Payday loan consultants

Asset sales

admin — Thu, 17 Dec 2009 09:52:49 +0000

The lending bank may impose restrictions on the company’s right to dispose of assets, even if these are not explicitly pledged as collateral. The objective of this covenant is to prevent the company from disposing of its highest quality assets at a discount to their underlying value. Interest cover. The bank may require the company to maintain a minimum specified level of operating cashflow to interest payments.
In the event of any of these covenants being broken the bank has the right to force the company to take corrective action or risk the bank calling in the loan. If the company cannot repay the loan promptly the bank may take legal action against the borrower and act to foreclose on the pledged collateral.
Most legal agreements between banks and counterparties also include a “force majeure” clause. This is a clause that the bank can invoke in the event of a change in the regulatory environment or a specified external event beyond their control. Legal and regulatory changes, the imposition of capital controls or the outbreak of war are examples of the sort of events that would allow a bank to invoke this clause. The clause absolves the bank of responsibility for any losses or other adverse effects experienced by the customer.

CREDIT DERIVATIVES

admin — Tue, 15 Dec 2009 09:51:09 +0000

Credit derivatives are a relatively recent development and are only available in the more developed financial markets and then only for specific companies. They provide insurance policies that banks can buy to shield themselves from some losses arising from loan default. They are contracts between two parties where the seller of the credit derivative agrees to pay the buyer of the contract a pre-agreed amount when a specific condition or set of conditions is met. The sellers of these policies are usually insurance companies or SPVs (special purpose vehicles) set up by insurance companies.

Option statistics

admin — Thu, 10 Dec 2009 09:47:44 +0000

Option statistics are published daily in the pages of the finacial press. On June 30, for example, the August 380 calls with less than 2 weeks until expiry closed at $3.90; the September 380s with 6 weeks until expiry closed at $10.20, while the October 380s with 11 weeks to expiry closed at $12.80.
Note particularly the row entry starting with the strike price of 380. Since the August future has closed at 379.1, the August 380 option is trading very close to the money. Put and call options trading close to the money will command very similar prices. Indeed, when a future trades exactly at a strike price, the puts and calls at that strike must trade at exactly equal prices. Precisely why this equality has to prevail will be illustrated in the next series of posts.
Option values also increase with increasing market volatility. As of June 30, 1993, the gold market was the most volatile it had been in a year, the futures having risen $60.00 in less than 3 months. At that time, the 5-week at-the-money option was trading at $10.00. In early 1993, with gold in the doldrums, a similar 5-week option was trading at less than half this amount.
Option values are ultimately determined by the free interplay of supply and demand in the marketplace. A number of advisory services claim to be able to identify overvalued and undervalued option prices. If an option were obviously undervalued, it would obviously be worth buying, and buyers would quickly force the price up into some kind of equilibrium with other options having similar risk-reward characteristics. Similarly, if an option were obviously overvalued, it would clearly attract a lot of option writers on purely technical grounds. In practice, things are never that clear.

Time and demand elasticity

admin — Mon, 07 Dec 2009 09:59:22 +0000

As changing market conditions raise or lower the price of a product, both consumers and producers will respond. However, the response will not be instantaneous, and it is likely to become larger over time. In general, when the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run. Thus, the demand for most products will be more elastic in the long run than in the short run. This relationship between elasticity and the length of the adjustment period is sometimes referred to as the second law of demand.
The first law of demand says that buyers will respond predictably to a price change, purchasing more when the price is lower than when the price is higher, if other things remain the same. The second law of demand says that the response of buyers will be greater after they have had time to adjust more fully to a price change.

Futures prices

admin — Sat, 05 Dec 2009 09:49:52 +0000

There is considerable debate among market theoreticians on whether futures prices are random long-term. Fortunately, this debate is not relevant to the analysis of option prices. An option reacts as if the price of its underlying commodity future were a random variable and is not concerned with the direction of the futures market. Recent price direction in a commodity future, then, is irrelevant to the pricing of its options. The size of recent daily price fluctuations in a commodity future, however, is the single most important variable in the pricing of its options.
The value that the free market places on an option is an indication of the price the market expects the commodity future to be trading at the instant the option expires. Even though the most likely outcome is always that the futures price will not have changed at all by the time the option expires, the option market recognizes that there is a range of possibilities for the price of the future, a range of possibilities distributed more or less symmetrically about the unchanged level. Other things being equal, larger expected ranges will result in larger option premiums.
Two variables directly affect the range of possibilities for the price of a future at option expiry. One is the future’s perceived volatility- determined mostly by price patterns of the recent past. The other is time. A commodity future which has been fluctuating a lot in price is more likely to end up with a large cumulative change in price than a commodity future which has been trading in a relatively tight range. And a future with many trading days left till expiry clearly has more opportunity to arrive at an extreme price than one with just a few trading days left.
If daily commodity price changes were true random variables, normally distributed and with mean values of zero, determining the fair value of any commodity option, mathematically, would be possible. Indeed, a massive amount of academic firepower has been directed toward achieving this very goal, on the assumption that futures price changes are normally distributed. The fact that commodity price changes form distributions that are significantly nonnormal renders a great deal of current academic research into option pricing essentially useless, Nobel prizes in economics notwithstanding.

Debt–equity level

admin — Tue, 01 Dec 2009 09:46:42 +0000

The bank may impose a limit on the company’s net-debt-to-equity ratio. The objective of such a covenant is to prevent the company from taking on more debt by borrowing from another bank or issuing bonds or commercial paper. Any such action would result in a reduction in the company’s ability to service its borrowing.

Inventory

admin — Tue, 24 Nov 2009 09:45:33 +0000

For a small manufacturer of furniture the inventory will consist of raw material (wood, cloth, screws, glue etc.), semi-finished items (table tops, cupboard doors etc.) and a proportion of finished items that have not yet been dispatched.
As a going concern the accounts reflect the historic costs of these materials, including labor expended, and not their market value. In the event of liquidation, however, the price that the bank would obtain from a sale of these assets is likely to be well below that of their actual cost and book value.
When the inventory is technology based and there is a sudden build-up of inventory the value of the inventory is likely to fall rapidly as a result of obsolescence. Most manufacturers of Internet infrastructure equipment failed to forecast the sharp fall in demand that took place when the technology boom of the 1990s came to its abrupt halt. These companies were forced to write down the value of the subsequent inventory build-up and one major US company alone wrote off more than $3bn in one quarter.

Accounts receivables

admin — Tue, 17 Nov 2009 09:44:32 +0000

Accounts receivables represent the money due from customers for products or services delivered that have been invoiced but where payment has not yet been received. The composition of accounts receivables is the key factor in terms of its value as collateral. Accounts receivables at a utility company with hundreds of thousands of customers would be regarded as high quality. Historic default rates can be used to establish the likely level of future losses to a high level of confidence. Banks would also probably accept accounts receivables at companies that had only a handful of investment grade customers.
Banks are generally reluctant to accept accounts receivables as collateral from many companies, however.

A back-to-back deposit

admin — Thu, 12 Nov 2009 09:43:44 +0000

In addition to margin loans there are two occasions when a borrower may both draw down a loan and make an agreed deposit with the bank. Tax can provide an incentive where the interest expense on the loan is in a tax regime that allows it as a taxable expense while the interest income from the deposit is earned in a tax haven where it is not taxed.
A company that has highly seasonal cashflows may find itself in a situation where for parts of the year it is cash rich but for other parts of the year it needs external funding. One solution to this financing problem would be for the bank to agree a facility under which the borrower has the right, but not the obligation, to draw down against it up to a specified limit without notice. Another solution is for the bank to make an equivalent loan for the whole cycle but require the customer to deposit its periodical surplus cash with the bank. The bank may be able to offer better pricing for the second solution.

Time cost and consumer choice

admin — Thu, 05 Nov 2009 09:43:16 +0000

You may have heard the saying that “time is money.” It is certainly true that time has value and that this value can sometimes be measured in dollars. As we have learned, the monetary price of a good is not always a complete measure of its cost to the consumer. Consuming most goods requires not only money, but time as well; and time, like money, is scarce to the consumer. So a lower time cost, like a lower money price, will make a product more attractive. For example, patients in a dentist’s office would prefer a shorter wait before receiving care. One study showed that dental patients are willing to pay more than $5 per minute saved to shorten their time spent in waiting rooms.6 Similarly, commodities such as automatic dishwashers, prepared foods, air travel, and taxi service are demanded mainly for the time savings they offer. People are often willing to pay relatively high money prices for goods that help them save time.
Time costs, unlike money prices for goods, differ among individuals. They are higher for persons with higher wage rates, for example. Other things being equal, high-wage consumers choose fewer time-intensive (and more time-saving) commodities than people with lower time costs and wages. For example, high-wage consumers are overrepresented among airplane and taxicab passengers but underrepresented among television watchers, chess players, and long-distance bus travelers. Can you explain why? You can, if you understand how both money and time costs influence the choices of consumers.
Failure to account for time costs can lead to bad decisions. For example, which is cheaper for consumers: (1) waiting in line three hours to purchase a $25 concert ticket or (2)buying the same ticket for $40 without standing in line? A consumer whose time is worth more than $5 per hour will find that $40 without the wait in line is less costly. As you can see, time costs matter. For example, when government-imposed price ceilings create shortages, rationing by waiting in line is frequently used. For many consumers, the benefit of the lower price due to the ceiling will be largely, if not entirely, offset by their increased time cost of having to wait in line.