondary markets for existing assets, money markets for short-term debt, and capital markets for longer-term debt and equity. Financial markets provide important benefits such as directing funds to their most productive uses, providing liquidity to savers, and stimulating both savings and borrowing.
Japanese firms rely more heavily on bank financing and internal cash flows, while U.S. firms rely more on external financing through public debt and equity markets. This difference stems from Japan's main bank system where long-term relationships between firms and banks facilitate internal financing, compared to the U.S. where arm's-length capital markets play a larger role in corporate financing. As financial systems globalize, the differences in financing practices between countries have narrowed to some degree.
This document discusses various methods for financing international trade transactions, including letters of credit, standby letters of credit, and performance guarantees. It provides details on the functions and types of letters of credit, the Uniform Customs and Practices for Documentary Credits, standby letters of credit, and alternative financing methods for buyers and sellers through commercial banks and government assistance programs.
Bonds tend to have less risk than stocks, but at the cost of less return. However, a proper use of certain kinds of bonds may temper the risk of your overall portfolio using diversification.
Blog post scheduled for 9 Sep 2015
http://wp.me/p2Oizj-CR
This document discusses how exotic financial instruments like CMOs, POs, IOs, and CDS contributed to the 2007-2009 financial crisis. CMOs and MBS fueled demand for mortgages, leading to lower credit standards and risky subprime loans. POs and IOs allowed investors to bet on or hedge against mortgage prepayments but increased exposure to default risk. CDS were used like insurance on MBS but sellers failed to reserve properly against losses. Together these instruments obscured risk and spread it widely, facilitating the growth of a mortgage bubble that burst and caused the financial crisis when subprime loans defaulted.
This document provides an overview of credit derivatives and their role in credit risk management. It defines credit derivatives as instruments that insure against adverse movements in a borrower's credit quality. Various credit derivative products are examined, including total return swaps, credit default swaps, credit linked notes, collateralized debt obligations, and collateralized loan obligations. The growth and decline of these markets leading up to and during the global financial crisis is also discussed. The document aims to explain how credit derivatives can be used to transfer and manage credit risk.
Global Financial Crisis And SecuritisationAndrew Read
1) Securitization is a process where non-tradable debt like mortgages are pooled and used to issue tradable bonds. This increases funds available for loans and provides liquidity to investors.
2) Accounting rules allowed securitization entities to not be consolidated, enabling financial institutions to manipulate leverage ratios. This contributed to excessive risk-taking.
3) During the financial crisis, write-downs of toxic mortgage-backed bonds breached capital requirements and debt covenants, worsening the crisis. Regulators face issues around securitization reporting and valuation of impaired bonds.
Commercial banks are the largest financial institutions in terms of assets. They accept deposits and make loans. Their major assets are loans and investment securities, while deposits are their major liabilities. Banks play essential roles in payment services, maturity transformation, and monetary policy transmission. They are regulated to protect these services from disruption. Large banks engage in both retail and wholesale banking globally, while community banks focus on local retail banking. The number of banks has declined due to mergers and acquisitions.
Special Purpose Vehicals Securitizationfinancedude
Special Purpose Entities (SPEs) are legal entities created for specific purposes in structuring securitization transactions. SPEs are critical components of the $5.2 trillion U.S. securitization market, which provides liquidity to financial institutions and consumers through products like mortgages and credit cards. SPEs hold pools of financial assets, issue securities to investors, and protect investors from bankruptcy risk of the financial institution that established the SPE. Accounting standards require disclosure of risks and obligations associated with SPE transactions, even if the SPE is not consolidated on the financial institution's balance sheet.
Synthetic securitization is a process where a bank transfers only the credit risk of a pool of assets, rather than the assets themselves, to a special purpose vehicle (SPV). The SPV issues credit-linked notes to investors. If a credit event occurs, such as default, the SPV uses the proceeds from credit default swaps to pay investors. This allows banks to reduce credit risk on their balance sheets while maintaining ownership of the original assets.
Investment Activity of the Deposit Insurer BDIF ФГВБ
The document discusses investment policies for deposit insurers. It notes that while security and liquidity of funds are top priorities, deposit insurers should still aim to maximize investment returns within these constraints. This is particularly important for small countries with unstable currencies and economies. The document also examines factors that influence investment options like legal restrictions, fund size, and use of financial agents. It stresses the need for clear but flexible investment policies.
This document provides an overview of financial derivatives. It defines derivatives as contractual agreements where payment is based on an underlying benchmark, such as interest rates or stock indexes. While derivatives can help parties manage financial risks, they also carry risks like credit risk and leverage that must be understood and monitored. The document describes common derivative types like options, futures, and swaps. It emphasizes the importance of understanding derivative products fully before investing and monitoring ongoing risks from changes in markets.
This chapter introduces financial markets and institutions. It defines key terms like primary and secondary markets, as well as money and capital markets. It outlines the role of various financial institutions in channeling funds and the risks they face. It also discusses the regulation of financial institutions to prevent failures from causing economic harm. Globalization trends are noted, with international financial markets growing rapidly in recent decades. An appendix summarizes the failures that led to the 2007-2008 financial crisis and the major government responses.
This document discusses the role of financial intermediaries in lending and borrowing. It explains that in a world without transaction costs or information problems, there would be no need for intermediaries. However, intermediaries exist to reduce transaction costs, allow for portfolio diversification, gather and produce information, and address issues of asymmetric information like adverse selection and moral hazard. The evolution of financial intermediaries in the US is then reviewed, highlighting the impact of deregulation, technology, and the rise of institutional investors like pension funds and mutual funds.
Financial markets allow individuals and institutions to trade financial assets like stocks and bonds. There are different types of financial markets categorized by maturity and liquidity of securities. Money markets facilitate short-term lending under 1 year through instruments like treasury bills. Capital markets facilitate long-term lending over 1 year through bonds, mortgages, and stocks. Market prices reflect available information so markets are efficient when prices incorporate all public information. Interest rates balance supply and demand in the market.
This document discusses liquidity risk management for financial institutions. It begins by defining liquidity risk and explaining that depository institutions are highly exposed due to holding short-term liabilities to fund long-term assets. It then examines the causes of liquidity risk, effects of deposit drains on banks' balance sheets, and tools for measuring and managing liquidity risk such as the financing gap and net liquidity statement. The document also addresses liquidity issues for other financial institutions like insurance companies and investment funds.
This document discusses securitization and housing finance in India. It begins by defining securitization as the process of liquidating illiquid long-term assets like loans and receivables by issuing marketable securities against them. It then outlines the key parties and stages involved in securitization. Some benefits of securitization include additional funding, profitability, and risk spreading. Housing finance and the role of the National Housing Bank in promoting affordable housing are also summarized. Securitization has grown the Indian debt market and housing finance sector.
The document discusses financial services and activities. It defines financial services as mobilizing and allocating savings, and notes they are customer-oriented, intangible, require simultaneous performance by suppliers and consumers, and are people-intensive. Traditional financial activities include fund-based activities like underwriting and dealing in markets, as well as non-fund based fee-based services like managing capital issues, project advisory, and mergers/acquisitions guidance. Financial engineering involves designing innovative financial instruments and solutions.
The document outlines the steps to issuing a municipal bond to finance urban infrastructure projects. It begins with an overview stating the objective is to introduce the municipal bond issuance process. It then lists and provides brief descriptions of the 9 main steps: 1) Fiscal strengthening and capital investment planning, 2) Credit rating, 3) Project development, 4) Financial structuring, 5) Authorization and approval, 6) Preparation of prospectus, 7) Marketing to investors, 8) Preparation of documents, and 9) Completion of the transaction. The document concludes by recapping the process in a schematic and noting how PPIAF-SNTA can assist cities with bond issuance.
The document provides an overview of securitization and the mortgage-backed securities market. It discusses how companies fund projects through equity and debt, and introduces securitization as a way to pool similar mortgage loans and issue securities backed by the pooled loans. It then covers the basics of fixed income markets, how mortgage payments are calculated, the process of issuing agency-conforming and non-conforming mortgage-backed securities, and the major investors in the MBS market like pension funds, insurance companies, and GSEs.
This document provides information about mortgage-backed securities and the securitization process. It defines key terms like mortgages, MBS, and special purpose vehicles. It describes the major players in securitization like borrowers, originators, trustees, servicers, issuers, investors, and rating agencies. It explains how MBS are issued through an SPV and the types of MBS like pass-through, stripped, and collateralized mortgage obligations. Finally, it outlines regulations and guidelines from the SECP and SBP for entities involved in securitization.
This document provides information about insurance companies, including life insurance companies and property-casualty insurance companies. It discusses the primary functions of insurance companies, types of insurance policies, major assets and liabilities of life and property-casualty insurers, regulation of the insurance industry, and recent trends in underwriting ratios for property-casualty insurers. It also provides examples of calculating annuity payments and analyzes balance sheets and financial ratios of life and property-casualty insurers.
This document defines and describes several financial products and structures that played a role in the 2008 financial crisis:
- Mortgage-backed securities (MBS) are assets backed by principal and interest payments from pools of mortgage loans.
- Structured investment vehicles (SIVs) borrow at low rates and lend at higher rates, making profits from interest rate spreads, but invest in risky asset-backed securities and corporate bonds.
- Derivatives are financial instruments whose value is based on underlying variables like commodities, stocks, bonds, currencies, and can be used to hedge or speculate on risk.
- Collateralized debt obligations (CDOs) pool fixed-income assets like bonds into tranches
This document provides information on real estate acquisition and development/rehab financing for non-profit corporations through municipal bond financing. It explains that non-profits can obtain non-recourse debt financing through unenhanced tax-exempt municipal bonds to purchase and develop qualified projects like affordable housing, schools, and recycling plants. The financing provides a single loan for acquisition, development, and permanent financing with current market rates and 30-year terms. Projects must qualify based on providing a municipal benefit and cash flows supporting debt repayment. Redbridge Development Partners assists non-profits through this financing process.
Securitization involves pooling financial assets like loans and converting them into marketable securities. Key players include originators who make the original loans, special purpose entities that purchase the loans and issue securities, credit rating agencies that rate the securities, underwriters that help issue the securities, trustees that ensure obligations are fulfilled, servicers that collect loan payments, and investors who purchase the securities. SPVs play an intermediary role by holding the pooled securities and allowing risk sharing. Banks securitize to diversify risk, generate liquid assets, extend their credit pool, and earn fee income, while investors can earn higher returns through a diversified portfolio. However, prepayments and floating rates may impact returns, and maintenance obligations and regulator concerns about under
This document provides background information on various financial institutions and instruments involved in the 2008 financial crisis. It discusses how banks operate by taking deposits and lending money, and the risks involved. It also describes mortgage-backed securities, collateralized debt obligations, credit rating agencies, and the roles played by investment banks, insurance companies, pension funds, and government regulators. The subprime mortgage crisis that helped trigger the 2008 crisis is also briefly explained.
Securitization involves pooling financial assets like loans and converting them into marketable securities. This allows the originator to access funding and improve liquidity. In India, securitization grew out of similar developments in the US housing market in the 1970s. It involves an originator transferring assets to a special purpose vehicle which then issues bonds backed by the assets' cash flows. This benefits originators through lower funding costs, improved liquidity and balance sheet management.
Global Financial Crisis And SecuritisationAndrew Read
1) Securitization is a process where non-tradable debt like mortgages are pooled and used to issue tradable bonds. This increases funds available for loans and provides liquidity to investors.
2) Accounting rules allowed securitization entities to not be consolidated, enabling financial institutions to manipulate leverage ratios. This contributed to excessive risk-taking.
3) During the financial crisis, write-downs of toxic mortgage-backed bonds breached capital requirements and debt covenants, worsening the crisis. Regulators face issues around securitization reporting and valuation of impaired bonds.
Commercial banks are the largest financial institutions in terms of assets. They accept deposits and make loans. Their major assets are loans and investment securities, while deposits are their major liabilities. Banks play essential roles in payment services, maturity transformation, and monetary policy transmission. They are regulated to protect these services from disruption. Large banks engage in both retail and wholesale banking globally, while community banks focus on local retail banking. The number of banks has declined due to mergers and acquisitions.
Special Purpose Vehicals Securitizationfinancedude
Special Purpose Entities (SPEs) are legal entities created for specific purposes in structuring securitization transactions. SPEs are critical components of the $5.2 trillion U.S. securitization market, which provides liquidity to financial institutions and consumers through products like mortgages and credit cards. SPEs hold pools of financial assets, issue securities to investors, and protect investors from bankruptcy risk of the financial institution that established the SPE. Accounting standards require disclosure of risks and obligations associated with SPE transactions, even if the SPE is not consolidated on the financial institution's balance sheet.
Synthetic securitization is a process where a bank transfers only the credit risk of a pool of assets, rather than the assets themselves, to a special purpose vehicle (SPV). The SPV issues credit-linked notes to investors. If a credit event occurs, such as default, the SPV uses the proceeds from credit default swaps to pay investors. This allows banks to reduce credit risk on their balance sheets while maintaining ownership of the original assets.
Investment Activity of the Deposit Insurer BDIF ФГВБ
The document discusses investment policies for deposit insurers. It notes that while security and liquidity of funds are top priorities, deposit insurers should still aim to maximize investment returns within these constraints. This is particularly important for small countries with unstable currencies and economies. The document also examines factors that influence investment options like legal restrictions, fund size, and use of financial agents. It stresses the need for clear but flexible investment policies.
This document provides an overview of financial derivatives. It defines derivatives as contractual agreements where payment is based on an underlying benchmark, such as interest rates or stock indexes. While derivatives can help parties manage financial risks, they also carry risks like credit risk and leverage that must be understood and monitored. The document describes common derivative types like options, futures, and swaps. It emphasizes the importance of understanding derivative products fully before investing and monitoring ongoing risks from changes in markets.
This chapter introduces financial markets and institutions. It defines key terms like primary and secondary markets, as well as money and capital markets. It outlines the role of various financial institutions in channeling funds and the risks they face. It also discusses the regulation of financial institutions to prevent failures from causing economic harm. Globalization trends are noted, with international financial markets growing rapidly in recent decades. An appendix summarizes the failures that led to the 2007-2008 financial crisis and the major government responses.
This document discusses the role of financial intermediaries in lending and borrowing. It explains that in a world without transaction costs or information problems, there would be no need for intermediaries. However, intermediaries exist to reduce transaction costs, allow for portfolio diversification, gather and produce information, and address issues of asymmetric information like adverse selection and moral hazard. The evolution of financial intermediaries in the US is then reviewed, highlighting the impact of deregulation, technology, and the rise of institutional investors like pension funds and mutual funds.
Financial markets allow individuals and institutions to trade financial assets like stocks and bonds. There are different types of financial markets categorized by maturity and liquidity of securities. Money markets facilitate short-term lending under 1 year through instruments like treasury bills. Capital markets facilitate long-term lending over 1 year through bonds, mortgages, and stocks. Market prices reflect available information so markets are efficient when prices incorporate all public information. Interest rates balance supply and demand in the market.
This document discusses liquidity risk management for financial institutions. It begins by defining liquidity risk and explaining that depository institutions are highly exposed due to holding short-term liabilities to fund long-term assets. It then examines the causes of liquidity risk, effects of deposit drains on banks' balance sheets, and tools for measuring and managing liquidity risk such as the financing gap and net liquidity statement. The document also addresses liquidity issues for other financial institutions like insurance companies and investment funds.
This document discusses securitization and housing finance in India. It begins by defining securitization as the process of liquidating illiquid long-term assets like loans and receivables by issuing marketable securities against them. It then outlines the key parties and stages involved in securitization. Some benefits of securitization include additional funding, profitability, and risk spreading. Housing finance and the role of the National Housing Bank in promoting affordable housing are also summarized. Securitization has grown the Indian debt market and housing finance sector.
The document discusses financial services and activities. It defines financial services as mobilizing and allocating savings, and notes they are customer-oriented, intangible, require simultaneous performance by suppliers and consumers, and are people-intensive. Traditional financial activities include fund-based activities like underwriting and dealing in markets, as well as non-fund based fee-based services like managing capital issues, project advisory, and mergers/acquisitions guidance. Financial engineering involves designing innovative financial instruments and solutions.
The document outlines the steps to issuing a municipal bond to finance urban infrastructure projects. It begins with an overview stating the objective is to introduce the municipal bond issuance process. It then lists and provides brief descriptions of the 9 main steps: 1) Fiscal strengthening and capital investment planning, 2) Credit rating, 3) Project development, 4) Financial structuring, 5) Authorization and approval, 6) Preparation of prospectus, 7) Marketing to investors, 8) Preparation of documents, and 9) Completion of the transaction. The document concludes by recapping the process in a schematic and noting how PPIAF-SNTA can assist cities with bond issuance.
The document provides an overview of securitization and the mortgage-backed securities market. It discusses how companies fund projects through equity and debt, and introduces securitization as a way to pool similar mortgage loans and issue securities backed by the pooled loans. It then covers the basics of fixed income markets, how mortgage payments are calculated, the process of issuing agency-conforming and non-conforming mortgage-backed securities, and the major investors in the MBS market like pension funds, insurance companies, and GSEs.
This document provides information about mortgage-backed securities and the securitization process. It defines key terms like mortgages, MBS, and special purpose vehicles. It describes the major players in securitization like borrowers, originators, trustees, servicers, issuers, investors, and rating agencies. It explains how MBS are issued through an SPV and the types of MBS like pass-through, stripped, and collateralized mortgage obligations. Finally, it outlines regulations and guidelines from the SECP and SBP for entities involved in securitization.
This document provides information about insurance companies, including life insurance companies and property-casualty insurance companies. It discusses the primary functions of insurance companies, types of insurance policies, major assets and liabilities of life and property-casualty insurers, regulation of the insurance industry, and recent trends in underwriting ratios for property-casualty insurers. It also provides examples of calculating annuity payments and analyzes balance sheets and financial ratios of life and property-casualty insurers.
This document defines and describes several financial products and structures that played a role in the 2008 financial crisis:
- Mortgage-backed securities (MBS) are assets backed by principal and interest payments from pools of mortgage loans.
- Structured investment vehicles (SIVs) borrow at low rates and lend at higher rates, making profits from interest rate spreads, but invest in risky asset-backed securities and corporate bonds.
- Derivatives are financial instruments whose value is based on underlying variables like commodities, stocks, bonds, currencies, and can be used to hedge or speculate on risk.
- Collateralized debt obligations (CDOs) pool fixed-income assets like bonds into tranches
This document provides information on real estate acquisition and development/rehab financing for non-profit corporations through municipal bond financing. It explains that non-profits can obtain non-recourse debt financing through unenhanced tax-exempt municipal bonds to purchase and develop qualified projects like affordable housing, schools, and recycling plants. The financing provides a single loan for acquisition, development, and permanent financing with current market rates and 30-year terms. Projects must qualify based on providing a municipal benefit and cash flows supporting debt repayment. Redbridge Development Partners assists non-profits through this financing process.
Securitization involves pooling financial assets like loans and converting them into marketable securities. Key players include originators who make the original loans, special purpose entities that purchase the loans and issue securities, credit rating agencies that rate the securities, underwriters that help issue the securities, trustees that ensure obligations are fulfilled, servicers that collect loan payments, and investors who purchase the securities. SPVs play an intermediary role by holding the pooled securities and allowing risk sharing. Banks securitize to diversify risk, generate liquid assets, extend their credit pool, and earn fee income, while investors can earn higher returns through a diversified portfolio. However, prepayments and floating rates may impact returns, and maintenance obligations and regulator concerns about under
This document provides background information on various financial institutions and instruments involved in the 2008 financial crisis. It discusses how banks operate by taking deposits and lending money, and the risks involved. It also describes mortgage-backed securities, collateralized debt obligations, credit rating agencies, and the roles played by investment banks, insurance companies, pension funds, and government regulators. The subprime mortgage crisis that helped trigger the 2008 crisis is also briefly explained.
Securitization involves pooling financial assets like loans and converting them into marketable securities. This allows the originator to access funding and improve liquidity. In India, securitization grew out of similar developments in the US housing market in the 1970s. It involves an originator transferring assets to a special purpose vehicle which then issues bonds backed by the assets' cash flows. This benefits originators through lower funding costs, improved liquidity and balance sheet management.
Securitization is an American invention, but no longer remains an American curiosity. Almost every country’s financial systems have certain securitization schemes. Today, securitized assets not only include mortgages on properties, but also credit card receivables, computer leases, equipment notes financing, auto loans, and even future sales of music records. 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 consolidated debt as pass-through securities, or collateralized mortgage obligation (CMOs) to various investors. The cash collected from the financial instruments underlying the security is paid to the various investors who had advance money for that right. Securities backed by residential mortgage receivables are called residential-mortgage-backed securities (RMBS), while those backed by other types of receivables are asset-backed securities (ABS). Securitization has emerged globally as an important technique for bundling assets and segregating risks into marketable securities. It involves parceling and selling pools of eligible assets by the company owning the assets to a Special Purpose Vehicle (SPV) company, which issues debt securities to finance the purchase of such assets. This paper will discuss the present nascent state of the securitization market in India, its potential and attempts to identify what needs to be done by various stakeholders in this market for securitization to grow into its full potential. The paper will attempt to explain the growth of securitization in different markets, elaborating on the process, reasons for securitizing as- sets, benefits of and requirements for a successful asset securitization focusing on India with special reference to SARFAESI Act 2002.
Counterparty Risk in the Over-The-Counter Derivatives MarketNikhil Gangadhar
This paper discusses counterparty risk that may stem from the over-the-counter (OTC) derivatives market in the wake of the 2008 financial crisis. The paper aims to assess potential losses to the financial system if one or more major banks or brokers default on their OTC derivative contracts. To estimate counterparty risk, the paper calculates potential losses under different scenarios, taking into account the exposure of the financial system to institutions and the probability that other institutions may also default if a major counterparty fails. The results are discussed in the context of ensuring banking system stability.
Fiduciary or paper money is issued by the Central Bank on the basis of
computation of estimated demand for cash. Monetary policy guides the Central
Bank’s supply of money in order to achieve the objectives of price stability (or low
inflation rate), full employment, and growth in aggregate income.
Topic 8_Money and Financial Markets (1).pdfamalik32
Financial markets transfer funds from those with excess funds to those with a shortage. They promote economic efficiency and growth. Interest rates are important as they affect consumers, businesses, and the overall economy. The bond market enables borrowing, and interest rates are determined here. Stocks represent ownership in corporations and trade in stock markets. The foreign exchange market determines currency exchange rates. Financial institutions like banks reduce transaction costs and risks by acting as intermediaries between lenders and borrowers. Money supply increases often lead to inflation as more money chases the same amount of goods and services. Central banks conduct monetary policy to manage money supply, interest rates, and inflation.
This document discusses key aspects of savings, investment, and the financial system. It introduces how savings and investment are related through the savings-investment identity. Private investment is mostly done using other people's money obtained through stock sales or borrowing. Borrowers are charged an interest rate. The financial system helps facilitate investment by reducing transaction costs, risk, and improving liquidity through various financial assets like loans, bonds, stocks and bank deposits.
Revisiting A Panicked Securitization MarketIOSR Journals
With the passage of Finance Bill 2013 on April 30 in Lok Sabha proposing to Levy a 30% distribution tax on the investors in securitization deals through special purpose vehicles, there is a stir in the securitization market. The principal investors (banks) were paying the tax on their net income from the securitization transaction through SPVs. Now, they will be taxed on the gross income as per the new Finance Bill. The new securitization guidelines issued in May 2012 dipped the volume of fresh issue to Rs. 28,400 crore from Rs. 44,500 crore in the preceding fiscal.
Session 02 - Role of Financial Markets and Institutions.pptxExperimentalLab
1. Financial markets facilitate the flow of funds between surplus units and deficit units by transferring funds from those with excess funds to those who need funds. They allow corporations and governments to raise funds by issuing securities.
2. Financial institutions play a key role in financial markets by channeling funds from surplus units like households and corporations to deficit units in need of financing. Depository institutions like banks accept deposits and provide loans while non-depository institutions raise funds through other means like issuing securities.
3. Both depository and non-depository financial institutions help address imperfections in financial markets by evaluating borrowers, repackaging funds, and providing liquidity. They allow for efficient allocation of funds between surplus and deficit units
The graduate thesis examines the financial crisis and compares conventional and Islamic finance. It analyzes mortgage loans and securities in conventional finance that contributed to the crisis. Islamic finance prohibits interest and relies on profit-sharing models like musharakah, mudarabah, and murabahah. While avoiding risks of conventional models, ongoing debate discusses improving Islamic models for modern markets.
The document provides an overview of the downfall of Lehman Brothers, which filed for Chapter 11 bankruptcy in September 2008. It discusses several factors that contributed to Lehman Brothers' collapse, including the US housing bubble and subprime mortgage crisis, Lehman's high leverage and reliance on short-term funding, and flaws in risk management practices. After Lehman filed for bankruptcy, parts of its business were acquired by Barclays and Nomura. The collapse had widespread effects on financial markets and the global economy.
This document provides an overview and introduction to derivatives. It defines derivatives as contracts that derive their value from an underlying asset, and lists some common types including forwards, futures, options, swaps, and various structured products. It states that most derivatives are traded over-the-counter or on exchanges, and that they are one of the main categories of financial instruments along with stocks and debt.
This document provides a summary of Cameron Cowan's statement on securitization before two Congressional subcommittees. It discusses the history and growth of securitization, including the creation of mortgage-backed securities and asset-backed securities. Securitization involves pooling financial assets and issuing bonds backed by the cash flows from those assets, allowing originators to access funds upfront. This market has grown tremendously since the 1970s and now stands at $6.6 trillion, greatly expanding access to credit for borrowers and investment opportunities for investors.
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docxalanfhall8953
Week-1 Into to Money and Banking
and Basic Overview of U.S. Financial System
Money and Banking Econ 311
Instructor: Thomas L. Thomas
Financial markets transfer funds from people who have excess available funds to people who have a shortage.
They promote grater economic efficiency by channeling funds from people who do not have a productive use for them to those who do.
Well functioning financial markets are a key factor in producing economic growth, where as, poor functioning financial markets are a major reason many countries in the world remain poor.
Financial Markets
A security or financial instrument is a claim on the issuer’s future income or assets.
A bond is a debt security (IOU) that promises to make payments periodically for a specified period of time.
The bond market is especially important economic activity because it enables businesses and the government to borrow and finance their activities and because it is where interest rates are determined.
An interest rate is the cost of borrowing money or the price to rent (use someone else’s) funds.
Because different interest rates tend to move in unison, economist frequently lump interest rates together and refer to the “interest rate”.
Interest rates are important on a number of levels:
High interest rates retard borrowing
High interest rates induce saving.
Lower interest rates induce borrowing
Lower Interest rates retard saving
Information Asymmetry and Information costs
Why Financial Intermediaries
In the neo-classical world economists have argued financial intermediaries are not necessary. Savers (investors) could manage their risks through diversification.
The logic rests on the perfect market assumption – that is investors can always through their own borrowing and lending compose their portfolios as they see fit, without costs. In such a world there are no bankruptcy costs.
In such a world if taken to the extreme, perfect and complete markets imply that there is no need for financial institutions to intermediate in the financial (capital markets) as every investor (saver) has complete information and can contract with the market at the same terms as banks. E.g. Information Asymmetry
Why Financial Intermediaries Bonds
A common stock (usually called stock) represents a share of ownership in a corporation.
It is usually a security that is a claim on the earnings and assets of the corporation.
Issuing stock and selling it to the public (called a public offering) is a way for corporations to raise the funds to finance their activities.
The stock market is the most widely followed financial market in almost every country that has one – that is why it is generally called the market – here “Wall Street.”
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NYU Economics Research Paper (Independent Study) - Fall 2010
1. Non-Standard Securitizations: Their
Economic and Financial Applications
Potential
Jason Schron
New York University, New York, NY
College of Arts and Sciences, Undergraduate
Student
jns290@nyu.edu
Lucas Bernard
New York University
Economics Department
lucas.bernard@nyu.edu
Abstract
There are numerous obstacles that prevent non-uniform securitization
products from being traded in different domestic and international
marketplaces. Future flow receivables and diversified payment rights are the
most commonly used and traded assets in these markets. Remittances play an
important role in generating funds in economically challenged countries.
Securitization is also a major player in commodities markets and has
2. causations and correlations to the current [domestic and international]
economic recession. The securitization process for non-uniform products also
has similarities to the sub-prime home loan crisis. The history and development
of non-uniform securitizations and how they have grown into their current role
in markets is also included in this model. Moreover, explanations of the risks
and regulations that prevent non-uniform securitizations from becoming
standard in all markets greatly affect current economic measurables.
1. Introduction
There are many microeconomic, macroeconomic, legal, and other
issues that prevent non-uniform securitization products from becoming uniform
so that they can be traded in national and international marketplaces. Future-
flow securitizations and diversified payment rights securitizations are two
examples of non-uniform securitizations that have been under much scrutiny.
Different countries have different types of non-uniform securitizations, (e.g.
Crude); and their different potential risks, constraints, perceived value, fiscal
policies, market size, and trends in different marketplaces make it difficult to
make these securitizations standard.
Non-uniform securitizations were first known as "asset-backed
securitizations" in the early 1990s. They became known as "non-uniform
securitizations" as their popularity grew globally and their restrictions and
parameters begin to vary. Two examples of future-flow securitizations that are
quite popular are future-flow securitizations and diversified payment rights
3. (DPRs).
Future-flow securitizations became popular because they were readily
accessible for developing countries seeking to obtain low-cost, long-term
loans. Reputable public and private sector entities in these developing
countries were able to raise funds in formerly hard-to-reach capital markets and
obtain higher credit ratings than their own governments. By establishing
themselves in foreign markets, these developing countries were able to
overcome domestic credit ceilings and access cheaper foreign financing.
These actions also enable the borrowing country to lessen or prevent the
overwhelming panic that may occur if their domestic or foreign reserves
became depleted. Even in a porous economic climate such as today,
securitization of future flow receivables in emerging markets are performing
well (Mohapatra, 2008). This is because the securitization of credit cards,
tourism, trade, DPRs and other assets that were formerly not securitized are
enabling developing countries to maintain their access to international capital
markets, even in times of economic crisis.
2. Standard Features of Securitization
Securitization is the process by which pre-selected assets are pooled
together to be repackaged and sold to investors as interest-bearing securities.
This process originated in the 1970s when U.S. government-backed agencies
such as Fannie Mae and Freddie Mac pooled together home mortgages to be
resold to other investors; these large pools of home mortgages were sold as
4. collective assets known as mortgage backed securities.
Later in the 1980s, other assets began to be securitized and the
securitization market grew dramatically. Many financial institutions used
securitization to transfer the credit risk of assets from their balance sheets to
other financial institutions, such as hedge funds, insurance companies, and
banks. Securitized assets are relatively cheap to hold because rating agencies
have easier standards for them than the larger, non-securitized assets that they
were originally taken from. Securitization also lowers the concentration of risk
by spreading it across multiple entities (Jobst 2008).
A portfolio of securitizations is divided into three sections, known as
tranches: Junior, mezzanine, and senior. Each tranch is sold individually due to
their varying levels of risk. Junior has the most risk, mezzanine has the median
level of risk, and senior tranches have the least amount of risk. Investment
return, (which includes interest and principal repayment), and losses are
distributed among the three tranches based on their risk levels. Senior tranches
have the first choice of income generated from underlying assets due to their
lowest level of risk; mezzanine gets next choice, and the junior receives the
remainder of the income generated from underlying assets.
This concentrates portfolio losses in the junior tranches, which are the
smallest in size. Thus, junior tranches also have the highest risk, and therefore
the highest return to investors. Mezzanine tranches are the median in size and
are the median in terms of returns to investors. Senior tranches have extremely
low risk because of their low loss expectations. Investors often finance senior
5. tranch purchases by borrowing from elsewhere.
Any asset that supports a stable cash flow can be placed into a
reference portfolio and sold as securitized debt, which is why securitization has
become so popular and has spread to smaller and emerging markets in recent
years. In addition to mortgages, securities can be backed by individual lending
agreements, home equity loans, consumer credit, small business loans,
corporate loans, sovereign loans, project finance, lease receivables, and less/
trade receivables. These securities are known as “asset backed
securitizations” or “ABS.” Additionally, a variant is a collateralized debt
obligation which uses the same process as ABS, but includes a larger and
more diverse set of assets.
Securitization originated as a way for financial institutions and
corporations to find new sources of funding. It allowed banks to move assets off
of their balance sheets or borrow against their assets to refinance their
organization at a fair market rate. It also reduced their borrowing costs and in
the case of banks, it lowered their minimum regulatory capital requirements
(Jobst 2008).
A major reason for the reduction in costs is because the assets are
detached from the originator’s balance sheet and credit rating, thus allowing
the issuers of the assets to finance the purchase of the assets more cheaply
than if they were not securitized. Securitization does not inflate a company’s
liabilities as conventional debt does. Instead, securitization produces funds for
future investment without balance sheet growth.
6. Through the securitization process, investors are able to quickly adjust
their portfolios in response to changes in transactions costs, preferences, and
market volatility.
Occasionally, securities are not sold directly from the originator to the
issuer, which is called “true sale securitization.” Instead, the originator sells
only the credit risk associated with the asset without the transfer of its legal title;
this is called “synthetic securitization.” Synthetic securitization enables the
issuers to exploit price differences between the acquired, (and often illiquid),
assets and the price investors are willing to pay for them if they are diversified in
a larger pool of assets (Jobst, 2008).
3. Empirics of Future-Flow Securitization
First, the established country receiving the exported foreign funds to be
used as future-flow receivables has the foreign funds converted to their
sovereign currency in order to raise more funds in the same or other markets.
Second, the trustworthy country receiving the future-flow receivables
establishes an "SPV", (Special Purpose Vehicle; also know as an “SPE” --
“Special Purpose Entity” in some regions), in a tax neutral location outside the
foreign country receiving their loan(s). Third, the lending country sells its
current and future export receivables to the SPV for a lump sum payment; or the
lending country agrees to give the receivables to the SPV as security for a
different loan from the SPV. Occasionally, the original lending country who also
established the SPV inherits liability by agreeing to repurchase the receivables
7. from the SPV under unique pre-determined circumstances.
Next, the SPV funds the original loan/purchase price by issuing securities
backed by its right to receive the existing and future-flow receivables. During a
revolving period, the developing country acquiring the export receivables pays
the SPV by putting their payment in the SPV's personal, independent, offshore
bank accounts. The SPV uses the received payment to pay their own scheduled
interest and principal payments on the securities exchanged and any other
transaction costs; the remaining cash from the original payment to the SPV is
given back to the original payee country. Once the revolving period expires or
is completed, all of the cash from the original payment to the SPV for the future-
flow receivables is used to pay the interest and principal on the securities until
they have been paid in full.
The most desirable attribute of of future flow securitizations is that they
allow countries with external foreign currency debt ratings less than or equal to
investment grade to obtain outside funding from international capital markets in
order to issue securities with a higher foreign currency debt rating from the
money that they borrowed from a more credible source than themselves. This
action allows the borrowing countries to bypass the "sovereign ceiling"
because they can issue securities that are rated more highly than their native
country's external foreign currency debt rating, which allows the borrowing
country to gain access to higher quantity and quality international markets so
they can try to make money in order to improve their "developing country"
status.
8. 4. Securitization Types and Requirements
There are certain requirements for the types of receivables that can be
used to support a future flow securitization: First, the receivables must be
denominated in currency that is the same as the currency of the borrowing
country. Second, the receivables must be indebted to creditworthy entities that
are investment-grade rated which are not situated within the borrowing
country's borders. Third, the receivables must be liquid outside of the borrowing
country. Some examples of the types of receivables that have been used in
recent future flow securitizations are US currency receivables owed to an Asian
airline company by a credit card company for the purchase of airline tickets by
credit card; and US currency receivables owed to an emerging market telecom
company by international long distance telecom carriers for international long
distance telephone calls.
DPRs are recognized as an attractive and reliable alternative source of
long-run capital for banks, partly due to their lesser cost in comparison to riskier
bonds and because they normally receive a higher credit rating than the
borrowing country's foreign currency rating. DPRs receive higher credit ratings
on average compared to bonds because their future flow receivables are being
received from offshore obligors, the repayment is made directly by the [offshore]
SPV to the investor. In addition, the higher investment grade ratings given to
DPRs makes them more attractive to a larger audience of investors, (e.g.
insurance companies that will not purchase sub-investment grade investments).
Lastly, the purchased receivables are included in the SPV assets and are not
9. subject to the claims of any other creditors if bankruptcy were to occur. (ADB
2007).
5. Remittances
DPRs also fall under the category of remittances. Remittances have
become increasingly popular with both developed and developing countries. In
2005, global remittances were estimated at $225 billion, which is twice as large
formal development assistance flows from countries and governing bodies, and
are the second largest flow of external financial transactions after direct foreign
investments.
Remittance transactions play a significant role for developing countries by
helping them to obtain the funds they need to develop and reduce sovereign
poverty. Many of these developing countries do not have effective or efficient
economic support systems for their citizens, and they have porous or
nonexistent sovereign labor markets. Remittance flows from offshore/outside
entities catalyze sovereign consumption and growth and thus make currency
more mobile, and therefore available to more citizens.
Remittances are more consistent than other flows and are countercyclical,
which help balance economic fluctuations due to exogenous factors.
Remittances also promote economic stability, specifically in regards to foreign
exchange rates. This helps to finance the developing country's trade deficit and
spur national current account growth. Moreover, remittances strengthen a
country's banking system by pumping more money into the private sector. The
10. influx of new money supports expanded credit within the private sector and
increases the deposit base which decreases the amount of excess demand in
the sovereign loanable funds market.
6. Remittance Examples
For example, remittances are especially important for Central Asian
economies. Due to the collapse of the Soviet Union and lack of natural
resources, many of the Central Asian countries rely on remittances for stability
and growth. Even though many citizens in Central Asian countries are literate
and educated, the unemployment rates in these regions is strikingly high. Many
citizens emigrate to find suitable employment and their home countries rely on
employment as an exportable sovereign good for hire.
The nation of Kazakhastan also relies on remittances and compensation
for emigration, although for different reasons. About 20% of Kazakhastan's
population emigrated due to ethnic or cultural friction in the 1990s (e.g. Jews,
Germans, and Slavs). This left Kazakhastan at an extreme disadvantage, and in
desperate need of remittances' to make up for the loss of developed human
capital. Because Kazakhastan has been receiving outside remittances for the
last decade, all of the following have increased within its borders: The number
of borrowers, external sovereign lending, the disbursement of remittances, the
sovereign credit quality of Kazakhastan, the share of total financial assets in
financial sector, the total number of banking assets, the average size of loans,
and the development of technology. All of these positive effects have lead to
11. even more positive overall impacts of remittances in Kazakhastan: The
continued development of the banking subsection, domestic securitization
market, cross-border securitization market, and stability of the financial sector
(ADB 2007).
7. Impact on Current Economic Recession
As of late, securitization has become a larger player in commodities
markets. The current global economic downturn combined with the recent
credit crisis have increased the demand for the securitization of future flow
receivables and DPRs. The ratings of sovereign debt has decreased causing
the numbers of potential borrowers of future flow receivables and DPRs to grow
even though their respective abilities to produce goods or the potential demand
for these goods may have not changed. If a joint agreement is reached
between the country producing the good, the customers for its good, and an off-
shore/outside partner group which agrees to lend money to the producing
country in exchange for the rights to the proceeds of the sale of the good to be
sold to the producing country's customers, the off-shore/outside partner group
may agree to lend guaranteed ("collateralized") funds to the producing country
in exchange for the future cash flow produced by the sale of its goods to its
customers. Although there is some risk involved, the risk decreases because
the guaranteed cash flow comes from the outside creditworthy lending country,
which in turn results in a lower price for credit.
This process has similarities with the sub-prime loan crisis that occurred
12. within the last few years. Lenders would finance loans collateralized by homes
and the future earnings of the borrower would pay for the interest on these
loans. In the future flow securitization process, the future sale of commodities
will pay for the interest on the loans. In both scenarios, the increasing price of
the collateral reassures the investor of receiving his/her future payments from
the borrower(s).
In the recent, and still current economic downturn, securitization has
become more involved in "CMOs" (“Collateralized Mortgage Obligations”). In
equity markets, a tremendous amount of trade comes from institutions and
active traders balancing their market positions; connecting the two separate
transactions is the fact that much of the trading in CMOs during the recent
economic downturn has more to do with large and small market players
adjusting their portfolios and less to do with confidence in the real estate
market. Moreover, active market players have helped spur the growth of
commodities markets from an estimated $643 million in 1994, to $5.2 billion in
2004, to an estimated $80 billion at the beginning of 2010 (Bernard 2009).
8. Risks and Regulations
Although leveraged financing schemes are inherently risky, and thus ask
for higher returns from the borrower to the lender, CMOs are especially
dependent upon the default rate. Much along the same lines that overestimates
by financial intermediaries and monetary government bodies about the
incomes of home-owners weakened the CMO market and played a catalyzing
13. role in current recession, there is a similar risk relating to commodities: Due to
the necessity of looser financial restrictions when it comes to secondary
markets, the value of commodities are skyrocketing, perhaps with negative
future ramifications.
Even though contracts in commodity markets are normally private and
require additional informational services to assess their quality and risk, it is
plausible to compare the role CMOs played in the current financial crisis to the
potential role commodities could play in prolonging this current economic
crisis, or creating a new credit crunch in the future.
First off, the demand for commodities has been derived from the current
economic downturn because commodity producers are searching for lenders
due to the increased borrowing costs imposed by declining sovereign debt
ratings. Additionally, lenders want to lock in yields above what can be obtained
in more conventional money markets because they are more risk-averse now
than possibly ever before. Lastly, the demand for most commodities can only
increase. If the aforementioned theories hold true, which is seeming more and
more likely as time goes by, the movement in commodities prices may actually
be caused by, (NOT correlated to), a growing market in securitized products for
their future cash flows. This movement in commodities prices makes their
pricing mechanism even more complex to decipher, which makes the task of
creating standards for securities across international markets that much more
difficult.
Commodities are much more volatile than corporate bonds or real estate
14. investments, which will naturally result in a greater danger of default, similar to
the current mortgage downturn. This fact leads many educated people in the
financial world to believe that these structured financial products are very
sensitive to prices, which are dependent on default risk. The increased beta on
these assets reflected an increase in systematic risk due to sectors such as
real estate once the generous ratings were removed from some of the
packaged securities. This same dilemma is likely to occur in the commodities
market because of its greater volatility.
Additionally, commodities’ prices are sensitive to exogenous factors
such as political (monetary and fiscal policy), economic (money, capital,
national, global markets), and geographical (natural disasters, tourism), and
other unpredictable factors. Moreover, because commodities are used in
numerous ways, simulation based on empirical evidence is more appropriate
than creating a tangible and exact pricing model. Nonetheless, simulations are
only worthwhile mechanisms if all of their parts fit together to make a puzzle as
close to the real dilemma as possible.
9. Agricultural Commodities
Agricultural commodities are pivotal in the economic well-being in both
developed and developing nations. Agricultural commodities are often a key
economic export in developed nations, but inherently risky [volatile] commodity
prices can greatly affect agricultural commodities. For example, if an exporting
nation experiences a decrease in demand in conjunction with an unchanging
15. production rate, it can experience a significant economic downturn. Even if
production is decreased when demand initially decreases, the agricultural
sector will be dealt a blow with job losses.
In comparison, certain agricultural commodities are inherently in
demand. Corn is used to feed livestock and as natural fuel in the form of
ethanol. Due to government programs across the world encouraging, (and
occasionally subsidizing), domestic producers and consumers who are active
producing ethanol in order to reduce fossil fuels and increasing alternative
energy options and consumption, corn generally experiences high demand.
Continuing with the corn example, the increase in demand for corn can
lead to other dilemmas. As corn prices rise due to increased derived demand
for ethanol, farmers have less corn to feed their livestock with, and may have to
sell off some of their livestock. However, it takes time to sell off livestock as
farmers will search for the best buyers and negotiate for the highest prices.
Thus, the price of meat can remain low for long periods of time because
livestock buyers know that they have the upper hand in bargaining since
farmers need to get rid of livestock in order to slow their losses.(Schmidt, 2010).
As the supply of livestock decreases over time, the domestic and/or
international price of meat may rise, causing underdeveloped nations and/or
people with lower incomes to consume less protein and possibly decrease the
quality of their health.
Higher grain prices have catalyzed higher prices for agricultural assets
in equities markets. However, most investors do not want to get involved with
16. future flow receivables, and invest in proxies instead, (such as fertilizer
companies and tractors in reference to grain equities). The investment in
proxies might artificially inflate their prices in the short run and investors should
research for other reasons why these prices may increase, decrease, or remain
constant in the future.
When the harvests are completed early or on time, and the harvest’s size
and condition are close to predicted market values, it caps agricultural equities
prices for the short term (few months at most).
Moreover, the U.S. dollar is currently weak compared to other
international currencies, (i.e. Euro or Yuan), making U.S. agricultural goods
cheaper and raising the purchasing expectations of domestic grain harvesters
and traders.
In the case of the Chinese Yuan, because China purchased so much
U.S. debt as investments, the Yuan and U.S. dollar are connected. An increase
[decrease] in Chinese interest rates would increase [decrease] the value of the
Yuan and increase [decrease] the value of the U.S. dollar. A stronger dollar will
lower demand for U.S. agricultural goods in international market places, which
could lessen the amount of grain traded in exchanges. This is partly due to the
fact that not all investors understand that agricultural goods are produced on
farms under varying exogenous and endogenous conditions rather than
controlled factory conditions such as processed products (Schmidt, 2010).
Nonetheless, underdeveloped nations frequently invest in agricultural
infrastructure and innovation because of their available untapped natural
17. resources or potential contributions to global markets if their societies are
improved. The work on improving the purification system for Africa’s water by
multiple investors could have a major impact on the global economy in
numerous ways and sectors.
A diverse group of agricultural commodities are also traded in many
exchanges around the world. Trading agricultural commodities strengthens
their business and individual market by allowing farmers to lock in constant
prices for the future. Without the trade of agricultural commodities, farmers
would be more at risk for losing the value of their crops to unpredictable
negative events, such as natural disasters (Wisegeek 2010).
Summary
The economic and financial applications potential of all non-standard
securitizations is infinite. If it were possible to come up with a way to be able to
make securitizations standard so they could be traded, bought, and sold in
marketplaces across the globe, the current global economic crisis could be
corrected, and possibly become an economic boom.
The number and type of assets that are able to be securitized have
increased enormously in recent years, and can continue to do so if
internationally accepted standards are created for securitizations.
However, due to exogenous factors such as different economic climates
in different countries and regions of the world, language barriers, and different
codes of moral and ethical conduct; as well as endogenous factors such as:
18. Will the borrowing country receiving the money from the established lending
country actually use the money for the same purposes that they promised to?
(Moral Hazard quandry); does the borrowing country know enough about the
established and more developed country lending them money to know if they
are getting a fair deal or not? (Adverse Selection problem).
As soon as a solution to making non-standard securitizations standard in
one marketplace becomes reality, it will be much easier to create variations of
this solution to pertain to allowing non-standard securitizations to become
standard in other market places, and thus generate more business across the
world.
19. References
Asian Development Bank ("ADB"). Report and Recommendations of the
President to the Board of Directors. Project Number 40941: July 2007.
Bernard, Lucas and Semmler, Willi. Boom-Bust Cycles: Leveraging, Complex
Securities, and Asset Prices 28 September 2009.
Culp, Christopher L. Forrester, J. Paul. "Structured Financing Techniques in Oil
& Gas Project Finance: Future Flow Securitizations, Prepaids,
Volumetric Production Payments and Project Finance Collateralized
Debt Obligations." Social Science Research Network. 5 August 2009
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Jobst, Andrea. "Back to Basics" Finance and Development September 2008,
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Jobst, Andrea. “How Securitization Works” Chart. "Back to Basics" Finance and
Development September 2008, Volume 45, Number 3.
Mohapatra, Sanket. “How Remittance Securitizations Can Help Developing
Countries During a Credit Crisis.” People Move. 27 August 2008
http://blogs.worldbank.org/peoplemove
Schmidt, Ned W. “Food Prices Spiraling Higher, Grains Feed Meat Prices” The
Market Oracle 21 October 2010 http://www.marketoracle.co.uk/
Article23658.html
“What Are Agricultural Commodities?” Wisegeek 2010
http://www.wisegeek.com/what-are-agricultural-commodities.htm