short selling (also known as shorting or going short) is the practice of selling assets, usually securities that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender (expecting a bearish market)
short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them
Naked Short selling
Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale.
The transaction generally remains open until the shares are acquired by the seller, or the seller's broker, allowing the trade to be settled. If it is not settled the trade is considered to have “failed to deliver”
Mechanism of short selling..
1.The investor instructs the broker to sell the shares and the proceeds are credited to his broker's account.
2.Upon completion of the sale, the investor has 3 days (in the US) to borrow the shares. If required by law, the investor first ensures that cash or equity is on deposit with his brokerage firm as collateral for the initial short margin requirement
3.The investor may close the position by buying back the shares (called covering). If the price has dropped, he makes a profit. If the stock advanced, he takes a loss.
4.Finally, the investor may return the shares to the lender or stay short indefinitely.
5.At any time, the lender may call for the return of his shares e.g. because he wants to sell them. The borrower must buy shares on the market and return them to the lender (or he must borrow the shares from elsewhere). This is called ‘called away’ This happens when many people short sells a particular security
Wednesday, July 21, 2010
Hedge Accounting
A method of accounting where entries for the ownership of a security and the opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment of a financial instrument's value, known as marking to market. This reduced volatility is done by combining the instrument and the hedge as one entry, which offsets the opposing movements.
Hedge accounting modifies the usual accounting treatment of a hedging instrument and/or a hedged item to enable gains and losses on the hedging instrument to be recognised in the income statement in the same period as offsetting losses and gains on the hedged item. This is a matching concept. A pre-requisite for hedge accounting is that a hedging instrument, normally a derivative, is designated as an offset to changes in the fair value or cash flows of a hedged item.
Why hedging and hedging accounting
1.Most business activity involves risks and uncertainties, and it is necessary of elaborating effective financial strategies in order to manage these risks and uncertainties.
2.One way in which this can be done is to enter into transactions that expose the entity to risk and uncertainty that fully or partially offsets one or more of the entity’s other risks and uncertainties, transactions known as ‘hedges’.
3.The instrument acquired to offset risk or uncertainty is known as ‘hedging instrument’ and the risk or uncertainty hedged is known as ‘hedged item’.
4.When certain criteria are met, International Accounting Standard (IAS) 39 “Financial instruments: Recognition and Measurement” permits entities to apply special accounting treatment, so-called ‘hedge accounting‘.
Types of Hedge Accounting
1.Cash flow Hedging
2.Fair Value Hedging
3.Hedge of a Net Investment
Hedge accounting modifies the usual accounting treatment of a hedging instrument and/or a hedged item to enable gains and losses on the hedging instrument to be recognised in the income statement in the same period as offsetting losses and gains on the hedged item. This is a matching concept. A pre-requisite for hedge accounting is that a hedging instrument, normally a derivative, is designated as an offset to changes in the fair value or cash flows of a hedged item.
Why hedging and hedging accounting
1.Most business activity involves risks and uncertainties, and it is necessary of elaborating effective financial strategies in order to manage these risks and uncertainties.
2.One way in which this can be done is to enter into transactions that expose the entity to risk and uncertainty that fully or partially offsets one or more of the entity’s other risks and uncertainties, transactions known as ‘hedges’.
3.The instrument acquired to offset risk or uncertainty is known as ‘hedging instrument’ and the risk or uncertainty hedged is known as ‘hedged item’.
4.When certain criteria are met, International Accounting Standard (IAS) 39 “Financial instruments: Recognition and Measurement” permits entities to apply special accounting treatment, so-called ‘hedge accounting‘.
Types of Hedge Accounting
1.Cash flow Hedging
2.Fair Value Hedging
3.Hedge of a Net Investment
Electronic Clearing System
Coverage
Bulk payment transaction like periodic payments defined as “User”
The transactions to move from a single User source to a large number of Destination Account Holders
The credit instructions from the User to the Destination Account Holders would be on media (tape/floppy/CD/pen drive) and would form the basis for the Sponsor Bank to debit the User’s account and the Destination Bank branches to credit the beneficiaries' Accounts
Such other payment transactions involving a single debit to a User’s account at one bank and multiple credits to a large number of beneficiaries at many banks to be specified by National Clearing Cell (NCC) / Clearing House (CH) after ascertaining the level of infrastructure available at the Service/Main branches of member banks.
ECS Process Cycle
1.Guidelines for Input Preparation and Input Submission ( User Institution -> Sponsor Bank -> Clearing House) )
2.Record layout of inward data for destination banks ( Clearing House -> Destination Banks)
3.Record layout of return data ( Destination Banks -> Clearing house)
4.Record layout of Final Output Data after return processing (Clearing House -> Sponsor Bank -> User Institution)
Return of processed output
If a Destination Bank branch is not in a position to credit a particular transaction for reasons like “Account closed/transferred”, “No such Accounts”, “Account description does not tally”, etc., it should report the same with a Return Memo . The same would be forwarded to its Service Branch/Main Branch on day-1
Bulk payment transaction like periodic payments defined as “User”
The transactions to move from a single User source to a large number of Destination Account Holders
The credit instructions from the User to the Destination Account Holders would be on media (tape/floppy/CD/pen drive) and would form the basis for the Sponsor Bank to debit the User’s account and the Destination Bank branches to credit the beneficiaries' Accounts
Such other payment transactions involving a single debit to a User’s account at one bank and multiple credits to a large number of beneficiaries at many banks to be specified by National Clearing Cell (NCC) / Clearing House (CH) after ascertaining the level of infrastructure available at the Service/Main branches of member banks.
ECS Process Cycle
1.Guidelines for Input Preparation and Input Submission ( User Institution -> Sponsor Bank -> Clearing House) )
2.Record layout of inward data for destination banks ( Clearing House -> Destination Banks)
3.Record layout of return data ( Destination Banks -> Clearing house)
4.Record layout of Final Output Data after return processing (Clearing House -> Sponsor Bank -> User Institution)
Return of processed output
If a Destination Bank branch is not in a position to credit a particular transaction for reasons like “Account closed/transferred”, “No such Accounts”, “Account description does not tally”, etc., it should report the same with a Return Memo . The same would be forwarded to its Service Branch/Main Branch on day-1
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