ba finance domain - tutorials

8/13/2019 BA Finance Domain - Tutorials

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Firsttime homebuyer: A person having no claim on the main home at least for 2 years, after theend of which he or she owns the main home (his or her spouse) to which these conditionsapplies, is considered as the first-time buyer.

Am I li able to pay poin ts?

When you compare the different mortgages, you must take into notice the number of points, thatis your up-front interest, together with your rate of interest.

Are there any options for the individuals having bad credit record?

Yes, there are! Many lenders are particularly concerned with this kind of clients only. Many ofthe buyers missed the opportunity of having a better deal stroked because of their sheer apathytowards their credit report. It is not always that your credit report is as worse as you think it is.You can get a fair deal once you sit down and re-evaluate your credit report and correct theerrors if any along with handling your account better. Here you are provided with a scheme of

free credit report together with free Credit Check Monitoring Service for 30 consecutive days. Ifyou are also facing the problem of a poor credit report, but want a great deal on your mortgagethen you can rely on the service of the LendingTree.

What the terms front rati o & back ratio indicates to, as I frequentl y encounter them when

looking for a mortgage program?

Before you are awarded a loan it is determined that of what scale a house you can afford and it isassessed through your present income. This process involves these two terms, front & back ratio.

Front Ratio: It is the ratio of all the mortgage payments (PITI) that includes your taxes, principalamount, insurance, and condominium to your GROSS income. It should be under 28% mark, butis not compulsory. For an instance, if your income is $37000/month and your total mortgagepayment is $973, and then your front ratio will end up being 26%.

Back Ratio:It is the ratio of the sum of your total mortgage payment, credit card payments, carpayments or any other kind of loan payments to your GROSS income. Its limit is up to 36%. Foran instance, if your income is $37000month, your mortgage payment is $973, two credit cardpayment is $59 and & $43, car payment is $212 that adds up to $1287, and then your back ratiowould be 35%.

What should a buyer do in case he doesnt have any money for the down payment and for the

closing costs?

There are a few mortgage programs that allow the individuals having low or no money to buy ahome. But still, you are supposed to deposit funds for the down payment or the closing cost or insome cases both. This is because the lenders expect you to be actively participating in theprogram, as a substantial amount of your income would go into the mortgage payment. In some


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circumstances it has been seen that the seller itself bears some of the closing costs (normallyranges between 3%-5%) or the cost of down payment is lowered (up to 5%). But it is very hardto find a case of no down payment at all. Although, having a good credit report and money forthe closing costs, enables an individual to benefit in some ways in the area of conventional loan.

What is a fixed rate loan?

It is the interest rate that never varies until the loan gets repaid and the monthly installmentsremain the same. It also means that your rate of interest and the installments will remain steadyirrespective of the market rates. This way, once your home equity loan gets closed with Citibank,you will be entitled to get all your money in a single payment.

What is Home equity l ine of credit (HELOC)?

It is a kind of credit that enables a borrower to get the maximum amount from its lender within aspecified time period. This type of credit can be used again, once the total amount has been paidback and the borrower can use its principal amount again. With the use HELOC, a borrower canget the full benefits on the accumulated equity. This line of credit is available through checks andor some other means (e.g., Citibank Financial Center, ATM or through online and others). Youcan understand the value of HELOC by looking at its uses in different areas that includeeducational needs, renovation of home, automobile purchases and many others. Some of the

properties of HELOC include:

It is very much alike to the credit cards, but its limit is determined through your home-equity and your credit report and is normally of lower rate than the credit cards.

You can always utilize the power of the Line of Credit, thus making it very useful foryou and your family.

In case of HELOC, the rate of interest can vary according to the market trend as it isassociated with the Prime Rate and is mostly lower than the fixed rate that can be seen ina particular section of the Wall Street Journal called Money Rates.

You have the power to pay your interest to a period that can span up to 10 years or canpay the whole balance at once.

Citibank provides you with a facility to get your funds through checks.

Debt to income lien holder


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What i s Debt-to-income-ratio?

It is the ratio of your debt payments per month (including mortgage debt) to your gross incomeper month.

On which cri ter ia the sanctioni ng of a loan depends?

There are three criteria for a mortgage program sanctioning: LTV, Debt ratio & FICO score.

What is Lien and Li en Holder?

Lien is the legal claim on a property until the debt on that property is repaid. Lien Holder can bean individual or an institution that has a lien on someones other property.

Everything That You Should Know About Mutual Fund

Mutual funds are the combined money of a group of interested persons that have put their moneyas an investment for a particular management company. And, as usual, mutual funds also comewith its own kind of commissions and fees. There are mainly two types of mutual funds based onthe way a mutual fund company collects money.

The money required for a load mutual fund includes the total price of the shares along with thesales fee. Generally, sales fee hovers around 4%-8% of the total invested amount. Take anexample: If you are opting for a load mutual fund of 5% and your investment is $1000, then youractual investment will be $950 and the rest $50 is taken as commission.

Again the load mutual fund could be divided into two types: (1) back end loads fee is chargedat the time withdrawal of the funds; (2) front end loads: fee is charged at the time of investment.

But you can also invest in shares without paying any kind of commissions in the form of no-loadfund. This type of investment is normally recommended, as it doesnt involve any kind of sales

fee. But you should always avoid withdrawing the funds early as it encompasses a penalty fee(normally before the completion of 5 years) in a no-load fund investment. But you can reap itsbenefit better if you are a going to invest for a longer duration.

What are stocks and trading


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provide those details to the concerned investor. Despite referred as a physical exchange, theNYSE makes use of the vast capability of computers as well.

The Nasdaq

The other kind of exchange called virtual exchange or more often over-the-counter (OTC)market is devoid of any kind of physical trading floors or the floor brokers. Nasdaq is the samefor the virtual exchange, what NYSE is for the physical exchange. All sorts of transaction andtrading are achieved through a network of computers and telephones. Previously it became acustom for all the bigger companies to go for the NYSE, leaving behind other second-tier stocksto be listed on other exchanges. But the scenario has changed completely with the advent oflatest technologies in the late 90s that made Nasdaq the primary choice for many largertechnology companies that included Dell, Microsoft, Oracle and Intel. This change put theNasdaq in the level of the NYSE.

Here on Nasdaq, there are market markers for the stocks that are nothing but the brokerages as in

the NYSE. Through these market markers the shares prices are regulated within a limit and bidsare thrown continuously to create a potential market for those shares. Market markers can alsofind the compatible sellers & buyers, but most of the time they are involved in supplementing therequirements of the investors by creating the shares-inventory. We are not describing the wholeprocess in detail, as the detail is available in our tutorial named "Electronic Trading and MarketMakers."

What are different stock exchanges

Other Exchanges

Earlier the American Stock Exchange (AMEX) was also a great competitor of the NYSE, butnow its been displaced by the Nasdaq. But it is still the third biggest exchange of the U.S.market. It has been bought by the parent of nasdaq called the National Association of SecuritiesDealers (NASD) in 1998. Amex has now been the target source for small-cap stocks and theirderivatives.

Despite being the largest and most prominent hub of stock exchanges, the America is home for

only a part of the total investments all around the world. London & Honk Kong represents theother two most significant markets for their respective stock exchanges.

An over-the-counter market generally comprises small public undertakings that are not at parwith those of finely regulated markets and includes Nasdaq and over-the-counter bulletin board(OTCBB). The investment in OTCBB should be carefully tracked; otherwise there is a highchance of losing your investment completely, as the OTCBB has no regulatory force at all. If you


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are really learning something from this tutorial then you should certainly avoid investing in theOTCBB.

What are the changes that will effect with price change in

stock market

What are the factors that af fect the changes to the price of stocks?

Due to the market force of supply & demand the change in the stock prices is of a dailyphenomenon. If the ratio of demand to supply is higher, the stock prices go upwards. But whenthis ratio comes below the mark of one, the stock prices go downwards. Demand & supply aredirectly related to buying & selling respectively.

It is quite easy to understand the concept of demand and supply. The thing that is somewhatmore complex to understand is that why people prefer a particular stock to others. Differentplanning and strategies of different investors govern this preference to the stocks and it involvesthe favorable or unfavorable news concerned to the companies.

Stock prices of an individual companies vary according to the understanding of investors for thecompanys worthiness. Never judge the value of a company through its stock price rather itshould be judged through the market capitalization of the company. Market capitalization iscalculated as the stock price multiplied with the shares outstanding. To understand it moreclearly take an example: the company having stock price @ $50 and 5,000,000 shares

outstanding ($50 x 5,000,000 = $250,000,000) has more value than the company having @$100/share and 1,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000). Besides,deciding the value of a company the stock prices are also used to assess the future growth of thecompany.

Now the more a companys earning the greater is its value in the market. Earnings of a companyshow its profit and if there is no earning to show then obviously there is no profit or money torun the company. The earnings of public sector companies are reported in a year for four earningseasons, at which the Wall Street keeps its attention. The reporting of the earning has a veryimportant value in deciding the future value of a company. The more a company shows itsearnings the better its chance to be valued highly by the market analysts and the investors; andthis analysis is based upon the future earning projections of the company decided by their currentearning report.

But the earning is not the sole reason behind the pricing of the stocks. There are other forces toothat works towards deciding the stock prices. To understand it, we should go into the marketduring dot-com-bubble. That time many Internet companies mushroomed with their marketcapitalization worth millions of dollars and that without having any supportive earning to report.Most of these companies couldnt hold to their capitalization and been valued far lower than


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account, but their service charge is higher; the latter provides limited services to your account butis cheaper in comparison. There was a time when only full service brokerage was there thatcharged heavy service charges and were out of the reach of small investors. But, with the adventof Internet there came the flood of discounted brokerage as a relief for the small investors.

Dividend Reinvestment Plans (DRI Ps) and Di rect I nvestment Plans (DIPs)

These plans allow the investors to purchase their stocks directly from the stock releasingcompanies and drawing the stock prices to a lower level. So, if you plan to invest small sum ofmoney at regular intervals, the DRIPS is a great plan to follow.

With the purchase of stocks you get the right to vote for the companys policies and also have thelimited ownership on the assets as well as on the earnings of the company.

Why stocks are treated as equity, while the bonds as debt?

This is because the bonds provide a guaranteed return on the investment with a higher claim too.On the other hand, shares doesnt always guarantee return on the investment and so is riskier, butthe shares provide comparatively higher returns on the same amount of investment.

This means that you get more money from the same amount of investment from stocks than frombonds, if your investment is in a profitable company, but you also have the risk to loose all ofyour money if your decision to choose a particular stock proves a mistake. There are mainly twokinds of stocks: common & preferred. Companies can form classes within their stocks at theirwill.

So, always remember one thing that it is not too difficult to understand the stock tables or stock

quotes, if you know what does mean a specific term there.

How many types of swaps are there?Forward swapIt is also known as delayed start swap, forward start swap or deferred start swap and is

a kind of swap agreement that is often valued with two different and partial offsetting swaps and both

the swaps starts immediately. But one of them ends on the date of the start of the other one known as

forward swap. This swap is specially designed for the timing convenience of the investors.

Total return swap it isthe most widely used form of swap in physical commodities market or in case

of equity market. It is a kind of swap agreement that allows one party to pay according to a fixed rate or

according to a variable rate. But, the other party only pays according to the returns it gets from the

underlying assets like loans, bonds, etc. and includes the generated income from and the capital gains of

the underlying assts.


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Currency swap it is the kind of swap with the help of which all of the principal amount as well as the

interest on that amount of a particular currency can be swapped with another currency and it is free of

any kind of exchange rules.

Circus swap it also termed as currency coupon swap or cross -currency swap and includes the

characteristics of both the currency swap as well as of the interest rate swap. Under this swap a loan of

fixed rate of a particular currency can be replaced with a loan of floating rate of some other currency.

Commodity swap this is a kind of swap under which all of the cash transactions are the result of the

underlying commodity and hence called commodity swap. Through this swap an institution gets a fixed

price from the commodity user and market price from the commodity producer. The financial institution

in return facilitates the required needs of both the parties.

Asset swap Under this swap agreement, only the floating or the fixed investments are swapped but

not the fixed or floating interest rates and this swap is almost similar to the plain vanilla swap except the

underlying swap contract.

Interest rate swap it is the kind of swap agreement between two companies or banks to switch over a

floating rate loan into a fixed rate loan or vice versa in different countries. The currencies into which the

swap has taken place could be either same or different.

Constant maturity swap it is the kind of swapping agreement under which a buyer has the right to set

its own time duration for the received flows on a particular swap. It can of two different types termed as

cross-currency swap or single currency swap. This swap allows the readjustment of a part of the interest

rate periodically based on the fixed maturity rate of the market and it is a variant form of interest rate

swap. But it cannot be readjusted with any floating reference index rate.

Basic rate swapGenerally, due to different rates of borrowing and lending, companies run the risk of

interest rate, which is neutralized with the help of basic rate swap. It enables the two parties involved in

the agreement to exchange the interest rates varying according to money markets.

Variance swap It is a variant of the volatility swap and under this swap the linearity of variance go

along with the payout, not with the volatility as in the case of volatility swap. This difference makes the

payout as the one with higher rates, not the volatility.

Overnight index swap it simply involves the swapping of a fixed interest rate to an overnight rate.

Zero basic rate also known as Zebra swap, actual rate swap or perfect swap and is a swap agreement

between a financial intermediary and a municipality. Under this swap agreement, the financial

intermediary receives from the municipality a floating rate of interest and pays to the municipality a

fixed rate of interest.


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Roller coaster swap it is a kind of seasonal swap that gets created for meeting the periodical financial

requirements of the counter-party and provides some liberty in terms of payment according to the

periods set beforehand. So if a company is dealing in some commodity, which has its demand

seasonally, then the company will surely go for a roller coaster swap.

Airbag swap this swap gets created to counter the effects of fluctuating interest rates that puts a

negative pressure on the investment. This counter effect is achieved through the adjustment of the

notional value of the fluctuating interest rate by indexing the very part of the interest rate that is

fluctuating to a constant maturity swap.

How many types of OPTIONS are there?

There are mainly two types of OPTIONS called calls and puts. The former provides anauthentication to an individual to make a purchase of some property within a given time frameand is very much similar to a stocks long position. Buyers invest in the cal ls with an expectation

of a large raise in the value of stocks. But when it comes to put, the holder gets an authenticationto sell some property or asset within a given time period and it is very much similar to a stocksshort position.

How many types of Bonds are there?

Treasury bonds this bond is the most widely known and is issued by the U.S. governmentonly with a starting value of $1000. Its maturity being longer than 10 years has a fixed interestrate and is marketable too.

Municipal bonds this bond can be issued by municipality or the state or the country itself and

its purpose is to provide debt security by financing the public expenditures.

Corporate bonds this bond is issued by the corporations only and thus taxable. Normally it hasa par value of $1000 and a maturity term, but can be traded freely at major exchanges.

Zero coupon bonds it is named zero coupon bond because there no payment in terms ofcoupon is made rather an initial discount is offered at the par value. As an instance, a tradingvalue of $600 could be possible for a zero coupon bond that has its par value at $1000 andmaturity term of ten years. So, this zero coupon bonds would be worth of $1000 after theexpiration of its maturity term.

What are bonds in finance

What i s the way of pri cing and tr ading of the bonds?


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the break-even value would come to be $73.15. Now, if the stock price comes to any price lowerthan the mark of $70 that is the strike price, the option would be of no value or in other wordsyou are in loss.

Now, if three weeks afterwards the stock price comes to be $78, then the option contract will

also increase and would be worth of $8.25 x 100 = $825. You can calculate your profit as: ($8.25- $3.15) x 100 = $510. So, you can see the money almost doubled in a span of three weeks. Now,you can also exercise your right to close your option by selling it off in the market and cancollect your profit along with your principal. But if you realize that the prices would still rise,then you can wait for a few more days. But, if at the time of expiration the price comes to be $62,then the option contract would be worthless. To see all of the events in a summary, look at thetable below:

DATE May 1st May 21st Expiry date

Stock Price $67 $78 $62Option Price $3.15 $8.25 Worthless

Contract Value $315 $825 $0

Paper Gain/ Loss $0 $510 -$315

What i s a der ivative how does it function?

It is a kind of financial security that derives its price from one or more than one underlyingassets. It is in itself nothing more than a contract between two or more than two parties. Its price

is highly depends on the fluctuating value of the underlying assets. Some of the importantunderlying assets on which the price of derivative depends are: commodities, stocks, interestrates, bonds, currencies, etc. The institutional investors mostly use it for their increment inoverall return.

Which are the most prominent f ixed income instruments?

The most prominent fixed income instruments include: notes, bonds and bills.

What k ind of work a broker dealer does?

Basically the two terms denote two separate individual or institution, but due to the functioningof several brokerage firms both as a dealer and as a broker has combined the two terms as brokerdealer. If taken separately, a broker does all kinds of transactions on behalf of an investor. On theother hand, a dealer is one who deals with every details of his/her account himself/herself.


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What is commercial bank and brokerage

industry?

How does a commercial bank operate in a brokerage industry?

There are several functionalities of a commercial bank in a brokerage industry:

It helps the brokerage firms in dealing with their security inventories and providingmargin loans to their clients, by financing the loans.

It acts as a cashier for the securities of the U.S. government.

It also provides custody to the financial institutions. It issues commercial papers and loans to make it easier of the availability of short-term

credit for the trading market. It also takes part in the municipal bonds underwriting. It also functions as the creator of bankers acceptances to facilitate the trade

internationally.

Who i s a market maker?

Market makers, also known as Ax, are the one who throw bids continuously and quote the pricesthat ranges within the prescribed percentage spread of the shares and the market makers areobliged to make a market for the share within that spread. It depends on the volume of the stock,if the numbers of the market makers for that stock would be 4 or 40 or somewhere within them.Market makers also exert a large effect on the secondary market through accelerating theliquidity of stocks and in result growing the market on a long run. This is why; the marketmakers are also termed as the catalyst of the market.

The main function of a designated market maker is to make ready the buyers and the sellers forthe sell orders and the purchase orders respectively. So, they are responsible for both the bid andthe price quote to be maintained all the time and that also under a predefined spread. Thisfunction of a market maker creates a market for the stocks.

Who is a special ist?


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To perform all kinds of trading functions, the NYSE rely on an individual known as thespecialist. All of the stocks in the NYSE are allocated to this specialist, who performs all kindsof buying and selling of those stocks through a particular place called the trading post. Theagents, brokers or the floor traders, all of them gather at this trading post to know about the all ofthe bids and the ask prices for the securities. Then the current bids and the ask prices are told

loudly to the floor traders and an execution of trading completes, when a bid and its ask ordermeets each other.

Many of the specialists are not only assigned the task of meeting the buyers and the sellers ratherthey also have to hold a substantial number of different shares in order to fill the gap, if any,between the buy and the sell orders. So, the traders are continuously holds more and more shareuntil equilibrium reaches for the demand & supply. It is a common task for the specialists to holdshares. Besides, these regular tasks the specialists are also responsible for holding the order of acustomer that has ordered a price that is higher than the lowest ask price or is lower than the stop

order, which is the best bid price. Now that the specialists only execute order when he ensuresthat the ordered price has come at par with the stock price.

Another task for the specialists is to find out the fair price for each of the stocks, which are undertheir supervision, at the start of the trading day, under their guidance. Fair price of a stock isdetermined according to the current demand & supply of the concerned stock. The specialists hasalso the authority to delay the opening of a particular stock well after the opening of the NYSE at9:30 a.m., until they find the fair price for that stock. So, its quite evident that a specialistsworks are very stressful and he/she hardly gets any leisure time in between.

It becomes the responsibility of the market makers to buy or to sell minimum 1000 securities attheir quoted price, once they make that quotation. Afterwards, they can leave the market and thenpropose a new bid or the price, so that they can make some profit on those securities. Besidesthis task they are also involved in the facilitation of the liquidation for their clients. For this taskthey get a predetermined commission. They can also do the trading for a firm other than theirown, just like a specialist.

The market makers are federally bound to provide the best possible bids and ask prices to theirclients for every transaction and it has the purpose of conducting a fair transaction for a two-sided market. Without these regulations, the customers would have been the victims of thetrading market.


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All About bonds and bond types:What is a Treasury bond?

Treasury bonds involve no risk at all as the U.S. government itself issues them in a term of 30 years with

a fixed interest rate calculated half-yearly.

What is a corporate bond?

There are times when a company needs a large capital for some kind of investment or expenditures, but

are not able to support it through their own sources. Then the company issues bonds in the market for

the public to buy them and these very bonds are called corporate bonds.

What is a Euro bond?

Some company that has no presence in the European market issues euro bonds, also known as theglobal bonds. This is why the, the currency in which the issuing company of this type of bonds deals in

are different from the currency in which the Euro bonds are sold and bought. Mostly, the currency for

trading Euro bonds is Euro.

What is a municipal bond?

Municipal bonds are those bonds that are issued by the local government or the state or the city itself,

to raise funds to meet their special expenditures and some special projects.

What is an emerging market bond?

This is the kind of bond issued by the financial market that is still in the phase of development and is

comparatively small in size. These markets are situated in the developing countries.

What is an investment grade bond?

These are the bonds that are considered safe to invest in with a high rating of bond, such as BBB or even

higher.

What are high yield bonds?

There was a time when the high yield bonds were considered very risky. But now, it has earned its

credibility among the investors as a solution for the non-investing companies to raise some capital in the

market. Only those companies that are far from the credit rating guidelines of Fitch, S&P and Moody

issue these bonds.

What are convertible bonds?


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As its name suggests these are the bonds that can be converted or exchanged with a certain number of

the same companys shares that has issued the convertible bonds. These bonds are normally of junior

debenture kinds.

What is an equity-linked bond?

It is the bond that has its returns dependent upon the performances of the equity index, the single

equity share and the basket of equity securities.

What is an exchangeable bond?

These bonds have the same properties as that of the convertible bonds. The only exception is that an

exchangeable bond can be exchanged into a certain number of shares of the companies that havent

issued that exchangeable bond.

What is an inflation-linked bond?

An inflation-linked bond is very much similar to a regular saving bond. The difference lies in its capability

to insulate the effects of inflation due to the tying of its yield with the rate of inflation.

What is a mortgage bond?

Mortgage bonds are those bonds that are acquired by offering a physical property or real state as the

mortgage. This mortgage provides the security to the issuing company.

What is a Yankee bond?

It is the bond that can only be issued by the overseas corporations and banks that are not situated in the

U.S., but the value of bonds are denominated in the dollars of U.S. only.

What is a subordinate bond?

This bond is also termed as the junior security and is taken as a subordinate of other kinds of bonds in

respect of the earnings and the assets.

What is a discount bond?

This is the bond whose market price is valued lower than that of its face value.

What is a zero coupon bond?

This is the bond, which doesnt provide any interest whatsoever, but provide profits in terms of a large

discount at the time of buying and this discount can be converted into cash at the time of its maturity.


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What is a T-bill?

Ii is the security that is issued by none other than the U.S. government itself, for a term less than a year.

What is a commercial paper?

The corporations and the banks issue it as unsecured obligation to fund their short-term financial need,

e.g., inventory and the accounts receivables. The period of maturity varies from 2 days to 270 days.

What is a floating rate note?

It is also termed as floaters and carries a interest rate that is variable. Usually, after every six months, its

interest rate is gets associated with some specific money-market index.

What is called repo?

Repo is also termed as repurchase agreement or buyback due to its property that allows its issuers to

buy it back from its holder at a specific time and value.

What is the bond future and option?

It is the contract, under the rules of which bonds are considered as the underlying assets.

What is the interest rate swap?

It is the agreement between two parties, where a specific future interest payments are swapped with

some other payments based upon a predetermined principal amount. The two parties are called the

counter-parties. This kind of swaps most often include the swapping of a payment that is fixed in nature

with a payment that is not, but is linked to an interest rate (e.g., LIBOR). The companies exercise this

swaps when they want to limit or to manage the effects of the interest rate fluctuations. They also use it

to reduce the interest rate, without which they wont be able to lower the interest rate easily.

What is asset swap?

This swap is very much similar to a vanilla swap. But here, the exchange takes place between the fixed

and the floating investments rather than between the fixed and the floating rate interests.

What is a credit default swap?

Under this swap agreement two counter-parties can transfer the credit risks of a third party, associated

with any of them, between one another.

What is a total return swap?


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This is the kind of swap under which the total return of the equity and the instruments with fixed

income decide (with a longer life than the swap itself) the non-floating rate. .

What is a collateralized debit obligation?

These dont include the non-mortgage bonds and loans and is supported by a collection of bonds, loansand some other types of assets.

What is SOX ?

It is the act that has been passed by the U.S. Congress in favor of investors, through which the

corporations are bound not to do any kind of fraud with the investors. This act provides more teeth to

the already present security regulations. The important points of SOX Act is given below:

It is the law for the security of investors and is necessary to follow by the people who comesunder its net and knows its relationship with the information security.

It secures the whole audit history of different software policies and maintains all the recordsincluding the changes in policies.

It also helps in keeping the proper record and maintenance of the project documentations. It also keeps the tab on the data conversion and the security risk and develops the system

acquisitions. It clearly defines the boundary between the development and the application of products in

order to automate and model the involved processes.

Ensures a strict regimen of testing which also includes the test cases. Keeps continuous vigil to the application-movements by development authorities throughout

from the testing to the production.

Reviews the management and the approval of IT systems by automating the process ofapproval.

Keeps the security system intact by enforcing all of the formal procedures and policies. It has also established the Public Company Accounting Oversight Board (PCAOB) for the

companies to be registered and that is mandatory too.

Hires auditing committees to strictly apply auditor regulation and inspect the actions ofaccounting firms.

Increases the responsibilities for corporate to always take care of any kind of fraudulentactivities.

Enforces the ethical guidelines for the senior financial officials and disclosure of the financialstatements of companies.

Stipulates the guidelines to be followed in case of any conflicts of interest among analysts. Availability of the authorities before Commission & Federal Court and requirement of

qualifications for the brokers and the dealers.


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Availability of the enforcement methods to punish any criminal activities, identified under theAct.

Basel II also known as New accord (International Convergence of capital Measurement and capitalstandards)

As Basel I was not efficient enough to provide insulation against the credit risks, e.g., Basel I is incapable

of distinguishing the characteristics of involved risk between 1-year loan and 5 year loan and also

between collateralized & non-collateralized loans. So, all of these anomalies were tried to be eradicated

with the introduction of Basel II with some completely novel rules and norms.

There are several financial institutions are constantly being evaluated for their operational risk

capabilities, practices as well as their credit by Basel II Capital Accord. To enhance the financial

performance and to have an advantage over others, many a firms are trying to incorporate their risk

management practices with the Basel II standards.

The goal of the final version Basel II

Separation of the operational risk from the credit risk and to quantify both of them. Making the capital allocation to be more risk sensitive in nature. Minimizing the regulatory arbitrage by closely aligning the economic and the regulatory capital.

There is a concept of three pillars that is used by Basel II and includes: minimum capital requirements,

supervisory review and market discipline. All these three players have the role in stabilizing the financial

system. Basel I made use of only a few aspects of these three pillars like, it only dealt with credit risk

without taking into account the market risk or the operational risk involved.

First Pillar


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them to do so. Eventually, despite being a genuine bank with honest dealing, a smaller bank doesnt

receive as much reputation as that of larger banks. The same story is true for the developed and the

developing countries too. Basel II also makes it quite difficult for the smaller banks to access credit.

Now it has been very difficult to choose one of the more sophisticated risk management systems or the

lesser one, as the more sophisticated measures were required for the larger banks yet these measures

were against the interest of the smaller banks. On the other hand, by application of less sophisticated

measures it was easier to calculate the risks but it compromised with the sensivity of the risk

management. But there is a bright side of the better credit risks that is significant in terms of true pricing

by the banks. It has been observed in the U.S. and the U.K. that with a more sophisticated risk

management there is greater chance of lending money by the banks to the higher risk borrowers. With

this system the locked out borrowers were also able to create a good credit record with the banks.

Basel II is also facing a very sound criticism that its operation will result in a pronounced business cycle

with more intensity. The reason behind this criticism is the credit models applied under the pillar I

compliance that uses the horizon of one-year. This model will further promote the downturns in the

business cycles, as the forecast of this model will support an increased loss in the future. This forecast

will naturally make the banks reduce their lending that will lead to an increased downturn. So, the

regulators should keep the repercussions of this model and must neutralize its effects while assessment

of the bank models.

what is SOX act compliance,

Implementation of Basel II

Reviews the Basel readiness for all the three Basel Pillars Helps in the development of the Basel implementation plan (according to U.S. regulators, Sep.

2005).

Helps in the development, validation or implementation of the models of economic capital. Provides guidance to the operational risk AMA implementation. Provides the required support for internal audit.


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Association of the Sarbanes-Oxley and the

Basel II

Creation or integration of the loss event systems for meeting different compliance standards,identification and collection.

Integration of the processes of risk control self-assessment for different compliance initiatives. Determination of the responsibilities as well as the complementary roles for internal audit, risk

management & compliance.

Some more risk management services

Governance assessment & design KRI and the model validation Designing and the facilitation of the risk control self-assessment programs Formulation of the risk mitigation strategies Experts in the matters of information security, operational exposures, disaster preparedness,

fraud, litigation and some other operational exposures that are critical in nature

Six Sigma

Six Sigma (Six Standard Deviations from mean) is a methodology to enhance the efficiency and minimize

the errors in any given process through some special tools & techniques.

First of all it was applied in the manufacturing division of the Motorola Company, where this process is

rigorously used for minimizing the errors in the processes of producing several millions of different

parts. Afterwards, its application widened with the inclusion of non-manufacturing processes too. It has


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spread to such a level that its use can be witnessed in the fields as different as call centers, medical

processes and insurance processes.

This methodology always keeps on improving the latest business processes through constant revision

and alterations. To get this job done, Six Sigma makes use of a novel methodology called DMAIC (Define

opportunities, Measure performance, Analyze opportunity, Improve performance, Control

performance).

Six Sigma is not only limited to improving the quality of processes, it is also being used widely to create a

completely new business process from scratch. For this job, the Six Sigma makes use of another novel

methodology called DFSS(Design For Six Sigma) principles. The efficiency of the Six Sigma can be gauged

from the fact that there is no scope of more than 3.4 defects in a million of transactions taking place

either in the area of products or services. Six Sigma uses the statistical techniques for reducing the

errors and measuring the quality.

The experts of Six Sigma, known as green & black belts, thoroughly examine a given business process

and then only determines the remedies to get rid of its defects and improve its quality. They are also

expert in creating a completely new business process with the help of DFSS (Design For Six Sigma)

principles. But it is observed that creating a new business process is a lot easier than improving the

quality of an existing business process.

The techniques and the principles used by the Six Sigma are very fundamental to the business,

engineering and statistics too. The basic elements of the Six Sigma are none other than these three

principles with the help of which the Six Sigma can minimize variations, increase performance and keep

intact the quality of process outputs. These measures result in the improvement of profits, reduction in

defects, enhancement of quality and satisfaction of the customers.

The methodology of Six Sigma is also applicable for the initiatives of business process management. But

these initiatives of business process management are not only restricted to the manufacturing processes


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instead they are also applicable within call centers, supply chain management, customer support and

project management too.

Some of the important elements for the improvement of process by Six Sigma are: continuousimprovement, metrics & measures, customer requirements, employee involvement and design quality.

The three core elements of Six Sigma

Customer satisfaction:

The Six Sigma is very strict towards the customer satisfaction. Under the Six Sigma methodology, it is

ensured that the satisfaction of the customers is never compromised with.

Defining processes & metrics and measures:

This element Of Six Sigma defines the usefulness and the understanding of data & systems as well as

sets the goals for improvements.

Involvement of employees and team building:

Under Six Sigma, it is imperative to involve all the employees by the company and to provide the

employees with proper incentives and opportunities. This way the employees can be motivated to dotheir work more sincerely. Besides, Six Sigma also ensures that each of the employees has a defined role

in the company and there is no scope of ambiguity, at all.


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Although, Six Sigma evolved from the Motorola Company for the improvement of its manufacturing

processes, it can also be utilized by other business to make some profit. To bring high quality into their

services, various industries can make use of the benefits of Six Sigma. The different industries that could

gain something from Six Sigma are: service industry (Financial/Investment Services, Insurance, call

centers, etc.), educational services, ecommerce industry (B2B/B2C websites). The larger companies, like

Motorola and GE, have adopted Six Sigma very enthusiastically, but the same is not true with the smaller

companies. GE has been the prominent user of Six Sigma methodology.

To make it clearer, consider the points listed below:

Larger companies have the access to large resources and due to which they have their dedicatedteams especially working to implement the norms of Six Sigma. They also have a program calledtrain the trainer through which these companies can regularly produce more and more Six

Sigma instructors.

There are also several larger companies who hire green and black belts of Six Sigma to evolvemore interest towards Six Sigma by their employees.

It is more difficult to apply the norms of Six Sigma than it appears in the learning classes. Larger companies also encourage their employees to be a part of Six Sigma and give out

incentives to the employees who heed these instructions and help other employees too to join

Six Sigma.

It is common perception that Six Sigma works only for the larger companies because of theirlarger product volumes and a large base of employees, which is not true. Despite Being small

and having as few as 10 employees only, a smaller company can also reap the benefits of Six

Sigma after its acceptance.

CMM capability maturity model

It is a process that refines the understandings and the definitions of the processes of an organization.

Under CMM, there are five different levels that define the different levels of processes and is described

by SEI as: The improvement in the predictability, the effectiveness and the control of the software

processes through these five levels of CMM will eventually help the overall processes of an organization

to be improved. While this belief is not absolutely out of errors, yet its positive effect has been seen in

the processes for which it has been applied till date.


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The five different levels are described below:

1st

LevelAd hoc (chaotic)

This is the level, which is characterized by the un-documentation of the processes and their status of

being in a dynamic change mode, which makes the processes to get into an ad hoc, reactive or

uncontrolled status and this situation can be brought about by the users or some events. So, at this level

the processes remain in an unstable form or we can also call it the chaotic condition.

Organizational implications of level 1:

Due to non-availability of an organized institutional knowledge at this level, it is hard for thecommon participants or stakeholders to understand a process thoroughly with its components.This situation leads to the inconsistency in the performance of processes, which highly depends

on the competence, institutional knowledge and the out-performance efforts by a very few

number of people.

Notwithstanding, the presence of this chaos the organizations keep going on the production andthe services front. But doing so, the companies run the risk of under-estimation of the budget or

the schedule of a project. Now, when this under-estimation takes place, the organizations are

not able to fix this problem, as they dont know the process, which has created this situation or

how does a particular process works.

Organizations at this level of CMM do not use processes with a good planning and good

executive commitment or are limited with the acceptance of the processes. This nature of the


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organization shows its lackluster attitude towards the structure and the formality of processes.

These organizations tend to commit way beyond their capacity or leave a process in between its

execution. They are also not able to repeat the past successes.

2nd

Level - Repeatable

At this level of CMM processes have the repeatable characteristics and that also with a result that is very

consistent in nature. But this repetition could not be seen for each and every process of an organization.

Organization commonly makes use of a basic project management program to determine the cost and

schedule for a particular project. The discipline for the processes is not very strict, yet it ensures the

execution of existing practices even in the time of stress. So, at this level the processes are managed

according to the plans that have already been documented.


Service deliveries and status of projects are very much apparent for the management at certainpoints like, at major milestones, at completion of major activities.

Project management processes used to determine the cost, functionality and schedule of aparticular project with time-to-time tracking also. The disciplines of the processes that have

been successful in the past are repeated for the same kind of processes under a project.

3rd

Level - Defined

At this level of CMM the processes have the characteristics of defined as well as documented standardsand are subject to a certain degree of timely improvement. These processes that are standards among

different organizations (i.e., AS-IS processes) are used to instill a consistency in the performance of the

processes. Projects always follow the defined processes that are established with a definite set of

standard organizations processes and can also be customized with similar standardized guidelines.


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The management of the organization defines and establishes the process objectives accordingto the process standards set by the organization itself. The management also make it sure thatthe defined objectives must be followed properly.

4th Level - Managed

At this level of CMM the processes have the characteristics of being effectively controlled (control of the

AS-IS process) by the management through the utilization of process metrics as is witnessed in theprojects of software development. At this level, the management is capable of altering the processes in

such a way that they become applicable for a particular project without losing much quality form their

set of standards. Establishment of process capability is achieved form this level itself.


Goals with definite quantity as well as quality are set for the output of processes like, softwareand software maintenance.

Performance of the processes is very much under control and predictable because of itsmonitoring and measurement with the use of quantitative as well statistical techniques.

5th

LevelOptimized

At this level of CMM the processes have the characteristics of improving their performances through

integration of innovative & incremental changes in the technology.



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Establishment of the quantitative objectives for the improvement in processes of anorganization took place under this level with the scope of continuous revision to integrate the

varying business objectives into the processes. It is also used as a standard for the management

of improvement in the processes. Hence, under this level, the factors, responsible for variationin processes, are specifically identified, evaluated and then deployed.

After the deployment of the process improvements, their effects are measured with certaintyand then gets compared with the quantitative process-improvement objectives

Both types of processes are targeted for the activities of measurable improvements and theprocesses include, the defined processes the standard processes of the organization.

The process variation, which is being considered under this level are the one that shows thecritical distinction between the two types of maturity level (level 4 & level 5).

Processes, which are at the maturity level 4, takes into account the statistical special causes for the

variation of processes and provides the results with statistical predictability. Despite the prediction of

the results along with the statistics, it may be sometimes not enough to fulfill the objectives that are

already established.

Processes, which are at the maturity level 5, takes into account the statistical common causes for thevariation of processes and improves the performances of the processes by changing them like, shifting

of the mean of the performance of a process. Along with changing the processes for the improvement of

their performance, it is also maintained that the processes achieve the established quantitative process-

improvement objectives.


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