Investment Banking

Investment Banking

A financial intermediary that performs a variety of services. Investment banks specialize in large and complex financial transactions such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial adviser for institutional clients. Major investment banks include Barclays, BofA Merrill Lynch, Warburgs, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, UBS, Credit Suisse, Citibank and Lazard. Some investment banks specialize in particular industry sectors. Many investment banks also have retail operations that serve small, individual customers. The advisory divisions of investment banks are paid a fee for their services, while the trading divisions experience profit or loss based on their market performance. Professionals who work for investment banks may have careers as financial advisers, traders or salespeople. An investment banker career can be very lucrative, but it typically comes with long hours and significant stress.

Because investment banks have external clients but also trade their own accounts, a conflict of interest can occur if the advisory and trading divisions don’t maintain their independence (called the “Chinese Wall”). Investment banks’ clients include corporations, pension funds, other financial institutions, governments and hedge funds. Size is an asset for investment banks. The more connections the bank has within the market, the more likely it is to profit by matching buyers and sellers, especially for unique transactions. The largest investment banks have clients around the globe.

Investment banks help corporations issue new shares of stock in an initial public offering or follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds. The investment bank's role begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.

Bangladesh automated clearing system(BACH)

Bangladesh Automated Clearing House (BACH)

BACH, the first ever electronic clearing house of Bangladesh, has two components - 

The Automated Cheque Processing System and

The Electronic Funds Transfer.

Both the systems operate in batch processing mode – transactions received from the banks during the day are processed at a pre-fixed time and settled through a single multilateral netting figure on each individual bank’s respective books maintained with the Bangladesh Bank. A state-of-the-art Data Center (DC) and a Disaster Recovery Site (DRS) have been established comprising of most modern software and hardware for dealing with the operations of BACH. A Virtual Private Network (VPN) has been created between the participating commercial banks and Data Center (DC) & Disaster Recovery Site (DRS) for communicating necessary information related to BACH. Digital Certificate has been formulated for the first time in Bangladesh for secured data communication. Important Features of BACH :

§  Images of clearing instruments is considered for clearing process.

§  Settlement made through wave

§  Physical movement of officers not required (cont’d)

§  PBM : Presenting Bank Module

§  CPS : Cheque Processing System

§  Work Station

§  Batch & Run

§  Routing number

§  Scanner

§  BACH Program manager

Bank Stress Test'

An analysis conducted under unfavorable economic scenarios which is designed to determine whether a bank has enough capital to withstand the impact of adverse developments. Stress tests can either be carried out internally by banks as part of their own risk management, or by supervisory authorities as part of their regulatory oversight of the banking sector. These tests are meant to detect weak spots in the banking system at an early stage, so that preventive action can be taken by the banks and regulators.

Stress tests focus on a few key risks – such as credit risk, market risk, and liquidity risk – to banks' financial health in crisis situations. The results of stress tests depend on the assumptions made in various economic scenarios, which are described by the International Monetary Fund as "unlikely but plausible." Bank stress tests attracted a great deal of attention in 2009, as the worst global financial crisis since the Great Depression left many banks and financial institutions severely under-capitalized.

Core Capital'

The minimum amount of capital that a thrift bank, such as a savings bank or savings and loan company, must have on hand in order to comply with Federal Home Loan Bank regulations. Core capital consists of equity capital and declared reserves. The minimum requirement was put in place to ensure that consumers are protected when creating financial accounts.

Following the financial crisis of 2008, regulators began focusing heavily on banks' Tier 1 capital, which consists of core capital, but can also include nonredeemable, noncumulative preferred equity. This is more stringent than normal capital ratios, which can also include Tier 2, and lesser-quality capital.

National Payment Switch (NPS)

The Bangladesh Bank has introduced National Payment Switch Bangladesh (NPSB) in order to facilitate interbank electronic payments originating from different channels like Automated Teller Machines (ATM), Point of Sales (POS), Internet, Mobile Devices etc. The main objective of NPSB is to create a common electronic platform for the switches in Bangladesh. NPSB is a mother switch of of all other switches in the country. NPSB will facilitate the expansion of the card based payment networks substantially and promote e-commerce throughout the country. Online payment of Government dues, using cards and account number information through Internet will greatly be enhanced using NPSB. Payment Systems Department (PSD) is concerned to operate and settle the transactions regularly. NPSB was launched as “go-live” on December 27, 2012 to route ATM transactions.

The Bangladesh Bank has taken initiative to establish National Payment Switch (NPS) in order to facilitate interbank electronic payments originating from different delivery channels e.g. Automated Teller Machines (ATM), Point of Sales (POS), Internet, Mobile Applications, etc. The main objective of NPS is to create a common platform among the existing shared switches already built-up by different private sector operators. NPS will facilitate the expansion of the card based payment networks substantially and promote e-commerce throughout the country. Online payment of Government dues, using cards and account number information through Internet will greatly be enhanced using NPS. Payment Systems Division (PSD), Department of Currency Management and Payment Systems (DCMPS), BB has started the implementation of NPS which is funded by the International Finance Corporation-Bangladesh Investment Climate Fund (IFC-BICF).

The stages of money laundering

Money laundering is the disguising of funds derived from illicit activity so that they may be used without detection of the illegal activity that produced them. Money laundering involves three stages: placement, layering and integration.

Placement involves physically placing illegally obtained money into the financial system or the retail economy. "Dirty" money is most vulnerable to detection and seizure during placement.

Layering means separating the illegally obtained money from its source through a series of financial transactions that makes it difficult to trace the origin. During the layering phase of money laundering, criminals often take advantage of legitimate financial mechanisms in attempts to hide the source of their funds. A few of the many mechanisms that may be misused during layering are currency exchanges, wire transmitting services, prepaid cards that offer global access to cash via automated teller machines and goods at point of sale, casino services and domestic shell corporations lacking real assets and business activity that are set up to hold and move illicit funds.

Integration means converting the illicit funds into a seemingly legitimate form. Integration may include the purchase of businesses, automobiles, real estate and other assets.

 Annual agricultural credit policy

Inspite of declining share of agriculture in GDP growth the importance of this sector is very crucial in view of its role in employment generation and poverty reduction.Bangladesh bank also continued its proactive policy to boost up agriculture production.The Bangladesh Bank (BB) announced the country's agricultural and rural credit policy aimed at expanding agricultural credit and financial inclusions.The target for disbursement of agricultural credit for 2013-14 fiscal year has been set at Tk 145.95 billion.The country's state-owned commercial, specialised, private local and foreign banks will disburse the credit which is nearly 3.29 per cent more than that of last fiscal year.The newly-launched six commercial banks will also disburse agricultural credit at least 5 per cent of their net loans and advances according to the conditions of their banking licenses.The central bank continued its earlier decision relating to 2.5 per cent farm-credit disbursement by banks.However, targets set for Bangladesh Krishi Bank is at Tk 46 billion, Rajshahi Krish Unnayan Bank at Tk 14.50 billion, four state-owned banks at Tk 27.40 billion, nine foreign banks at Tk 4.33 billion and 30 private commercial banks at Tk 53.72 billion.Some new fruits have been included along with oil palm cultivation in the new policy for giving credit.The central bank has given clear-cut ideas about refinancing schemes meant for agro-processing, renewable energy and vermin-compost and bio-fertiliser or manure.Vermi-compost and bio-fertiliser have been approved as a new sector of the BB's refinance scheme.Burmese grape or 'lotkon', lemon, Hog-plum, Sapota and Malta have been included in this policy as new crops.The credit norms for oil palm has been determined in this policy which was absent in the previous fiscal year, the policy said.The policy about 'contract farming' has been clarified and made more farmer-friendly, it said.The credit limit of all crops has been increased and interest rate of the sectors included in refinance scheme of renewable energy (solar panel, bio-gas, integrated bio-gas plant, bio-fertiliser) has been revised to make it more investment-friendly.

Risk premium 

Risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, or the expected return on a less risky asset, in order to induce an individual to hold the risky asset rather than the risk-free asset. (Note that risk premia may be negative.) Thus it is the minimum willingness to accept compensation for the risk.

In finance, the risk premium refers to the amount by which an asset's expected rate of return exceeds the risk-free interest rate. When measuring risk, a common approach is to compare the risk-free return on T-bills and the risky return on other investments (using the ex post return as a proxy for the ex anteexpected return). The difference between these two returns can be interpreted as a measure of the excess expected return on the risky asset. This excess expected return is known as the risk premium.

Call Option Definition:

A Call Option is security that gives the owner the right to buy 100 shares of a stock or an index at a certain price by a certain date. That "certain price" is called the strike price, and that "certain date" is called the expiration date. A call option is defined by the following 4 characteristics:

• There is an underlying stock or index
• There is an expiration date of the call option
• There is a strike price of the call option
• The option is the right to BUY the underlying stock or index. This contracts to a put option, which is the right to sell the underlying stock

A call option is called a "call" because the owner has the right to "call the stock away" from the seller. It is also called an "option" because the owner of the call option has the "right", but not the "obligation", to buy the stock at the strike price. In other words, the owner of the call option (also known as "long a call") does not have to exercise the option and buy the stock--if buying the stock at the strike price is unprofitable, the owner of the call can just let the option expire worthless.

The most attractive characteristic of owning call options is that your profit is technically unlimited. And your loss is limited to the amount that you paid for the option. Look at this call options payoff diagram and you will see what I mean. This diagram shows the payoff for owning call options with a strike price of $40 and a cost of $2. You will notice that if the stock price closes at or below $40, you lose the $200 ($2 price times 100 shares) cost of buying the option (note the horizontal line intersecting the y-axis at -$200). You will also notice that as the stock price increases above $40 the line slopes up indicating your profit. Finally, notice that the up sloping line become profitable at $42, which is the strike price of $40 plus the $2 cost of buying the option.

A Portfolio Management

A Portfolio Management refers to the science of analyzing the strengths, weaknesses, opportunities and threats for performing wide range of activities related to the one’s portfolio for maximizing the return at a given risk. It helps in making selection of Debt Vs Equity, Growth Vs Safety, and various other tradeoffs.

Major tasks involved with Portfolio Management are as follows.

·         Taking decisions about investment mix and policy

·         Matching investments to objectives

·         Asset allocation for individuals and institution

·         Balancing risk against performance

There are basically two types of portfolio management in case of mutual and exchange-traded funds including passive and active.

·         Passive management involves tracking of the market index or index investing.

·         Active management involves active management of a fund’s portfolio by manager or team of managers who take research based investment decisions and decisions on individual holdings.

Risk-weighted asset 

Risk-weighted asset is a bank's assets or off-balance-sheet exposures, weighted according to risk.^[1] This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution. In the Basel I accord published by the Basel Committee on Banking Supervision, the Committee explains why using a risk-weight approach is the preferred methodology which banks should adopt for capital calculation.^[2]

·         it provides an easier approach to compare banks across different geographies

·         off-balance-sheet exposures can be easily included in capital adequacy calculations

·         banks are not deterred from carrying low risk liquid assets in their books

·         Global banking supervisors based in Basel Switzerland use the concept of risk-weighted assets to determine a bank’s minimum capital needs. Risk-weighted assets are computed by adjusting each asset class for risk in order to determine a bank's real world exposure to potential losses. Regulators then use the risk weighted total to calculate how much loss-absorbing capital a bank needs to sustain it through difficult markets.

·         Under the Basel III rules, banks must have top quality capital equivalent to at least 7 per cent of their risk-weighted assets or they could face restrictions on their ability to pay bonuses and dividends.

·         The risk weighting varies accord to each asset's inherent potential for default and what the likely losses would be in case of default - so a loan secured by property is less risky and given a lower multiplier than one that is unsecured.

·         Under the Basel II banking accord, which still governs most risk-weighting decisions, government bonds with ratings above AA- have a weight of 0 per cent, corporate loans rated above AA- are weighted 20 per cent, etc. The rules also attempt to classify assets by their credit risk, operational risk and market risk

 Wages Theory of Profit

According this theory the services of the entrepreneur are also classified as labour though of a superior type. These entrepreneurs do a lot of work in organizing the business unit as well. The entrepreneurs in the shape of profit pay to themselves for service just as managers are paid for their services. It means that profit is a wage for the entrepreneur for the services rendered by them.

wage theory, portion of economic theory that attempts to explain the determination of the payment of labour.

A brief treatment of wage theory follows. For full treatment, see wage and salary.

The subsistence theory of wages, advanced by David Ricardo and other classical economists, was based on the population theory of Thomas Malthus. It held that the market price of labour would always tend toward the minimum required for subsistence. If the supply of labour increased, wageswould fall, eventually causing a decrease in the labour supply. If the wage rose above the subsistence level, population would increase until the larger labour force would again force wages down.

The wage-fund theory held that wages depended on the relative amounts of capital available for the payment of workers and the size of the labour force. Wages increase only with an increase in capital or a decrease in the number of workers. Although the size of the wage fund could change over time, at any given moment it was fixed. Thus, legislation to raise wages would be unsuccessful, since there was only a fixed fund to draw on.

Karl Marx, an advocate of the labour theory of value, believed that wages were held at the subsistence level by the existence of a large number of unemployed.

Marine insurance

Marine insurance is a type of insurance that covers boats and ships, as well as their cargo and in some instances the places where the boat or ship is docked. It has a colorful history, beginning informally in England during the 17th century. In 1906, the Marine Insurance Act was passed under British law, creating a standard operating procedure for policies that dictates the world's policies to this day. The standards set forth by the act are considered reasonable, but due to changes in technology and social standards, the act is generally seen as obsolete and is being replaced by more modern legislature.

There are several varieties of insurance that can be taken out by a boat or ship owner. Marinecargo insurance covers whatever goods the boat is carrying. Inland marine insurance can be procured for floating vessels that are not ocean-bound, but travel primarily on lakes, rivers and reservoirs. There are also more general policies that cover the boat itself and its passengers,liability for damages to other moving vehicles and liability during an encounter with a non-moving object. These all fall under the heading of a marine insura

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination. Cargo insurance — discussed here — is a sub-branch of marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability. When goods are transported by mail or courier, shipping insurance is used instead.

Loan Classification System

A system introduced by the HKMA in December 1994 requiring authorized institutions to report on a quarterly basis loans (including investment debt securities) and provisions made against them under the following five categories: Pass: Loans for which borrowers are current in meeting commitments and for which the full repayment of interest and principal is not in doubt. Special Mention: Loans with which borrowers are experiencing difficulties and which may threaten the authorized institution's position. Substandard: Loans in which borrowers are displaying a definable weakness that is likely to jeopardise repayment. Doubtful: Loans for which collection in full is improbable and the authorized institution expects to sustain a loss of principal and/or interest, taking into account thenet realisable value of collateral. Loss: Loans that are considered uncollectable after all collection options (such as the realisation of collateral or the institution of legal proceedings) have been exhausted. Loans that are classified as substandard, doubtful or loss are collectively known as classified loans.