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

Explain the implicit cost of capital, Explain the Implicit cost of capital ...

Explain the Implicit cost of capital Implicit cost of capital can be defined as the rate of return associated with the best investment opportunity for the firm and its Shareho

Describe the meaning of financial management, Q. Describe the Meaning of Fi...

Q. Describe the Meaning of Financial Management? Meaning of Financial Management: - Financial management is a vital as well as an integral part of business management. It demot

Mountain fresh growth, The Mountain Fresh Company had earnings per share (E...

The Mountain Fresh Company had earnings per share (EPS) of $6.32 in 2006 and $11.48 in 2011.  The company pays out 30 percent of its earnings as dividends per share (DPS), and the

Rating methodologies of a debt instrument, The key parameters t...

The key parameters taken into account while rating a debt instrument are as follows: 1. Industry Evaluation - This involves an evaluation of the

Sustainable growth rate, You are given the following information for Clapto...

You are given the following information for Clapton Guitars, Inc. Profit margin 6.3% Total Asset turnover 1.6 Total debt ratio 0.44 Payout ratio 35% Calculat

Show factors influencing participation, Q. Show Factors influencing partici...

Q. Show Factors influencing participation? Factors influencing participation: several research studies have shown that the intensity of participation depends on four factors.

When comparing different projects than standard deviation, Why is the coeff...

Why is the coefficient of variation often a better risk measure when comparing different projects than the standard deviation? Whenever we wish to compare the risk of investmen

What are the benefits of collecting early and how it attempt, What are the ...

What are the benefits of "collecting early" and how do companies attempt to do this? A fund has time value.The sooner money is collected the better.  Companies utilize regional

Differentiate between systematic and unsystematic risk, QUESTION a) Dis...

QUESTION a) Discuss the importance of diversification in the context of stock markets using appropriate numerical illustrations. b) Mimine and Minush are two companies with

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