Swap In Finance

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is a swap? A swap is a financial derivative in which two parties agree to exchange payments based on the movement of an underlying asset.
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Option-Adjusted Spread

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Option-Adjusted Spread (OAS)? There are different interest rates used for different transactions in the financial market. One popular rate is option-adjusted spread (OAS), which can be interpreted as a measure of MBS returns indicating potential compensation after adjusting for prepayment risk. We can also refer to the OAS as option-adjusted because the cash flows on the interest rate paths consider the borrowers' Option to prepay. It can be expressed as the excess of the expected MBS return over the return on Treasuries. 
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Transaction Risk

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

Whenever there is an involvement of foreign exchange, there is always a risk of currency conversion involved. Hence, we refer to Transaction Risk as the risk when the cash flow of one currency must be exchanged for another at a future date to settle a specific transaction. It can occur within a receivable or a payable context for a firm. 
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What is Net Asset Value?

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Net Asset Value? Net Asset Value is used chiefly for open-end mutual funds. Net Asset Value is calculated by summing all the assets, subtracting them by all fund liabilities, and then dividing by the total shares outstanding. It is calculated daily at the closing of the market.
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What are Mortgage Backed Securities Prepayment

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are MBS Prepayments  Mortgage-Backed Securities are long term contracts with payments of both interest and principal. As the contracts are long term, there is an option of paying the amount back before the entire contract term. Generally, the borrower pays the monthly payment amount, and the interest and principal follow the amortisation schedule. But there is also a possibility of paying an amount in excess of the required payment or even paying off the loan entirely. The prepayment option may benefit the borrower in the absence of prepayment penalties.
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Loss Ratio

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is the Loss Ratio?
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Lease Rates

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Lease Rates? As we pay interest rates for financial instruments, we pay lease rates for commodities similarly. We define lease rate as the amount of interest a lender of a commodity requires. The lease rate is defined as the investor's amount of return to buy and then lend a commodity. In other words, the lease rate represents the cost of borrowing the commodity. The lease and risk-free rates are important inputs to determine the commodity forward price.
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Interest Rate Parity

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Interest Rate Parity? Interest rate parity becomes applicable whenever we talk about investing in different countries. If an investor gets higher rates in country A than country B, it should be more interested in investing in country A. However, as we invest more in country A, we must buy that country's currency, continually reducing the forward rate spread until no additional profits can be made by making the forward contract-hedged investments. 
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Hedge Fund Strategies

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Hedge Fund Strategies?
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What is Expense Ratio?

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Expense Ratio?
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Economic Risk

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Economic Risk? Economic Risk is a more broad risk that is difficult to quantify. The risk usually occurs when currency volatility affects the firm’s cash flows or its competitive standing within the domestic market. Let's talk about a company operating in Canada. Changes in the Canadian exchange rate may make it advantageous for a foreign competitor to enter the Canadian market and negatively impact the Canadian firm. There are multiple ways of hedging economic risk. One possible way is from an operational perspective by relocating production facilities or expanding sales overseas.
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Conditional Prepayment Rate

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Conditional Prepayment Rate (CPR)? Prepayment risk is the risk that the borrower repays the amount before the contract term. Banks have developed methodologies to calculate the possible prepayment rate to manage the risk well. One such method for the calculation is the conditional prepayment rate which has become a benchmark. The CPR is the annual rate at which a mortgage pool balance is assumed to be prepaid during the life of the pool. A mortgage pool’s CPR is a function of past prepayment rates and expected future economic conditions. 
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Combined Ratio

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is a Combined Ratio?
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Backwardation and Contango

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Backwardation and Contango? In interest rates management, backwardation and contango are two critical phenomena that identify the direction of interest rates.
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Translation Risk

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Translation Risk?
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What are Options?

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are the Options? An option is the most used product while doing the Hedging. In an option contract, the buyer is given the right but not the obligation to buy (sell) as an asset against the pre-specified price within a specified time. The Option is purchased while paying a premium to the option seller. 
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Agriculture Commodities

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Agriculture Commodities? Like financial instruments, agricultural commodities are also essential for the commodity markets. These commodities have a higher rate of fluctuation due to seasonality. The primary reason is that the production of commodities is seasonal while their demand is relatively even throughout the year. 
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Global Financial Crisis & Impact

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

  What is Global Financial Crisis? Since the 1929 stock market crash, this financial crisis has been the most prominent economic disaster. With the fall of investment bank Lehman Brothers in September 2008, it developed into a global financial crisis that began with a subprime mortgage lending crisis in 2007. 
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What is a Subprime Mortgage?

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Subprime Mortgages? A subprime mortgage is a loan secured by real estate and issued to a credit-worthy borrower. Subprime borrowers have a history of delinquent payments, large loan-to-values (low up-front deposits) or large loan-to-income ratios. A typical subprime loan could be structured as 30-year 2-28 adjustable-rate mortgage (ARM). This type of product comes with a 2-year relatively low fixed teaser rate, which then reverts to a much higher variable rate for the remaining 28 years of the mortgage.
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GARP Code of Conduct

ACCA, CIMA, CPD, FRM | by Owais Siddiqui

What is the Code of Conduct? The GARP Code of Conduct is a set of basic principles aimed at assisting financial risk management. Code was developed for the Financial Risk Manager (FRM) program as well as other certification programs administered by the Global Association of Risk Professionals (GARP).
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