...Case Study – First American Bank: Credit Default Swaps CapEx Unlimited (CEU), one of Charles Bank International’s (CBI) important clients, asked for $50 million to finance its network expansion. However, the new loan would put CBI over its credit exposure limit. CBIT contacted First American Bank (FAB) to establish a credit default swap, which would mitigate its credit risk from the new loan. What is the probability that CEU will default within two years? In order to accurately price the credit default swap, we need to start with an assessment of credit risk – the probability of default. According to Exhibit 10b, the probability that CEU (rating B2) will default by the end of year 2 is 13.7%. But, this data only reflects historical information, which is not appropriate for derivatives pricing. Therefore, we use Merton Model to calculate CEU’s default probability. The Merton Model proposed by Robert Merton characterizes a company’s equity as writing a call option or buying a put option on the assets of the company with maturity T and a strike price equal to the face value of the debt. The implied volatility from options can be regarded as the expected probability of default. Currently, CEU’s market value of the firm equals to $10,900 million (S0) and the outstanding debt has a maturity of 5 years (T). CEU’s market value of debt is $4,100 million, so its face value of debt should be more than $4,100 million. For treasury STRIP with 5-year maturity (r=4.5% according to Exhibit 8)...
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...Cds- First American Bank First Questions: 1. What is a default swap? How does it work? A credit default swap (CDS) is a credit derivative which provides insurance against the risk of default by a specific company or reference entity. This is an agreement between two parties stating that the buyer of the CDS, who is taking a short position in the credit event risk, will make a series of payments (known as the spread) to the seller for the full extent of the CDS life or until a credit event occurs, in exchange for a payoff if the underlying loan defaults. The spread of a CDS is the total amount paid per year to buy protection A higher CDS spread is considered to be more likely to default, and thus a higher fee is charge to receive protection against the company. Again, if a default occurs, the seller receives possession of the defaulted loan and the buyer is compensated with the notional amount or face value of the loan. The settlement in the event of defaults involves either physical delivery or a cash payment. Let’s use our case to illustrate how a default swap works. Using a credit default swap, CBI would make a periodic fee payment to First American Bank in exchange for receiving credit protection. First American Bank would assume the credit risk of the additional loan to CapEx Unlimited (CEU) by guaranteeing a payment to CBI if CEU defaulted on its debt. Banks are generally going to be the net buyers of credit protection while insurance companies tend to be selling...
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...if the underlying loan defaults. The spread of a CDS is the total amount paid per year to buy protection A higher CDS spread is considered to be more likely to default, and thus a higher fee is charge to receive protection against the company. Again, if a default occurs, the seller receives possession of the defaulted loan and the buyer is compensated with the notional amount or face value of the loan. The settlement in the event of defaults involves either physical delivery or a cash payment. Let’s use our case to illustrate how a default swap works. Using a credit default swap, CBI would make a periodic fee payment to First American Bank in exchange for receiving credit protection. First American Bank would assume the credit risk of the additional loan to CapEx Unlimited (CEU) by guaranteeing a payment to CBI if CEU defaulted on its debt. Banks are generally going to be the net buyers of credit protection while insurance companies tend to be selling these contracts. Hedge funds are other big players in this type of derivative and utilize CDS to speculate on credit risk. The recent housing market crisis and subsequent AIG bailout has led to new regulation and the implementation of a central clearinghouse for all CDS trades. This means that each CDS between two parties must also be accepted by the central clearing house (or the CCP). Acceptance of the...
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... Inter-American Development Bank Department of Research and Chief Economist Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis Joong Shik Kang* Alessandro Prati* Alessandro Rebucci** * International Monetary Fund ** Inter-American Development Bank Inter-American Development Bank 2010 Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library Kang, Joong Shik. Aid, exports, and growth : a time-series perspective on the Dutch disease hypothesis / Joong Shik Kang, Alessandro Prati, Alessandro Rebucci. p. cm. (IDB working paper series ; 114) Includes bibliographical references. 1. Economic assistance—Economic aspects. 2. International finance. I. Prati Musetti, Alessandro. II. Rebucci, Alessandro. III. Inter-American Development Bank. Research Dept. IV. Title. V. Series. HC60.S55 2010 © Inter-American Development Bank, 2010 www.iadb.org Documents published in the IDB working paper series are of the highest academic and editorial quality. All have been peer reviewed by recognized experts in their field and professionally edited. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This paper may be freely reproduced provided credit is given to the Inter-American Development...
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...a period of two years. Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with financial institutions, international banks and Indian banks. The working capital is financed by a consortium of banks in which Global bank, Pune branch, is the leader. The company imports many parts of the car engine in a CKD (completely knocked down) condition from General Motors, Detroit, after establishing import letters of credit through its main bankers, Global Bank, Pune Branch. M/S Auto India approached Global Bank, Pune for opening of import letter of credit as per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit. Type of credit Application Applicant Beneficiary Issuing Bank Advising Bank Negotiating Bank Reimbursing Bank Availability Expiry Amount Merchandise Quantity and price - Irrevocable negotiable - UCP ICC 600 - M/S Auto India, Pune, India - M/S General Motors, Detroit, USA - Global Bank, Pune, India - The American Bank, New York - The American Bank, New York - International Bank, New York - Negotiable at sight - At the counters of The American Bank, New York - USD 100,000 - Car engine parts - 50 units @ USD 2000 per unit Circumstances Issuing Bank Global Bank, Pune issued its irrevocable negotiable credit through its head office in Pune since Global Bank co-ordinated all...
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...a period of two years. Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with financial institutions, international banks and Indian banks. The working capital is financed by a consortium of banks in which Global bank, Pune branch, is the leader. The company imports many parts of the car engine in a CKD (completely knocked down) condition from General Motors, Detroit, after establishing import letters of credit through its main bankers, Global Bank, Pune Branch. M/S Auto India approached Global Bank, Pune for opening of import letter of credit as per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit. Type of credit Application Applicant Beneficiary Issuing Bank Advising Bank Negotiating Bank Reimbursing Bank Availability Expiry Amount Merchandise Quantity and price - Irrevocable negotiable - UCP ICC 600 - M/S Auto India, Pune, India - M/S General Motors, Detroit, USA - Global Bank, Pune, India - The American Bank, New York - The American Bank, New York - International Bank, New York - Negotiable at sight - At the counters of The American Bank, New York - USD 100,000 - Car engine parts - 50 units @ USD 2000 per unit Circumstances Issuing Bank Global Bank, Pune issued its irrevocable negotiable credit through its head office in Pune since Global Bank co-ordinated all...
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...slogans, chants, and the democrats words against them. 28 In fact, the “Log Cabin and Hard Cider” slogan came from a Democrat editor. While the Harrison made far more noise than Van Buren, the popular vote was very close, Harrison with 146,843 more than Van Buren from a total vote count of more than two and a half million. With this victory, the Whigs proved that they also had the capability to put an “impoverished” Westerner in the White House. Underneath all of the politicking, this was a massive decision for the American people. The United States was still suffering from its largest economic panic, and the two candidates represented two different economic platforms. 29 By choosing Harrison, the people social programs and increased Federal power. Harrison’s victory led to another massive shift in power as the Whigs gained the spoils of the Presidency. 27 Kennedy, American Pageant, 270 28 Kennedy, American Pageant, 271 29 Holt, Rise and Fall of the American Whig Party: Jacksonian Politics and the Onset of the Civil War,...
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...printed in the colony of New Jersey in 1776. (Gilder Lehrman Collection) Banks are among the oldest businesses in American history—the Bank of New York, for example, was founded in 1784, and as the recently renamed Bank of New York Mellon it had its 225th anniversary in 2009. The banking system is one of the oldest, largest, and most important of our industries. Most adult Americans deal with banks, often on a fairly regular basis. Nonetheless, banks and banking seem rather mysterious. What do banks do? Why have they for so long been an integral part of our economy? Why, as in the financial crisis that commenced in 2007, do banks every so often get into trouble and create serious problems for the country? Banks have two important economic functions. First, they operate a payments system, and a modern economy cannot function well without an efficient payments system. We make most of our payments by writing checks, swiping credit cards issued by banks or tied to them, and by paying bills via online banking. Most of the money stock of the country is in fact bank money; the rest of the currency is “legal tender” issued by the government, namely Federal Reserve Notes and coins. We have confidence in bank money because we can exchange it at the bank or an ATM for legal tender. Banks are obligated to hold reserves of legal tender to make these exchanges when we request them. The second key function of banks is financial intermediation, lending or investing the money we deposit with...
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...a period of two years. Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with financial institutions, international banks and Indian banks. The working capital is financed by a consortium of banks in which Global bank, Pune branch, is the leader. The company imports many parts of the car engine in a CKD (completely knocked down) condition from General Motors, Detroit, after establishing import letters of credit through its main bankers, Global Bank, Pune Branch. M/S Auto India approached Global Bank, Pune for opening of import letter of credit as per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit. Type of credit - Irrevocable negotiable Application - UCP ICC 600 Applicant - M/S Auto India, Pune, India Beneficiary - M/S General Motors, Detroit, USA. Issuing Bank - Global Bank, Pune, India Advising Bank - The American Bank, New York Negotiating Bank - The American Bank, New York Reimbursing Bank - International Bank, New York Availability - Negotiable at sight Expiry - At the counters of The American Bank, New York Amount - USD 100,000 Merchandise - Car engine parts Quantity and price - 50 units @ USD 2000 per unit Circumstances Issuing Bank Global Bank, Pune issued its irrevocable negotiable credit through its head office in Pune since Global Bank co-ordinated all its accounting and communication functions at its...
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...each question. Answer all questions. http://www.encyclopedia.com/doc/1G2-3045001189.html 1) American Standard Co. has a 90 day £1 million receivable. American Standard’s bank, Bank of America, suggests a 90 day forward contract. American Standard sells forward £1 million. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit. Answer: Part a) Hedging is the correct answer. ------------------------------------------------- 2) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a put option contract that matures in 90 days. American Standard purchases one put option contract, where one contract corresponds to a quantity of £62,500. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit. Answer: Part a) Hedging is the correct answer. Because in this case, the American Standard Co is sure about the money to be received and wants to hedge against the exchange rate risk which is hedging. ------------------------------------------------- 3) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a call option contract that matures in 90 days. American Standard purchases one call option contract, where one contract corresponds to a quantity of £62,500. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit. Answer:...
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...America and how they contributed to the financial crisis of 2008. These banks were facing the possibility of bankruptcy, and in turn the American government had an increasing need for these banks as the means to fund the necessary investments in the economy. 13 bankers, breaks down the American banking industry in how they have grown so big, so profitable, that they have become resistant to regulations. The banks grown to the enormous that the stability of the economy was dependent, giving they a political influence by pouring money into campaigns of congressional candidates and congressmen, assuring investment banks to maintain influence and position in the White House and the Treasury department. Theses “megabanks” had balance sheet assets that accounted for more than 60 percent of the country’s gross domestic product. In March of 2009, the presidents of thirteen of these “Megabanks” met at the White House with the President, Obama that gave a message, “everybody has to pitch in. We’re all in this together” –President Obama (13 Bankers, page 4) this message giving a clear indicator the thirteen bankers needed the government and in turn, the government needed these 13 bankers to maintain stability of the economy. Thomas Jefferson was strongly suspicious of the financial industry and of banks and feel they are more dangerous than standing armies. Jefferson feared that the economic power held by banks have the possibility to grow out of government control. Jefferson’s vision...
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...The American Lion ! Strong-willed and sharp-tempered, a fierce patriot and rabid partisan, Andrew Jackson was always controversial both as a general and as President. He personalized disputes and demonized opponents. He was the defender of the Union, the conqueror of nullification, the hero of democracy. Andrew Jackson was President of the United States during a crucial period of decision making that not only affected Americans, but particularly the economy involving the Second Bank of the United States. Jackson opposed all banks, believing that they only made the rich more wealthy and corrupted government. Although Jackson’s main concern was to give lower social classes the same opportunities that the wealthy Bank owners denied, as time went on, he clearly made the Bank issue personal resulting in temporary abolishment of the Second Bank of the United States. Along with the bank itself, Jackson more specifically despised the paper currency distribution because it caused Americans to desire wealth without labor and increased the temptation to obtain money at any sacrifice. Jackson’s thorough hatred for paper currency and the monetary system of the United States during the time of his Presidency raises the question as to why he is on the most widely used denomination of paper money in America to this day, the twenty dollar bill. The Treasury and Federal Reserve ironically chose Andrew Jackson’s portrait to appear on the twenty-dollar bill to get revenge long after his death, but...
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...Jackson defends the policy saying they are better off without the Americans interrupting their practices. Beside a majority of the Cherokee, most of the tribes signed treaties and relocated to the west of the Mississippi. At...
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...We, the American people, were honored to have electee Andrew Jackson serve as our president for two terms. His valiant decisions in events such as the Bank War, South Carolina’s Nullification Act, and the Indian Removal Act ensured that the majority of Americans opinions would be represented. As a democratic leader elected by the majority of the American people, it is only right that he has responded to and executed the American majority’s beliefs. During Jackson’s first term, the state of South Carolina initialized the Nullification Act. This state act called for South Carolina to nullify any federal institutionalized law to which they found unconstitutional. Despite having ratified the constitution and taken the vow to uphold it, South...
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...CASE 1: 1) Global Bank, Pune was incorrect in its interpretation of UCP 600 article 14. The credit clearly stated that it expired at the counters of the negotiating bank and that the documents were to be sent to the head office of Global Bank. The credit did not contain any indication that presentation at the counters of Global Bank’s head office was for administrative purposes only, and that effective presentation to the issuing bank would only be considered when the issuing bank had received the required documents. UCP 600 article 6 states that presentation of documents must be made to issuing bank, or the confirming bank, if any, or any other nominated bank. The beneficiary presented the documents to the nominated negotiating bank and American Bank, New York presented the documents to the issuing bank as instructed. Therefore, Global bank’s Pune Branch had a duty to determine the number of days remaining in the five banking day period after presentation of the documents at their head office in order to comply with article 14 of UCP 600. 2) Yes, the stand taken by American Bank, New York, as the negotiating bank, is correct. As per the terms and conditions of the credit, they have negotiated the documents and forwarded the same to Global Bank’s head office. The American bank, New York should have received the notice of rejection of the documents within five banking days following the day of receipt of the documents at the counters of the head office of...
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