Star Funds Case Study

Evaluate the terms of the proposed $900 million financing from the perspective of both parties. How would you calculate the return to investors in this transaction? If you need more information, what information do you need?

the stock is a put option on the firm's assets, and risky projects increase the exercise price of the option.

The company’s existing portfolio has high risk options. They have been funding companies that requires huge amount of capital which increases the company’s risk. Also it was mentioned in the case that firm is experiencing a “Resource Problem”. Members of investment firm had been part of inner

When risk is dispersed, it can be shared amongst investors who are better suited to absorb losses. Greenbaum and Thankor (1987) argue that securitisation does not always lead to credit risk diversification but instead, promotes the retention of risky loans. Likewise, by making illiquid loans liquid, securitisation could enhance the risk appetite of banks (Calem and Lacour, 2003). Therefore, banks at the time of the financial crisis may not have been making adequate financial decisions about investments and securities.

By achieving “bankruptcy remoteness”, firms commit to more efficient investment decisions in bankruptcy (Ayotte & Gaon, 2010). In addition, this practice together with other credit enhancement mechanisms, generally allow the new securities issued to obtain higher ratings from credit agencies – including risk free levels. A number of studies have concluded that securitization has various positive implications. For instance, some empirical studies show that securitization creates value by increasing liquidity, reducing credit and improving leverage ratios (Amrose, Lacour-Little, & Sanders, 2005). According to Riddiough (2011), and it can alleviate market failure, and increase competition and borrower choice. In their study, Altunbas et al (2009) show how banks’ capacity to supply new loans has been strengthened by the securitization activity. In addition, another advantage of securing assets is that funding costs can be reduced because the securities issued can match better the risk return preferences of investors (Aiyar et al,

Counterparty risk is the risk that the person or institution who enter a financial contract or who is a counterparty to the related contract. The contract maybe will default on the obligation and also fail to fulfil that side of the contractual agreement. In other words, counterparty risk consider as a type of credit risk. Counterparty risk is the greatest in contracts drawn up directly between two parties and least in contracts when an intermediary acts as counterparty. Counterparty risk usually related to an institution which facing creditworthiness. In this context, the financial system that include banks, broker dealers and non-banking institutions will face counterparty risk. Counterparty risk will be a cumulative loss to the financial system from a counterparty that fails to deliver on its over the counter derivative obligation. For the example, in listed derivatives market, the industry’s or the exchange clearing house was a counterparty

that together managed some $20 billion, High Grade Structured Credit Strategies Enhanced Leverage Fund and High Grade Structured Credit Strategies Fund, found themselves on the losing side of their subprime bets (Made in the form of investments in CDOs)., consists of complex derivatives backed by mortgages The first one is three years old, and had 40 consecutive months without a loss., but as the housing market began to stutter in late 2006 suffered returns. It has been collected in this fund 35 times the money invested

In this report, we intend to observe, select, and critically analyze five mutual funds and produce an optimally risky portfolio. After thorough evaluation, we agreed upon the following mutual funds; Vanguard PRIMECAP Fund (VPMCX), Harbor Small Cap Value Fund (HASCX), Vanguard Tax-Managed Capital Appreciation Fund (VTCIX), Victory RS Small Cap Growth Fund (RSYEX), and Allianz GI NFJ Mid-Cap Value Fund (PQNCX). We selected these particular funds due to historical performance and future growth potential. We used the Standard and Poor’s 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) as our benchmarks to evaluate and determine performance and returns. We selected these mutual fund styles based on the Morningstar’s Style Box,

The default dilemma. The uncertain recourse upon default severely undermines the altruistic aspect of non-interest lending. Collecting defaulted funds can prove to be time-consuming and difficult for creditors, as there exists an industry built upon the evasion of creditors. The stifling of funds to lend, due to the default risk, could be circumvented in real estate transactions by securing the loans against real estate. Loan terms, such as lower loan-to-value ratios, could help further protect the lenders, in the event of default, with market price shifting.

Generally, individuals and non-banking institutions are able to be the dealer which may cause default

Prior to the intensification of the financial crisis in October 2008, covered bonds were a key source of funding for euro area banks. The market had grown to over €2.4 trillion by the end of 2008, compared with about €1.5 trillion in 2003 (ECBC, 2009). The lack of credit risk transfer with covered bonds is an important distinction with this asset class compared with, for example, asset-backed securities (ABS) and other securities that were subject to securitization. This may well explain the resilience of the covered bond market at the initial stage of the crisis in August 2007. (Biswas, 2010) Investors’ affinity for covered bonds can be explained by their relative safety compared with any non-securitized asset class. In relation to covered bonds, a pool of collateral backs the credit risk of the issuer, which is usually of high quality. Despite this, however, the covered bond market was not totally immune to the effects of the crisis. Up to the intensification of the crisis following the collapse of Lehman Brothers in mid-September 2008, it was clear that the covered bond market had outperformed other wholesale funding instruments. The widening of spreads was much less substantial for covered bonds than other ABS and unsecured debt. (Biswas, 2010) Graph 1 backs up this argument that the widening of spreads was less significant for covered bonds as

The financial services industry is highly competitive and constantly evolving. Not long ago, terms such as collateralized debt obligations, credit default swaps, and synthetic collateralized debt obligations would seem like a strange foreign language. But today, they have risen to become an increasingly larger share of our industry. It’s no secret that these types of financial instruments played a significant role in the financial crisis of 2008-2009. However, they are a necessary evil and must be part of any viable growth strategies in the financial services world. We must take similar risks in order to maximize our profits. That’s

Today, an increasing number of risky bond options have been introduced to customers, but only a few customers can understand how to price a risky bond option. The credit derivative is a new type of financial derivative which is based on the credit condition of the loan developed in the 1990s, and its function is to separate the credit risk from other risks of the primary assets and transfer it to the counterparty. Also, credit derivatives can make credit risk appear in a more fluid and tradable form, which has a great application in improving the portfolio of returns and presenting a highly structured risk portfolio. Meanwhile, credit derivatives can be used in the investment market Avoid risks, and thus mobilize the credit market activity.

Poor borrowers cannot provide collateral to lending institutions and even when it is available, legal obstacles often prevent repossessing collateral when borrowers default. (Ghatak, 1999).

In 2015, Indian Mutual Fund Industry has seen a fastest growth in terms of resource mobilisation i.e. 13.5 percent as compared to previous year. The net inflow during 2013-14 was ₹ 53,782 crore, which increased in 2014-15 to 92% i.e. ₹ 1,03,287 crore. The reason for such growth in Indian mutual fund industry is due to positive outlook and well-timed reforms initiated by SEBI.