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

Add or drop analysis, Add or Drop Analysis Lakespring Retirement Village is...

Add or Drop Analysis Lakespring Retirement Village is home to senior citizens who are fairly independent but need assistance with basic health care and occasional meals. Jill Thomp

Determining the appropriate rates in valuation process, After estimat...

After estimating the cash flows, the next step is to determine the appropriate interest rate that should be used to discount the cash flows. The minimum return re

Calculate the new interest rate and excel function pv, Continuing growth of...

Continuing growth of the company has required that we issue the company''s corporate debt soon. As you know, in 6 months we plan to issue $10 million worth of 20-year corporate bon

What are the drawbacks of the payback, The drawbacks of the payback approac...

The drawbacks of the payback approach are as follows - Payback ignores the overall profitability of a project by ignoring post payback cash flows. In the illustration above the

What is the required rate of return on the project, The risk free rate is 1...

The risk free rate is 10 percent and the expected return on the market portfolio is 14 percent. A firm considers a project that is expected to have a beta of 1.3, whereas the beta

Define the term- future cost and historical cost, Define the term- Future C...

Define the term- Future Cost and Historical Cost Future cost of capital refers to expected cost of funds to be raised to finance a project. In contrast, historical cost signifi

Asset-backed securities, Introduction When financial assets...

Introduction When financial assets or bonds are pooled together and offered to the investors for receiving the inflow of funds from these underlying

Operating cycles, use the operating cycle to formulate a broiler business

use the operating cycle to formulate a broiler business

Federal agency securities, Federal Agency Securities are those securi...

Federal Agency Securities are those securities issued by federally related institutions and those issued by Government-Sponsored Enterprises (GSE). Securities iss

Definition of financial leverage, Q. Definition of financial leverage? ...

Q. Definition of financial leverage? One of the goals of planning an appropriate capital structure is to maximize the return on equity shareholders fund or else maximize the ea

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