Benefits Of Using Cds Used For Hedging Purposes

Despite those enormous advantages, it has been argued that IFRSS adoption lead to significant costs. The main argument is that IFRSs do not consider local needs and priorities as every country has their own ‘business environment, legal systems, cultures, language and political environment’ (Henderson and Peirson, 2000 cited from Malthus, S., 2004). However, to overcome this problem, IASB can accommodate flexible reporting standards that enable companies to choose alternatives that are more suitable for their external condition. It is opinion of some opponents of IFRS adoption that IAS is ‘insufficiently detailed’ (Uddin,M.S., 2005, p.4) that require accountants’ and auditor’ professional judgment. However, overly detail might be contra productive and not flexible in anticipating every changes and differences.

As the responsibilities of the global harmonization of accounting standards IFRS and GAAP transfer to IASB, FASB’s influence is waning. Advantages of the convergence include high quality financial reporting, which lowers cost of capital for investors and the cost of borrowing for companies. However, there are disadvantages to be noted, such as the costs of introducing IFRS to current and potential accountants and the risk of reducing the uniformity of financial reports due to the lax rulings of IFRS, which promotes earnings management amongst companies. Although arguments regarding the convergence remain prevalent, the completion of IFRS and GAAP is inevitable. Come year 2015, accountants, investors, and companies alike will discover whether or not the pros outweighed the cons; or vice versa.

CDs require a minimum amount of money to invest. CDs are safe ways to save money but it is hard to get the money out. Bank will charge a fee if money is taken out early. Generally ranges from

UK’s IFRSs are designed to make it easier to compare the performance of organizations in different countries, rather than each country maintaining its own GAAP, which makes such comparisons difficult. All listed EU companies have been required to use IFRSs since 2005. The adoption of IFRSs by the private sector is expected to have various benefits for both companies and investors; including (1) UK’s IFRSs will remove the need for companies with foreign subsidiaries to translate the accounts for consolidation with the parent company accounts. Also (2) it will be easier for investors to make informed decisions about the performance of companies in different countries because of the increased transparency and a better understanding of financial statements.

SFAC No. 8 addresses the cost constraint on useful financial reporting, “Cost is a pervasive constraint that standard setters, as well as providers and users of financial information, should keep in mind when considering the benefits of a financial reporting requirement.” (SFAC No. 8 BC 3.47) However, the ability to place a dollar value and fully enumerate a cost or benefit is almost an impossible task for standard-setters. Additionally, there is no way to successfully identify and measure all of the economic consequences associated with a new standard. The FASB should be applauded though for advancing uniformity in accounting standards, however; uniform financial reporting suggests a one size fits all approach. “Smaller, non-publicly listed firms (and their auditors) argue that accounting standards are formulated mainly for larger, publicly traded firms” and that “compliance costs are disproportionately higher and the

CDSs are used as an insurance against the possibility that the borrower could not repay his or her loan. In such case the issuer has to pay a specified sum to the buyer. Of course they are sold for a premium and if no credit events occur, the issuer makes profit. After the subprime mortgage crisis began, and many borrowers started defaulting on their loans, the pressure on the companies that had issued CDSs was rising. There were companies that simply did not have enough money to repay everything they owed. A famous example is AIG. The subprime mortgage crisis and the bankruptcy of big financial companies, like Lehman Brothers, meant that AIG had to pay much more money that it expected and made the company insolvent. The company itself had AAA rating shortly before this. This made the investors confident that even their high-rating investments failed, the insurer would certainly be able to repay them. A bailout from the US government followed. Generally, the issuers of these instruments can be held accountable for issuing them, without the ability to pay what they had to, when the credit events occurred. Of course many of them were mislead by the credit rating agencies and the overall conviction in the market that it was not as risky as it actually was. Many people argue that such instruments need to be regulated much better. They can create clear conflict of interests. For example, a

Cds can be issued to people, enterprises, trusts, assets and affiliations. NRIs can likewise subscribe to CDs, yet on non-repairable premise as it were. In auxiliary market such CDs can't be embraced to another NRI. They are issued at a rebate rate openly dictated by the backer and the market/financial specialists. Compact discs are issued in divisions of Rs.1 Lac and in the products of Rs. 1 Lac from that point. Advances can't be allowed against CDs and Banks/FIs can't purchase back their own CDs before development.

A CDO is created when mortgage loans are grouped together, divided by risk, and sold to investors from the banks that hold them. The banks, when doing so, pass the risk of a loan defaulting onto the investor. However, they do not make as much money on the loan, as the investor has to make their profit as well (Kiviat 30). These CDO’s initially appeared as a sound investment, but when the demand for CDO’s exceeded supply for investment, artificial CDOs were created by dividing up other CDOs. This allowed people to be deceitful of the quality of their investments. Investments are rated on a scale from AAA to A and BBB to B, with AAA being the least risky, and B being the most. What these artificial CDOs did was carefully chop up grade BBB or even grade BB legitimate CDOs and repackaged as AAA investments even though they contained things like subprime mortgages and no documentation loans in the mix (Kiviat 30). Because some holding groups invested heavily in CDOs, losses in the subprime market caused hedge funds to become nearly worthless. One of the hardest hit companies was BearStearns, who had two hedge funds go from over $1.5 billion to practically nothing (Kiviat 30).The artificial CDOs created by greed on Wall St. has also caused international banks, like BNP Paribas SA, France’s biggest bank to freeze funds because the bank couldn’t “ ‘fairly’ value their holdings after

US Bank Corporation (USB) is a commercial bank which offers customers checking accounts, savings accounts, and time services contracts. The bank trades in financial securities but its main source of revenue is various types of loans. These loans range from residential and commercial real estate loans, industry loans, and other individual loans. In this analysis the overall strength of US Bank will be evaluated and will be compared with two similar financial institutions. The two institutions chosen for comparison are Wells Fargo (WFC) and Bank of America (BAC). To evaluate the overall strength the major

The CDS should be used in order to achieve quality and safety improvements. The CDS is important in providing

In addition, there was another ticking time bomb in the financial system with the world 's largest insurance company that was selling huge quantities of derivatives called Credit Default Swaps (CDS). For investors who owned CDOs Credit Default Swaps worked like an insurance policy. An investor who purchased an CDS paid AIG accordingly a premium. If the CDO failed, AIG promised the investors to pay them for their losses. However, unlike regular insurance, speculators could also

The country selected for this study is the United Kingdom (UK). UK Generally Accepted Accounting Practice (GAAP) has been in place for a long period of time and was harmonized in 2005 so as to comply with the international accounting standards. The UK embraced the principles of the International Financial Reporting Standards (IFRS) in 2005 after the European Union (EU) mandated that all members that were publicly listed companies be subject to reporting under the International Accounting Standards (IAS). This was to help facilitate that those listed companies could easily be compared to onr other on their performance and transparency was improved since they were now subject to the same principles of reporting. Companies in the United

With complete notion and awareness of how each country has their set of rules, “the goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements” (Rouse, 2011). This view is meant to provide general guidelines, as well as international comparisons through conventional and edifying means. To bring broader and vivid objectives, IFRS replaced IAS, the older standards, in order to bring a more comprehensive and simplified accounting procedures.

The CDS does not require buyers to actually hold underlying assets. That means a third party can “insure” against default risk that it would not bear the consequence at the first place. A financial institution can act like an insurance company by selling CDSs. American International Group (AIG) was the largest CDS underwriter during the crisis. AIG issued tons of CDSs because historical default rate on bonds were so low that issuing CDS became a cash generator. They simply collected the premium and never though of paying out anything until the crisis hit.

Drawing upon the existing literature in derivatives use, CDS use is modeled as a function of CEOs risk-taking incentives generated by stock options compensation (vega) and the following control variables: growth opportunities, financial distress (leverage), firm focus (diversification), managers risk aversion, delta, bank size, and other derivatives.