Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower or investor, fails to close and the loan "falls out" of the pipeline.

The lending risk that occurs when the terms of a loan are confirmed simultaneously with the terms of a property sale. Because the mortgage terms are set but the sale is not finalized, there is a risk that the transaction may not be completed. This represents a risk to the mortgage pipeline, as the loan may not be issued.

Negative Equity

When the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan.

The equity in the investment is the difference between how much the purchased item is worth and how much still owes on the loan. If the amount owing on the loan becomes greater than the value of the investment then the difference between these two figures is known as negative equity. This can happen for a number of reasons, but the most common is due to an unforeseen decline in the asset's value.

For example, negative equity often occurs when a homeowner purchases a house using a mortgage and then the economy starts to slow or home prices start to drop. After the house purchase, the value of the home decreases below the value of the amount owed on the mortgage, causing negative equity.

Value Additivity Principal

Value additivity principal prevails when the value of a whole group of assets exactly equals the sum of the values of the individual assets that make up the group of assets. The principle states that the net present value of a set of independent projects is just the sum of the net present values of the individual projects.

The Balanced Scorecard

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and non-profit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals.

A balanced scorecard is a set of performance measures constructed for four dimensions of performance. The dimensions are financial, customer, internal processes, and learning and growth. Having financial measures is critical even if they are backward looking. Customer measures examine the company's success in meeting customer expectations. Internal process measures examine the company's success in improving critical business processes. And learning and growth measures examine the company's success in improving its ability to adapt, innovate, and grow. The customer, internal processes, and learning and growth measures are generally thought to be predictive of future success.

Efficient Market Hypothesis

The hypothesis states that all relevant information is fully and immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis.

Three forms of efficient market hypothesis exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all publicly available information) and strong form (stock prices reflect all relevant information including insider information).

The Phillips Curve

The Phillips curve represents the relationship between the rate of inflation and the unemployment rate discovered by Professor A.W.Phillips. He found that there was a trade-off between unemployment and inflation, so that any attempt by governments to reduce unemployment was likely to lead to increased inflation. Phillips found a consistent inverse relationship: when unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly. Phillips’s “curve” represented the average relationship between unemployment and wage behaviour over the business cycle. It showed the rate of wage inflation that would result if a particular level of unemployment persisted for some time.This relationship was seen by Keynesians as a justification of their policies. However, in the 1970s the curve began to break down as the economy suffered from unemployment and inflation rising together (stagflation).

A Phillips curve shows combinations of unemployment and inflation at given points in time. As consumer adjust to higher anticipated levels of inflation the Phillips curve shifts to the right. The expectations-augmented Phillips Curve was developed by Milton Friedman to try explaining the breakdown of the Phillips Curve in the 1970s. He incorporated people's price expectations, and said that there would be a number of short-run Phillips Curves - one for each level of price-expectations. However, in the long-run there would be no trade-off between unemployment and inflation and any attempt to reduce unemployment to below its natural rate would simply be inflationary.

Hedging

Hedging refers to making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced.

It is a strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.

Law of one price

The law of one price is an economic law stated as: "In an efficient market all identical goods must have only one price."

It states that a given security must have the same price regardless of the means by which one goes about creating that security. This implies that if the payoff of a security can be synthetically created by a package of other securities, the price of the package and the price of the security whose payoff it replicates must be equal.

The intuition for this law is that all sellers will flock to the highest prevailing price, and all buyers to the lowest current market price. In an efficient market the convergence on one price is instant.

Stratified Sampling Bond Indexing

Stratified Sampling Bond Indexing is a method of bond indexing that divides the index into cells, each cell representing a different characteristic, and that buys bonds to match those characteristics.

Stratified sampling starts with dividing the index securities across a variety of characteristics. These could include industry, growth, value, yield and market capitalization, among many other possibilities. Stocks are categorized within a matrix of all such categories and each cell would be assigned a weight based on the weight of that group of stocks in the index. Then, a stock would be randomly chosen from each cell and weighted according to that cell’s weight in the index.

Stratified sampling allows the portfolio to match the basic characteristics of the index without requiring full replication. The more dimensions within the matrix, the more closely the portfolio will match the index.

Basket Options

Basket options are a type of option whose underlying asset is a basket of commodities, securities, or currencies. A basket option is an option whose payoff is linked to a portfolio or "basket" of underlier values. The basket can be any weighted sum of underlier values so long as the weights are all positive. Basket options are popular for hedging foreign exchange risk. A corporation with multiple currency exposures can hedge the combined exposure less expensively by purchasing a basket option than by purchasing options on each currency individually.The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of exchange. A basket option is generally used by multinational corporations with multicurrency cash flows since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each of the currencies that make up the basket.

Payback Period

The amount of time it takes to recover the cost of an investment. In capital budgeting the payback period refers to the specific time period needed by the firm in order to recoup the initial plus and subsequent costs of the capital investment. The payback period includes all initial investment to the annual predicted cash inflows for the recovery time period. The major problem of this ratio is that it does not take into account cash flows which the firm receives after the payback period has been met and thus cannot be considered a measure of the profitability of any particular investment. undertaking.

It is calculated as:

Cost of Project/Annual Cash Inflows

For example, if a project costs $150,000 and is expected to return $30,000 annually, the payback period will be $150,000 / $30,000, or five years.

Random Sampling

Random sampling is a sampling technique where we select a group of subjects (a sample) for study from a larger group (a population). Each individual is chosen entirely by chance and each member of the population has a known chance of being included in the sample.

In random sampling, each item or element of the population has an equal chance of being chosen at each draw. A sample is random if the method for obtaining the sample meets the criterion of randomness (each element having an equal chance at each draw). The actual composition of the sample itself does not determine whether or not it was a random sample.

American Depositary Receipts (ADRs)

Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. ADRs can be sponsored or unsponsored.

If the ADR's are sponsored, the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. Unsponsored ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share.

Gap Analysis

Gap analysis is a tool that helps a company to compare its actual performance with its potential performance. At its core are two questions: "Where are we?" and "Where do we want to be?" If a company is not making the best use of its current resources then it may be producing or performing at a level below its potential.

The goal of gap analysis is to identify the gap between the optimized allocation and integration of the inputs and the current level of allocation. This helps provide the company with insight into areas which could be improved. The gap analysis process involves determining, documenting and approving the variance between business requirements and current capabilities. Such analysis can be performed at the strategic or operational level of an organization.

Quantity Theory of Money

The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service.

Another way to understand this theory is to recognize that money is like any other commodity: increases in its supply decrease marginal value (the buying capacity of one unit of currency). So an increase in money supply causes prices to rise (inflation) as they compensate for the decrease in money’s marginal value.
The Theory’s CalculationsIn its simplest form, the theory is expressed as:

MV = PT (the Fisher Equation)

Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services

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Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the buyer (unless the bond is in default).

Stakeholder

A stakeholder is a party that can affect or be affected by the actions of the business as a whole. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research institute. It defined stakeholders as "those groups without whose support the organization would cease to exist." The theory was later developed and championed by R. Edward Freeman in the 1980s. The term has been broadened to include anyone who has an interest in a matter. Stakeholder includes shareholders, creditors, employees, investors, government, customers, labour unions, suppliers and community at large.

Acid-test ratio

It is also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Price elasticity of demand

Price elasticity of demand (PED or E_d) is a measure used in economics to show the sensitivity, or elasticity, of the quantity demanded of a good or service to a change in its price. Keeping all the other determinants of demand such as income constant, it gives the percentage change in quantity demanded in response to a one percent change in price.

Credit Default Swap

A credit default swap (CDS) is a swap agreement in which the buyer of the CDS makes a series of payments (often referred to as the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event. It is a form of reverse trading.  A swap designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

Australia allows stock exchange competition from late 2011

Takeover target ASX Group Ltd is set to lose its two-decade monopoly later this year after
Australia's securities regulator on Thursday opened the door to competition
from Nomura's Chi-X. 

Competition from electronic trading platforms like Chi-X has spurred a string of global exchange mergers, including Deutsche Boerse's bid for NYSE Euronext , London Stock Exchange's bid for Toronto Stock Exchange parent TMX Group Inc and Singapore Exchange's $7.7 billion bid for ASX. 
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India: RBI Guidelines on Credit Default Swaps

The Reserve Bank of India (RBI) has issued draft guidelines on credit default swaps (CDSs) for corporate bonds.

The objective of introducing Credit Default Swaps (CDS) on corporate bonds is to provide market participants a tool to transfer and manage credit risk in an effective manner through redistribution of risk. CDS as a risk management product offers the participants the ability to hive off credit risk and also to assume credit risk which otherwise may not be possible. Since CDS have benefits like enhancing investment and borrowing opportunities and reducing transaction costs while allowing risk-transfers, such products would increase investors’ interest in corporate bonds and would be beneficial to the development of the corporate bond market in India.

Detailed guidelines.

Most Optimistic Economy

The results of the annual Grant Thornton International Business Report (IBR) showed that Filipino business leaders were now ranked third in the world in terms of optimism with 87 percent of businessmen saying they were more confident about business prospects for 2011.

Local businessmen came in just behind their peers from Chile (95-percent optimism) and India (93 percent), and ahead of those in Brazil (78 percent).

The IBR—conducted locally by the group’s affiliate Punongbayan & Araullo—is an international survey of the opinions of medium to large privately held businesses.

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Australia regulator announces strict liquidity rules

Australia's financial regulator has ruled certain assets, including quasi-sovereign bonds, cannot be considered a reliable source of liquidity for banks and financial institutions, taking a harder line than many global peers and dealing a setback to local banks.

The Australian Prudential Regulation Authority (APRA) said in a statement on Monday it will accept cash, balances with the Reserve Bank of Australia, as well as government and semi-government securities as liquid assets, known as Level 1 assets.

This is in line with Basel III's new standards announced in December 2010 by the international banking regulator in a move to ensure banks hold enough liquid assets to survive a major crisis.

However, in contrast with the Basel Committee, APRA will not accept sovereign or quasi-sovereign bonds, commonly called supranational bonds, or corporate bonds because they are not deemed liquid enough in Australia, APRA said.

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