There is a very interesting discussion on stackexchange on how to determine the credit risks of a startup. What would be the ideal way to develop the IFRS9 ECL model for startup fintech when there is no historical data. There are 2 answers to this question (as of November 2021)
This is in fact a very tough question. We have faced this situation frequently in our consulting practice. To determine the credit risks of a startup, or a private company in general, we usually utilize
Another possible solution is to develop a predictive model, but again, lack of data will be an issue. Let us know what you think. Article Source Here: How to Determine Credit Risks of a Startup
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One general goal for investing is to own assets that will appreciate over time. As an investor, note that there are different types of markets to consider when you want to execute a trade. The auction market is primarily concerned with executing trades among buyers and sellers. Having a lot of buyers who are interested in buying a financial instrument will make that asset more valuable. Also, when liquidating the asset to cash, the market gets to set the prices realized for the assets being sold. In this article, you will get to know what an auction market is, how it works, and differentiate between the auction market and the dealer market. What is an Auction Market?An auction market is a trading market where buyers and sellers trade assets. In this market, a trade is executed when the highest price from the buyer matches with the lowest price the seller is willing to accept. It's an environment where a bidding process facilitates competition between buyers and sellers. How Does an Auction Market Work?This market strategy is quite different from OTC (over-the-counter) market strategy, where trade is carried out directly between two parties without a broker. The auction market can be done physically and also via the computer. But there's no direct negotiation between the buyers and sellers. Here, the seller place offers in the desired financial instrument. Also, buyers place multiple bids in the desired financial instrument that is available in the market. Then the trade executes when the highest bid price is matched with the lowest ask price. In this process, there could either be multiple buyers and multiple sellers or multiple buyers and one seller. ExamplesWe'll use the case scenario where there are multiple buyers and multiple sellers to explain further. Three buyers are interested in buying a share of company ABC with the bid prices of $5.00, $5.03, and $ 5.5 respectively. Whereas, three sellers had offered to sell their shares of company ABC for $5.5, $5.7, and $5. 9 respectively. In this scenario, the highest bid price of $5.5 will be matched with the lowest sell price of $5.5 and the trade will be executed. However, the rest of the orders will not be executed immediately and the current market price of company ABC will be adjusted to $5.5. Auction Market vs Dealer MarketGoing through the characteristics of the dealer market, it is quite different from the auction market in various ways. As explained earlier, an auction market is a competitive market where trade is executed by matching the buyer's highest bid price with that of the lowest sell price. On the other hand, a dealer market is a market where dealers post a fixed price to sell a desired financial instrument. Without involving a third party, trade is executed when an investor accepts the dealer’s fixed price. In the auction market, there's a single platform where buyers and sellers post the prices they want to buy and sell. However, this process ensures that the financial security is sold at a good price. In the dealer’s market, buyers and sellers get to know the bid price and offer price electronically but the trade is executed through dealers. The auction market operates an order-driven market where buyers and sellers engage in competitive bidding. On the other hand, dealers get to fix the sell and buy prices. That is to say, the dealer market operates a quote-driven system. ConclusionThe main focus of the auction market is to connect buyers and sellers. In doing this, brokers stand in place of the individual owners of the securities. It's important to note that, no matter how intense trading might be, each market operates with a set of guiding rules. Post Source Here: Auction Market: Definition, Examples, Comparison with Dealer Market In financial markets, the logarithms of asset prices are often modeled as a normal distribution. Elsewhere in life, many things are normally distributed: people's height, education levels, talents, working hours in a day, etc. Success, as measured by wealth, however, is not normally distributed. In fact, it’s heavily skewed and follows the Pareto rule: 20% of the world’s population own 80% of the wealth. Indeed, the world’s 8 richest people have a total wealth equivalent to that of the world’s poorest 3.8 billion people. Why is that? In Reference [1], the authors showed that a large part of a person's success can be attributed to luck. They used computer simulation to reach that conclusion, In this paper, starting from few very simple and reasonable assumptions, we have presented an agent-based model which is able to quantify the role of talent and luck in the success of people's careers. The simulations show that although talent has a Gaussian distribution among agents, the resulting distribution of success/capital after a working life of 40 years, follows a power law which respects the "80-20" Pareto law for the distribution of wealth found in the real world. An important result of the simulations is that the most successful agents are almost never the most talented ones, but those around the average of the Gaussian talent distribution – another stylised fact often reported in the literature. The model shows the importance, very frequently underestimated, of lucky events in determining the final level of individual success. Since rewards and resources are usually given to those that have already reached a high level of success, mistakenly considered as a measure of competence/talent, this result is even a more harmful disincentive, causing a lack of opportunities for the most talented ones. Our results highlight the risks of the paradigm that we call "naive meritocracy", which fails to give honors and rewards to the most competent people, because it underestimates the role of randomness among the determinants of success. We find the article very interesting. It
The article raised the following questions,
To this effect, the authors also proposed some schemes for improving meritocracy in research funding, …several different scenarios have been investigated in order to discuss more efficient strategies, which are able to counterbalance the unpredictable role of luck and give more opportunities and resources to the most talented ones - a purpose that should be the main aim of a truly meritocratic approach. Such strategies have also been shown to be the most beneficial for the entire society, since they tend to increase the diversity of ideas and perspectives in research, thus fostering also innovation. References [1] A. Pluchino, A.E. Biondoy, A. Rapisardaz, Talent vs Luck: the role of randomness in success and failure, Advances in Complex Systems, Vol. 21, (2018) Article Source Here: Is It Better To Be Lucky Than Good? Companies incur various expenses that are crucial for their operations. One of these includes purchases, which are direct costs. Usually, they involve expenses incurred on purchasing raw materials or products. Companies report these costs in the income statement as a part of the cost of goods sold. However, most companies usually include them as net purchases. What are Net Purchases?When companies purchase products for resale or manufacturing, their expenses rise. These expenses also increase the purchase costs reported on the income statement. However, several items exist, which can result in a decrease in this amount. Accounting standards require companies to disclose these items in the income statement. These disclosures fall under net purchases as deductions from gross purchases. Net purchase is the gross amount of purchase made by a company minus deductions for specific items. For most companies, these deductions include purchase discounts, returns, and allowances. In accounting, a purchase is an expense account, while these accounts form contra expense accounts. What are the components of Net Purchases?Net purchases have several components which affect the final figure reported on the income statement. The most significant of these is a company's purchases. As mentioned, it usually includes costs incurred on manufacturing materials or resalable products. Without any deductions, it is known as gross purchases. When converting this figure into net purchases, the following three components are crucial. Purchase returnsPurchase returns include any items that companies return to the supplier. Companies may return goods to suppliers for various reasons, for example, when they receive damaged items. Since companies have already recorded the purchase expense in the accounts, they cannot reverse it. Instead, they use the purchase returns account to reduce the figure through a contra account. Purchase DiscountsWhen companies purchase goods on credit, they may receive a cash discount. This discount involves paying the value of those goods within a specific time period. For example, a supplier may offer its customer a 10% discount if they pay within 15 days with a credit term of 30 days. For the purchaser, this discount reduces the cost of the goods purchased. Therefore, they result in a deduction from the gross purchases. Purchase AllowancesPurchase allowances have similar features as purchase discounts. However, it does not entail a prompt or early payment. Instead, it involves the reduction in prices of goods for various reasons. For example, a supplier may offer a company a reduction in price for damaged goods. Purchase allowances are a decrease in the price of goods purchased to avoid purchase returns. What is the formula for Net Purchases?The formula for net purchases is straightforward after considering its components. As mentioned, it is the residual amount after deducting returns, discounts, and allowances from gross purchases. Therefore, the net purchases formula is as below. Net Purchases = Gross Purchases - Purchase Returns - Purchase Discounts - Purchase Allowances Usually, companies report this figure in the notes to the financial statements. The net purchases amount goes into the income statement. ExampleA company, Blue Co., made total purchases of $100,000 during an accounting period. Of these purchases, the company returns $10,000 worth of goods to suppliers. Blue Co. also received discounts of $6,000 during the year for early payments. Lastly, the company accepted allowances of $4,000 for purchases that included faulty products. Therefore, the company's net purchases will be as follows. Net Purchases = Gross Purchases - Purchase Returns - Purchase Discounts - Purchase Allowances Net Purchases = $100,000 - $10,000 - $6,000 - $4,000 Net Purchases = $80,000 ConclusionNet purchases include a company's gross purchases minus returns, discounts, and allowances. Similarly, three components are crucial to this amount. These include purchase returns, discounts, and allowances. Companies report net purchases in the income statement. However, these deductions appear on the notes to the financial statements. Article Source Here: Net Purchases: Definition, Formula, Examples What is the Bid-Ask Spread?Bid-ask spreads are most commonly found in the market for stocks, futures, and options. A bid-ask spread is a difference between the price that a buyer is willing to pay for an asset and the price at which a seller is willing to sell the same asset. Bid-ask spreads exist because investors may not immediately agree on a price, so they need time to negotiate. As a result, the price is set at a point where the lowest ask price equals the highest bid price. In this article, we'll explore what Bid-ask Spread is and how it works. Definition of Bid-Ask spreadBid-ask spread is the difference between the price at which you can sell an asset and the price at which you must buy it. An easy way to understand Bid-ask spread is thinking of it as being similar to a commission when buying or selling something in real life. The Bid-ask spread is used by traders to determine the impact of an order on the market. The wider the spread, the less liquid a security or asset is and the more difficult it is to execute the order. Why does Bid-Ask exist?Bid-ask spreads are actually not that hard to understand once you get familiar with how trading works. A bid-ask spread represents the difference between the lowest asking price for a stock and its highest bid price. To understand the Bid-Ask spreads better, let's take an example of an investor who wants to enter a market order. When placing this kind of order, you'll be selling at whatever price is available in the exchange, which means that you might not get as much as you would like for it. On the other hand, if you place a limit order to buy at $100 and somebody places an offer to sell the stock under that price then your order is going to be filled. This means that you don't have to buy for a higher price than what you're willing to because someone else is willing to sell under that price. For simplicity's sake, let's say that the bid-ask spread for Company inc. shares is $4.95 and $5.00. This means that investors can sell the shares at $4.95 and simultaneously buy at $5.00. The difference between these two prices ($0.05) will be given to whoever operates this exchange. Use of Bid-Ask SpreadThe Bid-Ask spread is used mostly to gauge market liquidity and to decide what type of order we should place. For example, if the Bid-Ask spread is tight, then it’s safer to use the market order. On the other hand, if the Bid-Ask spread is wide, then a limit order should be used. Here are some of the benefits of Bid-ask Spread
ConclusionThe bid-ask spread is the difference between the lowest selling price for a share and the highest buying price. As you can see from our example above, traders can either sell at a lower price or buy under a certain price depending on which order they place. Article Source Here: Bid-Ask Spread: Understanding, How to Read, Example, Liquidity There are many types of audits that companies may go through. The most common of these include an external or statutory audit required by laws and regulations. Being a taxpayer, companies may also fall under tax audits. These audits also apply to individuals or any entity that may be considered a taxpayer. Tax audits differ from other types of audits. What is a Tax Audit?A tax audit involves the examination of a taxpayer's tax returns by a tax regulatory body. Every country will have an organization that is responsible for overlooking its tax matter. For example, in the US, it is the Internal Revenue Services (IRS), and in the UK, it is the HM Revenues and Customs (HMRC). These bodies do not have a specific requirement for organizations to conduct tax audits. Instead, they examine taxpayers’ tax returns and select taxpayers based on their criteria. Usually, it involves choosing taxpayers with unusual transactions or figures reported. In tax audits, the tax authority investigates a taxpayer's tax returns more accurately. Through this process, it verifies the incomes and deductions reported in the tax return. A tax audit allows tax authorities to determine whether taxpayers’ financial records and transactions on the tax returns are accurate. It also allows them to confirm that their returns reflect their actual income and deductions that they have claimed. The audit procedures performed in these audits differ from other audits, for example, external or internal audits. It also involves a special tax compliance audit report, which the auditors submit directly to the tax office. What are the types of Tax Audits?There are various types of tax audits that a tax authority may conduct. Usually, the complications of the audit will dictate which form of tax audit will occur. However, there are other criteria that tax authorities will also consider before choosing the type. Some of those types are as below. Mail tax auditMail tax audits are the simplest forms of tax audits. With these audits, the complications are lower, resulting in lesser details required. Regardless of the tax audit type, taxpayers will receive a notice for the audit through the mail. However, not all of these audits fall under mail audits. Overall, mail tax audits involve requesting taxpayers for additional evidence to support their claims on their returns. Mail tax audits are also known as correspondence tax audits. Office tax auditsOffice tax audits involve questioning a taxpayer in the tax authority office. Usually, there is an audit officer who will investigate the taxpayer in person. The taxpayer will receive a notice in advance entailing the requirements for the audit and the supporting evidence they must bring. The taxpayer can also choose to get represented by advocates, for example, accountants or lawyers. Field tax auditsField tax audits are the broadest tax audits conducted by a tax authority. These audits involve an agent visiting and investigating a taxpayer. The taxpayer chooses the location for this audit, which usually includes their home or office. Field audits are more thorough and have higher requirements compared to the other types of tax audits. ConclusionTax audits involve examining a taxpayer's financial records and transactions for tax purposes. With these audits, the auditors confirm whether the tax returns reflect accurate information. There are several types of tax audits that taxpayers may go through. These include mail, office, and field tax audits. Usually, the complications of the process dictate under which type a taxpayer will fall. Post Source Here: Tax Audit: Definition, Types, Examples Day trading is a popular discussion topic in the practitioners’ literature, the blogosphere, and social media. It receives, however, less attention in the academic community. We have previously discussed a paper on the intraday momentum in the stock indices. Reference [1] extended the research to the oil market. It used USO, an oil ETF, 1- minute data to conduct studies. The authors reached several interesting conclusions, First, our study reveals that the first half-hour return of a trading day significantly predicts the last half hour return of that day, both in sample (IS) and out of sample (OS). For the IS analysis, the predictive value is 0.729%, and the predictive power of the first half-hour returns is further confirmed with an OS R-squared value of 0.659%, both values being economically sizable and much higher than those of monthly predictors… Second, since intraday predictability varies across crisis and noncrisis periods, we split our sample into crisis and non-crisis periods, the former encompassing two crises: the global financial crisis from June 1, 2008, to January 31, 2009, and the oil market crisis from June 1, 2014, to January 31, 2016 (e.g., Gao et al., 2018). We find that predictability is especially strong during the crisis periods, with a predictive value of 1.923%, a level of predictability that substantially exceeds the predictive value of 0.335% during non-crisis periods… Third, we find that the predictive power of the first half-hour returns is stronger when the first half hour’s trading has higher realized volatility, higher trading volume, and significant overnight return jumps, all of which are associated with high overnight uncertainty… Fourth, our next step is to assess economic values by using the predictability of the first half-hour return as a trading signal in a market timing strategy. Specifically, if r1 is positive (negative), we take a long (short) position at the beginning of the first half hour and close the position at the end of the last half hour. Our results show that this market timing strategy significantly outperforms two other benchmark strategies In brief, intraday momentum also exists in the crude oil market, and a profitable day trading strategy can be developed. These findings are consistent with our observations and experience. It would be interesting to see how the trading strategy would perform during the pandemic, especially when the price of the front-month oil futures went negative. References [1] Z. Wen, X. Gong, D. Ma, Y. Xu, Intraday momentum and return predictability: Evidence from the crude oil market, Economic Modelling, Volume 95, February 2021, p. 374 Article Source Here: Does Intraday Momentum Exist in the Crude Oil Market What is a market orderWhen an investor wants to buy or sell a security, he can use several types of orders to execute the trade. One of the most frequently used order types is the market order. Market order ensures that your trade is executed. In this article, we'll take a closer look at market order, its types, and its benefits. So let's get started. DefinitionA market order is an order to buy or sell a security at the current market price. Basically, you instruct your broker to purchase or sell securities at whatever the current market price is upon his/her receiving the order. Market orders are completely FIFO (first in, first out) meaning they will be executed based on when they were placed. This is different from other types of orders such as limit orders, which can be canceled. A market order does not guarantee the price that you will get for your trade, but it does ensure that your quoted price is within the stock's trading range. You may get a slightly worse quote if there are no buyers or sellers at that given time. Different types of Market OrderThere are mainly three types of Market Order
A limit market order is an order to buy or sell a security at no worse than a specified price (or better). The execution will only occur if the market moves to that given price (or better). For example, if you place an order to buy shares of Google at $610, the order will only be executed if/when it moves to that price or lower.
When you place a stop market order, the deal is carried out when the market price reaches your specific stop loss level. What this means is that you won't receive the best possible price since the trade is only executed when there's a sharp drop or rise in price. Sometimes, we also see stop-limit orders. This type of order is often called stop loss in the financial media. Many investors believe that it provides protection for their portfolios. This is only true if the market moves slowly and there is sufficient liquidity. In a fast-moving market, stop loss might not be an effective risk-management tool.
A market-if-touched order is an order type that specifies to buy or sell a security at the best possible price, but only if the market price touches or goes through a given stop loss level. ExampleIf you place a limit market order to buy shares of Google at $610, the order will only be executed if/when it moves to that price or lower. Market Order BenefitsMarket orders have clear benefits as compared to limit and other types of orders, especially when it comes to low liquidity issues. Here are some of them:
ConclusionA market order is a type of trading order that guarantees the execution of your trade, but it doesn't guarantee the price. When you place a market order to buy or sell, you instruct your broker to purchase or sell securities at whatever the current market price is upon his/her receiving the order.
Originally Published Here: Market Order: Definition, Types, Example Both equity and capital are terms used in the world of finance to describe ownership in a business. These two terms are closely related but they have key differences depending on the context for which they are being used. If you run a business or have an interest in the financial industry, it’s important to understand the difference between equity and capital. In this article, we will define equity and capital and outline their differences. What is Equity?Equity refers to the claim that shareholders have in a business once all liabilities have been deducted. In other words, equity describes the amount of money the owners of a business will receive once the liabilities have been deducted from business assets. Equity is also referred to as owner’s equity or shareholder’s equity. How to Calculate EquityMathematically, an equation of equity is represented as: Equity = Assets – Liabilities Suppose a company whose total assets are valued at $500,000 has liabilities of $150,000. The calculation of its total equity is: $500,000- $150, 000 = $350, 000 A business is considered to have positive equity when it has enough assets to cover its liabilities. On the other hand, if a company’s total liabilities are greater than total assets, the company is said to have negative equity. Why Is Equity Important?Equity is included in a company’s balance sheet to help a company’s owners assess the overall value of a business. By knowing a company’s equity, you’ll be able to tell if it’s financially stable. Furthermore, equity represents the claim that shareholders have in a company, so each shareholder can know the amount to expect in case the company liquidates. By analyzing a company’s total equity, investors can determine the worth of a company and decide whether they should invest. The common items that impact a company’s equity include retained earnings, treasury shares, net income, and dividend payments. What Is Capital?Capital refers to the money or resources that a company’s owners invest in a business. Capital is used to purchase assets, run a business and fund its future growth. It can be cash, equipment, property, receivable accounts, or anything that increases a business’s ability to generate value. Capital is a subcategory of owner’s equity. There are two main sources of capital—debt financing and equity financing. There are three types of capital:
ConclusionAs you can see, these two terms can be confusing, especially for those who are new in the business. In a nutshell, equity is a business’s book value, which is attributable to the owners of the business; while capital is the money that a business’s owners invest in a business. Post Source Here: Equity Vs Capital Currency swaps were originally conceived as a way to avoid the foreign exchange transaction costs that were associated with international trade. By using an intervening currency, parties would be able to reduce these costs and improve their terms of trade by locking in a favorable rate for future transactions. Today, currency swaps are used by corporations and governments alike as a means of hedging against adverse movements in exchange rates. They also allow companies the opportunity to capitalize on interest rate differentials (although these days cross-currency basis swaps are often used for this purpose). In this article, we are going to dig in and look at what currency swaps are, some examples, and their benefits. Currency Swap DefinitionA currency swap is a derivative contract between two parties, also known as counter-parties. It involves an exchange of principal and interest in one currency for the same in another currency at certain intervals for a pre-agreed period. Swap contracts normally state that the original principal amounts should be repaid in full at the end of the period, though this can be extended if both parties agree. The contract defines the dates on which interest payments are due and how the exchanged principal amounts are calculated. Currency Swap ExampleFor example, if Mr. A wants to borrow $1 million for 3 years from Mr. B; Mr. A may enter into a currency swap deal with Mr. B, to exchange 3 yearly £1 million interest payments for a single $1 million interest payment at the end of the period. In this example, if Mr. A borrows from an American bank and wants to exchange his GBP interest payments for USD interest payments during the 3 years, he can enter into a currency swap contract with Mr. B, and exchange his GBP interest payments for USD interest payments. At the end of the period, he would repay $1 million to Mr. B as well as pay $1 million worth of GBP revenue to Mr. A (although this figure may change over time due to changes in FX rates). Currency Swap BenefitsThe principal benefit of a currency swap is that it allows an individual or business to manage exchange rate risks. This can be done by taking out a hedge between two currencies so that the value of liabilities and assets remains constant in either one currency or another. Here are a few benefits of Currency Swap
ConclusionCurrency swaps are powerful derivatives that can be used to manage the risks of foreign currencies and interest rates. They are particularly useful for businesses that depend on cross-currency transactions, or for banks that want to lock in future exchange rates. They are flexible contracts with many uses, but it is important not to focus too much on what they cannot do, and instead on how they can help you. Article Source Here: Currency Swaps: Definition, Meaning, Examples, Usage |
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