In course of banks lending involves a number of risks. In addition to the risks related to creditworthiness of the counterparty, the banks are also exposed to interest rate, Forex and country risks. Unlike market risks, where the measurement, monitoring, control etc. are to a great extent centralized. Credit risks management is a decentralized function or activity. This is to say that credit risk taking activity is spread across the length and breadth of the network of branches, as lending is a decentralized function. Proper a sufficient care has to be taken for appropriate management of credit risk. Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit Continue reading
Business Finance
Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
Importance of Derivatives Instruments
Derivatives are becoming increasingly important in world markets as a tool for risk management. Derivatives instruments can be used to minimize risk. Derivatives are used to separate the risks and transfer them to parties willing to bear these risks. The kind of hedging that can be obtained by using derivatives in cheaper and more convenient than what could be obtained by using cash instruments. It is so because, when we use derivatives for hedging, actual delivery of the underlying asset is not at all essential for settlement purposes. The profit or loss on derivatives deal alone is adjusted in the derivative market. Moreover, derivatives do not create any new risk. They simply manipulate risks and transfer them to those who are willing to bear these risks. To cite a common example, let us assume that Mr. X owns a car. If he does not take an insurance, he runs a Continue reading
Financial Derivative – Futures: Definition, Features and Types
Meaning and Definition of Futures A futures contract is very similar to a forward contract in all respects excepting the fact that it is completely a standardized one. Hence, it is rightly said that a futures contract is nothing but a standardized forward contract. It is legally enforceable and it is always traded on an organized exchange. Clark has defined future trading “as a special type of futures contract bought and sold under the rules of organized exchanges”. The term ‘future trading’ includes both speculative transactions where futures are bought and sold with the objective of making profits from the price changes and also the hedging or protective transaction where future are bought and sold with a view to avoiding unforeseen losses resulting from price fluctuation. A future contract is one where there is an agreement between two parties to exchange any asset or currency or commodity for cash at Continue reading
The Concept of Cash Management
Concept of Cash “Cash, like the blood stream in the human body, gives vitality and strength to business enterprises.” Though cash hold the smallest portion of total current assets. However, cash is both the beginning and end of working capital cycle – cash, inventories, receivables and cash. It is the cash, which keeps the business going. Hence, every enterprises has to hold necessary cash for its existence. Moreover, steady and healthy circulation of cash throughout the entire business operations is the basis of business solvency. In the words of R.R. Bari, “Maintenance of surplus cash by a company unless there are special reasons for doing so, is regarded as a bad sigh of cash management.” Cash may be interpreted under two concepts. In narrow sense, cash is very important business asset, but although coin and paper currency can be inspected and handled, the major part of the cash of most Continue reading
Importance of Financial Information to Stakeholders
In business there are two types of stakeholders that’s: internal stakeholders and external stakeholders. Internal stakeholders mean those stakeholders are dwell inside the company for examples: managers, employees, board members etc. On the other hand those stakeholders are not directly a part of a company is called external stakeholders for examples: shareholders, customers, suppliers etc. All shareholders want to see the use of their investment and thus asses the management through the financial statements. Because financial statements are very useful for businesses. Stakeholders of the company require the financial information for following reasons. To know how well the company is doing. To find company has earned more money than they spent. To get an idea about strategic and tactical plans of the management. To provide information to make decisions who make decisions about organisatoin. Avoid dissimulations and corruptions of the organisation. The usefulness of financial statements to different stakeholders is Continue reading
Interest Rate Risk in Banking
The management of interest rate risk should be one of the critical components of market risk management in banks. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. Interest rate risk in banking is the potential negative impact on the Net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability, off-balance sheet items and cash flow. Hence, the objective of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken and effect risk return trade-off. Management of interest rate risk aims at capturing the risks arising from Continue reading