Slides Week 12 - Unit revision and exam tips.pptx

Netting is very common in the swap markets for

This preview shows page 75 - 81 out of 95 pages.

Netting is very common in the swap markets. For example, assume two parties enter into a swap agreement on a particular security. At the end of the swap period, Investor A is due to receive $100,000 from Investor B. At the same time, Investor B is due to receive $25,000 from Investor A. Instead of Investor B giving Investor A $100,000 and Investor A giving Investor B $25,000, the payments would be netted. Investor A would give Investor B $0, while Investor B would give Investor A $75,000. Accounting for netting is the offsetting of accounts receivable and accounts payable between two business entities, so that payment is only made for the net difference between their receivables and payables 75
Image of page 75

Subscribe to view the full document.

What does IFRS7 deal with? IFRS 7, ‘Financial instruments: Disclosures’, applies to financial and non-financial institutions and therefore also applies to investment funds, private equity funds, real estate funds and investment managers. IFRS 7 requires disclosures on a reporting entity’s financial instruments and how they affect the entity’s financial position, performance and cash flow. IFRS 7 is divided into two sections. The first section covers quantitative disclosures about the numbers in the balance sheet and the income statement. The second section deals with risk disclosures. This is what takes the disclosures to a new level. The risk disclosures arising from financial instruments under --IFRS 7 are given ‘through the eyes of management’ and should reflect the way management perceives, measures and manages the fund’s risks. --IFRS 7 both combines and goes beyond the disclosure requirements previously set out in IAS32 and IAS 30. 76
Image of page 76
Textbook Chapters (cont’d) Part 4 Mitigation and transfer. (Chapters 13-18): one question. Mitigating risk in the derivative market Structural mitigants Credit insurance, surety bonds, letters of credit Credit derivatives (Credit default swaps) Collateralized debt obligations Bankruptcy 77
Image of page 77

Subscribe to view the full document.

Credit Insurance Designed exclusively to protect trade receivables . The company buys an insurance from an insurer: Euler-Hermes (France and Germany, a sub of Allianz) Atradius (Spain and Netherlands) Coface (France) By 2011, they wrote a total of nearly $5 billion in premium and generated $580 billion in net income. 78
Image of page 78
Coverage types Ground-up coverage: Protection takes effect as losses start to occur . Stop-loss coverage: Covers aggregate losses up to a certain amount, once losses reach the deductible amount. Credit limits: Based on the financial info provided, the policy will cover losses in the aggregate based on this pool of receivables. 79
Image of page 79

Subscribe to view the full document.

Strengths and weaknesses of credit insurance Rigidity (rarely accepts changes) Only receivables (excludes other activities) Short-term policies (3 to 6 months) Whole turnover policy (not sub-portfolios) Cancelation/reduction of credit lines (Most insurers have the unilateral right to reduce or cancel coverage with as little as one day’s notice.
Image of page 80
Image of page 81
  • Fall '19
  • Collateralized debt obligation, Credit default swap

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern