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Financing Options
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FINANCING OPTIONS
OPTION It belongs to family of derivatives It is a contract that confers the right to
its owner/holder but not obligation to buy or sell
The buyer of the option is placed in an advantageous situation as he will exercise his option only when it is profitable
In other words seller of the option is in disadvantageous position as he is under obligation to buy or sell the securities in case the buyer exercise his option
IMPORTANT TERMS ASSOCIATED WITH OPTIONS Buyer – is the one who by paying the
option premium buys the right to buy /sell securities but not the obligation to exercise his option on the seller /writer of the option
Writer of an option – is the one who receives the option premium & is there by obliged to sell/buy the securities if the buyer exercise the option on him
Option price/premium – is the price that the option buyer pays to option seller
CONTD… Expiry Date – is the date specified in the
options contract by which the option can be excercised
Strike price – The price specified in the options contract at which the buyer can exercise his right to buy or sell the securities
At the money option – is an option that would lead to zero cash flow (no profit no loss )to the holder
In the Money option- is an option that would lead to positive cash flow to the holder
Out of the money Option – is an option that would lead to negative cash flow to the holder
MULTIPLE OPTION BONDS Appealing to Different Requirements of
Investors for Income Planning
Flexibility in Tax Planning of InvestorsPayment of Interest is staggered with varied options
Became Popular and adopted for Infrastructure Bonds also
FINANCIAL ENGINEERING -MEANING Corporate finance, bank finance, and
investment finance have changed in recent years has given birth to a new discipline that has come to known as financial engineering.
Financial engineering involves the design, the development, and the implementation of innovative financial instruments and processes, and the formulation of creative's solution to problem in finance
CONTD… For many firms, their risk exposure is
unique in the sense that the risk exposure is based on an asset whose value is not easily hedged .
By combining elements of forwards, futures, options, and swaps, firms can create a financial instrument that meets the needs of the corporation that is trying to hedge its risk exposure or one that offers the institutional investor an investment opportunity with a unique payoff structure.
OFFSHORE INSTRUMENTS Offshore investment is the keeping of
money in a jurisdiction other than one's country of residence
Offshore centers are widely used and are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity.
REASONS FOR OFFSHORE INVESTMENT
Tax Advantages Investment diversification Lower levels of regulation Specialist financial services
FOREIGN DIRECT INVESTMENT Direct investment into production or
business in a country by a company of another country.
A Chinese Company building a factory and a supply chain in the US in order to tap into the American market would be an example of Chinese foreign direct investment into America.
FDI FACT SHEET
From April 2000 to June 2010 AMOUNT(In million $)
CUMULATIVE AMOUNT OF FDI INFLOWS IN INDIA 170,323
SECTOR-WISE DISTRIBUTION OF FDI EQUITY INFLOW
NAME OF INDUSTRY
GROWTH RATE% AS
ON DEC 2009POWER 3
AUTOMOBILE 5.2
METALLURGICAL
8.6
PETROLEUM 6.2
CHEMICAL 12
FINANCIAL 8.5
SOFTWARE/HARDWARE
33
TELECOM 14
REAL ESTATE 11
CONSTRUCTION
8.5
INDIA’S INVESTMENT OPPORTUNITIES Engineering & Automobiles Information Technology Banking & Financial Sector Agricultural – Short of Investment in agro processing Infrastructure – Mining, Steel, Oil & Gas, Public Transport,
Roads Jewelry & Diamond Processing Aviation Logistics & Transportation Healthcare Education
WHAT ARE CONTINGENT CONVERTIBLE BONDS bonds are hybrid capital securities that
absorb losses in accordance with their contractual terms when the capital of the issuing bank falls below a certain level
As a bail-in mechanism to infuse additional capital under adverse market conditions Transfer of risk from taxpayers to the private sector in times of distress
LEASING A lease is an agreement whereby the
lessor conveys to the lessee , in return for rent, the right to use an asset for an agreed period of time.
A financing arrangement that provides a firm with an advantage of using an asset, without owning it, may be termed as „leasing‟.
HIRE PURCHASE is the legal term for a contract, in which
a purchaser agrees to pay for goods in parts or a percentage over a number of months
FINANCIAL BENCHMARKING
Financial benchmarking involves running a financial analysis and making a comparison of the results in order to assess a firm's overall competitiveness, efficiency and productivity.
The term benchmarking refers to the process of comparing one's business practices and performance standards to other firms within one’s industry. Quality, time, and cost are the most common divisions to be measured.
CREDIT APPRAISAL IN BANKING SECTOR Credit appraisal means an
investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed.
Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future
Credit appraisal is the process of appraising the credit worthiness of the loan applicant
MEANING OF DUE DILIGENCE It is the process of carrying out an
investigative analysis of the financial, legal and operating activities of an entity in connection with a proposed transaction that would result in a significant change in the ownership or the capital structure of the entity.
AIM OF THE DUE DILIGENCE PROCESS Identify problems within the business,
particularly any issues which may give rise to unexpected liabilities in the future.
Ingredients of a successful Due Diligence Must be unbiased
Should be carried out by independent professionals.
Requires the management’s co-operation
Done with a positive attitude
A credit rating is an evaluation report of how well or bada company is performing in absolute terms in a particularmarket or industry.
Such a report makes it possible for the stakeholders tocompare a company’s credit worthiness against other companies operating in similar market or industryinternationally.
The rating exercise is considered as one of the mostessential reports, besides the External auditors’ report,which provides the stakeholders an overview of the financial standing of the commercial entity.
The report is made up of both; (a) quantitative, and (b)qualitative information.
Why the Need for a Credit Rating?(a) The financial sector especially the banking industry in most emerging economies is going through a process of change,
(b) Financial transactions have become a major economic activity in most service-based economies, thus any disruption or imbalance in its infrastructure will have a significant impact on the whole economy,
(c) A safe and sound banking industry can bring about stability within the financial markets,
(d) During the last decade, banks around the world had to respond to the emerging challenges of competition, risks and uncertainties,
Economic & Industry Risk in Asia-Pacific Banking SystemsECONOMIC RISK
Very High High
ModeratelyHigh Moderate
Moderately Low
Low
Low Australia
Moderately Low
New ZealandSingapore
Moderate Hong Kong
Malaysia
Moderately High Thailand
South KoreaTaiwan
Japan
High ChinaPhilippines India
Very High IndonesiaVietnam
IND
UST
RY R
ISK
Source: Standard & Poor’s : Asia-Pacific Banking Outlook 2005
Banks Credit Rating
The factors considered in the rating of banks or financialInstitutions are as follows:
Industry Risk Financial Risk Structure Funding & Liquidity Ownership profile Capitalization Customer base Earnings Regulation Market position Degree of diversification Management style & strategies Standards of accounting used Perceived Economic Risk Risk ManagementCredit Risk Strategy Market RiskMarket/Structural Risk Credit RiskTrading Risk Financial Flexibility