Business Analyst Finance

8/18/2019 Business Analyst Finance

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BUSINESS ANALYST ( FINANCE )

Business Analyst finance domain interview Questions

How are the three terms, pre-qualification, pre-approval & final loan approval differs fromeach other?

The first process called pre-qualificatio i !ol!es the assess"e t of the total "ort#a#e $ou caoffer to the le der a d this is deter"i ed %$ the i co"e-proof pro!ided %$ $ou a d $our creditreport& The !erificatio of $our e"plo$"e t a d accou ts i for"atio is co ducted i the e'tprocess called pre-appro!al& I this !er$ process $our "ort#a#e capacit$ is appro!ed after esti"ati # the "ar et !alue of the propert$ $ou are i terested i & The last process o* asthe fi al loa appro!al "ar s the co"pletio of the loa appro!al *ith all ecessar$ docu"e tsa d other for"alities i cludi # co ti #e c$ pla %ee fi ali+ed %$ the le der&

How many types of first-time buyer programs are there?

You ca co fir" a%out the differe t %u$er pro#ra"s a!aila%le to $ou throu#h $our a#e t& Butal*a$s re"e"%er that %u$er pro#ra"s are "ostl$ there at the le!el of $our local co""u it$state or pro!i ce rather tha at the le!el of the atio & This is %ecause the %u$er pro#ra"s arefreque tl$ created a d operated upo at the local le!el&

How could I know that which one is the best of the number of different mortgage plans?

To choose the %est "ort#a#e pla for $ourself $ou,ll ha!e to do so"e research& This researchshould i clude fro" a local %a ha!i # a "ort#a#e pro#ra" to the %ro ers that ha!e a *idera #e of le ders to offer& ther tha that $ou should also !isit so"e sources o li e li eLe di #Tree *here $ou *ill #et i for"atio a%out the le ders fro" across the U&S& You caalso ha!e three le ders o offer fro" a si #le loa request for" that are !$i # to #i!e $ou the

loa &

Is the IR retirement fund is accepted as the down payment for a house?

If it,s $our first ti"e to %u$ a house the $ou are "ost *elco"e to utili+e $our I.A retire"e tfu ds& /oreo!er The I.S stipulates that hus%a d 0 *ife ca separatel$ utili+e up to 123 333 asthe qualified acquisitio costs that is also pe alt$-free pro!ided each of the" is %u$i # thehouse for the first ti"e& The qualified acquisitio costs is othi # %ut the costs of ha!i # a house%uilt re%uilt or %ou#ht i cludi # other fi a cial tra sactio s li e closi # a d settle"e t costs&

First 4ti"e ho"e%u$er5 A perso ha!i # o clai" o the "ai ho"e at least for 6 $ears after the e d of *hich he or she o* s the "ai ho"e (his or her spouse) to *hich these co ditio s

applies is co sidered as the first-ti"e %u$er&

m I liable to pay points?

7he $ou co"pare the differe t "ort#a#es $ou "ust ta e i to otice the u"%er of poi ts thatis $our up-fro t i terest to#ether *ith $our rate of i terest&


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Finance interview questions for business analyst

How much is the domain experience important for a business analyst in the financeindustry?

As a %usi ess a al$st la$s the fou datio of the s$ste" *ith the require"e t #atheri # a da al$sis its !ital that he has the respecti!e %ac #rou d i the fi a ce i dustr$ i order to relateto the fu ctio al ter"s *hich *ill %e used %$ the e d users duri # the require"e ts process& Asthere are se!eral areas such as *ealth "a a#e"e t i !est"e t %a i # retail %a i #treasur$ "a a#e"e t a d all *ith their separate process flo* its esse tial for the %usi essa al$st to ha!e practical e'perie ce i the particular area so as to #i!e positi!e a d rele!a ti puts to the require"e t #atheri # a d a al$sis phase& If the %usi ess a al$st has *or ed ithe fi a ce depart"e t of a $ or#a i+atio a d is a*are of the the accou ti # sta dards or isfro" a d accou ti # %ac #rou d the its e!e "ore %e eficial& Enumerate the basic technical skills expected from the finance business analyst

Soft*are "ethodolo#ies such as .U;(.atio al U ified process) 7aterfall A#ile etc U/L (U ified /odeli # La #ua#e) tools such as E terprise Architect .atio al .ose

/S isio /S office tools prefera%l$ the latest !ersio Gata%ase "a a#e"e t 4 .ACLE SHL Ser!er E.;@C./ e'perie ce

!hat are the main tasks of a finance business analyst?

;ro!idi # %usi ess solutio s to the fu ctio al a d o fu ctio al %usi essrequire"e ts

A al$+e opportu ities to #ather resources a d de!elop supporti # %usi ess cases Assist i the i"ple"e tatio of fi a cial a d operatio s pro ects Ge!elopi # stro # i terperso al relatio ships *ith e$ sta eholders

!hat is a fi ed rate loan?

It is the i terest rate that e!er !aries u til the loa #ets repaid a d the "o thl$ i stall"e tsre"ai the sa"e& It also "ea s that $our rate of i terest a d the i stall"e ts *ill re"ai stead$irrespecti!e of the "ar et rates& This *a$ o ce $our ho"e equit$ loa #ets closed *ith Citi%a$ou *ill %e e titled to #et all $our "o e$ i a si #le pa$"e t

!hat is home equity line of credit"HE#$%& ?

It is a i d of credit that e a%les a %orro*er to #et the "a'i"u" a"ou t fro" its le der *ithi aspecified ti"e period& This t$pe of credit ca %e used a#ai o ce the total a"ou t has %eepaid %ac a d the %orro*er ca use its pri cipal a"ou t a#ai & 7ith the use 9EL C a%orro*er ca #et the full %e efits o the accu"ulated equit$& This li e of credit is a!aila%lethrou#h chec s a d or so"e other "ea s (e& Citi%a Fi a cial Ce ter AT/ or throu#ho li e a d others)& You ca u dersta d the !alue of 9EL C %$ loo i # at its uses i differe tareas that i clude educatio al eeds re o!atio of ho"e auto"o%ile purchases a d "a $others& So"e of the properties of 9EL C i clude5

It is !er$ "uch ali e to the credit cards %ut its li"it is deter"i ed throu#h $our ho"e-equit$ a d $our credit report a d is or"all$ of lo*er rate tha the credit cards&


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You ca al*a$s utili+e the po*er of the Li e of Credit thus "a i # it !er$ useful for $ou a d $our fa"il$&

I case of 9EL C the rate of i terest ca !ar$ accordi # to the "ar et tre d as it isassociated *ith the ;ri"e .ate a d is "ostl$ lo*er tha the fi'ed rate that ca %e seei a particular sectio of the 7all Street Jour al called /o e$ .ates&

You ha!e the po*er to pa$ $our i terest to a period that ca spa up to 23 $ears or ca pa$ the *hole %ala ce at o ce&

Citi%a pro!ides $ou *ith a facilit$ to #et $our fu ds throu#h chec s

!hat is 'ebt-to-income-ratio?

It is the ratio of $our de%t pa$"e ts per "o th (i cludi # "ort#a#e de%t) to $our #ross i co"eper "o th&

(n which criteria the sanctioning of a loan depends?

There are three criteria for a "ort#a#e pro#ra" sa ctio i #5 LT Ge%t ratio 0 FIC score&

!hat is )ien and )ien Holder?

Lie is the le#al clai" o a propert$ u til the de%t o that propert$ is repaid& Lie 9older ca %ea i di!idual or a i stitutio that has a lie o so"eo e,s other propert$

How does the line of credit calculated?

It is calculated according to the formula: {loan * x%(interest)}/12. So it is !our interest onl! "a!ment for the loan amount for a line of credit. #ut for a fixed rate loan it is calculated as theratio of the amount of loan to the "eriod of loan in terms of months. $ou also ha e a &enefit'hile using line of credit is that for the dra'ing of mone! !ou ha e 12 months and !ou can "a!it &ac 'ith further li&ert! of using !our fund

What is an underwriting?

It is the assessment of !our 'orthiness for the loan and is assessed &! the lender itself.

What is a second mortgage?

It is the mortgage on a home ta en after a first mortgage has alread! &een ta en on this home. llof the conditions of a second mortgage automaticall! &ecome the su&ordinate of the first one.

What is equity?

It is the difference of the mar et alue of the home from the total de&t &alance on the homeincluding mortgages.


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When a home is said to have some equity?

Sometimes it ha""ens that the de&t in terms of mortgage on a home &ecomes less than the mar etalue of the home due to increases in the mar et alue and then the difference in the mar etalue and the de&t is termed as the e+uit! for that home.

Why should one opt for a home equity?

It is &ecause !ou can sa e on !our taxes 'hile using !our home e+uit!. #esides it is a 'idel!no'n "henomenon that a home e+uit! loan attracts lo'er rate of interest.

What is annual percentage rate?

It is re"resented as a single "ercentage num&er and is the charge for &orro'ing. It re"resents thetrue cost of fund for the com"lete term of loan.

What is appraisal?

It is also no'n as a""raised alue and is nothing &ut the "ro"er determination of the mar etalue of the home &! concerned "rofessionals at 'hich a mortgage loan has &een a""lied for.

,he "ro"ert! (in this case home) 'hich is &eing used as a mortgage for the loan is termed ascollateral and the estimation charge for the determination of the mar et alue of the home iscalled as a""raisal fee.

What is appreciation?

It is the increase in the alue of the home &eing used as collateral. ,his a""reciation could &e

result of a single facto or a com&ination of factors li e ele ation in the mar et alue a higha""raisal or some ind of income.

What is buy down?

It is a "a!ment in cash &! an! of the "art! to "ro ide a reduction in the monthl! "a!ment of theloan from the &orro'er-s side.

What is closing?

It is the e ent mar ing the com"letion of all inds of "rocedures in ol ed in lending the loan to a

&orro'er. #ut 'hen it is a&out the home e+uit! loan there comes a ne' term called right ofrescission 'hich is a da! "eriod during 'hich the &orro'er can choose not to acce"t the loan.So the actual closing for a home e+uit! loan comes after the so called closing date.

Who is a co-signer?

,his is a "erson that assures the lender that if the &orro'er fails to re"a! the loan it 'ill &ehis/her res"onsi&ilit! to re"a! the loan though the co signer is not the &eneficiar! of the loan.


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Who is a creditor?

,he lender itself is the creditor.

What is debt consolidation?

It is the "rocess of re"a!ing se eral other de&ts from the funds of a "articular loan. It is acommon "ractice to re"a! other de&ts &! the use of home e+uit! loan.

What is default and who is a defaulter?

,he ina&ilit! of a &orro'er to re"a! the loan amount 'ithin sti"ulated time frame and this canresult into the "ossession of the mortgage "ro"ert! of the &orro'er &! the lender. In this case the

&orro'er is called a defaulter.

What is delinquency?

It is the failure on "art of the &orro'er to follo' an! of the conditions of the loan.

What is disclosure?

It is the su&mission of com"lete information of the terms of credit to the 0ederal or state la's'ho in turn 'ill "ro ide that information to concerned consumers.

What is depreciation?

It is the o""osite of a""reciation i.e. the reduction in the mar et alue of the "ro"ert!.

What is fair market value?

,he "rice at 'hich &oth of the "art! &u!er seller are agreed to transact 'ithout an! dis"ute iscalled a fair mar et alue.

What is finance charge?

It is the sum of all inds of charges and ex"enses the &orro'er has to &ear to get his loanfinanced and it includes commitment fees loan interest "re"aid interest.

What is a first mortgage?

,he mortgage on a "ro"ert! that has no "rior de&t of an! ind on it is called the first mortgagealso no'n as the "rimar! lien.

What is inflation rate?

It is the "ercent increase in the "rices of commodities calculated for a gi en "eriod of time.


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What is initial draw amount?

It is the initiall! 'ithdra'n mone! from a line of credit at the time of closing.

What does it mean by liquidating?

It is the "rocess of con erting an! mo a&le or immo a&le "ro"ert! into cash.

What does it mean by lock-in?

,he "eriod of holding the mortgage rate and the "oints (to &e "aid &! the &orro'er at the samerate agreed at the time of recei ing the a""lication &! the lender) &! the lender 'ith its consent iscalled loc in "eriod 'hich normall! s"an u" to to da!s.

What is margin?

It is the "oints in "ercentage or a definite num&er that is added to the rate of index &! the lenderand it is used to find out the annual "ercentage rate.

What does it mean by minimum payment?

,he minimum amount is nothing &ut the monthl! "a!ment or the installments against a loan. Insome cases it onl! contains the interest of the loan and in others it contains the interest as 'ell asthe "rinci"al amount in "art.

What is this term, mortgage insurance denote to?

It is the insurance "lan ("ri ate or federal) o er a loan "ro ided to the &orro'er as a securit!measure in case the &orro'er 'ill not &e a&le to re"a! the loan.

Who are mortgagee and mortgagor?

3ortgagee is the lender 'ho "ro ides the loan and the &orro'er is the mortgagor 'ho recei esthe loan.

What is origination date?

It is the date of closing of the loan.

What is outstanding balance?

It is the &alance !et to &e re"aid against a de&t or loan.


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What are points?

It is the amount in "ercent of the total amount of credit line and a single "oint re"resent one "ercent. #orro'ers are &ound to "a! these "oints at closing itself that is "aid se"aratel! from themonthl! interest.

What is pre payment?

It is the fee "aid &! the &orro'er in case he/she decides to re"a! the loan com"letel! &efore itsmaturit!.

What is prime rate?

It is the alue through 'hich it can &e determined that ho' much the re"a!ment of loan 'ouldcost to the &orro'er.

What is the principal amount?

,he total amount of mone! lender has agree to lend to the &orro'er is no' as "rinci"al and isalso called face alue of the loan.

What is the right of rescission?

,he "eriod after the closing date of the loan during 'hich a &orro'er can decide not to acce"t theloan and the duration normall! extends u" to three da!s. ,he &orro'er has the right under thefederal la's to den! the acce"tance of loan 'ithout "a!ing an! "enalt!. home e+uit! loan or aline of credit is released after the right of rescission "eriod gets o er

What is a revolving line of credit?

,he home e+uit! line of credit is a ind of the re ol ing line of credit. It is the credit that "ro ides the facilit! to a &orro'er to reuse the same amount of mone! once it is "aid &ac andthis credit remains 'or ing for a sti"ulated time "eriod. ,he amount of mone! to &e re"aid ariesaccording to the outstanding &alance.

What is a secured loan?

It is a loan that has &een financed &! ta ing a "ro"ert! mortgage in such a 'a! that the lender

gets the right of the "ro"ert! and also gets the securit! interest.

What does it mean by the single-family residence (S !"?

It is a house the has all of its 'alls roof grounds or an! other "art of it com"letel! se"aratedfrom an! other house or &uilding near&!.


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Everythin' (hat )ou *hould +now About ,utual Fund

/utual fu ds are the co"%i ed "o e$ of a #roup of i terested perso s that ha!e put their "o e$ as a i !est"e t for a particular "a a#e"e t co"pa $& A d as usual "utual fu dsalso co"e *ith its o* i d of co""issio s a d fees& There are "ai l$ t*o t$pes of "utualfu ds %ased o the *a$ a "utual fu d co"pa $ collects "o e$&

The "o e$ required for a load "utual fu d i cludes the total price of the shares alo # *ith thesales fee& -=> of the total i !ested a"ou t& Ta e ae'a"ple5 If $ou are opti # for a load "utual fu d of > a d $our i !est"e t is 12333 the $our actual i !est"e t *ill %e 1 3 a d the rest 1 3 is ta e as co""issio &

A#ai the load "utual fu d could %e di!ided i to t*o t$pes5 (2) %ac e d loads 4 fee is char#edat the ti"e *ithdra*al of the fu dsK (6) fro t e d loads5 fee is char#ed at the ti"e of i !est"e t&

But $ou ca also i !est i shares *ithout pa$i # a $ i d of co""issio s i the for" of o-loadfu d& This t$pe of i !est"e t is or"all$ reco""e ded as it does ,t i !ol!e a $ i d of sales

fee& But $ou should al*a$s a!oid *ithdra*i # the fu ds earl$ as it e co"passes a pe alt$ fee( or"all$ %efore the co"pletio of $ears) i a o-load fu d i !est"e t& But $ou ca reap its%e efit %etter if $ou are a #oi # to i !est for a lo #er duratio &

(radin' %f *tocks

E'cha #es are the places *here %oth the sellers a d the %u$ers tra sact *ith each other&E'cha #es ca %e of t*o t$pes5 ph$sical a d !irtual& ;h$sical e'cha #es ha!e so"e tradi #floors for the tra sactio s *hile the !irtual e'cha #es "a e use of co"puters a d I ter et for the tradi #& It is "ost li el$ that $ou ha!e see the actio s of the traders #oi # out i theph$sical e'cha #es o T or throu#h so"e other sources&

Stoc "ar et is a place that pro!ides all of the %asic require"e ts that o e eeds to trade i asecure e !iro "e t& It *ould ha!e %ee al"ost i"possi%le to trade or tra sact *ithoutco"pro"isi # *ith $our securit$ a d pri!ac$ if this i d of e'cha #es *ere ot there& So thee'cha #es could %e ta e as a *holesale "ar et that caters to the eed of e!er$ %u$ers a dsellers&

No* proceedi # further to u dersta d the stoc "ar et o e "ust o* the i"porta ce of thet*o t$pes of "ar et5 ;ri"ar$ 0 Seco dar$& ;ri"ar$ "ar et is i !ol!ed i the creatio of securities throu#h I; a d seco dar$ "ar et deals *ith the tradi # of those securities& This!er$ seco dar$ "ar et is co strued as the stoc "ar et *here the i !estors trade their securities *ithout a $ direct e #a#e"e t of the issui # co"pa $&


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-mportance of (he .ew )ork *tock Exchan'e

Ne* Yor Stoc E'cha #e (NYSE) is the "ost pro"i e t of all a"o # the tradi # e'cha #es&The %irth of Bi# Board occurred 633 $ears %ac at the ta%le *here so"e 6D Ne* Yor Cit$stoc %ro ers a d "ercha ts had si# ed the Butto *ood A#ree"e t& Al"ost all of the A"erica,s%i##est co"pa ies i !est i the "ar et throu#h NYSE o l$ a d it co tai s all %i# a"eco"pa ies li e


11/26

A o!er-the-cou ter "ar et #e erall$ co"prises s"all pu%lic u derta i #s that are ot at par *ith those of fi el$ re#ulated "ar ets a d i cludes Nasdaq a d o!er-the-cou ter %ulleti %oard( TCBB)& The i !est"e t i TCBB should %e carefull$ trac edK other*ise there is a hi#hcha ce of losi # $our i !est"e t co"pletel$ as the TCBB has o re#ulator$ force at all& If $ouare reall$ lear i # so"ethi # fro" this tutorial the $ou should certai l$ a!oid i !esti # i the

TCBB

!hat are the factors that affect the changes to the price of stocks?

Gue to the "ar et force of suppl$ 0 de"a d the cha #e i the stoc prices is of a dail$phe o"e o & If the ratio of de"a d to suppl$ is hi#her the stoc prices #o up*ards& But *hethis ratio co"es %elo* the "ar of Mo e the stoc prices #o do* *ards& Ge"a d 0 suppl$ aredirectl$ related to %u$i # 0 selli # respecti!el$&

It is quite eas$ to u dersta d the co cept of de"a d a d suppl$& The thi # that is so"e*hat"ore co"ple' to u dersta d is that *h$ people prefer a particular stoc to others& Giffere tpla i # a d strate#ies of differe t i !estors #o!er this prefere ce to the stoc s a d it i !ol!esthe fa!ora%le or u fa!ora%le e*s co cer ed to the co"pa ies&

Stoc prices of a i di!idual co"pa ies !ar$ accordi # to the u dersta di # of i !estors for theco"pa $,s *orthi ess& Ne!er ud#e the !alue of a co"pa $ throu#h its stoc price rather itshould %e ud#ed throu#h the "ar et capitali+atio of the co"pa $& /ar et capitali+atio iscalculated as the stoc price "ultiplied *ith the shares outsta di #& To u dersta d it "oreclearl$ ta e a e'a"ple5 the co"pa $ ha!i # stoc price Q 1 3 a d 333 333 sharesoutsta di # (1 3 ' 333 333 R 16 3 333 333) has "ore !alue tha the co"pa $ ha!i # Q1233@share a d 2 333 333 shares outsta di # (1233 ' 2 333 333 R 1233 333 333)& Besidesdecidi # the !alue of a co"pa $ the stoc prices are also used to assess the future #ro*th of the co"pa $&

No* the "ore a co"pa $,s ear i # the #reater is its !alue i the "ar et& Ear i #s of aco"pa $ sho* its profit a d if there is o ear i # to sho* the o%!iousl$ there is o profit or "o e$ to ru the co"pa $& The ear i #s of pu%lic sector co"pa ies are reported i a $ear for four ear i # seaso s at *hich the 7all Street eeps its atte tio & The reporti # of the ear i #has a !er$ i"porta t !alue i decidi # the future !alue of a co"pa $& The "ore a co"pa $sho*s its ear i #s the %etter its cha ce to %e !alued hi#hl$ %$ the "ar et a al$sts a d thei !estorsK a d this a al$sis is %ased upo the future ear i # pro ectio s of the co"pa $decided %$ their curre t ear i # report&

But the ear i # is ot the sole reaso %ehi d the prici # of the stoc s& There are other forcestoo that *or s to*ards decidi # the stoc prices& To u dersta d it *e should #o i to the "ar etduri # dot-co"-%u%%le& That ti"e "a $ I ter et co"pa ies "ushroo"ed *ith their "ar et

capitali+atio *orth "illio s of dollars a d that *ithout ha!i # a $ supporti!e ear i # to report&/ost of these co"pa ies could ,t hold to their capitali+atio a d %ee !alued far lo*er thae'pected fro" their capitali+atio & So, it,s quite clear that there are other dri!i # force too thatare *or i # to*ards deter"i i # the !ale of stoc s& So"e of those forces i clude !er$ stra #eter"s li e /o!i # A!era#e Co !er#e ce Gi!er#e ce (/ACG) a d Chai i scillator *hilethere are so"e "ore fa"iliar ter"s too li e ;@E ratio&


12/26

*o, why the stock prices keep changing?

It,s a s*er is ot a a eas$ tas to fi d out& There are people *ho %elie!e that creati # flo*-charts *ith the help of past perfor"a ces of the stoc s it is possi%le to deter"i e the !alue of the stoc s& The there are people *ho thi that it is si"pl$ ot possi%le to deter"i e the!alue of stoc s for sure& So o e ca sa$ that the thi # that is o* for certai t$ is theu certai t$ of the stoc prices&

;oi ts to %e ept i "i d for this su% ect are5

The first thi # ha!i # deter"i i # effect o to the stoc price is suppl$ 0 de"a d&

7hile co"pari # the !alue of t*o co"pa ies the "ar et capitali+atio (i&e& price shares outsta di #) should also %e co sidered&

I theor$ it is the co"pa $,s ear i # throu#h *hich i !estors assess the !alue of aco"pa $ %ut it is ot co"pletel$ true& ther co""o factors ha!e also their roles to

pla$ li e e'pectatio s se ti"e ts relia ce of the i !estors to*ards the co"pa $&There are se!eral theories doi # the rou ds that clai" to %e "ost effecti!e i deter"i i # thestoc prices %ut i realit$ ot a si #le theor$ is capa%le e ou#h to correctl$ predict the stocprice&

How to buy a stock?

As it is e'plai ed a%out "ea i # of stoc s a d pri ciples 0 forces of stoc "ar et it is the ti"eto o* ho* to %u$ stoc s You do ,t ha!e to scare fro" the chaos of the tradi # floors as ai !estor $ou are ot supposed to perso all$ #o to the tradi # floor& You ca %u$ stoc s fro" a $of the t*o *a$s5

+hrough $rokerage

It is the "ost accepted *a$ of %u$i # stoc s& There t*o t$pes of %ro era#e to choose fro"5 fullser!ice 0 discou t ser!ice& The for"er t$pe of %ro era#e ta es all of the respo si%ilities of $our accou t %ut their ser!ice char#e is hi#herK the latter pro!ides li"ited ser!ices to $our accou t%ut is cheaper i co"pariso & There *as a ti"e *he o l$ full ser!ice %ro era#e *as there thatchar#ed hea!$ ser!ice char#es a d *ere out of the reach of s"all i !estors& But *ith thead!e t of I ter et there ca"e the flood of discou ted %ro era#e as a relief for the s"alli !estors&

'ividend Reinvestment lans .'RI s/ and 'irect Investment lans .'I s/

These pla s allo* the i !estors to purchase their stoc s directl$ fro" the stoc releasi #co"pa ies a d dra*i # the stoc prices to a lo*er le!el& So if $ou pla to i !est s"all su" of "o e$ at re#ular i ter!als the G.I;S is a #reat pla to follo*&

7ith the purchase of stoc s $ou #et the ri#ht to !ote for the co"pa $,s policies a d also ha!ethe li"ited o* ership o the assets as *ell as o the ear i #s of the co"pa $


13/26

!hy stocks are treated as equity/ while the bonds as debt?

This is %ecause the %o ds pro!ide a #uara teed retur o the i !est"e t *ith a hi#her clai"too& the other ha d shares does ,t al*a$s #uara tee retur o the i !est"e t a d so isris ier %ut the shares pro!ide co"parati!el$ hi#her retur s o the sa"e a"ou t of i !est"e t&

This "ea s that $ou #et "ore "o e$ fro" the sa"e a"ou t of i !est"e t fro" stoc s thafro" %o ds if $our i !est"e t is i a profita%le co"pa $ %ut $ou also ha!e the ris to loose allof $our "o e$ if $our decisio to choose a particular stoc pro!es a "ista e& There are "ai l$t*o i ds of stoc s5 co""o 0 preferred& Co"pa ies ca for" classes *ithi their stoc s attheir *ill&

So al*a$s re"e"%er o e thi # that it is ot too difficult to u dersta d the stoc ta%les or stocquotes if $ou o* *hat does "ea a specific ter" there&

How many types of swaps are there?

Forward swap0 It is also o* as dela$ed start s*ap for*ard start s*ap or deferred starts*ap a d is a i d of s*ap a#ree"e t that is ofte !alued *ith t*o differe t a d partialoffsetti # s*aps a d %oth the s*aps starts i""ediatel$& But o e of the" e ds o the date of thestart of the other o e o* as for*ard s*ap& This s*ap is speciall$ desi# ed for the ti"i #co !e ie ce of the i !estors&

(otal return swap it is the "ost *idel$ used for" of s*ap i ph$sical co""odities "ar et or i case of equit$ "ar et& It is a i d of s*ap a#ree"e t that allo*s o e part$ to pa$ accordi #to a fi'ed rate or accordi # to a !aria%le rate& But the other part$ o l$ pa$s accordi # to theretur s it #ets fro" the u derl$i # assets li e loa s %o ds etc& a d i cludes the #e eratedi co"e fro" a d the capital #ai s of the u derl$i # assts&

$urrency swap it is the i d of s*ap *ith the help of *hich all of the pri cipal a"ou t as *ellas the i terest o that a"ou t of a particular curre c$ ca %e s*apped *ith a other curre c$a d it is free of a $ i d of e'cha #e rules&

$ircus swap it also ter"ed as curre c$ coupo s*ap or cross-curre c$ s*ap a d i cludesthe characteristics of %oth the curre c$ s*ap as *ell as of the i terest rate s*ap& U der thiss*ap a loa of fi'ed rate of a particular curre c$ ca %e replaced *ith a loa of floati # rate of so"e other curre c$&

$ommodity swap this is a i d of s*ap u der *hich all of the cash tra sactio s are theresult of the u derl$i # co""odit$ a d he ce called co""odit$ s*ap& Throu#h this s*ap ai stitutio #ets a fi'ed price fro" the co""odit$ user a d "ar et price fro" the co""odit$

producer& The fi a cial i stitutio i retur facilitates the required eeds of %oth the parties&

Asset swap U der this s*ap a#ree"e t o l$ the floati # or the fi'ed i !est"e ts ares*apped %ut ot the fi'ed or floati # i terest rates a d this s*ap is al"ost si"ilar to the plai!a illa s*ap e'cept the u derl$i # s*ap co tract&

-nterest rate swap it is the i d of s*ap a#ree"e t %et*ee t*o co"pa ies or %a s tos*itch o!er a floati # rate loa i to a fi'ed rate loa or !ice !ersa i differe t cou tries& Thecurre cies i to *hich the s*ap has ta e place could %e either sa"e or differe t&


14/26

$onstant maturity swap it is the i d of s*appi # a#ree"e t u der *hich a %u$er has theri#ht to set its o* ti"e duratio for the recei!ed flo*s o a particular s*ap& It ca of t*odiffere t t$pes ter"ed as cross-curre c$ s*ap or si #le curre c$ s*ap& This s*ap allo*s theread ust"e t of a part of the i terest rate periodicall$ %ased o the fi'ed "aturit$ rate of the"ar et a d it is a !aria t for" of i terest rate s*ap& But it ca ot %e read usted *ith a $ floati #refere ce i de' rate&

Basic rate swap0


15/26

/u icipal %o ds this %o d ca %e issued %$ "u icipalit$ or the state or the cou tr$ itself a dits purpose is to pro!ide de%t securit$ %$ fi a ci # the pu%lic e'pe ditures&

Corporate %o ds this %o d is issued %$ the corporatio s o l$ a d thus ta'a%le& Nor"all$ ithas a par !alue of 12333 a d a "aturit$ ter" %ut ca %e traded freel$ at "a or e'cha #es&

Vero coupo %o ds it is a"ed +ero coupo %o d %ecause there o pa$"e t i ter"s of coupo is "ade rather a i itial discou t is offered at the par !alue& As a i sta ce a tradi #!alue of 1 33 could %e possi%le for a +ero coupo %o d that has its par !alue at 12333 a d"aturit$ ter" of te $ears& So this +ero coupo %o ds *ould %e *orth of 12333 after thee'piratio of its "aturit$ ter"

!hat is the way of pricing and trading of the bonds?

The price of a %o d e!er re"ai s co sta t o a #i!e da$ as it is true for a $ of the securitiesthat are traded pu%licl$& It is ot ecessar$ to hold a %o d for its selli # u til its "aturit$ rather itca %e sold a $ ti"e i a ope "ar et a d this is the reaso its price e!er re"ai s static&

There are se!eral factors affecti # the price of a %o d %ut the "ost i flue tial of the" all isprese t i terest rates doi # rou ds i a eco o"$& The other factors i clude5 "aturit$ ter"face !alue $ield coupo pa$"e t a d the issuer& The price of the %o ds falls as soo as thepre!aili # i terest rate i the "ar et rises %ri #i # up the $ield of the older %o ds a d "a i #the sta d at the sa"e price le!el to that of the e*er %o ds *ith hi#her coupo & theco trar$ the price of the %o ds raises as soo as the pre!aili # i terest rate i the "ar et falls%ri #i # do* the $ield of the older %o ds a d "a i # the" sta d at the sa"e price le!el to thatof the e*er %o ds *ith lo*er coupo &

How the three terms bonds, bills & notes can be differentiated from each other?

To u dersta d the differe ce a"o # the three ter"s first o e should o* the purpose a d thesi"ilarit$ of the three& All of the" are the "ea s of le di # $our "o e$ to the U&S& #o!er "e titself i retur of *hich $ou #et so"e i terests paid %$ the #o!er "e t& The U&S& #o!er "e tissues those three to raise the "o e$ for pa$i # off to the "aturi # de%ts a d for other fi a cial

eeds&

T-%ills are traded at a discou ted price fro" that of its face !alue a d are issued for a short-ter" "aturit$ (2 $ear or less)& But there,s o pro!isio of a $ i terest %efore the date of "aturit$&The i terest of T-%ills *ould %e the differe ce of the purchase price fro" the face !alue paid at"aturit$& But if it *ere sold to so"eo e else %efore its "aturit$ the the i terest *ould %e thediffere ce %et*ee the purchase price a d the selli # price&

But the release of i terest rate is se"i-a uall$ or half-$earl$ i case of treasur$ %o ds a dtreasur$ otes& 7he it co"es to the differe ce %et*ee otes a d %o ds the it is their "aturit$ ter"& Notes are issued *ith a "aturit$ ter" of 6 to 23 $ears a d the %o ds *ith "oretha 23 $ears

How an option is dealt with?

To u dersta d it clearl$ let us assu"e that there is a co"pa $ MSa ra a d its stoc price is1 ? *ith a pre"iu" rate of 1:&2 o 2 st /a$ for a Jul$ ?3 call so the e'piratio date *ould fall


16/26

o to : rd Frida$ of Jul$ *ith a stri e !alue of 1?3& The o!erall !alue of the a#ree"e t *ouldco"e to %e 1:&2 ' 233 R 1:2 & This is %ecause stoc optio a#ree"e t or co tract is to %u$the shares 233 i u"%ers& But the stri e price to %e of a $ !alue for the call optio the price of stoc "ust %eco"e "ore tha 1?3& Besides as the co tract represe t the !alue of each shareat 1?3K the %rea -e!e !alue *ould co"e to %e 1?:&2 & No* if the stoc price co"es to a $price lo*er tha the "ar of 1?3 that is the stri e price the optio *ould %e of o !alue or iother *ords $ou are i loss&

No* if three *ee s after*ards the stoc price co"es to %e 1?= the the optio co tract *illalso i crease a d *ould %e *orth of 1=&6 ' 233 R 1=6 & You ca calculate $our profit as5(1=&6 - 1:&2 ) ' 233 R 1 23& So $ou ca see the "o e$ al"ost dou%led i a spa of three*ee s& No* $ou ca also e'ercise $our ri#ht to close $our optio %$ selli # it off i the "ar eta d ca collect $our profit alo # *ith $our pri cipal& But if $ou reali+e that the prices *ould stillrise the $ou ca *ait for a fe* "ore da$s& But if at the ti"e of e'piratio the price co"es to%e 1 6 the the optio co tract *ould %e *orthless& To see all of the e!e ts i a su""ar$ looat the ta%le %elo*5

GATE /a$ 2st /a$ 62st E'pir$ dateStoc ;rice 1 ? 1?= 1 6

ptio ;rice 1:&2 1=&6 7orthlessCo tract alue 1:2 1=6 13;aper


17/26

How does a commercial bank operate in a brokerage industry?

There are se!eral fu ctio alities of a co""ercial %a i a %ro era#e i dustr$5

• It helps the %ro era#e fir"s i deali # *ith their securit$ i !e tories a d pro!idi #"ar#i loa s to their clie ts %$ fi a ci # the loa s&

• It acts as a cashier for the securities of the U&S& #o!er "e t&

• It also pro!ides custod$ to the fi a cial i stitutio s&

• It issues co""ercial papers a d loa s to "a e it easier of the a!aila%ilit$ of short-ter"credit for the tradi # "ar et&

• It also ta es part i the "u icipal %o ds u der*riti #&

• It also fu ctio s as the creator of %a er,s accepta ces to facilitate the tradei ter atio all$

!ho is a market maker? • /ar et "a ers also o* as A' are the o e *ho thro* %ids co ti uousl$ a d quote

the prices that ra #es *ithi the prescri%ed perce ta#e spread of the shares a d the"ar et "a ers are o%li#ed to "a e a "ar et for the share *ithi that spread& It depe dso the !olu"e of the stoc if the u"%ers of the "ar et "a ers for that stoc *ould %eD or D3 or so"e*here *ithi the"& /ar et "a ers also e'ert a lar#e effect o theseco dar$ "ar et throu#h accelerati # the liquidit$ of stoc s a d i result #ro*i # the"ar et o a lo # ru & This is *h$K the "ar et "a ers are also ter"ed as the catal$st of the "ar et&

• The "ai fu ctio of a desi# ated "ar et "a er is to "a e read$ the %u$ers a d thesellers for the sell orders a d the purchase orders respecti!el$& So the$ are respo si%le

for %oth the %id a d the price quote to %e "ai tai ed all the ti"e a d that also u der apredefi ed spread& This fu ctio of a "ar et "a er creates a "ar et for the stoc s&

• It %eco"es the respo si%ilit$ of the "ar et "a ers to %u$ or to sell "i i"u" 2333securities at their quoted price o ce the$ "a e that quotatio & After*ards the$ calea!e the "ar et a d the propose a e* %id or the price so that the$ ca "a e so"eprofit o those securities& Besides this tas the$ are also i !ol!ed i the facilitatio of theliquidatio for their clie ts& For this tas the$ #et a predeter"i ed co""issio & The$ caalso do the tradi # for a fir" other tha their o* ust li e a specialist&

• The "ar et "a ers are federall$ %ou d to pro!ide the %est possi%le %ids a d as pricesto their clie ts for e!er$ tra sactio a d it has the purpose of co ducti # a fair

tra sactio for a t*o-sided "ar et& 7ithout these re#ulatio s the custo"ers *ould ha!e%ee the !icti"s of the tradi # "ar et&

!ho is a specialist?

• To perfor" all i ds of tradi # fu ctio s the NYSE rel$ o a i di!idual o* as thespecialist& All of the stoc s i the NYSE are allocated to this specialist *ho perfor"s all

i ds of %u$i # a d selli # of those stoc s throu#h a particular place called the tradi #post& The a#e ts %ro ers or the floor traders all of the" #ather at this tradi # post to


18/26

o* a%out the all of the %ids a d the as prices for the securities& The the curre t %idsa d the as prices are told loudl$ to the floor traders a d a e'ecutio of tradi #co"pletes *he a %id a d its as order "eets each other&

• /a $ of the specialists are ot o l$ assi# ed the tas of "eeti # the %u$ers a d thesellers rather the$ also ha!e to hold a su%sta tial u"%er of differe t shares i order tofill the #ap if a $ %et*ee the %u$ a d the sell orders& So the traders are co ti uousl$holds "ore a d "ore share u til equili%riu" reaches for the de"a d 0 suppl$& It is aco""o tas for the specialists to hold shares& Besides these re#ular tas s thespecialists are also respo si%le for holdi # the order of a custo"er that has ordered aprice that is hi#her tha the lo*est as price or is lo*er tha the stop order *hich is the%est %id price& No* that the specialists o l$ e'ecute order *he he e sures that theordered price has co"e at par *ith the stoc price&

• A other tas for the specialists is to fi d out the fair price for each of the stoc s *hichare u der their super!isio at the start of the tradi # da$ u der their #uida ce& Fair price of a stoc is deter"i ed accordi # to the curre t de"a d 0 suppl$ of theco cer ed stoc & The specialists has also the authorit$ to dela$ the ope i # of aparticular stoc *ell after the ope i # of the NYSE at 5:3 a&"& u til the$ fi d the fair price for that stoc & So it,s quite e!ide t that a specialist,s *or s are !er$ stressful a dhe@she hardl$ #ets a $ leisure ti"e i %et*ee &

ll bout bonds and bond types#

!hat is a +reasury bond?

Treasur$ %o ds i !ol!e o ris at all as the U&S& #o!er "e t itself issues the" i a ter" of :3$ears *ith a fi'ed i terest rate calculated half-$earl$&

!hat is a corporate bond?

There are ti"es *he a co"pa $ eeds a lar#e capital for so"e i d of i !est"e t or e'pe ditures %ut are ot a%le to support it throu#h their o* sources& The the co"pa $ issues%o ds i the "ar et for the pu%lic to %u$ the" a d these !er$ %o ds are called corporate %o ds&

!hat is a 1uro bond?

So"e co"pa $ that has o prese ce i the Europea "ar et issues euro %o ds also o* asthe #lo%al %o ds& This is *h$ the the curre c$ i *hich the issui # co"pa $ of this t$pe of

%o ds deals i are differe t fro" the curre c$ i *hich the Euro %o ds are sold a d %ou#ht&/ostl$ the curre c$ for tradi # Euro %o ds is Euro&

!hat is a municipal bond?

/u icipal %o ds are those %o ds that are issued %$ the local #o!er "e t or the state or the cit$itself to raise fu ds to "eet their special e'pe ditures a d so"e special pro ects&


19/26

!hat is an emerging market bond?

This is the i d of %o d issued %$ the fi a cial "ar et that is still i the phase of de!elop"e ta d is co"parati!el$ s"all i si+e& These "ar ets are situated i the de!elopi # cou tries&

!hat is an investment grade bond?

These are the %o ds that are co sidered safe to i !est i *ith a hi#h rati # of %o d such asBBB or e!e hi#her&

!hat are high yield bonds?

There *as a ti"e *he the hi#h $ield %o ds *ere co sidered !er$ ris $& But o* it has ear ed

its credi%ilit$ a"o # the i !estors as a solutio for the o -i !esti # co"pa ies to raise so"ecapital i the "ar et& l$ those co"pa ies that are far fro" the credit rati # #uideli es of Fitch S0; a d /ood$ issue these %o ds&

!hat are convertible bonds?

As its a"e su##ests these are the %o ds that ca %e co !erted or e'cha #ed *ith a certaiu"%er of the sa"e co"pa $,s shares that has issued the co !erti%le %o ds& These %o ds areor"all$ of u ior de%e ture i ds&

!hat is an equity-linked bond?

It is the %o d that has its retur s depe de t upo the perfor"a ces of the equit$ i de' thesi #le equit$ share a d the %as et of equit$ securities&

!hat is an e changeable bond?

These %o ds ha!e the sa"e properties as that of the co !erti%le %o ds& The o l$ e'ceptio isthat a e'cha #ea%le %o d ca %e e'cha #ed i to a certai u"%er of shares of the co"pa iesthat ha!e ,t issued that e'cha #ea%le %o d&

!hat is an inflation-linked bond?

A i flatio -li ed %o d is !er$ "uch si"ilar to a re#ular sa!i # %o d& The differe ce lies i itscapa%ilit$ to i sulate the effects of i flatio due to the t$i # of its $ield *ith the rate of i flatio &

!hat is a mortgage bond?

/ort#a#e %o ds are those %o ds that are acquired %$ offeri # a ph$sical propert$ or real stateas the "ort#a#e& This "ort#a#e pro!ides the securit$ to the issui # co"pa $&

!hat is a 2ankee bond?


20/26

It is the %o d that ca o l$ %e issued %$ the o!erseas corporatio s a d %a s that are otsituated i the U&S& %ut the !alue of %o ds are de o"i ated i the dollars of U&S& o l$&

!hat is a subordinate bond?

This %o d is also ter"ed as the u ior securit$ a d is ta e as a su%ordi ate of other i ds of %o ds i respect of the ear i #s a d the assets&

!hat is a discount bond?

This is the %o d *hose "ar et price is !alued lo*er tha that of its face !alue&

!hat is a 3ero coupon bond?

This is the %o d *hich does ,t pro!ide a $ i terest *hatsoe!er %ut pro!ide profits i ter"s of alar#e discou t at the ti"e of %u$i # a d this discou t ca %e co !erted i to cash at the ti"e of its "aturit$&

!hat is a +-bill?

Ii is the securit$ that is issued %$ o e other tha the U&S& #o!er "e t itself for a ter" less thaa $ear&

!hat is a commercial paper?

The corporatio s a d the %a s issue it as u secured o%li#atio to fu d their short-ter"fi a cial eed e& i !e tor$ a d the accou ts recei!a%les& The period of "aturit$ !aries fro"6 da$s to 6?3 da$s&

!hat is a floating rate note?

It is also ter"ed as floaters a d carries a i terest rate that is !aria%le& Usuall$ after e!er$ si'"o ths its i terest rate is #ets associated *ith so"e specific "o e$-"ar et i de'&

!hat is called repo?

.epo is also ter"ed as repurchase a#ree"e t or %u$%ac due to its propert$ that allo*s itsissuers to %u$ it %ac fro" its holder at a specific ti"e a d !alue&

!hat is the bond future and option?

It is the co tract u der the rules of *hich %o ds are co sidered as the u derl$i # assets&

!hat is the interest rate swap?

It is the a#ree"e t %et*ee t*o parties *here a specific future i terest pa$"e ts are s*apped*ith so"e other pa$"e ts %ased upo a predeter"i ed pri cipal a"ou t& The t*o parties arecalled the cou ter-parties& This i d of s*aps "ost ofte i clude the s*appi # of a pa$"e tthat is fi'ed i ature *ith a pa$"e t that is ot %ut is li ed to a i terest rate (e& LIB .)&


21/26

The co"pa ies e'ercise this s*aps *he the$ *a t to li"it or to "a a#e the effects of thei terest rate fluctuatio s& The$ also use it to reduce the i terest rate *ithout *hich the$ *o ,t%e a%le to lo*er the i terest rate easil$&

!hat is asset swap?

This s*ap is !er$ "uch si"ilar to a !a illa s*ap& But here the e'cha #e ta es place %et*eethe fi'ed a d the floati # i !est"e ts rather tha %et*ee the fi'ed a d the floati # ratei terests&

!hat is a credit default swap?

U der this s*ap a#ree"e t t*o cou ter-parties ca tra sfer the credit ris s of a third part$associated *ith a $ of the" %et*ee o e a other&

!hat is a total return swap?

This is the i d of s*ap u der *hich the total retur of the equit$ a d the i stru"e ts *ith fi'edi co"e decide (*ith a lo #er life tha the s*ap itself) the o -floati # rate& &

!hat is a collaterali3ed debit obligation?

These do ,t i clude the o -"ort#a#e %o ds a d loa s a d is supported %$ a collectio of %o ds loa s a d so"e other t$pes of assets

!hat is *%4?

It is the act that has %ee passed %$ the U&S& Co #ress i fa!or of i !estors throu#h *hich thecorporatio s are %ou d ot to do a $ i d of fraud *ith the i !estors& This act pro!ides "oreteeth to the alread$ prese t securit$ re#ulatio s& The i"porta t poi ts of S O Act is #i!e%elo*5

• It is the la* for the securit$ of i !estors a d is ecessar$ to follo* %$ the people *hoco"es u der its et a d o*s its relatio ship *ith the i for"atio securit$&

• It secures the *hole audit histor$ of differe t soft*are policies a d "ai tai s all therecords i cludi # the cha #es i policies&

• It also helps i eepi # the proper record a d "ai te a ce of the pro ectdocu"e tatio s&

• It also eeps the ta% o the data co !ersio a d the securit$ ris a d de!elops thes$ste" acquisitio s&

• It clearl$ defi es the %ou dar$ %et*ee the de!elop"e t a d the applicatio of productsi order to auto"ate a d "odel the i !ol!ed processes&

• E sures a strict re#i"e of testi # *hich also i cludes the test cases&

• Peeps co ti uous !i#il to the applicatio -"o!e"e ts %$ de!elop"e t authoritiesthrou#hout fro" the testi # to the productio &


22/26

• .e!ie*s the "a a#e"e t a d the appro!al of IT s$ste"s %$ auto"ati # the process of appro!al&

• Peeps the securit$ s$ste" i tact %$ e forci # all of the for"al procedures a d policies&

• It has also esta%lished the ;u%lic Co"pa $ Accou ti # !ersi#ht Board (;CA B) for

the co"pa ies to %e re#istered a d that is "a dator$ too&• 9ires auditi # co""ittees to strictl$ appl$ auditor re#ulatio a d i spect the actio s of

accou ti # fir"s&

• I creases the respo si%ilities for corporate to al*a$s ta e care of a $ i d of fraudule tacti!ities&

• E forces the ethical #uideli es for the se ior fi a cial officials a d disclosure of thefi a cial state"e ts of co"pa ies&

• Stipulates the #uideli es to %e follo*ed i case of a $ co flicts of i terest a"o #a al$sts&

• A!aila%ilit$ of the authorities %efore Co""issio 0 Federal Court a d require"e t of qualificatio s for the %ro ers a d the dealers&

• A!aila%ilit$ of the e force"e t "ethods to pu ish a $ cri"i al acti!ities ide tified u der the Act&

Basel -- also known as .ew accord "-nternational $onver'ence of capital ,easurementand capital standards&

As Basel I *as ot efficie t e ou#h to pro!ide i sulatio a#ai st the credit ris s e& Basel I isi capa%le of disti #uishi # the characteristics of i !ol!ed ris %et*ee 2-$ear loa a d $ear

loa a d also %et*ee collaterali+ed 0 o -collaterali+ed loa s& So all of these a o"alies *eretried to %e eradicated *ith the i troductio of Basel II *ith so"e co"pletel$ o!el rules a dor"s&

There are se!eral fi a cial i stitutio s are co sta tl$ %ei # e!aluated for their operatio al riscapa%ilities practices as *ell as their credit %$ Basel II Capital Accord& To e ha ce the fi a cialperfor"a ce a d to ha!e a ad!a ta#e o!er others "a $ a fir"s are tr$i # to i corporate their ris "a a#e"e t practices *ith the Basel II sta dards&

(he 'oal of the final version Basel --0

• Separatio of the operatio al ris fro" the credit ris a d to qua tif$ %oth of the"&• /a i # the capital allocatio to %e "ore ris se siti!e i ature&

• /i i"i+i # the re#ulator$ ar%itra#e %$ closel$ ali# i # the eco o"ic a d the re#ulator$capital&

There is a co cept of three pillars that is used %$ Basel II a d i cludes5 "i i"u" capitalrequire"e ts super!isor$ re!ie* a d "ar et discipli e& All these three pla$ers ha!e the role ista%ili+i # the fi a cial s$ste"& Basel I "ade use of o l$ a fe* aspects of these three pillars


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li e it o l$ dealt *ith credit ris *ithout ta i # i to accou t the "ar et ris or the operatio al risi !ol!ed&

First 5illar0

It is i !ol!ed i the re#ulator$ capital "ai te a ce that is calculated %$ ta i # i to accou t thethree ris factors faced %$ a %a & The three ris s are5 credit operatio al 0 "ar et ris & But itdoes ,t ta e i to accou t other tha these three ris s&

There are three "ethods of calculatio of the credit ris a d are called Fou datio I.BSta dardi+ed Approach 0 Ad!a ced I.B (I ter al .ati # Based Approach)& Li e*ise theoperatio al ris ca also %e calculated throu#h three "ethods called Sta dardi+ed ApproachBasic Approach 0 Ad!a ced /easure"e t Approach (A/A)& But the *idel$ used "ethod for thecalculatio of "ar et ris is a. ( alue at .is )&

*econd 5illar0

It ta es care of the re#ulator$ respo ses of for the first pillar a d pro!ides re#ulator *ithi"pro!ed tools *hich are "ore ad!a ced tha the o es used i Basel I& It is also i !ol!ed icreati # the platfor" for the actio a#ai st the ris s faced %$ the %a s li e reputatio liquidit$a d le#al ris s a d these ris s are called as the residual ris s u der the Act&

(hird 5illar0

The "a dator$ disclosures "ade %$ %a s are i creased u der this third pillar a d it "a es itclear to the "ar et that *hat are the ris positio s of the %a s a d ho* the cou ter-parties of the %a *ill tra sact&

6isadvanta'es of Basel --0

There are se!eral disad!a ta#es too associated *ith the Basel II& Gue to its detailed"a a#e"e t of the ris s prese t for the %a s the lar#er %a s #ets the upper ha d as the$are capa%le of i"ple"e ti # all of the or"s of the Act& But the s"aller %a s ca ,t do so%ecause their fi a cial status does ,t allo* the" to do so& E!e tuall$ despite %ei # a #e ui e%a *ith ho est deali # a s"aller %a does ,t recei!e as "uch reputatio as that of lar#er %a s& The sa"e stor$ is true for the de!eloped a d the de!elopi # cou tries too& Basel II also"a es it quite difficult for the s"aller %a s to access credit&

No* it has %ee !er$ difficult to choose o e of the "ore sophisticated ris "a a#e"e ts$ste"s or the lesser o e as the "ore sophisticated "easures *ere required for the lar#er %a s $et these "easures *ere a#ai st the i terest of the s"aller %a s& the other ha d %$

applicatio of less sophisticated "easures it *as easier to calculate the ris s %ut itco"pro"ised *ith the se si!it$ of the ris "a a#e"e t& But there is a %ri#ht side of the %etter credit ris s that is si# ifica t i ter"s of true prici # %$ the %a s& It has %ee o%ser!ed i theU&S& a d the U&P& that *ith a "ore sophisticated ris "a a#e"e t there is #reater cha ce of le di # "o e$ %$ the %a s to the hi#her ris %orro*ers& 7ith this s$ste" the loc ed out%orro*ers *ere also a%le to create a #ood credit record *ith the %a s&

Basel II is also faci # a !er$ sou d criticis" that its operatio *ill result i a pro ou ced%usi ess c$cle *ith "ore i te sit$& The reaso %ehi d this criticis" is the credit "odels applied


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At this le!el of C// processes ha!e the repeata%le characteristics a d that also *ith a resultthat is !er$ co siste t i ature& But this repetitio could ot %e see for each a d e!er$process of a or#a i+atio & r#a i+atio co""o l$ "a es use of a %asic pro ect "a a#e"e tpro#ra" to deter"i e the cost a d schedule for a particular pro ect& The discipli e for theprocesses is ot !er$ strict $et it e sures the e'ecutio of e'isti # practices e!e i the ti"e of stress& So at this le!el the processes are "a a#ed accordi # to the pla s that ha!e alread$%ee docu"e ted&

%r'ani:ational implications of level


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@th #evel 9 %ptimi:ed 0

At this le!el of C// the processes ha!e the characteristics of i"pro!i # their perfor"a cesthrou#h i te#ratio of i o!ati!e 0 i cre"e tal cha #es i the tech olo#$&

%r'ani:ational implications of level @;

• Esta%lish"e t of the qua titati!e o% ecti!es for the i"pro!e"e t i processes of aor#a i+atio too place u der this le!el *ith the scope of co ti uous re!isio to i te#ratethe !ar$i # %usi ess o% ecti!es i to the processes& It is also used as a sta dard for the"a a#e"e t of i"pro!e"e t i the processes& 9e ce u der this le!el the factorsrespo si%le for !ariatio i processes are specificall$ ide tified e!aluated a d thedeplo$ed&

• After the deplo$"e t of the process i"pro!e"e ts their effects are "easured *ithcertai t$ a d the #ets co"pared *ith the qua titati!e process-i"pro!e"e t o% ecti!es

• Both t$pes of processes are tar#eted for the acti!ities of "easura%le i"pro!e"e ts a dthe processes i clude the defi ed processes the sta dard processes of theor#a i+atio &

• The process !ariatio *hich is %ei # co sidered u der this le!el are the o e that sho*sthe critical disti ctio %et*ee the t*o t$pes of "aturit$ le!el (le!el D 0 le!el )&

;rocesses *hich are at the "aturit$ le!el D ta es i to accou t the statistical special causes for the !ariatio of processes a d pro!ides the results *ith statistical predicta%ilit$& Gespite thepredictio of the results alo # *ith the statistics it "a$ %e so"eti"es ot e ou#h to fulfill theo% ecti!es that are alread$ esta%lished&

;rocesses *hich are at the "aturit$ le!el ta es i to accou t the statistical co""o causesfor the !ariatio of processes a d i"pro!es the perfor"a ces of the processes %$ cha #i #the" li e shifti # of the "ea of the perfor"a ce of a process& Alo # *ith cha #i # theprocesses for the i"pro!e"e t of their perfor"a ce it is also "ai tai ed that the processesachie!e the esta%lished qua titati!e process-i"pro!e"e t o% ecti!es&

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