Delivery and credit risk, Financial Management

Assignment Help:

When a borrower uses repo market for fund financing, he has to deliver the securities to the lender. One way to do this is to deliver the collateral to the lender or to the lender's clearing agent. At the end of the contract, the lender returns the collaterals to the borrower. This process, though simple and straightforward, the costs associated with delivering the collateral may turn to be expensive, particularly for a short-term repo. Instead of delivering the securities, the borrower, if the lender agrees, may hold the security in a segregated customer account. This transaction is called as Hold-In-Custody repo (HIC repo). Even this option is not free from risk. The borrower may use the collateral in another repo transaction. Despite the credit risk associated with HIC repo, it is used when the collateral is difficult to deliver, the transaction amount is very small and the borrower has good reputation. Another alternative to delivering securities is - the borrower can deliver the collateral to the lender's custodial account at the borrower's clearing bank. This process involves merely transfer of securities within the borrower's clearing bank. Suppose a dealer A enters into an overnight repo with X, A transfers the securities to the X's custodial account at A's clearing bank. Next day, the securities are transferred back to A. The dealer A can enter a new transaction with Y without redelivering the securities. The clearing bank establishes a custodial account for Y. this type of repo arrangement is known as tri-party repo.


Related Discussions:- Delivery and credit risk

Compare and contrast a forward contract and an option, QUESTION (a) Bri...

QUESTION (a) Briefly define foreign exchange rate risk and the three different types of exchange rate risks (b) Identify and outline the different methods of internal and ex

Alternative summarised version of tests of controls, Alternative summarised...

Alternative summarised version of tests of controls · Segregation of duty (staff records are separate from wages department) · Documentation ( written evidence ) ·

Analysis of company position, Analysis of Company Position Associated ...

Analysis of Company Position Associated International Supplies Ltd Circulation: Associated International Supplies Ltd (AIS Ltd.) Author: A. Consultant, AXY Consultin

Integration of economic, a) Globalisation refers to the interdependence and...

a) Globalisation refers to the interdependence and integration of economic, social and politic issues (services, goods, people and capital), across the world. For example, consumer

Explain the relationship between growth and inequality, While poverty reduc...

While poverty reduction has become the main goal of development efforts, there is an on-going and sometimes heated debate about the elements that would be at the center of any sens

Brief on mistakes in linton’s evaluation, Mistakes in Linton's evaluation ...

Mistakes in Linton's evaluation (1) The preliminary investment in working capital should be offset by a working capital release in the final year, assuming a constant level of

Underwrite, Under write An arrangement under which the investment b...

Under write An arrangement under which the investment banks agree to purchase a certain amount of privacy of a new issue (typically an IPO) at a given date for a given pric

Project on investment banking house, The Project to be Addressed by the Pap...

The Project to be Addressed by the Paper: You have just graduated from CCI's MBA program and have secured a position as a fund manager for a well known investment banking house

Account balance - inherent risk, Account balance - Inherent risk At a...

Account balance - Inherent risk At account balance / class of transaction level Balances susceptible to misstatement. History of errors. Complexity of transac

Finance for managers, Before tax cost of debt and after tax cost of debt; ...

Before tax cost of debt and after tax cost of debt; Personal finance problem. David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following inform

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd