Sources and Applications of Funds Used to Classify Financial Institutions and Services Offered
The overall scandal was mainly identified in 1995, where the losses of Barings organisation amounted to 827 million GBP. Nick leeson the prodigy of Barings organisation mainly increased the overall losses in futures market by making wrong bets at the wrong time. Nick leeson mainly used fake account number of ‘88888’ for transferring all the losses, which helped in hiding the losses from Barings organisation. Nick leeson mainly lost around 208 million GBP of the Barings organisation fund from 1992 to 1994 by taking risky investments bet in futures market (nickleeson.com 2017). During the 1995, Nick leeson was long in futures of Nikki and JGP, when suddenly an earthquake in Japan shaking the overall country. An earthquake mainly decline Nikki futures 1000 points, which resulted in a massive loss incurred by Nick leeson. For covering up the losses, Nick leeson bet on more futures just for the thought of gaining from the rising Japan market, which never came. The fabricated gains produced by Nick leeson was busted after use losses incurred by the Barings futures, which resulted in liquidation of the bank (nickleeson.com 2017).
Futures contract could be defined as a legal binding, which is between two parties who opt for selling or buying a particular commodity at a given price and date. Companies to reduce any kind of risk, which might arise from volatile capital market, mainly conduct future contracts (Butler, 2016). The basic principle of future trading are depicted as follows.
- With the help of future contract management are able to hedge their position and reduce any kind of risk that might be conveyed from volatile capital market.
- Future contracts are priced according to the physical market, where if the actual prices of the commodity fall it is directly reflected on the overall future contract prices.
- Relative examples could be followed for identifying the risk perspective, where prices of silver increases with physical market and future contract value of silver declines. Therefore, it allows investors to effectively hedge for the rising prices in physical market (Feng, Ming & CHANG, 2016).
Relevant rules for setting with risk management strategies could be identified, where investors for freezing the current prices of a commodity mainly uses futures contract. This mainly allows investors to reduce the negative impact of rising prices for a commodity. Investor mainly uses the future contracts to lock the prices of a commodity, which could be bought in near future. However, investors also use the future contract to freeze the interest rate risk, which might arise during the augmentation of a corporate Bond. For example, if a company intends to issue bonds in later date, they need to hedge against interest risk rate, which might decrease the overall borrowed amount from the bond listing. The company needs to sell future contracts that cover interest rate risk exposure, which might effectively help in reducing the negative impact from changing risk rates (Schwager, & Etzkorn, 2017).
Nick leeson did not use any adequate risk measures which food has its position in the Nikkei futures and JGP futures. Therefore, Nick leeson was not able to accommodate the changing prices of futures market. Moreover, the risk management could have helped Nick leeson to effectively hedge against the earthquake in Japan and reduce its risk from investment (Ayankoya, Calitz & Greyling, 2016).
Future contract are mainly conducted with the help of electronic measures used by different types of exchanges. The following could be identified, as the procedure for buying futures contract.
- Futures contract are mainly traded from Exchange with the help of relevant brokers and regulatory authorities.
- The investors buying futures contract mainly places the order to buy and sell with its broker
- The exchange effectively uses electronic devices for comparing all the relevant trades conducted in the market. This mainly helps in identifying the relevant buyers and sellers in a particular commodity. This helps the exchange to deliver irrelevant prices and volatility in the futures market (Bick, 2016).
- Clearinghouses are also used in the futures market for smoothing the whole process and effectively conducting relevant future trades.
There are several implications, which needs to be followed by individual who are long or short in futures trade. Therefore, it could be identified that investors need to maintain different types of implications according to the exposure in the market (Filipovic & Trolle, 2016). These implications are mainly depicted as follows.
- Investors that have long positions needs to buy the relevant commodity at the end of the tenure
- Moreover, investors that have short position needs to sell the relevant commodity at the end of the tenure.
- Both long and short position traders Needs to maintain margin calls, which are provided to the exchange. This minimum maintenance margin call needs to be kept by the investor with the adequate exchange for effectively continuing with the future trades.
- The investors having long position are exposed to the overall losses if the future prices decline, whereas investors having short position are exposed to the overall losses if future prices rise (Srinivasan & Babu, 2017).
Value of Financial Institutions’ Securities Used in Financial Decisions
There are different types of measures that could be used by investors in closing out from future trades before the delivery date. These measures are depicted as follow. Investors mainly use opposite futures contract effectively to opt out of from the exposure made on certain commodity. The futures contract could be nullified if the investor takes an option contract on the same expiry date and volume. Similarly, in case of short positions investors could effectively take up long positions before the actual delivery the future contract. This could mainly help in nullifying the obligation of investors to provide the actual commodity in futures market. Investors mainly use this strategy to speculate the commodity and futures market, while gaining from momentum. The use of example could effectively help depicting the overall situation. If an investor takes long position in the commodity market without intention of purchasing the actual commodity at the end of their tenure, he mainly needs to take up short position before delivery of the commodity. This mainly allows the investor to speculate the futures market without actually taking delivery of any commodity or stock (Chen, Song, & Zhang, 2016).
Being a Prodigy Barings Bank, Nick leeson was provided with undue trust and power to conduct operations in the Singapore branch. Management was partially responsible for overall scandal that was developed by Nick leeson. The main fault rose from the reduced control all the managers on the operations of Singapore branch. In addition, the management also failed in producing any kind of audit from an independent risk management unit, which could evaluate activities of Nick leeson in Singapore. This reduced control over the activities of Nick leeson main result in the largest fraud during 1990s. Barings Bank management was not involved in all the activities for the bank, which instigated the unethical activities conducted by Nick leeson (Yoon, J., Yildiz & Talluri, 2016). According to Nick leeson, the bank mainly focuses in obtaining profits from the trading activities, which resulted in risky trades that was taken by Nick leeson. In addition, the overall accounts maintained by the Barings bank was also not evaluated by the management, as Nick leeson used account number ‘88888’ to hide maximum of its losses from derivative market. If the management had effectively conducted its review and check on Singapore branch it could have identified losses much before 1995. Therefore, management could also be partially held responsible for revaluation of different branches in the bank (nickleeson.com 2017).
The overall situation involving company’s activities, which might stop due to an unexpected event, is mainly known as risk. The different natures of risk, which is value added by the organisation to effectively conduct its operations. Organisations mainly have financial as well as operational risk, which might hamper continuity of the business. The control over identified risk mainly help I live in concert effectively continue with its business operations. Financial risk is mainly identified as the overall asset, liability and cash risk, which might incur by the company. Moreover, operational risk mainly arises from all activities conducted by an organisation (Wook et al., 2016).
Performance Analysis of Financial Institutions
The main purpose of risk management best to help organisation identified different types of risk associated with the operations. In addition, it also helps in pinpointing the risk outcomes, which might be disastrous for the company. Moreover, the use of risk management effectively helps in reducing both financial and operational risk that might have the activities of the company. Lastly, the use of risk management allows organisation to effectively identify, measure and manage risk of an organisation (Meyer, Characklis & Brown, 2017).
The risk management objectives are mainly drafted or prepared by the authorities and regulatory bodies of an organisation. Moreover, the board of directors are solely responsible for drafting the documentation of relevant risk, which might hamper operations of the business. In addition, the documentation mainly holds all the relevant risk objectives, which might incur during business operations. Completion of the documentation is many conducted by directors where adequate risk factors are listed in the management policies. The listing of risk factors in management policy mainly helps in focusing different types of risk management measures, which could mitigate the identified risks (Cundy et al., 2016). However, executive officers and executive management is solely responsible for drafting the risk management procedures, and strategies that would help in reducing the negative impact form identified risk. Furthermore, the directors are also responsible for developing the procedures and strategies that needs to be used at the time of facing certain risks. The developed constrains me help the management to achieve organisational goals and minimise the risk from operations.
After analysing the case of Nick leeson, lack of relevant risk measures adopted by him could be identified, this resulted in the huge losses in futures market. Nick leeson was mainly not able to comprehend and adapt to the changing risks from the investment Nikkei and JGP futures. Instead, for covering his losses in 1995 due to an earthquake in Japan, he bought more futures of Nikkei and JGP in hopes of sudden recovery of the Japanese market. Nick leeson mainly made wrong bets and and did not use adequate risk measurement tools which could have helped in identifying, managing and measuring the risk involved in investment (Dieperink et al., 2016).
Therefore, after analysing case of Nick leeson, it is essential for an investor to identify all the relevant risk associated from an investment before initiation of the contract. This identification could eventually help investor to calculate the minimum risk and the maximum return, which might be portrayed from an investment. This identification of the overall measures used by investors could eventually help in mitigating risk from investment and help them know when to opt out from a contract after taking the losses (Hall & Frazier, 2016).
The main function of capital is to provide adequate stability in organisation effectively conductive operations in a competitive environment. The capital also helps in supporting activities of the business regardless of the losses incurred by the company in the fiscal year. The maintenance of adequate capital allows investors effectively conduct investment bets, which could you please return from investments. However in case of Nick leeson, capital played a major function, is increasing losses incurred by him mainly reduce the capital of Barings bank. This reduction in capital mainly led to the liquidation of Barings Bank in 1995, as it was not able to pay 827 million GBP. Therefore, it is essential for investors to hold adequate capital for supporting its investment activities. The lack of sufficient capital mainly opted Lesson out from its future contracts and build huge amount of losses incurred from investment (Bishu, O’Reilly, Lahiff & Steiner, 2016).
Impact of Monetary and Fiscal Policies on Financial Institution Operations
Credit risk is mainly states the default on debt, which might arise if the borrower fails to provide relevant payments that was instigated before borrowing. The minimum Capital requirement that needs to be held by Basel II capital accord is depicted as follows.
- According to the Prudential standard a financial institution mainly needs to maintain a nominal capital ratio of 8% at all time (Burchi & Martelli, 2016).
- Moreover, half of the rest based capital ratio must be taken from Tier 1 capital and the remainder should be taken from the Tier 2 capital upper and lower circuit.
- Regulatory body mainly needs institution to maintain risk weighted assets, where the capital ratio of 8% must be maintained, which might help in depicting its financial stability.
The evaluation of above figure mainly helps in depicting the minimum Capital requirement under Basel III and Basel II, which could be used by banks effectively create their lending options. It can be seen that under Basel II all the relevant measures needed low requirement, where is under Basel III all the requirements have been increased for minimum capital requirements (Samanta & Chakraborty, 2016). There was no advantage ratio identified in Basel II where is in Basel III leverage ratio of 3% must be maintained by the banks. All the other activities like counter cycle buffer and capital conservative buffers in Basel III for effectively improving the requirement of minimum capital.
Reference:
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