Currency Overlay

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currency-globeCurrency overlay programs are committed to the management of current currency risk in a portfolio; currency exposures are looked upon as a distinct choice from the comprehensive asset distribution. The goal of currency overlay programs is to restrict losses and optimize gains that occur from currency risk.

In the context of the volatility of exchange rates, it is expected that investments in global equities are unpredictable. Currency risk can have an adverse effect on a portfolio that contains foreign denominated stock.

Investment in foreign denominated currency results in additional risk to portfolios. However, currency overlay programs can reduce the risks, while some result in profit opportunities.

The overlay programs are committed to the management of current currency risk in a portfolio. However, a currency overlay program is not a direct investment. It is a risk management program executed with derivatives that do not need an asset distribution.

Currency overlay can be passive/active. A passive overlay is not very complex. A comprehensive hedge of the currency exposure is established and efficiently transforms the complete foreign exchange exposure into the base currency. The emphasis of such a strategy is to remove the risk. This method does not look at supplementing additional return to the portfolio. By flattening out the peaks and valleys in asset values because of currency changes, a passive currency hedge removes all the risk due to exposure to foreign currency. It delivers improved stability to asset values.

A passive currency overlay is implemented utilizing basic derivatives, especially futures, forwards, and swaps. The advantages of passive currency management occur from the total effortlessness of the strategy.

A portfolio is safeguarded from any unfavorable fluctuations in foreign currency. This would enable the investor to assume more risk in other asset classes. The fees are also less since the strategy has been passive and depends on standardized derivative contracts. Though passive overlay programs are correct for certain clients, they are very basic in nature and structure.

Active overlay programs seek to decrease losses from foreign currency exposure.  For a normal currency overlay execution, an initial hedge ratio is established. The initial hedge ratio is identified on a portfolio specific basis by looking at factors like clients’ assets, liabilities and liquidity requirements. The part of the portfolio that is not hedged is then actively managed to create alpha by manipulating currency fluctuations.

Currency overlay programs could be of use to investors who are concerned about the currency risk that is a part of international investments. Passive and active programs are available to meet the objectives and risk tolerance of every specific plan. Before pursuing an overlay program, investors must prudently assess their overall asset allocation, future liquidity requirements, and investment policy guidelines to determine if an overlay program is appropriate.

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Mortgage Banking

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mortgagebankingIn order to cater to the increasing needs for regulatory compliance, mortgage banks must adopt a wide-ranging method to compliance risk management (interfacing regulatory analysis, determining contesting regulations, incorporating operational process controls, managing data quality, and planning documents management).

Mortgage banking stakeholders comprehend the challenges, while adhering to transforming regulations and requirements from government regulators, government-sponsored enterprises (GSEs) and investors. Regulatory compliances impact the complete life cycle of originating and servicing a mortgage loan. The emphasis is on data quality related to decision-making, calculations, and analytics.

An organization cannot be looked upon as being compliant with a procedure unless it delivers proof of the functions, procedures and data represented by the rule. In order to prove “evidence of compliance”, an organization must record the connection between compliance rules, calculations conducted, and data derived.

There exist five critical components of managing a compliance program that delivers evidence needed to reduce compliance risk:

Regulatory Interpretation

Compliance is related to a comprehensive documentation of regulatory, investor, state and corporate needs. It is directly connected to the operational processes, data, and reports impacted by a distinct requirement. The process is handled by a team of stakeholders to bridge the gap between business and technology. The stakeholders collaborate with business, legal, IT and compliance personnel to interpret and record regulatory needs.

Regulatory Controls

It facilitates the interpretation of regulations being translated into related business processes. It needs a comprehensive process design, control, and management. Efficient process controls also need a robust elucidation of the process, an effective understanding of the key points of control and proper reporting that particularly addresses the key control points.

Exception Management

An effective process control and monitoring system would result in business process exceptions being reduced.

Data Integrity

 The effective execution of the previous three components would have a major impact on data quality. It is structured to facilitate the veracity and flexibility of data across the life cycle. The data quality is validated by the integrity of the source.

Event Data

 At the time of origination, servicing and default management, a loan transits via multiple stages and critical processing outcomes. It is vital for the data to be documented at the same time as the occurrence of the event to ensure compliance afterward. For instance, during the origination process, a distinct fee is modified in excess of an elucidated ceiling, the modified values along with the event are managed and used in compliance reporting.

Data Transfer

 Identify the perfect source system for specific elements and effectively transfer the data elements to a centralized repository. The lack of accuracy during the data transfer process is a vital reason for bad data quality. It needs inefficient initiatives to integrate the data later on.

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Mobile Voice Recording in Financial Sector

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top-image-990x743In the financial sector, managing compliance is a critical yet progressively intricate challenge. Until recently, compliance needs for mobile communications were not subject to regulatory scrutiny in financial firms.

However, in 2011, the Financial Conduct Authority (FCA) eliminated the recording exemption for mobile phones and regulated that all mobile communications directly connecting to a financial trade should be recorded.

It was followed by the Dodd-Frank Wall Street Reform in the US, which makes it mandatory for telephone trades to be recorded, including those on mobile devices for financial firms trading in the US.

The MiFID II EU legislation would be implemented in January 2018. This would launch the most stringent mobile voice recording (MVR) regulations. It would result in substantially spreading regulatory needs within the UK.

All the market players involved in the advice chain for a planned trade should record all their mobile communications and maintain the data over a five-year period.

According to research conducted by Ovum (an independent analyst and consultancy firm), two-thirds of the firms required to record mobile communications have not yet complied.

It could be possible that several firms still have not accepted MVR because of misunderstandings about complex or expensive executions.

Again, some firms may have experienced MVR solutions before and could have had a negative experience, such as call degradation.

Moreover, there would be those waiting for MiFID II to take effect in January 2018, not understanding that if they have to renew their current mobile phone contracts at present, they could end up terminating those agreements and face expensive penalties for doing so.

If the appropriate solution is executed, MVR could ensure FCA compliance without disturbing productivity. Conversations would have to be recorded on a mobile device. There would not be any requirement for any special software, call forwarding or local applications.

The most optimal MVR solutions are one that records calls in line, at a network level. This facilitates compatibility with any mobile device, prevents the user from evading the solution and has no impact on IT needs for installation and maintenance.

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The IMF Provides a Poverty Warning to The US

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imf_4The International Monetary Fund issued a warning to the US with regard to poverty and increasing inequality in the nation on June 22nd, 2016. The two issues could impact its economic growth.

The IMF reduced its prospect for the US economic development this year to 2.2% compared to 2.4% estimated at the start of the year.

It mentioned the influence of moderate overall global growth, the reduction in the energy sector because of low oil prices, and a slowdown in domestic consumer expenditure.

Overall, the US economy is in good shape, rising strongly compared to other important developed nations, with unemployment at almost a nine-year low and inflation in control.

The biggest economy in the world has constantly proven its resilience in the face of market volatility, a bolstering dollar, and restrained global demand.

However, it recognized distinct trends that it said would gradually block avenues for future growth if not addressed at the earliest, especially an extremely high-level of poverty for a developed economy and growing inequality.

The IMF alleged a combination of several factors – the ageing of the US population, an increase in the no of people moving into retirement, decrease in productivity, and lack of investment present a new challenge to the US economy.

The IMF said, the progress of inequality and continuation of high poverty would aggravate those trends.

It further observed that 46.7 million people in the US are living in poverty. The share of the working class of all income in the nation has dropped by five percent in 15 years. The size of the middle class is the smallest in the last 30 years.

The divergence in the distribution of income has effectually cut consumer demand by 3.5 percent since 1999. The trend would impair both probable and actual growth.

According to IMF Managing Director Christine Lagarde, “Not only does poverty create significant social strains, it also eats into labor force participation, and undermines the ability to invest in education and improve health outcomes.”

The US must increase expenditure on education and infrastructure, and provide support to the economically weaker sections of the society (taxation reforms, improved social programs, a higher minimum wage) to reverse the trends.

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Gold Surges Post Brexit

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gold-etf_190Gold rose as much as 8% (the highest in over two years) on June 24th, 2016 after the UK provided a shock vote to exit the EU.

The investors were found rushing for protection in bullion and other assets perceived as lower risk. They were purchasing gold as an insurance asset, a hedge against tail risks and increases in volatility.

The anxiety in the market is expected to remain in place this week until the market comprehends the next political moves.

In sterling standings, gold delivered double-digit percentage increases to top 1,000 pounds an ounce for the first time in over three years.

The rate for spot gold peaked at $1,358.20 per ounce. The US gold futures for August delivery moved up by $59.30 to settle at $1,322.40. Shares of gold mining firms also moved higher.

Brexit is extremely beneficial to gold since, in an overall risk-off mode, it’s a logical safe haven for all investors.

Post-Brexit, market experts believe that there is a greater probability that the $1,350-1,360 per ounce level could be breached.

Gold dealers in the UK reported rising demand for coins and bars among retail investors, while stocks were rangebound.

Global stocks headed for one the substantial crashes on record as the vote triggered 8 percent falls for Europe’s biggest exchanges and the greatest drop for sterling.

The sterling was under pressure because of worries among the investors that the Brexit vote would result in similar movements in other European nations.

The Fed was expected to reduce interest rates to help protect the economy from any global fallout. Gold would be supported by the change in the stance to easier monetary policy.

Gold has become very attractive post-Brexit because the interest rates globally have been pushed lower.

At present, deflation is a bigger threat than inflation. Investors would not want to invest in a government bond with a negative interest rate.

The demand for gold always moves up when there are negative interest rates. Again from a political perspective, Brexit could trigger other nations to leave the EU. These uncertainties would contribute to the rise in demand for gold in the future.

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Five Charts to Analyse After Brexit

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logo_brexit_new_size2The historic decision taken by the UK to leave the European Union has triggered a sharp response in the markets.

The pound dropped to its lowest level in over three decades. The impact of the UK’s exit is being felt throughout the global markets.

The below mentioned five charts would provide an indication of the movement of the markets.

Money Markets

A measure of where bank borrowing costs would be in the coming months, known as the FRA/OIS spread, reached the maximum level since 2012.

The Bank of Japan has initiated measures to deliver enough liquidity, including the use of cross-currency swap arrangements. This is to ensure stability in the market.

Increasing Volatility

The Chicago Board Options Exchange’s Volatility Index, which is also known as the VIX measures volatility in the markets. The VIX index and its derivatives are expected to increase following the vote for Brexit.

Foreign Exchange Market

The consequence of Brexit is affecting the foreign exchange markets. Several safe haven currencies are gaining.

The Japanese yen has been the best performer among the major currencies, while the euro has come under severe pressure.

Analysts believe that the franc and the pound are also an excellent measure of the risk of a Brexit.

The Renminbi

The Renminbi is the official currency of China. It has declined to its lowest level in comparison to the US dollar since 2011.

The devaluation of the Renminbi had resulted in a market crash in August 2015. Hence, the markets fear that the weakening of the Renminbi could result in another market turmoil.

An assessment of the volatility of this pair (for a month) indicated by options prices has also increased after the referendum outcomes.

 The Futures and Eurodollars

The real S&P 500 futures contract is dropping after the Brexit vote. The market prospects regarding the direction of the Federal Reserve’s policy rate are measured on the basis of the December 2016 Eurodollar futures contract.

The December 2016 Eurodollar futures contract is progressing, indicating that traders forecast less tightening from the Fed in the US by the end of the year.

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Europe Needs Investments Instead of Budget Rules

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blog-budget-693x425After hesitating for some time, over the failure of Spain and Portugal to conform with Europe’s budget rules, the European Commission arrived at a decision to assess the countries’ excessive borrowing in July.

Experts believe that’s the problem with fiscal rules that are difficult to enforce. Europe requires a comprehensive reform of its unsuccessful fiscal structure, but it does not have the required political resolve and widespread support. Until this changes, it would be difficult to encourage investment.

According to the European rules, budget deficits should not be over 3 percent of national income. At present, Spain has a budget deficit of 5.1%, while Portugal has a budget deficit of 4.4%. Again, nations are required to maintain public debt at no more than 60% of income.

Among the 28 EU members, just three have constantly complied with both rules. At present, nine nations are subject to the provisions of the excessive deficit procedure.

This would result in fines of nearly 0.2 percent of the gross domestic product. Completely revamping the fiscal system needs a change in the thought process. The policy makers must concentrate on the basics of the economy.

They must also establish a restricted form of fiscal union for nations that are members of the euro zone.

The EU must focus on two less fundamental methods. In the first place, boost public investment. It is evident that the net public investment in several EU nations has been low for a long time and particularly since the financial crisis.

Any additional infrastructure investment would generate demand in the short period and increase growth in the long-term.

The EU should also quicken efforts to establish a unified market for capital and equities. This would be the most optimal method to enable the EU to negate economic shocks. This is more effective than the operating fiscal union.

It needs a committed attack on regulatory restrictions to capital flows within the EU, integrated insolvency laws, and other measures.

The EU should focus on investment. The correct public investment would make the EU very popular.

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