Fiscal reports

Forex trading

admin — Sun, 13 Mar 2011 12:45:20 +0000

The foreign exchange market (forex) is a worldwide financial market for the trading of currencies. Financial centers scattered around the world facilitate the trading for buyers and sellers around the clock, except weekends. The primary purpose of the foreign exchange is to assist international trade by allowing individual businesses or private investors to convert currencies.

In a typical forex trading transaction, a buyer purchases one currency by paying another. The foreign exchange market is very unique because it possesses the following qualities: a high liquidity, wide geographical dispersion, the low margins of relative profit compared with other markets of fixed income, and the use of leverage to enhance profit margin.

Property management

admin — Wed, 22 Jul 2009 14:14:08 +0000

Private owners have a strong incentive to care for and properly manage what they own. Will Ed regularly change the oil in his car? Will he see to it that the seats don’t get torn? Probably so, since being careless about these things would reduce the car’s value, both to him and to any future owner. The car and its value-the sale price if he sells it-belong just to Ed, so he would bear the burden of a decline in the car’s value if the oil ran low and ruined the engine, or if the seats were torn. Similarly, he would capture the value of an expenditure that improved the car, like a new paint job. As the owner, Ed has both the authority and the incentive to protect the car against harm or neglect and even to enhance its value. Private-property rights give owners a strong incentive for good stewardship.
Do you take equally good care not to damage an apartment you rent as you would your own house? If YOU share an apartment with several roommates, are the common areas of the apartment (such as the kitchen and living room) as neatly kept as the bedrooms? Based on economic theory, we guess that the answer to both of these questions is probably “No.”
In 1998, the student government association at Berry College in Georgia purchased 20 bicycles to be placed around campus for everyone’s use.6 These $200 Schwinn Cruiser bicycles were painted red and were marked with a plate reading “Berry Bike.” The bikes were available on a first-come, first-served basis, and students were encouraged to take them whenever they needed them and leave them anywhere on campus for others to use when they were finished. What do you think happened to these bikes? Within two months, most of these top-quality bikes were severely damaged or lost. The campus newspaper reported on the “mangled corpses of twisted red metal that lie about campus.” Over the summer break the student government replaced or fixed the bikes, but despite its pleas to “treat the bikes as if they were your own property,” the same thing happened the following fall precisely because the bikes weren’t the students’ own property. It wasn’t that the students at Berry College were inherently destructive; after all, there were no problems on campus with privately owned bikes being lost or abused during this time. It was a matter of the different incentives they faced. The student government association eventually abandoned the program and began leasing the remaining bikes to individual students instead. As you can see, there is no denying the strong incentive that private ownership creates for owners to care for their property (or the lack of incentive when private ownership is not clearly defined and enforced).
The incentive for owners to care for and properly manage their property is strong. The owner of a hotel doesn’t want to neglect fixing electrical or plumbing problems if it means fewer repair costs due to electrical fires or water leaks in the future. The owner knows travelers aren’t going to want to stay in a charred or water-damaged hotel. Poor management will reduce the hotel’s value and the owner’s personal wealth. This gives the owner an incentive to manage the asset properly.

Private property

admin — Wed, 22 Jul 2009 14:12:20 +0000

Private owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others. Realtors often advise home owners to use neutral colors for countertops and walls in their house because they will improve the resale value of the home. As a private owner you could install bright green fixtures and paint your walls deep purple, but you will bear the cost (in terms of a lower selling price) of ignoring the wishes of others who might want to buy your house later. On the other hand, by fixing up a house and doing things to it that others find beneficial, you can reap the benefit of a higher selling price. Similarly, you could spray paint orange designs all over the outside of your brand-new car. but private ownership gives you an incentive not to do so because the resale value of the car depends on the value that others place on it.
Consider a parcel of undeveloped privately owned land near a university. The private owner of the land can do many things with it. For example, she could leave it undeveloped. turn it into a metered parking lot, erect a restaurant, or build rental housing. Will the wishes and desires of the nearby students be reflected in her choice, even though they are not the owners of the property? Yes. Whichever use is more highly valued by potential customers will earn her the highest investment return. If housing is relatively hard to find but there are plenty of other restaurants, the profitability of using her land for housing will be higher than the profitability of using it for a restaurant. Private ownership gives her a strong incentive to use her property in a way that will also fulfill the wishes of others. If 5he decides to leave the property undeveloped instead of erecting housing that would benefit the students, she will bear the opportunity cost of forgone rental income from the property.
As a second example, consider the owner of an apartment complex near your campus. The owner may not care much for swimming pools, workout facilities, study desks, washers and dryers, or green areas. Nonetheless, private ownership provides the owner with a strong incentive to provide these items if students and other potential customers value them more than it costs to provide them. Why? Because tenants will be willing to pay higher rents to live in a complex with amenities that they value. The owners of rental property can profit by providing an additional amenity that tenants value as long as the tenants are willing to pay enough additional rent to cover the cost of providing it. Because renters differ in their preferences and willingness to pay for amenities, some will prefer to live in less expensive apartments with fewer amenities, while others will prefer to live in more expensive apartments with a greater range of amenities. By choosing among potential apartment complexes, renters are able to buy as few or as many of these amenities as they wish.

Bayesian probability

admin — Fri, 26 Jun 2009 20:32:52 +0000

Maybe the Bayesian school can offer us some insight in operational risk by deﬁning management causality that cannot be measured adequately using VaR, RAROC or EVA (economic value-added). Bayesian networks constitute a branch of Bayesian conditional probability theory, e.g.
Prob ( A) = Prob( B ) given Prob(C )
Where A, B, C are discrete events.
Prob (company defaulting) = Prob (20 % share price fall ) given Prob (bad CEO)
This has some potential for creating deductive causal links in the loss database.
The use of Bayesian probability has uses in VaR in that we can build conditional VaR modelling.

Stress testing

admin — Fri, 26 Jun 2009 20:32:13 +0000

Stress testing subjects a portfolio or a set of market positions through the strains of various situations to see how they perform under these extreme situations. This can start with the simple “what-if ” analysis, by changing a few variables in a model. Stress testing is designed to diagnose exposures to extreme market volatility that are missed by VaR analysis. VaR is not designed to capture extreme market events. Stress testing must be done with an investigative view.
Once a risky situation has been identiﬁed, ﬁnancial executives can decide to manage an unhealthy exposure through various choices:
Simply unwinding the position.
Pricing it differently.
Buying protective instrument.
Preparing a liquidity or funding backstop.
Restructuring the business.
An uncritical view on risk that is not sufﬁciently calibrated can end up overallocating capital, increasing company operating costs and reducing RAROC. Inadequate stress testing can leave a company undercapitalised until a huge disaster strikes. Thus, it has to devise risk mitigation devices, which include contingency capital as the ultimate line of defence.

RISK MANAGEMENT TO PICK UP THE PIECES

admin — Thu, 25 Jun 2009 20:31:39 +0000

There are additional techniques to deal with the risk spectre.
Scenario analysis
Scenario analysis lets us think wider to encapsulate more dramatic risk events. These include the Exxon Valdez and Hurricance Andrew extreme risk events that drove many companies to the brink of bankruptcy. There cannot have been a more damaging and unthinkable recent disaster than September 11th.
The limits of thinking and use of business imagination are widened under scenario analysis, consistent with a set of given possible future events for brainstorming.
Scenario testing has been applied in preference to other modelling techniques in some cases because it is easier to comprehend. For example, the pension funds around the world have used simple what-if scenarios at times to determine the money left to cover the payment of pensions.
Let us say that scenarios of 4 %, 6 %, 8 % and 10 % rates of return were taken up by some banks. These were somewhat conservative given the double-digit real returns on the stock markets in the 1990s. Yet, as we have seen, investor behaviour can be irrational and place too much weight upon recent experiences. This is unrealistic against the evidence of a probability density function (PDF) for percentage returns. A comparison of market values against PDF numbers gives a more objective view than being caught in a buying mania.
Unfortunately, pension funds should have foreseen the impending difﬁculties in the value of stock markets, and made provisions accordingly under more pessimistic scenario analysis. A 4–6 % annual return would have kept the pension funds more secure, but many got carried away in the optimism of the stock market and have not kept provisions in reserve for future bad debts.37 Life insurance companies also guaranteeing 8 % pay-outs to their policy-holders was a disastrous move when stock market returns fell to record low levels.
For pensions and life annuities, things have generally gone from bad to worse. The UK pensions mis-selling episode was estimated to have cost around £12 billion to future pensioners. The UK disaster over shortfalls in endowment mortgages has been variously projected to cost many times more than this ﬁgure. A benevolent summary of this situation is a business-like patch over what could prove a very messy and expensive mistake. Some would call this compensation exercise a fudge, but it has given a limited redress for victims, and it has put in place damage-limitation procedures.
Scenario analysis does not complicate the risk models, but simpliﬁes their application. Well-designed scenarios can bring to light weaknesses of risk management systems, including modelling vulnerability. Results help to identify critical procedures necessary for reducing risk and conserving capital, returns, market position, core competencies and reputation. Scenario analysis should lead to changes in the way to allocate capital, or planning contingency procedures. Scenario analysis suffers from being less standardised than the more established VaR, and it makes little use of complex mathematical modelling. There is less in a way of a formal methodology or modelling tool, but it rests upon widely accepted engineering and actuarial techniques. It is often a difﬁcult technique to sell internally within the company.

Dow Jones Averages

admin — Wed, 24 Jun 2009 20:34:37 +0000

The Dow Jones Industrial Average (DJIA) of 30 large, “blue-chip” corporations has been computed since 1896. Its long history probably accounts for its preeminence in the public mind. (The average covered only 20 stocks until 1928.)
Originally, the DJIAwas calculated as the simple average of the stocks included in the index. Thus, if there were 30 stocks in the index, one would add up the value of the 30 stocks and divide by 30. The percentage change in the DJIAwould then be the percentage change in the average price of the 30 shares.
This procedure means that the percentage change in the DJIAmeasures the return on a portfolio that invests one share in each of the 30 stocks in the index. The value of such a portfolio (holding one share of each stock in the index) is the sum of the 30 prices. Because the percentage change in the averageof the 30 prices is the same as the percentage change in the sumof the 30 prices, the index and the portfolio have the same percentage change each day. To illustrate, consider the following data: stock ABC sells initially at $25 a share, while XYZ sells for $100. Therefore, the initial value of the index would be (25 %?100)/2%?62.5. The final share prices are $30 for stock ABC and $90 for XYZ, so the average falls by 2.5 to (30 %?90)/2 %?60. The 2.5 point drop in the index is a 4% decrease: 2.5/62.5 %?.04. Similarly, a portfolio holding one share of each stock would have an initial value of $25 %?$100 %?$125 and a final value of $30 %?$90 %?$120, for an identical 4% decrease.
Because the Dow measures the return on a portfolio that holds one share of each stock, it is called a price-weighted average. The amount of money invested in each company represented in the portfolio is proportional to that company’s share price.
Price-weighted averages give higher-priced shares more weight in determining performance of the index. For example, although ABC increased by 20%, while XYZ fell by only 10%, the index dropped in value. This is because the 20% increase in ABC represented a smaller price gain ($5 per share) than the 10% decrease in XYZ ($10 per share). The “Dow portfolio” has four times as much invested in XYZ as in ABC because XYZ’s price is four times that of ABC. Therefore, XYZ dominates the average.
You might wonder why the DJIAis now (in early 2001) at a level of about 10,000 if it is supposed to be the average price of the 30 stocks in the index. The DJIAno longer equals the average price of the 30 stocks because the averaging procedure is adjusted whenever a stock splits or pays a stock dividend of more than 10%, or when one company in the group of 30 industrial firms is replaced by another. When these events occur, the divisor used to compute the “average price” is adjusted so as to leave the index unaffected by the event.

Sarbanes–Oxley Act for audit control

admin — Wed, 24 Jun 2009 20:31:16 +0000

The ideas that back up the Sarbanes–Oxley Act in auditing can be transferred into the banks and investment houses, especially when it comes to launching “hot” IPOs and bond issues. The legal framework for auditing work has now changed in the US post-Enron. “Simply stated, the current status quo for corporate governance is unacceptable and must change.”
The Sarbanes–Oxley Act was passed into law in August 2002. It laid out ﬁrm rules:
CEO and CFO to certify company ﬁnancial statements. It became a criminal offence to make such a certiﬁcation falsely knowing (and “knowing” is the key word) that the report was intentionally misleading within the deﬁnition of the Act.
Enforced rotation of audit partners where the audit partners (the speciﬁc persons) have performed full audit services in each of the ﬁve previous ﬁscal years of service.
Prohibition of non-audit services where the accounting ﬁrm already performs audit of the client.
Document destruction or alteration now attracts new criminal penalties where the intention is to impede any US government investigation.
Already auditors are being faced with a mandatory change every ﬁve years so that they do not get too cosy with the customer as in Enron. The effectiveness of any legislation is governed by roughly the same factors as a successful project. It needs:
1. Scope.
2. Risk monitoring.
3. Enforcement.
4. Performance (i.e. punishment or ﬁnancial redress).
Sarbanes–Oxley can prove itself particularly potent particularly in the last two factors. An investor can look to Sarbanes–Oxley for some sympathy and support, but will have to search elsewhere for anything close to complete investment protection.

Tax Timing

admin — Tue, 23 Jun 2009 11:00:07 +0000

In many situations, the IRS does not allow reinvestment of funds generated by a project without an interim tax penalty. This can be important when you compare one long-term investment to multiple short-term investments that are otherwise identical. For example, consider a farmer in the 40% tax bracket who purchases grain that costs $300, and that triples its value every year.
• If the IRS considers this farm to be one long-term two-year project, the farmer can use the ﬁrst harvest to reseed, so $300 seed turns into $900 in one year and then into a $2,700 harvest in two years. Uncle Sam considers the proﬁt to be $2,400 and so collects taxes of $960. The farmer is left with post-tax proﬁts of $1,440.
• If the IRS considers this production to be two consecutive one-year projects, then the farmer ends up with $900 at the end of the ﬁrst year. Uncle Sam collects 40% ·$600 = $240, leaving the farmer with $660. Replanted, the $660 grows to $1,980, of which the IRS collects another 40% ·$1, 980 = $792. The farmer is left with post-tax proﬁts of 60% ·$1, 980 = $1, 188.
The discrepancy between $1,440 and $1,188 is due to the fact that the long-term project can avoid the interim taxation. Similar issues arise whenever an expense can be reclassiﬁed from “reinvested proﬁts” (taxed, if not with some credit at reinvestment time) into “necessary maintenance.”
Although you should always get taxes right—and really know the details of the tax situation that applies to you—be aware that you must particularly pay attention to getting taxes right if you are planning to undertake real estate transactions. These have special tax exemptions and tax depreciation writeoﬀs that are essential to getting the project valuation right.

Dividend and Capital Gains Taxes

admin — Sat, 13 Jun 2009 10:59:08 +0000

While ordinary income applies to products and services sold, capital gain applies to income that is earned when an investment asset that was purchased is sold for a higher price. Capital gains are peculiar in three ways:
1. If the asset is held for more than a year, the capital gain is not taxed at the ordinary income tax rate, but at a lower long-term capital gains tax rate. (In 2002, the long-term capital gains tax rate is 15 percent for taxpayers that are in the 25% tax bracket or higher.)
2. Capital losses on the sale of one asset can be used to reduce the taxable capital gain on another sale.
3. The tax obligation occurs only at the time of the realization: if you own a painting that has appreciated by $100,000 each year, you did not have to pay 20% · $100, 000 each year
in taxes. The painting can increase in value to many times its original value, without you ever having to pay a dime in taxes, just as long as you do not sell it. In contrast, $100,00 in income per year will generate immediate tax obligations—and you even will have to pay taxes again if you invest the labor income for further gains.
Dividends, that is, payments made by companies to their stock owners, used to be treated as ordinary income. However, the “Bush 2003 tax cuts” (formally, the Jobs&Growth Tax Relief Reconciliation Act of 2003) reduced the tax rate to between 5% and 15%, the same as long-term capital gains taxes—provided that the paying company itself has paid suﬃcient corporate income tax. However, this will only be in eﬀect until 2008, when dividends may be taxed at the ordinary income tax level again. There is no guarantee that this will not change every couple of years, so you must learn how to think about dividend taxes, not the current details of dividend taxes.
In the United States, corporations holding shares in other companies are also taxed on dividend proceeds. This makes it relatively ineﬃcient for them to hold cross equity stakes in dividend paying companies. However, in Europe, dividends paid from one corporations to another are often tax-exempted or tax-reduced. This has allowed most European corporations to become organized as pyramids or networks, with cross-holdings and cross-payments everywhere. (In eﬀect, such cross-holdings make it very diﬃcult for shareholders to inﬂuence management.)