CHAPTER 5 (Type of international risk (Operational Risk ( Is the risk…
Credit derivatives -Designed to transfers credit risk on portfolio of bank loans from bank to non bank (insurance companies)
- Credit Default option - Is an option to buy protection or sell protection as a credit default swap on a specific reference credit with a specific maturity
Credit Default Swap (CDS)
- Is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of loan default.
- In the event of the default, the buyer of the CDS receives compensate usually at the face value of the loan and the seller of the CDS takes possession of the defaulted loan
- CDS Buyer ( bank) , CDS Borrrower (who make default) , CDS Seller ( who give credit to borrower )
Credit Forward Agreement (CFA)
- CFA hedges against an increase in default risk on loan or decline in credit quality of a borrower after the loan rate is determined and the loan has been issued
- CFA specifies a credit spread
Credit Securitizations - Involves process of transforming the invidual loans into assets that may be buy by the investors in order to reduce the bank exposure to individual financial risks
Risk Defined as the chance that an investment's actual return will be different than expected which includes the possibility of losing some or all of the original investment.
Anti Money Laundering (AMLA)
- Definition: A process of transforming profits earned from a criminal or illegal activity into legal profits
- 3stages of money laundering
- 1) Placement - The first stage which placement the currency into a banking and financial institutions example commercial bank, brokerage house and investment bank , offshore bank
- 2) Layering - The movement of funds from instruction to another in order to disguise the original source and ownership of the funds.
- 3) Integration - The time when the funds having been laundered are reinvested into a legitimate business
- The prevention measure of AMLA
- Develop a customers acceptance policy & procedures
- Conduct customers due diligence
- Keep all records and documents of transactions at least 6 years
- Promptly submit suspicious transaction report to the Financial Intelligenece Unit in Central Bank