Bank Theory

Securitization and Securitization of Assets - Notes, Examples & MCQs Securitization and Securitization of Assets Description Securitization is the financial process of pooling various types of contractual debt such as mortgages, car loans, or credit card debt obligations and selling their related cash flows to third-party investors as securities. These securities are known as Asset-Backed Securities (ABS). It allows financial institutions to remove these assets from their balance sheet, enhance liquidity, and manage risk better. Key Features of Securitization Conversion of illiquid assets into liquid, tradable securities Improves liquidity and capital adequacy for originators Investors receive predictable cash flows from pooled assets Involves a Special Purpose Vehicle (SPV) or entity to handle asset transfer Reduces credit risk for financial institutions 5 Mathematical Examples ...

Derivatives: Notes, Examples, and MCQs | Bank Theory Derivatives: Characteristics, Functions, and Types What is a Derivative? A derivative is a financial contract whose value is derived from the performance of an underlying asset, index, or rate. Common underlying instruments include stocks, bonds, interest rates, commodities, and currencies. Characteristics of Derivatives They derive value from underlying assets. Highly leveraged instruments. Used for hedging, speculation, and arbitrage. Contracts are executed on organized exchanges or OTC. Price depends on time to maturity, volatility, interest rate, and underlying asset price. Functions of Derivatives Hedging against price volatility and risk. Price discovery in financial markets. Market efficiency through arbitrage. Facilitates access to unavailable assets or markets. Lower transaction costs compared to physical trading. Users of Deri...

Factoring, Forfaiting & Trade Receivables Discounting System (TReDS) What is Factoring? Factoring is a financial service where a business sells its accounts receivables (invoices) to a third party (called a factor) at a discount to obtain immediate cash flow. This helps companies improve liquidity without waiting for the payment terms to mature. History of Factoring The concept of factoring dates back to ancient Mesopotamia (around 2000 BC), where traders used agents to collect payments. Modern factoring developed during the 14th century in England, supporting the wool industry. In the United States, factoring became popular in the 19th century, particularly in the textile industry. Types of Factoring Recourse Factoring: The seller bears the risk if the customer fails to pay. Non-recourse Factoring: The factor bears the risk of non-payment. Domestic Factoring: Both the client and customers are b...

Capital Markets and Stock Exchanges Primary Market The Primary Market deals with the issuance of new securities. Corporates, governments, and other institutions raise funds through the sale of equity or debt instruments to investors. The primary market facilitates capital formation directly. Secondary Market The Secondary Market involves trading of securities previously issued in the primary market. It provides liquidity to investors and helps in price discovery. Stock exchanges are vital platforms for secondary market transactions. Stock Exchanges in India Major stock exchanges in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Both are regulated by the Securities and Exchange Board of India (SEBI) to ensure transparent and fair trading practices. Financial Products/Instruments in the Secondary Mar...