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what is the goal of regulation d | regulation d allows smaller companies that cannot afford a registered public offering to still access capital markets the provisions in regulation d also serve as safeguards for investors in private offerings allowing them to verify that a company meets the exemption requirements and is not engaging in fraudulent activity 1 | |
what is an accredited investor | accredited investors are people or businesses who are permitted to trade securities that are not registered with the sec they must meet certain financial or business benchmarks an accredited investor must either have a net worth of 1 million or more have an annual income of at least 200 000 300 000 if married in each of the prior two years or meet certain professional criteria 7 | |
how is regulation a different from regulation d | like regulation d regulation a allows smaller companies to sell securities to the public with fewer reporting requirements than a public offering has however regulation d requires that most investors be accredited investors under regulation a companies may sell to non accredited investors however there are limits on the amount of money a non accredited investor may invest 18the bottom lineregulation d is a provision that exempts some companies from the registration requirements associated with a public offering it gives smaller companies access to investment capital by letting them offer specific types of private placements there are rules within regulation d that allow different types of companies to raise money up to certain amounts they also lay out limitations for investments by non accredited investors a company selling securities under regulation d must still comply with all applicable state securities laws | |
what is regulation dd | regulation dd is a directive set forth by the federal reserve regulation dd was enacted to implement the truth in savings act tisa that was passed in 1991 this act requires lenders to provide certain uniform information about fees and interest when opening an account for a customer 1it was enacted in order to help consumers make more meaningful comparisons and more informed decisions about the accounts they open at depository institutions which provide the information noted above through disclosures these disclosures are given to consumers at various times including when an account is first opened additionally state laws that are inconsistent with the requirements of this federal act are pre empted to the extent of the inconsistency there is a procedure for requesting a preemption determination from the consumer finance protection bureau cfpb understanding regulation ddregulation dd applies only to accounts opened by individuals not to corporate or other organizational accounts 2 it is designed to protect and empower non sophisticated customers regulation dd helps individuals make intelligent decisions about where to open financial accounts the regulation applies to depository institutions with the exception of credit unions regulation dd applies only to accounts opened by individuals but not to corporate or other organizational accounts 2the types of accounts the regulation is intended to assist consumers with include savings accounts checking accounts money market accounts certificates of deposit cds variable rate accounts and accounts denominated in a foreign currency financial institutions are required under regulation dd to disclose information to consumers regarding annual percentage yield interest rates minimum balance requirements account opening disclosures and fee schedules disclosures are provided to consumers 3truth in savings actregulation dd implements the tisa which was part of the federal deposit insurance corporation fdic improvement act that passed the same year in 1991 the act was meant to promote healthy competition between institutions and create economic stability it also directs banks to be more transparent about some of their policies giving consumers more power to decide where they want to do their banking business regulation dd rulesadvertising rules set forth apply to individuals including deposit brokers who advertise the types of accounts offered by the institutions subject to the regulation the marketing rules restrict institutions from advertising in any way that may mislead consumers present inaccurate information or otherwise misrepresent the contract for the deposit account the ads cannot use the term profit when referencing the interest paid on an account 4for example if a deposit broker places an ad to offer consumers interest in an account the advertising rules apply to the advertisement regardless of whether the account is held by the consumer or the broker regulation dd amendmentsregulation dd was amended in 2006 to address issues like the concerns about uniformity of information provided to consumers when deposit accounts are overdrawn in 2010 other amendments were added directing depository institutions to comply with rule changes governing disclosures on periodic statements for aggregate overdraft and returned item fees 5 the amendments also featured a rule on providing balance disclosures to consumers made through automated systems regulation dd stipulates that disclosures provided to consumers are clear and conspicuous and are made available in writing or another form the consumer can keep the disclosures must also make it clear and identifiable when these disclosures for different accounts have been combined 5disclosures must reflect the terms of the legal obligation established for the accounts in question and the agreement between the consumer and the institution these disclosures can be rendered in electronic form at the approval of the consumer 6 | |
do credit unions have to comply with regulation dd | no regulation dd only applies to accounts issued by depository institutions non banks and credit unions are not affected | |
when does a bank have to notify me of changes | it depends for changes unfavorable to the consumer for example increases in fees for bank services regulation dd requires financial institutions to provide the consumer with at least 30 days notice for changes that are favorable to the consumer decreasing or eliminating fees no notice is required on the institution s part however if favorable changes are temporary the financial institution must comply with the requirements for advance notice of a change in terms | |
does a bank have to notify me in writing | the financial institution must provide in writing account disclosures that reflect the legal obligation or the contract between the parties and these disclosures must be in a form that consumers can retain the information must be presented clearly and conspicuously so that consumers can understand the account terms 7the bottom lineregulation dd offers consumers protection by requiring banks to provide transparent upfront disclosures that help non institutional consumers compare terms at different banks in order to make the best decisions for themselves about where to open an account | |
what is regulation e | regulation e is a regulation put forth by the federal reserve board that outlines rules and procedures for electronic funds transfers efts and provides guidelines for issuers of electronic debit cards the regulation is meant to protect banking customers who use electronic methods to transfer money understanding regulation eregulation e provides guidelines for consumers and banks or other financial institutions in the context of efts these include transfers with automated teller machines atms point of sale transactions and automated clearing house ach systems rules pertaining to consumer liability for unauthorized card usage fall under this regulation as well consumers and financial institutions both have an interest in understanding regulation e s guidelines regulation e was issued by the federal reserve fed as an implementation of the electronic fund transfer act a law passed by the u s congress in 1978 as a means of protecting consumers engaged in these sorts of financial transactions 1much of regulation e outlines the procedures that consumers must follow in reporting errors with efts and the steps that a bank must take to provide recourse errors subject to these regulations could include the consumer s receipt of an incorrect amount of money from an atm unauthorized credit or debit card activity or an unauthorized wire transfer to or from a consumer s account generally banks have a period of 10 business days during which to investigate a reported eft error this can however be extended to 45 business days provided that the bank provisionally credits the consumer s account with the reportedly missing funds banks then must report the results of an investigation to the fed and to the consumer 2regulation e also outlines consumer responsibility for reporting unauthorized eft activity typically involving a stolen or missing card for example consumers must report lost or stolen credit cards no more than two days after the consumer becomes aware of the theft otherwise the bank has no obligation to refund losses 3regulation e governs the issuance of debit but not credit cards which are governed by regulations outlined in the truth in lending act and implemented by the fed as regulation z 4 however regulation e does govern eft features of credit card usage 5special considerationsconsumers should make sure that they are complying with federal regulations when reporting errors to make sure that their financial institutions are complying and to avoid liability financial institutions should circulate these regulations internally to make sure that they have no difficulty in complying example of regulation eif you have a bank account regulation e has some important benefits it delineates your rights for disputing atm or debit card transactions if you believe an eft has been made in error this includes counterfeit errors as well as accidental ones 6 for example if you decide to cancel a tv streaming subscription service but you see an additional charge for membership after the cancellation you could ask the streaming service for a refund and if you are refused you could dispute the transaction with your bank according to regulation e rules enforcement of regulation every specific rules for compliance by the eft service provider are established in regulation e these requirements include keeping track of consumer agreements providing periodic statements error resolution reimbursement of fees incorrectly charged to the consumer providing access to account information disclosing a telephone number that the consumer can use to contact the financial institution and so on enforcement depends on various sources of information to identify possible issues that may lead to opening an investigation including other factors that weigh in on whether an investigation is initiated include if a description of the cfpb s enforcement work november 2020 can be found here 7 | |
how does regulation e protect me | regulation e allows you to dispute these types of errors | |
how does regulation e protect me if my debit card is stolen | regulation e limits your liability if your debit card is lost or stolen the sooner that you report a lost or stolen debit card the lower your maximum liability is if unauthorized charges are made with the card the longer that you wait to report a lost or stolen debit card the higher your personal liability will be if the card is used for unauthorized charges a guide to consumer liability for lost or stolen debit cards can be found here 3 | |
does regulation e cover credit cards | no credit cards are covered by the truth in lending act of 1968 modified in 2009 by the credit card accountability responsibility and disclosure credit card act but they are not covered by regulation e which only covers consumers when they use efts 85the bottom lineregulation e was enacted under the cfpb the regulatory agency that oversees financial products and services offered to consumers the cfpb was created in 2010 9 regulation e establishes the basic rights liabilities and responsibilities of consumers who use efts and remittance transfer services and of the financial institutions or others that offer these services | |
what is regulation o | regulation o is a federal reserve regulation that places limits and stipulations on the credit extensions a member bank can offer to its executive officers principal shareholders and directors the regulation is designed to prevent bank directors trustees executive officers or principal shareholders from benefiting from favorable credit extensions understanding regulation oregulation o regulates the credit extensions that member banks can offer to individuals who are considered to be insiders with respect to the bank while bank insiders are not barred from taking out loans from a bank with which they are professionally associated federal law carefully regulates how that bank treats the insider as a customer in addition to setting restrictions on credit extensions for bank insiders regulation o requires that banks report any extensions provided to insiders in their quarterly reports regulation o also gives a clear definition of bank insiders dividing them into multiple tiers of association subject to different credit extension regulations insiders can be directors or trustees of a bank executive officers for example the president or treasurer or principal shareholders individuals who own or otherwise control more than 10 of the publicly traded shares of the institution generally speaking the restrictions in place are devised to ensure that bank insiders are not given more advantageous or generous credit extensions than the bank would provide for a non insider the bank cannot give credit extensions that it would not provide to a non insider customer nor can it extend credit beyond legal or self imposed lending limits one exception to this rule comes with compensation packages provided by banks to all employees including non insiders for example if a bank has a policy of waiving certain mortgage application fees for non insider employees such as tellers the same fees could be waived for the bank president who would be an insider implementation and expansionregulation o lays out the reporting requirements mandated by two financial laws the financial institutions regulatory and interest rate control act of 1978 and the depository institutions act of 1982 banks and other lending institutions are often able to find exceptions or workarounds to regulation o in effect providing preferential treatment to insiders without violating any of the regulations one of the provisions of the dodd frank wall street reform and consumer protection act provided an extended definition of credit extension to expand the scope of regulation o reg o covers national banks state banks savings associations and insured branches of foreign banking organizations special considerations for regulation orecent growth in investments in mutual funds exchange traded funds etfs and other index based investment products have caused a number of companies to pay greater attention to regulation o large asset management companies are becoming principal shareholders through fund complexes organizations that invest in funds a complex that acquires 10 of a class of voting securities of a banking organization is considered a principal shareholder | |
what is the purpose of regulation o | regulation o was implemented to prevent certain bank insiders from receiving more favorable terms or benefits on loans or credit than those provided to non insiders or other bank customers who is considered an insider under regulation o a regulation o insider is a principal shareholder an executive officer a director or a related interest of any of these persons | |
which extensions of credit does regulation o cover | regulation o covers insider loans where there is any sort of indebtedness upon which an insider may be liable as guarantor examples would include extensions of credit by a member bank to an executive officer director or principal shareholder of the member bank a bank holding company of which the member bank is a subsidiary and any other subsidiary of that bank holding company | |
does regulation o apply to family members | shares owned or controlled by immediate family members are attributed to the insider individual such immediate family members are limited to a spouse and minor or adult children living with the insider the bottom lineregulation o prohibits lenders from extending unfair or favorable terms to bank insiders at the expense of others it is conceivable that a bank or bank employee could attempt to give their own preferential or special treatment such as lower interest rates reduced fees more flexible repayment terms or more cursory credit checks reg o prohibits such practices | |
what is regulation sho | regulation sho is a set of rules from the securities and exchange commission sec implemented in 2005 that regulates short sale practices regulation sho established locate and close out requirements aimed at curtailing naked short selling and other practices naked shorting takes place when investors sell short shares that they do not possess and have not confirmed their ability to possess understanding regulation shoshort selling refers to an exchange of securities through a broker on margin an investor borrows a stock sells it and then buys the stock back to return to the lender short sellers are betting the stock they sell will drop in price broker dealers loan securities to clients for the purpose of short selling the sec implemented regulation sho on january 3 2005 the first significant update to short selling rules since they were first adopted in 1938 regulation sho s locate standard requires brokers to have a reasonable belief the equity to be shorted can be borrowed and delivered on a specific date before short selling can occur the close out standard represents the increased amount of delivery requirements imposed upon securities that have many extended delivery failures at a clearing agency regulation sho requires reporting when the following has occurred for five consecutive settlement days history of regulation shoregulation sho has been amended over the years after initial adoption came two exceptions to the close out requirement the legacy provision and the options market maker exception there were ongoing concerns though regarding instances where requirements were not being met for closing out securities that had failed to deliver positions those concerns eventually led to the elimination of both exceptions in 2008 the result of this change was the strengthening of the close out requirements by applying them to failures to deliver as a result of a sales of all equity securities as well as cutting down the time allowed for failures to deliver to be closed out further changes to regulation sho came in 2010 one of the primary issues the sec had originally sought to address was the use of short selling to artificially force down the price of a security it specifically dealt with this problem via the modification of rule 201 which limits the price that short sales can be affected during a period of significant downward price pressure on a stock rule 201 is colloquially known as the alternative uptick rule rule 201 is triggered in the midst of a substantial decrease in a stock s price during intraday trading specifically when its shares fall at least 10 in one day it mandates that short sale orders must include a price above the current bid a move that prevents sellers from accelerating the downward momentum of a security already in sharp decline as a part of rule 201 trading centers are required to establish and enforce policies that prevent short sales at what would be deemed impermissible prices after a stock is dealt a 10 decrease in its price within the trading day this would trigger a circuit breaker that would bring price test restrictions into effect on short sales on that day and into the next trading day special considerationscertain types of short sales can qualify for an exception to regulation sho these orders are known as short exempt and are marked by brokers with the initials sse the primary exception is the use of non standard pricing quotes for trade execution | |
what is regulation t | regulation t is a collection of provisions that govern investors cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities according to regulation t an investor may borrow up to 50 of the purchase price of securities that can be bought using a loan from a broker or dealer the remaining 50 of the price must be funded with cash understanding regulation t reg t buying securities with borrowed money is commonly referred to as buying on margin which refers to assets that an investor must deposit with a broker dealer to obtain a loan additionally regulation t promulgates payment rules on certain securities transactions made through cash accounts regulation t or reg t was established by the board of governors of the federal reserve system to provide rules for extensions of credit by brokers and dealers and to regulate cash accounts an investor who has a cash account cannot borrow funds from a broker dealer and must pay the purchase price of securities with cash margin accounts on the other hand allow investors to obtain credit to fund a portion of their securities purchase because buying securities on credit can expose investors to sudden losses of a much larger magnitude compared to the same purchase using only cash the federal reserve board stepped in and promulgated a rule that limited the borrowing to be no greater than 50 of the securities purchase price 1 the 50 requirement is called the initial margin because it establishes a minimum borrowing level at the time of purchase certain brokers may have stricter requirements with levels above 50 regulation t limits the amount of credit an investor can get from their broker to buy securities on margin special considerationswhile the primary goal of regulation t was to govern margin it also introduced transaction rules for cash accounts because it takes up to two days for securities transactions to settle and the cash proceeds to be delivered to the seller of securities a situation can arise when an investor buys and sells the same securities before paying for them from the cash account this is called freeriding and it is prohibited by reg t in such cases the investor s broker must freeze the cash account for 90 days requiring the investor to fund their securities purchases with cash on the date of the trade example of reg tan investor who wishes to purchase securities using broker dealer credit must apply for a margin account that grants borrowing privileges when investors borrow money in their margin account they must pay interest based on the rate schedule established by the broker dealer suppose an investor wishes to obtain a loan from a brokerage firm to purchase 10 shares of a certain company with a price per share of 100 resulting in a total purchase of 1 000 regulation t states that the investor can borrow no more than 50 of the purchase price or 500 from the broker while the remaining balance must be paid in cash | |
what is regulation u | regulation u is a federal reserve board regulation that governs loans by entities involving securities as collateral and the purchase of securities on margin regulation u limits the amount of leverage that can be extended for loans secured by securities for the purpose of buying more securities securities involved typically include stocks mutual funds and other market traded securities understanding regulation uregulation u is designed to mitigate the adherent risks that exist when using margin leverage in securities trading especially when too much leverage is granted to an individual or business by limiting the margin amount regulation u aims to limit the potential losses that both borrowers and banks or lenders can sustain in instances where leverage can lead to very large losses relative to the physical capital extended regulation u specifically focuses on leverage extended with securities as collateral for the purchase of additional securities it applies to entities other than broker dealers such as commercial banks savings and loan associations federal savings banks credit unions production credit associations insurance companies and companies that have employee stock option plans regulation u sets a limit on the maximum loan amount an entity can issue to a borrower securing the loan against stock or other securities for the purpose of buying more securities the maximum loan value that can be offered is 50 of the collateral securities market value 1regulation u is designed to put a floor on potential losses that borrowers and banks or lenders can suffer in instances where leverage can lead to big losses relative to the capital that was made available bank lender requirementsregulation u has two important requirements that bank lenders must comply with first a bank lender must obtain a purpose statement form u 1 for loans secured by collateral that exceed 100 000 second a bank lender can only extend credit for 50 of the value of the securities used as collateral on the loan if the loan is to be used for securities purchases 1regulation u specifically applies to secured loans extended for the purpose of buying securities this is why purpose statements are important for complying with regulation u purpose statements are more strictly enforced for loans exceeding 100 000 a bank lender does not have federal reserve board restrictions when issuing a loan secured with securities that are not intended for the use of buying more securities 1the year regulation u first began covering securities credit extended specifically by commercial banks 1example of regulation u limitsfor example assume a borrower would like to borrow money from a bank for the purpose of buying securities and the borrower plans to use 400 000 in securities as collateral the loan would require a form u 1 disclosing the purpose of the loan since the loan is for the purpose of buying more securities the maximum amount of credit the bank can extend to the borrower is 200 000 if the borrower increased the amount of collateral he was willing to use to secure the loan to 500 000 then the bank could offer him a loan for 250 000 regulation u exemptionssome exceptions to regulation u may apply nonbank lenders are subject to slightly different oversight when lending with securities as collateral additionally loans offered against employee stock option plans may be exempt from regulation u requirements | |
what is regulation w | regulation w is a u s federal reserve system frs regulation that limits certain transactions between depository institutions such as banks and their affiliates in particular it sets quantitative limits on covered transactions and requires collateral for certain transactions the regulation applies to banks that are members of the fed insured state non member banks and insured savings associations regulation w was introduced to consolidate several decades of interpretations and rulemaking under sections 23a and 23b of the federal reserve act understanding regulation wregulation w the rule that implements sections 23a and 23b of the federal reserve act was published on dec 12 2002 and came into effect on april 1 2003 1sections 23a and 23b regulation w limits the risks to a bank from transactions between the bank and its affiliates they also limit the ability of a depository institution to transfer to its affiliates the subsidy arising from the institution s access to the federal safety net which offers benefits such as lower cost insured deposits and the discount window these objectives are accomplished by imposing quantitative and qualitative limits on the ability of a bank to extend credit to an affiliate or engage in certain other transactions with it 1the fed noted in january 2003 that regulation w included 70 years worth of interpretive guidance concerning statutory requirements that are fairly brief but extremely complex in application regulation w is comprehensive in its scope resolving as many as nine significant issues including derivative transactions intraday credit and financial subsidiaries 2complying with regulation wbecause most large u s banks exist within a diversified holding company structure the possibility that bank funds may finance somewhat risky purposes exists regulation w seeks to limit this risk and is conceptually straightforward although implementation is not easy compliance with regulation w is a particular challenge for some banks that are dealing with issues such as rapid growth in capital market activities or integration of previous acquisitions complying with regulation w was complex even before the regulatory reforms that were instituted in the wake of the 2008 financial crisis the dodd frank wall street reform and consumer protection act which has been criticized by some as being overly burdensome further tightened regulation w s requirements 3because exemptions to regulation w rules widely provided emergency liquidity to affiliates during the financial crisis the fed s ability to grant exemptions on its sole authority was curbed under the new rules for example the federal deposit insurance corporation fdic now has 60 days to determine whether an exemption is justified or whether it might pose an unacceptable risk to its deposit insurance fund and raise any objections 3modifications to regulation w have also expanded the concept of what an affiliate is and what constitutes a covered transaction under the law banking regulators now expect greater transparency from banks in complying with regulation w 3regulation w aims to protect banks and federal deposit insurance funds from undue financial risk | |
when does regulation w apply | given that regulation w applies to covered transactions between a bank and its affiliate two basic questions need to be answered in determining whether a transaction is subject to this regulation regulation w defines a bank s affiliates quite broadly including any company that the bank directly or indirectly controls or that is sponsored and advised by a bank as well as subsidiaries of the bank 1covered transactions under regulation w cover a wide spectrum of transactions including 1special considerationsunder regulation w transactions with any affiliate must total no more than 10 of a financial institution s capital and transactions with all affiliates combined must total no more than 20 of an institution s capital 4banks are also prohibited from purchasing low quality assets from their affiliates such as bonds with principal and interest payments that are more than 30 days past due meanwhile any extension of credit must be secured by collateral with coverage that ranges between 100 and 130 of the total transaction amount 4as an example consider a transaction where the hypothetical bank bigbanc intends to purchase a loan portfolio from its subsidiary smallbanc in order to comply with regulation w bigbanc must ensure that the transaction with smallbanc does not exceed more than 10 of its capital and that the loan portfolio is not considered a low quality asset the transaction must also take place under market terms and conditions the fed monitors banks exposures to their affiliates through the fr y 8 report that collects information on transactions between an insured depository institution and its affiliates 4 the report has to be submitted by banks quarterly on the last calendar day of each quarter 5financial institutions that are found to be in violation of regulation w can be hit with substantial civil penalties the amount of the fine is determined by several factors including whether the violation was caused with intent undertaken with reckless disregard for the institution s financial safety and soundness or resulted in any type of gain by the perpetrator 6 | |
how does regulation w work | regulation w establishes the rulemaking authority granted to the federal reserve pursuant to sections 23a and 23b of the federal reserve act it regulates covered transactions which include the extension of credit to an affiliate asset purchases from an affiliate acceptance of securities issued by an affiliate as collateral for credit and other specifically defined transactions | |
what is the limit of a transaction with a single affiliate | no transaction with a single affiliate can exceed 10 of an institution s capital 1 | |
what is the limit of transactions with all affiliates | all affiliate transactions may not exceed 20 of the institution s held capital 1 | |
are there exemptions from regulation w requirements | yes regulation w allows the federal reserve bank to permit exemptions but certain exemptions also require approval from the federal deposit insurance corporation fdic the bottom lineregulation w added to the federal reserve bank s alphabet regulations because it is the 23rd letter of the alphabet and the 23rd regulation governs covered transactions between a bank and its affiliates this is outlined in section 23a of the federal reserve act section 23a defines the kinds of companies that are bank affiliates it stipulates the kinds of transactions covered by this statute it also sets the quantifiable limitations on a bank s covered transactions with any single affiliate also with all collective affiliates finally it outlines collateral requirements for specific bank transactions with affiliates | |
what is regulation w | regulation w is a u s federal reserve system frs regulation that limits certain transactions between depository institutions such as banks and their affiliates in particular it sets quantitative limits on covered transactions and requires collateral for certain transactions the regulation applies to banks that are members of the fed insured state non member banks and insured savings associations regulation w was introduced to consolidate several decades of interpretations and rulemaking under sections 23a and 23b of the federal reserve act understanding regulation wregulation w the rule that implements sections 23a and 23b of the federal reserve act was published on dec 12 2002 and came into effect on april 1 2003 1sections 23a and 23b regulation w limits the risks to a bank from transactions between the bank and its affiliates they also limit the ability of a depository institution to transfer to its affiliates the subsidy arising from the institution s access to the federal safety net which offers benefits such as lower cost insured deposits and the discount window these objectives are accomplished by imposing quantitative and qualitative limits on the ability of a bank to extend credit to an affiliate or engage in certain other transactions with it 1the fed noted in january 2003 that regulation w included 70 years worth of interpretive guidance concerning statutory requirements that are fairly brief but extremely complex in application regulation w is comprehensive in its scope resolving as many as nine significant issues including derivative transactions intraday credit and financial subsidiaries 2complying with regulation wbecause most large u s banks exist within a diversified holding company structure the possibility that bank funds may finance somewhat risky purposes exists regulation w seeks to limit this risk and is conceptually straightforward although implementation is not easy compliance with regulation w is a particular challenge for some banks that are dealing with issues such as rapid growth in capital market activities or integration of previous acquisitions complying with regulation w was complex even before the regulatory reforms that were instituted in the wake of the 2008 financial crisis the dodd frank wall street reform and consumer protection act which has been criticized by some as being overly burdensome further tightened regulation w s requirements 3because exemptions to regulation w rules widely provided emergency liquidity to affiliates during the financial crisis the fed s ability to grant exemptions on its sole authority was curbed under the new rules for example the federal deposit insurance corporation fdic now has 60 days to determine whether an exemption is justified or whether it might pose an unacceptable risk to its deposit insurance fund and raise any objections 3modifications to regulation w have also expanded the concept of what an affiliate is and what constitutes a covered transaction under the law banking regulators now expect greater transparency from banks in complying with regulation w 3regulation w aims to protect banks and federal deposit insurance funds from undue financial risk | |
when does regulation w apply | given that regulation w applies to covered transactions between a bank and its affiliate two basic questions need to be answered in determining whether a transaction is subject to this regulation regulation w defines a bank s affiliates quite broadly including any company that the bank directly or indirectly controls or that is sponsored and advised by a bank as well as subsidiaries of the bank 1covered transactions under regulation w cover a wide spectrum of transactions including 1special considerationsunder regulation w transactions with any affiliate must total no more than 10 of a financial institution s capital and transactions with all affiliates combined must total no more than 20 of an institution s capital 4banks are also prohibited from purchasing low quality assets from their affiliates such as bonds with principal and interest payments that are more than 30 days past due meanwhile any extension of credit must be secured by collateral with coverage that ranges between 100 and 130 of the total transaction amount 4as an example consider a transaction where the hypothetical bank bigbanc intends to purchase a loan portfolio from its subsidiary smallbanc in order to comply with regulation w bigbanc must ensure that the transaction with smallbanc does not exceed more than 10 of its capital and that the loan portfolio is not considered a low quality asset the transaction must also take place under market terms and conditions the fed monitors banks exposures to their affiliates through the fr y 8 report that collects information on transactions between an insured depository institution and its affiliates 4 the report has to be submitted by banks quarterly on the last calendar day of each quarter 5financial institutions that are found to be in violation of regulation w can be hit with substantial civil penalties the amount of the fine is determined by several factors including whether the violation was caused with intent undertaken with reckless disregard for the institution s financial safety and soundness or resulted in any type of gain by the perpetrator 6 | |
how does regulation w work | regulation w establishes the rulemaking authority granted to the federal reserve pursuant to sections 23a and 23b of the federal reserve act it regulates covered transactions which include the extension of credit to an affiliate asset purchases from an affiliate acceptance of securities issued by an affiliate as collateral for credit and other specifically defined transactions | |
what is the limit of a transaction with a single affiliate | no transaction with a single affiliate can exceed 10 of an institution s capital 1 | |
what is the limit of transactions with all affiliates | all affiliate transactions may not exceed 20 of the institution s held capital 1 | |
are there exemptions from regulation w requirements | yes regulation w allows the federal reserve bank to permit exemptions but certain exemptions also require approval from the federal deposit insurance corporation fdic the bottom lineregulation w added to the federal reserve bank s alphabet regulations because it is the 23rd letter of the alphabet and the 23rd regulation governs covered transactions between a bank and its affiliates this is outlined in section 23a of the federal reserve act section 23a defines the kinds of companies that are bank affiliates it stipulates the kinds of transactions covered by this statute it also sets the quantifiable limitations on a bank s covered transactions with any single affiliate also with all collective affiliates finally it outlines collateral requirements for specific bank transactions with affiliates | |
what is regulatory capture | regulatory capture is a process by which regulatory agencies may come to be dominated by the industries or interests they are charged with regulating the result is that an agency charged with acting in the public interest instead acts in ways that benefit incumbent firms in the industry it is supposed to be scrutinizing understanding regulatory captureregulatory capture also known as the economic theory of regulation or simply capture theory was introduced to the world in the 1970s by the late george stigler a nobel laureate economist at the university of chicago stigler noted that regulated industries maintain a keen and immediate interest in influencing regulators whereas ordinary citizens are less motivated as a result even though the rules in question such as pollution standards often affect citizens in the aggregate individuals are unlikely to lobby regulators to the degree that regulated industries do 1regulated industries devote large budgets to influencing regulators at federal state and local levels by contrast individual citizens spend only limited resources to advocate for their own rights this is an extension of the concept of concentrated benefits and dispersed costs of regulation public policy and collective action in general as described by economist mancur olsen 2in many cases the regulators themselves come from the pool of industry experts and employees in part due to the complex and specialized knowledge needed to regulate an industry and may also then return to work in the industry after their government service this is known as the revolving door between government and special interests in some cases industry leaders trade the promise of future jobs for regulatory consideration making revolving doors criminally corrupt regulatory agencies that come to be controlled by the industries they are charged with regulating are known as captured agencies and agency capture occurs when that governmental body operates essentially as an advocate for the industries it regulates such cases may not be directly corrupt as there is no quid pro quo rather the regulators simply begin thinking like the industries they regulate due to heavy lobbying even well organized groups in favor of tougher regulations such as the sierra club a well known environmental advocate have only modest resources relative to industry interests examples of regulatory captureregulatory capture is common across the economy and throughout history many argue that it is a ubiquitous tendency whenever any industry is regulated because even regulation that harms or imposes costs on existing firms also tends to create barriers to entry to new firms regulation inherently tends to raise the cost of entry into a regulated market because new entrants have to bear not just the costs of entering the market but also of complying with the regulations oftentimes regulations explicitly impose barriers to entry such as licenses permits and certificates of need without which one may not legally operate in a market or industry incumbent firms may even receive legacy consideration by regulators meaning that only new entrants are subject to certain regulations regulatory capture can in some cases even result in deregulation of the behavior of the supposed subjects of the regulation themselves while maintaining regulations that benefit them such as barriers to entry subsidies and taxpayer bailout guarantees the transportation industry in the u s can be considered a classic example of regulatory capture in the late 19th century as the industrial revolution created vast new wealth government trade regulators openly advocated for the industries they oversaw including railroads large railroad companies themselves advocated for regulation by the interstate commerce commission icc under the interstate commerce act of 1887 and the icc allowed the railroad industry to function as an effective cartel 3modern financial regulatory bodies likewise tend to consist largely of industry insiders have overlapping interests with industry and act primarily in the interests of those whom they regulate financial market deregulation at the behest of the industry in the run up to the financial crisis combined with the retention of taxpayer guarantees for banks and the dramatic series of monetary and fiscal bailouts is widely believed to have contributed greatly to the u s housing bubble and ensuing great recession of the late 2000s 4criticism of regulatory capturesome economists discount the significance of regulatory capture they point out that many large industries that lobby regulators such as industries in the fossil fuel sector have experienced lower profits due to regulation in other words these economists argue that the lobbying efforts have failed to capture agencies | |
what is an example of regulatory capture | examples of regulatory capture can arise in any business sector from the food industry to banking from transportation to utilities any instance in which an agency advocates on behalf of the firms they are supposed to regulate can be an instance of capture | |
why is regulatory capture a problem | regulatory capture can be a problem because it can lead to situations where special interests are prioritized over those of the general public when agencies charged with regulating an industry for instance instead become advocates for that industry then they may fail to see the shortcomings or externalities of that business as incurred by others the bottom lineregulatory capture is a process by which regulatory agencies become dominated by the interests of those they were originally charged to regulate in this state the regulatory agency may directly or indirectly work to serve the interests of private firms rather than the general public | |
what is regulatory risk | regulatory risk is the risk that a change in laws and regulations will materially impact a security business sector or market a change in laws or regulations made by the government or a regulatory body can increase the costs of operating a business reduce the attractiveness of an investment or change the competitive landscape in a given business sector in extreme cases such changes can destroy a company s business model understanding regulatory riskvirtually any business can face significant regulatory risk given any government s power to compel businesses operating within its borders to follow its laws regulatory risks often materialize as a result of anger over a public harm caused by a business or business sector but even if new laws are never passed business leaders are obligated to assess and monitor regulatory risks and be prepared to react if they do materialize this can be time consuming and expensive because regulatory risk stemming from even one issue can drag on for years examples of regulatory riskone sector facing significant regulatory risk in the area of antitrust enforcement is big tech including meta formerly facebook amazon google and apple this is largely the result of a growing public backlash over their enormous and still growing market power and social influence past examples of regulatory risk that materialized include the introduction of the 2002 sarbanes oxley act which established more stringent accounting requirements and more severe criminal penalties for violating securities laws 1 it was passed following public outrage over multiple accounting scandals in the early 2000s including those of enron corporation and worldcom 23another type of regulatory risk would be more stringent pollution standards for manufacturers or mileage requirements for automobile makers as a result of public concerns over climate change in this case the risk may not derive from wrongdoing by any business but merely broader concern over the public good in this case the impact of climate change regulatory risk vs compliance riskcompliance risk is the risk that a company will have been determined to be in violation of already established laws or regulations this can have many causes including inadequate controls negligence human error ensuring that a business is capable of maintaining compliance and does so can be a source of significant expense as with regulatory risk managing compliance risk is an essential part of a business s overall risk management managing regulatory risk involves forward looking strategic thinking as well as careful monitoring of public opinion and the regulatory process in a business s given sector compliance risk on the other hand involves knowledge of existing laws and regulations and a more systematic approach to verifying that the company is compliant with all of them | |
what is rehypothecation | rehypothecation is a practice whereby banks and brokers use for their own purposes assets that have been posted as collateral by their clients clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees in a typical example of rehypothecation securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades understanding rehypothecationrehypothecation was a common practice until 2007 but hedge funds became much more wary about it in the wake of the lehman brothers collapse and subsequent credit crunch in 2008 09 in the united states rehypothecation of collateral by broker dealers is limited to 140 of the loan amount to a client under rule 15c3 3 of the sec rehypothecation occurs when a lender uses an asset supplied as collateral on a debt by a borrower and applies its value to cover its own obligations in order to do so the lender may have access to a variety of assets promised as collateral including tangible assets and various securities this innovative cycle of leveraging another party s assets as collateral generates a type of derivative that can expound positive results or bankrupt companies quickly should the strategy fail most often brokers rehypothecate assets as they need temporary working capital these parties often have illiquid assets they own yet have operating requirements that demand cash clients must be aware of rehypothecation as it is technically their own assets that have been pledged for someone else s debt this creates complicated creditor issues where an investors shares may longer be in their possession due to their custodian s default | |
when assets have been rehypothecated the original owner may turn into an unsecured credit and not reclaim assets during bankruptcy proceedings | rehypothecation vs hypothecationrehypothecation happens if a customer leaves a number of securities with a broker as a deposit most often in a margin account and the broker then uses the securities as a pledge for the margin on his own margin account or as backing for a loan hypothecation occurs when a borrower promises the right to an asset as a form of collateral in exchange for funds one common example occurs in the primary housing market where a borrower uses the home he is purchasing as collateral for a mortgage loan even though the borrower asserts a level of ownership over the property the lender can seize the asset if payments are not made as required similar situations occur in other collateralized loans such as a vehicle loan as well as with the setup of margin accounts to support other trading actions with rehypothecation the asset in question has been promised to an institution outside of the borrower s original intent for example if a piece of real estate functions as collateral on a mortgage loan and the lender pledges the asset to another financial institution in exchange for a loan if the mortgage lender fails the second financial institution may make a claim on the real estate protecting against rehypothecationthere s a few ways individuals can protect against rehypothecation and preserve their claim to assets during liquidations the most straightforward way relating to brokerage accounts is not open a margin account and utilize a cash account this account should not be allowed to have any margin capability although this type of account will be limited in what it can do this account may only be able to place stock trades using buy or sell orders it may also be able to purchase derivative products however you ll only be limited to the cash levels on hand within the account to cover settlements these types of accounts can never face a margin call as there are no margin requirements to satisfy there may be cases where owners of assets may opt in or opt out of allowing a custodian to pledge their assets in most cases these types of agreements are baked into the service agreement of the company if you do not agree most often the company especially if they are large and operate online may not extend to you service for one off transactions in which you wish to protect your collateral you may explicitly restrict rehypothecation of your collateral in the contract advantages and disadvantages of rehypothecationrehypothecation often makes it cheaper for individuals to incur debt borrowers who rehypothecate are often given rebates or lower costs of debt as opposed to traditional loans therefore though there may be more risk individuals often face less charges to raise capital this concept is especially important for financial institutions that rely on short term working capital to thrive but financial securities to maximize profits banks brokers or other financial institutions may navigate a liquidity crunch and access capital by rehypothecating client funds not only can this leverage strategy introduce liquidity it is conceptually a more efficient use of funds and promotes profitability the largest downside of rehypothecation is keeping potential customers in the dark when banks or brokers rehypothecate they may go behind their clients backs to use funds in the client s accounts some clients may not prefer that treatment of their assets especially if they are risk adverse or do not want their assets misused for speculative endeavors there are also leverage considerations that increase that risk of default overleveraged investments often face covenants when specific conditions are met trading accounts may receive a margin call or face debt default as a row of dominos fall after a single collapse a single margin call may cause other debts to fail their account maintenance requirements setting off a chain reaction that places the institution at higher risk of overall default often leads to lower costs to borrow fundshelps promote efficient use of capital in markets and institutionsgenerates higher profitability when rehypothecation is successfulallows risk seeking investors to leverage capitalresults in potentially not transparent practicesmay be unsettling to customers who do not want their assets touchedoften increases the risk of defaultmay entice bad actors to misuse assetsexamples of rehypothecationrehypothecation is often used in the financial sector allowing traders and investors access to more liquid assets such as capital that can be directly invested in assets or securities of their choosing for example imagine a trader who owns 100 shares of microsoft stock if the investor wants to buy shares ofa different company but can not afford to so they can open a margin account using the margin account the investor can post their microsoft shares as collateral to take out a loan then they can use those loan proceeds to buy more shares in theory the investor can continually post the most recently acquired shares as collateral then secure financing against those assets one of the more popular real examples of rehypothecation was the activity of mf global and its bankruptcy in 2011 mf global made a speculative bet in euro zone bonds financed via an off balance sheet arrangement it is suspected that mf global essentially used client funds as collateral to then secure funds that were used to back its trades the benefit for customers is they are often incentivized by cheaper fees as the company may be able to pass along lower expenses to the client as they do not need to take out debt one major regulation was limits up to the liability amount and it is suspected that mf global took advantage of international limits that were greater or limitless compared to that of the u s | |
how is rehypothecation legal | rehypothecation is legal because it is often agreed to by clients clients may have to agree to terms in order to use a service for example when they deposit shares into a specific brokerage account they may have agreed that the broker may do certain things to those shares second rehypothecation the same may be said about bank deposits in order to open a bank account at an institution the fine print may state that the firm is allowed to manage your funds as they see fit | |
what is bitcoin rehypothecation | there is nothing unique about bitcoin rehypothecation compared to other securities bitcoin rehypothecation is the act of leveraging the asset bitcoin into debt that is used to finance future investments though the party taking out the loan on the collateral does not own the bitcoin in this example because bitcoin is highly volatile the investor is at greater default risk compared to other securities as a single margin call may unwind all of their positions | |
how much can a broker rehypothecate | in the united states the securities and exchange commission restricts rehypothecation to 140 percent of the loan amount for example if collateral of 300 is used to take out a loan for 100 140 may be rehypothecated as was seen in the mf global bankruptcy there are no rehypothecation limits in some other countries the bottom linerehypothecation is the practice where banks brokers or individuals use collateral that they do not own to help finance assets previously pledged collateral is used as collateral for a new loan creating a leveraging cycle that promotes profitability but increases default risk consumers can avoid rehypothecation by avoiding margin accounts and restricting those who hold their collateral by using it in certain ways | |
what is reimbursement | reimbursement is compensation paid by an organization for out of pocket expenses incurred or overpayment made by an employee customer or another party reimbursement of business expenses insurance costs and overpaid taxes are common examples however unlike typical compensation reimbursement is not subject to taxation 1understanding reimbursementreimbursement is most commonly associated with business expenses many companies have policies outlining when they will reimburse employees for out of pocket expenses typically these expenses are related to travel and can include the costs associated with hotels food ground transportation and flights travel reimbursement companies may also reimburse employees for other types of expenses such as tuition reimbursement for college courses or continuing education classes self employed individuals can often reimburse themselves for business related expenses too and these may be tax deductible with the irs as well types of reimbursementbeyond business expenses reimbursement is also used in the insurance industry when a health insurance policyholder needs urgent medical attention the policyholder is unlikely to have the time to contact the insurer to determine the extent to which the policy covers expenses the policyholder may have to pay for medication medical services or related expenses out of pocket alternatively the insurance policy may require that the policyholder cover certain expenses out of pocket before seeking reimbursement this is common in the case of fitness reimbursement an insurer may reimburse up to a certain amount each year if a policyholder pays for and actively participates in a fitness program at a qualified fitness center in both cases the party that paid for the expenses out of pocket can seek reimbursement from the insurance company for any incurred expenses covered under the insurance policy reimbursement is also common with taxes paid to state and federal governments most income taxpayers have federal taxes withheld each pay period through payroll deductions which does not take into account the credits that a taxpayer may be entitled to due to other taxes paid or expenditures made 2 contractors pay their taxes in quarterly estimated tax payments 3 tax refunds provided to the taxpayer by the government are a form of reimbursement as the money being returned to the taxpayer is due to a previous overpayment a type of reimbursement called reimbursement alimony applies to the legal sector reimbursement alimony is ordered by a judge and is a payment made to an ex spouse as reimbursement for time and money invested in the spouse s financial prospects and growth a person in a divorce settlement who worked full time to support his or her spouse through college may be entitled to reimbursement alimony if the spouse has graduated and is now earning income requirements for reimbursementin the u s companies often use the per diem rates created by the general services administration gsa the gsa compiles reimbursement rates for various cities and states 4 the company may also choose to use its own methodology to set per diem rates by taking the gsa per diem rate as a base point and adjusting it factoring in company specific factors for example a company may want to set a higher reimbursement rate for executives or salespeople who entertain clients companies may also choose to provide employees with a fixed per diem rate special considerationsorganizations whether businesses insurers or governments have a vested interest in ensuring that reimbursements are only provided for legitimate reasons employees insurance policyholders and taxpayers can file for an expense that never occurred or inflate the value of an expense this requires the reimbursing organization to develop internal control processes in an attempt to catch fraudulent reimbursement requests another situation where a company could find itself reimbursing a fraudulent expense occurs in the banking industry for example if an account holder falls victim to identity theft or a data breach in this case the bank would run an investigation to ensure that the account was indeed compromised before it reimburses the client for any funds withdrawn from the account holder s debit or credit account example of reimbursed expensessay that you are a sales representative who visits an industry conference in order to better understand the state of the art for the industry to attend educational seminars and to professionally network as a result of this approved trip you spend out of your own money 300 for a hotel room 250 for transportation and 100 for food upon returning from your trip you file an official expense report with the company citing each of these three line items and submitting it for 650 in reimbursed expenses this sum shows up alongside your next paycheck in your bank account via direct deposit reimbursed faqsdepending on your arrangement with the company up to all of your mileage expense may be reimbursed by your employer for qualified business trips the irs also has a defined mileage allowance to refer to the deductibility of expenses car owners accrue while operating a personal vehicle for business medical charity or moving purposes for 2021 the irs suggests deducting 0 56 per mile for business use 0 14 for charity use and 0 16 for certain medical uses and moving for 2020 it s 0 575 0 14 and 0 17 respectively 5every state administers medicaid differently some states will reimburse patients for medical bills paid out of pocket if so their medicaid information should be provided to their doctor not all health care providers accept medicaid if you incur an expense covered by your health savings account hsa you can reimburse yourself for the cost via electronic transfer or by writing yourself a check drawn from the hsa account you may also be able to withdraw money from an atm using an hsa linked debit card out of pocket medicare expenses are usually reimbursed by filing a claim you can ask your health care provider to file the claim or you can do it yourself medicare then reimburses the medical costs directly to the service provider | |
what is reinsurance | reinsurance often referred to as insurance for insurance companies is a contract between a reinsurer and an insurer in this contract the insurance company known as the ceding party or cedent transfers some of its insured risk to the reinsurance company the reinsurance company then assumes all or part of one or more insurance policies issued by the ceding party 1 | |
how reinsurance works | reinsurance allows insurers to remain solvent by recovering some or all amounts paid out to claimants reinsurance reduces the net liability on individual risks and catastrophe protection from large or multiple losses the practice also provides ceding companies those that seek reinsurance the chance to increase their underwriting capabilities in number and size of risks ceding companies are insurance companies that pass their risk on to another insurer benefits of reinsuranceby covering the insurer against accumulated liabilities reinsurance gives the insurer more security for its equity and solvency by increasing its ability to withstand the financial burden when unusual major events occur insurers are legally required to maintain sufficient reserves to pay all potential claims from issued policies 2through reinsurance insurers may underwrite policies covering a larger quantity or volume of risk without excessively raising administrative costs to cover their solvency margins in addition reinsurance makes substantial liquid assets available to insurers in the event of exceptional losses 3types of reinsurancefacultative coverage protects an insurer for an individual or a specified risk or contract if several risks or contracts need reinsurance they are renegotiated separately the reinsurer holds all rights for accepting or denying a facultative reinsurance proposal 4a reinsurance treaty is for a set period rather than on a per risk or contract basis the reinsurer covers all or part of the risks that the insurer may incur under proportional reinsurance the reinsurer receives a prorated share of all policy premiums sold by the insurer for a claim the reinsurer bears a portion of the losses based on a pre negotiated percentage the reinsurer also reimburses the insurer for processing business acquisition and writing costs 5with non proportional reinsurance the reinsurer is liable if the insurer s losses exceed a specified amount known as the priority or retention limit in the case of non proportional reinsurance the reinsurer doesn t have a proportional share in the insurer s premiums and losses the priority or retention limit is based either on one type of risk or an entire risk category excess of loss reinsurance is a type of non proportional coverage in which the reinsurer covers the losses exceeding the insurer s retained limit or surplus share treaty amount this contract is typically applied to catastrophic events and covers the insurer either on a per occurrence basis or for the cumulative losses within a set period 6under risk attaching reinsurance all claims established during the effective period are covered regardless of whether the losses occurred outside the coverage period no coverage is provided for claims originating outside the coverage period even if the losses occurred while the contract was in effect 7 | |
what is reinsurance | reinsurance is insurance for insurance companies it s a way of transferring some of the financial risks that insurance companies assume when insuring cars homes people and businesses to another company the reinsurer contracts between ceding companies and reinsurers are complex and may include cut through provisions in case one party becomes insolvent | |
why should insurance companies have reinsurance | several common reasons that insurers obtain reinsurance include expanding an insurance company s capacity stabilizing its underwriting results financing gaining catastrophe protection spreading an insurer s risk and acquiring expertise 1 | |
what types of reinsurance are there | reinsurance has two basic categories treaty and facultative treaties are agreements that cover broad groups of policies like all a primary insurer s auto business facultative covers specific individual generally high value or hazardous risks such as a hospital that wouldn t be acceptable under a treaty 4the bottom linereinsurance often called insurance for insurance companies results from a contract between a reinsurer and an insurer in it the insurance company known as the ceding party or cedent transfers some of its insured risk to the reinsurance company as a result the reinsurance company assumes some or all of the insurance policies issued by the ceding party having reinsurance transfers risk to another company to reduce the likelihood of being exposed to large payouts for one or more claims | |
what is reinsurance ceded | reinsurance ceded is an insurance industry term that refers to the portion of risk that a primary insurer passes to another insurer that other insurer is often a specialist in reinsurance this practice allows the primary insurer to limit the overall risk exposure that it takes on with its clients the primary insurer is referred to as the ceding company while the reinsurance company is called the accepting company the accepting company receives a premium paid by the ceding company in exchange for taking on the risk reinsurance is sometimes called stop loss insurance the practice allows an insurance company to put a cap on the maximum losses it may sustain in a worst case scenario understanding reinsurance cededthe reinsurance process allows insurance companies to protect themselves against the possibility of a claim for catastrophic damages that would be beyond their financial resources a worst case scenario like a major hurricane could otherwise be devastating by offloading some portion of the overall risks they underwrite the insurance company reduces its overall risk and is able to keep premium costs lower for all of its clients the agreement between the ceding company and the accepting company is called the reinsurance contract and it covers all terms related to the ceded risk the contract outlines the conditions under which the reinsurance company will pay out claims the accepting company pays a commission to the ceding company on the reinsurance ceded this is called a ceding commission and covers administrative costs underwriting and other related expenses the ceding company can recover part of any claim from the accepting company reinsurance is often written by a specialist reinsurance company the biggest names globally in reinsurance include swiss re ltd berkshire hathaway inc and reinsurance group of america inc 1some reinsurance is handled by insurers internally automobile insurance for example by diversifying the types of clients the company takes on in other cases such as liability insurance for a large international business a specialty reinsurer may be necessary because diversification is not possible an insurer may multiply the ceding and reinsurance process to create a portfolio whose claims values fall below the premiums and investment income the company generates types of reinsurance contractsthere are two types of reinsurance contracts used for reinsurance ceding facultative reinsurance and the treaty reinsurance contract in a facultative reinsurance contract each type of risk that may be passed to the reinsurer in exchange for a premium is negotiated individually the reinsurer can reject or accept individual parts of a contract proposed by the ceding company or can accept or reject the contract in its entirety with a treaty reinsurance contract the ceding company and the accepting company agree on a broad set of insurance transactions that are covered by reinsurance for example the ceding insurance company may cede all of the risks for flood damage and the accepting company may accept all flood damage risks in a particular geographic area such as a floodplain munich re group is the world s largest reinsurer or recipient of ceded insurance as of 2022 with net premiums of approximately 43 1 billion according to statista 2benefits of reinsurance cededthe insurance industry by definition is exposed to an unusual degree of risk the process of reinsurance ceded keeps the industry stable that is it allows individual insurers to manage earnings volatility and maintain adequate capital reserves in any business those are keys to success 3reinsurance also allows an insurer the freedom to underwrite policies that cover a larger volume of risks without excessively raising the costs of covering their solvency margins or the amount at which the assets of the insurance company at fair values exceed its liabilities and other comparable commitments reducing risks through reinsurance frees up substantial liquid assets that an insurer needs to keep on hand in case of unexpected claims for the client the reinsurance ceded process lifts an administrative burden the client does not have to shop for multiple insurers to take on different types of risks or different levels of protection for its business operations the process is handled among insurers 4challenges to reinsurance cededreinsurance contracts are negotiated on a case by case basis and have grown increasingly complex according to deloitte a professional services advisory firm in a report modernizing reinsurance administration the company notes that many large insurers are taking on and administering literally thousands of reinsurance contracts it argues that many companies have not adequately updated and integrated their data technology systems in order to handle these complex demands effectively 5the main challenge for the reinsurance industry is of course the utter unpredictability of catastrophic events the covid 19 pandemic for example presents an unprecedented challenge to certain specialty reinsurers such as those in the business of protecting against losses in the travel industry and the convention business 6regulation of reinsurance cededthe insurance industry in the u s is regulated mostly at the state level that means that an insurance company must abide by the regulations of the individual states in which it does business the responsibilities are multiplied of course in a global business environment the reinsurance industry by contrast is not as heavily regulated reinsurers do not deal directly with policyholders so consumer protections do not necessarily apply nevertheless reinsurers must be licensed as insurers in each state in which they do business they also must abide by the regulations and financial reporting requirements of each jurisdiction 7questions answers | |
what is the difference between reinsurance ceded and reinsurance assumed | reinsurance ceded and reinsurance assumed are the actions taken by the two parties involved in this type of contract between two insurance companies | |
what is a ceded loss ratio | the loss ratio is a key metric for the insurance industry it is the ratio of losses paid out to premiums paid in and is expressed as a percentage it is a high level snapshot of an insurance company s profitability 8ceded loss ratio also called ceded reinsurance leverage is an indication of how much of its risk and how much of its premiums an insurance company is passing off to reinsurers | |
what is the difference between surplus share reinsurance and quota reinsurance | surplus share reinsurance and quota reinsurance are two types of agreement between an insurer and a reinsurer that define the responsibilities of each party in a surplus share treaty the primary insurer retains the liabilities of a contract up to a specific amount the remainder is passed along to a reinsurer a quota share treaty is essentially the reverse the primary insurer passes along the responsibility for risks to a reinsurer up to a certain limit the primary insurer is responsible for losses exceeding that amount | |
what is reinvestment | reinvestment is the practice of using dividends interest or any other form of income distribution earned in an investment to purchase additional shares or units rather than receiving the distributions in cash understanding reinvestmentsreinvestment is a great way to significantly increase the value of a stock mutual fund or exchange traded fund etf investment over time it is facilitated when an investor uses proceeds distributed from the ownership of an investment to buy more shares or units of the same investment proceeds can include any distribution paid out from the investment including dividends interest or any other form of distribution associated with the investment s ownership if not reinvested these funds would be paid to the investor as cash social enterprises mainly reinvest back into their own operations 1 dividend reinvestment plans also known as drips allow investors the opportunity to efficiently reinvest proceeds in additional shares of the investment issuers of an investment can structure their investment offerings to include dividend reinvestment programs corporations commonly offer dividend reinvestment plans other types of companies with public offerings such as master limited partnerships and real estate investment trusts can also institute dividend reinvestment plans fund companies paying distributions also decide whether or not they will allow dividend reinvestment investors investing in a stock that is traded on a public exchange will typically enter into a dividend reinvestment plan through their brokerage platform elections when buying an investment through a brokerage platform an investor has the option to reinvest dividends if dividend reinvestment is enabled for the investment if dividend reinvestment is offered an investor can typically change their election with their brokerage firm any time during the duration of their investment reinvestment is typically offered with no commission and allows the investors to buy fractional shares of a security with the distributed proceeds reinvestment is an important consideration for all types of investments and can specifically add to investment gains for income investors numerous income focused investments are offered for both debt and equity investments the vanguard high dividend yield fund vhdyx is one of the broad market s top dividend mutual funds it is an index fund that seeks to track the ftse high dividend yield index 2 it offers investors the opportunity to reinvest all dividends in fractional shares of the fund income investors choosing reinvestment should be sure to consider taxes when reinvesting paid distributions investors are still required to pay taxes on distributions regardless of whether or not they are reinvested 3 zero coupon bonds are the only fixed income instrument to have no investment risk since they issue no coupon payments special considerations reinvestment riskalthough there are several advantages to reinvesting dividends there are times when the risks outweigh the rewards for example consider the reinvestment rate or the amount of interest that can be earned when money is taken out of one fixed income investment and put into another essentially the reinvestment rate is the amount of interest the investor could earn if they purchased a new bond while holding a callable bond called due because of an interest rate decline if an investor is reinvesting proceeds they may need to consider reinvestment risk reinvestment risk is the chance that an investor will be unable to reinvest cash flows e g coupon payments at a rate comparable to the current investment s rate of return reinvestment risk can arise across all types of investments generally reinvestment risk is the risk that an investor could be earning a greater return by investing proceeds in a higher returning investment this is commonly considered with fixed income security reinvestment since these investments have consistently stated rates of return that vary with new issuances and market rate changes prior to a significant investment distribution investors should consider their current allocations and broad market investment options for example an investor buys a 10 year 100 000 treasury note with an interest rate of 6 the investor expects to earn 6 000 per year from the security however at the end of the term interest rates are 4 if the investor buys another 10 year 100 000 treasury note they will earn 4 000 annually rather than 6 000 also if interest rates subsequently increase and they sell the note before its maturity date they lose part of the principal | |
what is a reinvestment rate | the reinvestment rate is the amount of interest that can be earned when money is taken out of one fixed income investment and put into another for example the reinvestment rate is the amount of interest the investor could earn if he purchased a new bond while holding a callable bond called due because of an interest rate decline reinvestment rates are of particular concern to risk averse investors who invest in treasury bills t bills treasury bonds t bonds municipal bonds certificates of deposit cds preferred stocks with a stated dividend rate and other fixed income investments these investors who are often retirees or close to retirement rely on the steady income provided by their investments while reinvesting in fixed income securities is a common retirement portfolio strategy it does have risks such as interest rate risk understanding reinvestment ratethe reinvestment rate is the return an investor expects to receive after reinvesting the cash flows from an investment the return is expressed as a percentage and represents the anticipated profit the investor expects to make on the reinvestment of their money for example take an investor who has purchased a 5 year cd with an interest rate of 2 at the end of the term the investor can reinvest their money in another cd at the going interest rate they can take the cash without reinvesting or they can reinvest in another kind of investment if they choose to reinvest in a bond offering a 3 5 yield then their reinvestment rate is 3 5 reinvestment and interest rate riskanticipated reinvestment rates play a role in an investor s decisions about what term to select when purchasing a bond or certificate of deposit cd an investor who expects interest rates to rise might select a shorter term investment under the assumption the reinvestment rate when the bond or cd matures will be higher than the interest rates that can be locked for longer maturity investments | |
when a bond is issued and interest rates increase an investor faces interest rate risk since bond prices fall when interest rates rise an investor holding a fixed rate bond may experience a capital loss if the bond is sold before its maturity date the longer the time period until maturity the greater the bond is subject to interest rate risk because a bondholder is given the face amount at maturity bonds nearing the maturity date have little interest rate risk | investors can reduce interest rate risk by holding bonds of different durations and by hedging their investments with interest rate derivatives reinvestment risk | |
when interest rates decrease the price of a fixed rate bond increases an investor may decide to sell a bond for a profit holding onto the bond may result in not earning as much interest income from reinvesting the periodic coupon payments this is called reinvestment risk when interest rates decline interest payments on bonds also decrease a bond s yield to maturity declines reducing the total income received | reinvested coupon paymentsinstead of making coupon payments to the investor some bonds reinvest the coupon into the bond so it grows at a stated compound interest rate when a bond has a longer maturity period the interest on interest significantly increases the total return and might be the only method of realizing an annualized holding period return equal to the coupon rate calculating reinvested interest depends on the reinvested interest rate reinvested coupon payments may account for up to 80 of a bond s return to an investor the exact amount depends on the interest rate earned by the reinvested payments and the time period until the bond s maturity date the reinvested coupon payment may be calculated by figuring the compounded growth of reinvested payments or by using a formula when the bond s interest rate and yield to maturity rate are equal | |
what is reinvestment risk | reinvestment risk refers to the possibility that an investor will be unable to reinvest cash flows received from an investment such as coupon payments or interest at a rate comparable to their current rate of return this new rate is called the reinvestment rate zero coupon bonds z bonds are the only type of fixed income security to have no inherent investment risk since they issue no coupon payments throughout their lives 1understanding reinvestment riskreinvestment risk is the likelihood that an investment s cash flows will earn less in a new security creating an opportunity cost it is the potential that the investor will be unable to reinvest cash flows at a rate comparable to their current rate of return for example an investor buys a 10 year 100 000 treasury note t note with an interest rate of 6 the investor expects to earn 6 000 per year from the security however at the end of the first year interest rates fall to 4 if the investor buys another bond with the 6 000 received they would receive only 240 annually rather than 360 moreover if interest rates subsequently increase and they sell the note before its maturity date they stand to lose part of the principal in addition to fixed income instruments such as bonds reinvestment risk also affects other income producing assets such as dividend paying stocks callable bonds are especially vulnerable to reinvestment risk this is because callable bonds are typically redeemed when interest rates begin to fall upon redeeming the bonds the investor will receive the face value and the issuer has a new opportunity to borrow at a lower rate if they are willing to reinvest the investor will do so receiving a lower rate of interest 2managing reinvestment riskinvestors may reduce reinvestment risk by investing in non callable securities also z bonds may be purchased since they do not make regular interest payments investing in longer term securities is an option too since cash becomes available less frequently and does not need to be reinvested often a bond ladder a portfolio of fixed income securities with varying maturity dates may help mitigate reinvestment risk as well bonds maturing when interest rates are low may be offset by bonds maturing when rates are high the same type of strategy can be employed with certificates of deposits cds investors can reduce reinvestment risk by holding bonds of different durations and by hedging their investments with interest rate derivatives having a fund manager can help reduce reinvestment risk therefore some investors consider allocating money into actively managed bond funds however because bond yields fluctuate with the market reinvestment risk still exists 3instead of making coupon payments to the investor some bonds automatically reinvest the coupon paid back into the bond so it grows at a stated compound interest rate when a bond has a longer maturity period the interest on interest significantly increases the total return and might be the only method of realizing an annualized holding period return equal to the coupon rate calculating reinvested interest depends on the reinvested interest rate reinvested coupon payments may subsequently account for a good amount of a bond s return to an investor the exact amount depends on the interest rate earned by the reinvested payments and the time until the bond s maturity date the reinvested coupon payment may be calculated by figuring the compounded growth of reinvested payments or by using a formula when the bond s interest rate and yield to maturity rate are equal example of reinvestment riskcompany a issues callable bonds with an 8 interest rate interest rates subsequently drop to 4 presenting the company with an opportunity to borrow at a much lower rate as a result the company calls the bonds pays each investor their share of principal and a small call premium and issues new callable bonds with a 4 interest rate investors may reinvest at the lower rate or seek other securities with higher interest rates | |
what is a related party transaction | the term related party transaction refers to a deal or arrangement made between two parties who are joined by a preexisting business relationship or common interest companies often seek business deals with parties with whom they are familiar or have a common interest related party transactions are legal but may create conflicts of interest public companies must disclose these transactions investopedia jessica olahtypes of transactionsrelated parties who make transactions may be business affiliates shareholder groups or subsidiaries related party transactions can includethese transactions are not illegal but can cloud the business environment by leading to conflicts of interest they may show favorable treatment for close associates of the hiring business consider a company that contracts with a major shareholder s business to renovate its offices in some cases related party transactions must be approved by management consensus or a company s board of directors 1regulationsin the united states securities regulatory agencies ensure that related party transactions are conflict free and do not affect shareholders value or the corporation s profits negatively the securities and exchange commission sec requires that all publicly traded companies disclose all transactions with related parties such as executives associates and family members in their quarterly 10 q reports and their annual 10 k reports 2 many companies have compliance policies and procedures in place that outline how to document and implement related party transactions the financial accounting standards board fasb has accounting standards for related party transactions for public private and non profit organizations some of these standards include monitoring of payment competitiveness payment terms monetary transactions and authorized expenses 3related party transactions must be reported transparently to ensure that all actions are legal and ethical and do not compromise shareholder value exampleenron was a u s based energy and commodities company based in houston in the infamous scandal of 2001 the company used related party transactions with special purpose entities to help conceal billions of dollars in debt from failed business ventures and investments the related parties misled the board of directors their audit committee employees as well as the public these fraudulent related party transactions led to enron s bankruptcy prison sentences for its executives lost pensions and savings of employees and shareholders and the ruin and closure of arthur andersen the auditor for enron which was found guilty of federal crimes and sec violations 4this financial disaster led to the development of the sarbanes oxley act of 2002 which established new and expanded existing requirements for u s public company boards management and public accounting firms including specific rules that limit conflicts of interest arising from related party transactions 5 | |
are related party transactions audited | although there are rules and standards for related party transactions they tend to be difficult to audit owners and managers are responsible for disclosing related parties and their interests but if they withhold disclosure for personal gain the transactions could go undetected transactions with related parties may be recorded among similar normal transactions making them difficult to distinguish hidden transactions and undisclosed relationships could lead to improperly inflated earnings even fraud | |
which ifrs regulation covers related parties | the international financial reporting standards foundation ifrs is a non profit that develops global accounting and sustainability disclosure standards known as ifrs standards the organization s ias 24 covers related parties and ensures that an entity s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances including commitments with such parties 6 | |
does the irs need to know about related party transactions | the internal revenue service irs examines related party transactions for any conflicts of interest according to internal revenue code 267 if it finds conflicts the irs will not allow any tax benefits claimed from the transaction in particular the irs often scrutinizes property sales between related parties and deductible payments between related parties 7the bottom linea related party transaction is conducted between two parties that have a preexisting business relationship these transactions carry the potential for conflicts of interest so the activity is monitored by regulatory bodies such as the sec and the fasb | |
what is relationship management | the term relationship management refers to a strategy in which an organization maintains an ongoing level of engagement with its audience and supply chain this management can occur between a business and its customers which is called business to consumer b2c or between a business and other businesses which is referred to as business to business b2b relationship management aims to create a partnership between an organization and its patrons instead of viewing the relationship as merely transactional this is done through sales service and the analysis of data | |
how relationship management works | businesses must establish and maintain good relationships with their business partners and their customers in order to succeed this is done through relationship management relationship management involves strategies to build client support for a business and its offerings and increase brand loyalty building a relationship most often occurs at the customer level but it is valuable between businesses as well building a relationship with clients yields rewards for all parties customers who feel that a company is responsive to their needs likely will continue to use that company s products and services the same principle applies to relationships between businesses put simply business partners are more likely to be loyal when there s a better connection between the two a company s reputation for responsiveness and generous post sales involvement can often stimulate new sales maintaining communication with consumers lets a company identify potential problems before they come to a costly head a business may hire a relationship manager to oversee relationship building or it may combine this function with another marketing or human resources hr role the role of a relationship manager requires analytical and communication skills professionals in smaller firms may handle both consumer and business relations larger companies may employ two different individuals to handle each there are four components to relationship management customer retention loyalty profitability and satisfaction the first measures how many customers are loyal to the company loyalty is measured through repeated sales as well as referrals the third refers to the total profit or loss earned by a company satisfaction is how well received a company s goods and services are by its customers and suppliers types of relationship managementas noted above businesses have different relationship management options available to them based on the subject the first is business to consumer while the other is business to business we ve highlighted the basics of each below business to customer or b2c businesses rely on customer relationship management crm tools to build a solid rapport with their customers crm involves a significant amount of data and sales analysis as it seeks to understand market trends the economic landscape and consumer tastes crm also can include marketing techniques and a post sales support program a crm program typically consists of written media such as sales announcements newsletters and post sale surveys video media communication such as commercials and tutorials ongoing marketing is critical to a business as it is more costly to acquire a new customer than it is to maintain a current customer marketing helps a business to gauge consumers interests and needs and develop campaigns to maintain loyalty business relationship management which is also called b2b management promotes a positive and productive relationship between a company and its business partners as such business to business relationships occur with vendors suppliers distributors and other associates these relationships can also benefit from relationship management brm seeks to build trust solidify rules and expectations and establish boundaries it also can help with dispute resolutions contract negotiations cross sale opportunities and controlling risk for instance companies that have a long standing relationship with their suppliers may be able to negotiate a better price for supplies for quicker delivery and having a good relationship may help increase payment times to them from say 30 to 45 days | |
why is relationship management important | the obvious answer to this question is that relationship management builds and strengthens new and existing relationships with customers and business partners this can help increase brand loyalty and lead to greater efficiencies relationship management can help attract new customers vendors and suppliers thereby increasing a company s reputation and profitability this can often come through visibility or word of mouth from existing partners another key benefit to relationship management is the way it can reduce risks by using data analytics special software and other tools relationship managers can look for weaknesses and inefficiencies in their supply chains this gives them the option to look for new suppliers or find ways to improve their existing relationships | |
what is the main purpose of relationship management | relationship management is a process that companies use to manage and make effective use of their client and supplier relationships the process involves analyzing data and using software to attract new relationships increase and protect brand loyalty identify inefficiencies mitigate risk and boost profitability | |
why do companies use relationship management | companies use relationship management for many reasons relationship management refers to a strategy that helps them establish new and maintain existing relationships with customers and suppliers doing so allows them to increase brand loyalty find and deal with inefficiencies attract new relationships and increase profitability it also helps them mitigate risks by identifying weaknesses in supply chains | |
how do you improve relationship management | there are several ways companies can improve their relationship management these include establishing and outlining clear goals companies can also use special tools and software to analyze data and provide invite feedback to customers and suppliers training and developing staff is also a key driver to improve relationship management but perhaps the most obvious choice is to hire a relationship manager who is responsible for analyzing inputs communicating with those on both sides and delegating tasks the bottom linethere s a lot more to success than simply having a good product service or brand name sure these may attract a few new customers and suppliers but is it enough to retain them companies should employ some form of relationship management in order to ensure their success this is a strategy used to attract and retain new customers and suppliers boost brand loyalty increase profitability find inefficiencies and mitigate risk some companies use special tools like software while others do so by hiring a dedicated individual known as a relationship manager | |
what is a relationship manager | relationship managers work to improve business relationships with partner firms and clients relationship management is generally divided into two fields client relationship management and business relationship management both fields share the common goal of facilitating good relationships so that businesses can maximize the value of those relationships and maintain a good reputation understanding relationship managersgood relationship management is about communication conflict management and people skills as much as it is about the technical aspects of a particular business or industry professionals in this role may have a bachelor s or master s degree in business but they also might have an undergraduate or postgraduate degree in marketing or communications strong communication and coordination skills are needed for facilitating better relationships with clients and other partners it s also common for relationship managers to work closely with customer facing staff to help them better understand clients needs and motivate them to provide the highest service standards in addition to communication skills relationship managers need strong analytical skills to develop a deep understanding of the products or services being sold the markets in which they are being sold and broader industry trends the better they understand the technical aspects of the business the better and more efficient they can be at communicating with clients or partners or helping staff meet the needs of clients or partners types of relationship managersat smaller firms relationship managers may be responsible for overseeing aspects of both business relationships and client relationships however at larger firms relationship managers are likely to specialize in one area or the other a key role of relationship managers is to help businesses differentiate themselves from competitors the goal of client relationship managers is to build a culture of relationships with clients based on trust and value and not only on price 1 this helps create strong barriers to competition clients who know they can trust a particular business are more likely to return even if a less familiar or less trusted competitor offers a lower price client relationship managers work with senior executives sales managers technical managers finance directors and others who make or influence sales decisions they also may work directly with clients to address problems or overcome other obstacles client relationship managers also monitor industry trends in order to identify new sales opportunities and to brief the product development and sales teams to meet client needs they use the data they collect to establish revenue targets and identify the resources needed to meet them research also is important to analyze competitor trends and assess potential threats to the firm s relationships with clients another role for client relationship managers is to organize training planned maintenance and other services to help clients get better and more efficient use from products or services they also might help set up online ordering and payment systems that simplify the commercial arrangements with clients business relationship managers oversee the internal communication of business units within a larger corporation or with suppliers and other outside entities 2 they oversee teams that monitor purchases budgeting and cost factors and provide valuable information across business units to use resources efficiently and execute company standards this job involves tracking data related to how the business interacts with service suppliers raw material providers and other partners business relationship managers look for trends handle problems and analyze communications contracts and negotiations they use the information to refine company practices helping firms to maintain positive reputations in their communities is another important role that business relationship managers play businesses that are viewed as positive contributors to the community are better able to attract clients and business partners this means that building positive relationships with local municipalities or downtown development authorities is as important a part of the role of building relationships with other business partners | |
what goes into good relationship management | good relationship management is about communication conflict management people skills and the technical aspects of a particular business or industry | |
what skills do relationship managers need | relationship managers need relationship managers also need to work closely with customer facing staff in order to help them better understand clients needs and motivate them to provide the highest service standards | |
what are the two main relationship manager types | the two main types of relationship manager are | |
what is relative purchasing power parity rppp | relative purchasing power parity rppp is an expansion of the traditional purchasing power parity ppp theory to include changes in inflation over time purchasing power is the power of money expressed by the number of goods or services that one unit can buy and which can be reduced by inflation rppp suggests that countries with higher rates of inflation will have a devalued currency understanding relative purchasing power parity rppp according to relative purchasing power parity rppp the difference between the two countries rates of inflation and the cost of commodities will drive changes in the exchange rate between the two countries rppp expands on the idea of purchasing power parity and complements the theory of absolute purchasing power parity appp the appp concept declares that the exchange rate between the two nations will be equal to the ratio of the price levels for those two countries and appp is discussed later in this article purchasing power parity in theorypurchasing power parity ppp is the idea that goods in one country will cost the same in another country once their exchange rate is applied according to this theory two currencies are at par when a market basket of goods is valued the same in both countries the comparison of prices of identical items in different countries will determine the ppp rate however an exact comparison is difficult due to differences in product quality consumer attitudes and economic conditions in each nation also purchasing power parity is a theoretical concept that may not be true in the real world especially in the short run in 2023 the purchasing power index of the united states is 115 75 1dynamics of rppprppp is essentially a dynamic form of ppp as it relates the change in two countries inflation rates to the change in their exchange rate the theory holds that inflation will reduce the real purchasing power of a nation s currency thus if a country has an annual inflation rate of 10 that country s currency will be able to purchase 10 less real goods at the end of one year rppp also complements the theory of absolute purchasing power parity appp which maintains that the exchange rate between two countries will be identical to the ratio of the price levels for those two countries this concept comes from a basic idea known as the law of one price this theory states that the real cost of a good must be the same across all countries after the consideration of the exchange rate example of rpppsuppose that over the next year inflation causes average prices for goods in the u s to increase by 3 in the same period prices for products in mexico increased by 6 we can say that mexico has had higher inflation than the u s since prices there have risen faster by three points according to the concept of relative purchase power parity that three point difference will drive a three point change in the exchange rate between the u s and mexico so we can expect the mexican peso to depreciate at the rate of 3 per year or that the u s dollar should appreciate at the rate of 3 per year limitations of rpppusers of rppp information must be mindful of several limitations in the inherent process of calculating rppp some of the limitations include exchange rates can also be influenced by speculative trading and market sentiment therefore actual exchange rates may deviate from rppp calculations rppp vs apppthere s a couple of differences between relative purchasing power parity and absolute purchasing power parity appp first ppp is primarily concerned with comparing the relative price levels of two or more countries to determine their exchange rates absolute ppp is a simpler concept that focuses on the absolute price levels within a single country second ppp suggests that exchange rates should adjust over time to equalize the purchasing power of currencies allowing for a more accurate representation of the real exchange rate appp implies that exchange rates should be fixed or constant based on the ratio of absolute price levels between two countries last ppp takes into account changes in price levels over time while appp does not because app assumes that exchange rates should always be at a constant ratio it does not account for inflation | |
what is the formula for purchasing power parity | the formula for purchasing power parity ppp is cost of good x in currency 1 cost of good x in currency 2 this allows an individual to make comparisons of currencies and the value of a basket of goods they can buy | |
what country has the highest purchasing power | according to the crowdsourced database numbeo luxembourg has the highest purchasing power with a purchasing power index number of 127 1 in 2023 other top countries include qatar 123 6 united arab emirates 123 4 and switzerland 118 7 the lowest country in 2023 is nigeria 8 4 1 | |
why is purchasing power parity important | purchasing power parity is important because it allows economists to compare two different economies primarily the economic productivity and the standard of living among nations it seeks to equalize currencies to determine the value of a basket of goods the bottom linerelative purchasing power parity is an economic theory that suggests exchange rates between two countries currencies should adjust over time to reflect differences in their price levels according to ppp if one country experiences higher inflation than another its currency should depreciate to maintain the same purchasing power across borders promoting equilibrium in international trade | |
what is relative strength | relative strength is a strategy used in momentum investing and in identifying value stocks it focuses on investing in stocks or other investments that have performed well relative to the market as a whole or to a relevant benchmark for example a relative strength investor might select technology companies that have outperformed the nasdaq composite index or stocks that are outperforming the s p 500 index technical analysts use an indicator known as the relative strength index rsi to generate overbought or oversold signals understanding relative strengthwhile the goal of value investing is to buy low and sell high the goal of relative strength investing is to buy high and sell even higher as such relative strength investors assume that the trends currently displayed by the market will continue for long enough to allow them to realize a positive return any sudden reversal of that trend will lead to negative results to identify investment candidates relative strength investors begin by observing a benchmark such as the nasdaq composite index they will then look to see which companies within that market have outperformed their peers either by rising more rapidly than their peers or by falling less rapidly than them because relative strength investing assumes that present trends will continue into the future it is most effective in stable periods with minimal disruption by contrast chaotic periods such as the 2007 2008 financial crisis can be dangerous for relative strength investors because they can lead to sharp reversals of investment trends in those situations investor psychology can suddenly reverse with yesterday s investment darlings suddenly being shunned although momentum investing is often associated with individual stocks it can also be applied to whole markets or industry sectors using index funds and exchange traded funds etfs similarly investors can make relative strength investments in other asset classes such as in real estate using real estate investment trusts reits more exotic instruments such as commodity futures options and other derivative products can also be used relative strength investing can also be used as one component of a larger strategy such as pairs trading real world example of relative strengthharry is a relative strength investor who keeps a close eye on corporate bond prices and the s p 500 his investment portfolio consists of an s p 500 index fund and an etf that tracks the corporate bond market as a relative strength investor he periodically increases his allocation toward whichever asset is outperforming at that time in doing so he hopes to benefit from the continuing trend of that asset s outperformance effectively buying high and selling higher in recent months he has noticed that investors seem to be increasing their portfolio bond allocations at the expense of stocks this inflow of money into the bond market has been raising bond prices and lowering yields expecting this trend to continue harry responds by decreasing his investment in the s p 500 and increasing his investment in the corporate bond etf he hopes to benefit from any ongoing outperformance of bonds relative to stocks relative strength index rsi short term and technical traders also look at relative strength in technical analysis the relative strength index rsi is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset the rsi is displayed as an oscillator a line graph that moves between two extremes and can have a reading from 0 to 100 the indicator was originally developed by j welles wilder jr and introduced in his seminal 1978 book new concepts in technical trading systems traditional interpretation and usage of the rsi are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price an rsi reading of 30 or below indicates an oversold or undervalued condition image by sabrina jiang investopedia 2021 | |
what is the relative strength index rsi | the relative strength index rsi is a momentum indicator used in technical analysis rsi measures the speed and magnitude of a security s recent price changes to evaluate overvalued or undervalued conditions in the price of that security the rsi is displayed as an oscillator a line graph on a scale of zero to 100 the indicator was developed by j welles wilder jr and introduced in his seminal 1978 book new concepts in technical trading systems 1the rsi can do more than point to overbought and oversold securities it can also indicate securities that may be primed for a trend reversal or corrective pullback in price it can signal when to buy and sell traditionally an rsi reading of 70 or above indicates an overbought situation a reading of 30 or below indicates an oversold condition | |
how the relative strength index rsi works | as a momentum indicator the relative strength index compares a security s strength on days when prices go up to its strength on days when prices go down relating the result of this comparison to price action can give traders an idea of how a security may perform 2 the rsi used in conjunction with other technical indicators can help traders make better informed trading decisions 3the rsi uses a two part calculation that starts with the following formula 2r s i step one 100 100 1 average gain average loss rsi text step one 100 left frac 100 1 frac text average gain text average loss right rsistep one 100 1 average lossaverage gain 100 the average gain or loss used in this calculation is the average percentage gain or loss during a look back period the formula uses a positive value for the average loss take the next step to invest advertiser disclosure the offers that appear in this table are from partnerships from which investopedia receives compensation this compensation may impact how and where listings appear investopedia does not include all offers available in the marketplace periods with price losses are counted as zero in the calculations of average gain periods with price increases are counted as zero in the calculations of average loss the standard number of periods used to calculate the initial rsi value is 14 4 for example imagine the market closed higher seven out of the past 14 days with an initial average gain of 1 the remaining seven days all closed lower with an initial average loss of 0 8 the first calculation for the rsi would look like the following expanded calculation 55 55 100 100 1 1 14 0 8 14 55 55 100 left frac 100 1 frac left frac 1 14 right left frac 0 8 14 right right 55 55 100 1 140 8 141 100 once there are 14 periods of data available the second calculation can be done its purpose is to smooth the results so that the rsi only nears 100 or zero in a strongly trending market r s i step two 100 100 1 previous average gain 13 current gain previous average loss 13 current loss rsi text step two 100 left frac 100 1 frac left text previous average gain times 13 right text current gain left left text previous average loss times 13 right text current loss right right rsistep two 100 1 previous average loss 13 current loss previous average gain 13 current gain 100 after the rsi is calculated the rsi indicator can be plotted beneath an asset s price chart as shown below the rsi will rise as the number and size of up days increase it will fall as the number and size of down days increase image by sabrina jiang investopedia 2021as you can see in the above chart the rsi indicator can stay in the overbought region for extended periods while the stock is in an uptrend the indicator may also remain in oversold territory for a long time when the stock is in a downtrend this can be confusing for new analysts but learning to use the indicator within the context of the prevailing trend will clarify these issues | |
why is rsi important | using rsi with trendsthe primary trend of the security is important to know to properly understand rsi readings for example well known market technician constance brown cmt proposed that an oversold reading by the rsi in an uptrend is probably much higher than 30 likewise an overbought reading during a downtrend is much lower than 70 5as you can see in the following chart during a downtrend the rsi peaks near 50 rather than 70 this could be seen by traders as more reliably signaling bearish conditions many investors create a horizontal trendline between the levels of 30 and 70 when a strong trend is in place to better identify the overall trend and extremes 6on the other hand modifying overbought or oversold rsi levels when the price of a stock or asset is in a long term horizontal channel or trading range rather than a strong upward or downward trend is usually unnecessary the relative strength indicator is not as reliable in trending markets as it is in trading ranges in fact most traders understand that the signals given by the rsi in strong upward or downward trends often can be false a related concept focuses on trade signals and techniques that conform to the trend in other words using bullish signals primarily when the price is in a bullish trend and bearish signals primarily when a stock is in a bearish trend may help traders to avoid the false alarms that the rsi can generate in trending markets image by sabrina jiang investopedia 2021overbought or oversoldgenerally when the rsi indicator crosses 30 on the rsi chart it is a bullish sign and when it crosses 70 it is a bearish sign put another way one can interpret that rsi values of 70 or above indicate that a security is becoming overbought or overvalued it may be primed for a trend reversal or corrective price pullback an rsi reading of 30 or below indicates an oversold or undervalued condition 7overbought refers to a security that trades at a price level above its true or intrinsic value that means that it s priced above where it should be according to practitioners of either technical analysis or fundamental analysis traders who see indications that a security is overbought may expect a price correction or trend reversal therefore they may sell the security the same idea applies to a security that technical indicators such as the relative strength index highlight as oversold it can be seen as trading at a lower price than it should traders watching for just such an indication might expect a price correction or trend reversal and buy the security interpretation of rsi and rsi rangesduring trends the rsi readings may fall into a band or range during an uptrend the rsi tends to stay above 30 and should frequently hit 70 during a downtrend it is rare to see the rsi exceed 70 in fact the indicator frequently hits 30 or below 3these guidelines can help traders determine trend strength and spot potential reversals for example if the rsi can t reach 70 on a number of consecutive price swings during an uptrend but then drops below 30 the trend has weakened and could be reversing lower the opposite is true for a downtrend if the downtrend is unable to reach 30 or below and then rallies above 70 that downtrend has weakened and could be reversing to the upside trend lines and moving averages are helpful technical tools to include when using the rsi in this way be sure not to confuse rsi and relative strength the first refers to changes in the the price momentum of one security the second compares the price performance of two or more securities 2example of rsi divergencesan rsi divergence occurs when price moves in the opposite direction of the rsi in other words a chart might display a change in momentum before a corresponding change in price a bullish divergence occurs when the rsi displays an oversold reading followed by a higher low that appears with lower lows in the price this may indicate rising bullish momentum and a break above oversold territory could be used to trigger a new long position a bearish divergence occurs when the rsi creates an overbought reading followed by a lower high that appears with higher highs on the price 8as you can see in the following chart a bullish divergence was identified when the rsi formed higher lows as the price formed lower lows this was a valid signal but divergences can be rare when a stock is in a stable long term trend using flexible oversold or overbought readings will help identify more potential signals image by sabrina jiang investopedia 2021example of positive negative rsi reversalsan additional price rsi relationship that traders look for is positive and negative rsi reversals a positive rsi reversal may take place once the rsi reaches a low that is lower than its previous low at the same time that a security s price reaches a low that is higher than its previous low price traders would consider this formation a bullish sign and a buy signal conversely a negative rsi reversal may take place once the rsi reaches a high that is higher that its previous high at the same time that a security s price reaches a lower high this formation would be a bearish sign and a sell signal 9example of rsi swing rejectionsanother trading technique examines rsi behavior when it is reemerging from overbought or oversold territory this signal is called a bullish swing rejection and has four parts 8as you can see in the following chart the rsi indicator was oversold broke up through 30 and formed the rejection low that triggered the signal when it bounced higher using the rsi in this way is very similar to drawing trend lines on a price chart image by sabrina jiang investopedia 2021there is a bearish version of the swing rejection signal that is a mirror image of the bullish version a bearish swing rejection also has four parts 8the following chart illustrates the bearish swing rejection signal as with most trading techniques this signal will be most reliable when it conforms to the prevailing long term trend bearish signals during downward trends are less likely to generate false alarms image by sabrina jiang investopedia 2021the difference between rsi and macdthe moving average convergence divergence macd is another trend following momentum indicator that shows the relationship between two moving averages of a security s price the macd is calculated by subtracting the 26 period exponential moving average ema from the 12 period ema the result of that calculation is the macd line a nine day ema of the macd called the signal line is then plotted on top of the macd line it can function as a trigger for buy and sell signals 10 traders may buy the security when the macd crosses above its signal line and sell or short the security when the macd crosses below the signal line the rsi was designed to indicate whether a security is overbought or oversold in relation to recent price levels it s calculated using average price gains and losses over a given period of time the default time period is 14 periods with values bounded from 0 to 100 7the macd measures the relationship between two emas while the rsi measures price change momentum in relation to recent price highs and lows these two indicators are often used together to provide analysts with a more complete technical picture of a market these indicators both measure the momentum of an asset however they measure different factors so they sometimes give contradictory indications for example the rsi may show a reading above 70 for a sustained period of time indicating a security is overextended on the buy side at the same time the macd could indicate that buying momentum is still increasing for the security either indicator may signal an upcoming trend change by showing divergence from price the price continues higher while the indicator turns lower or vice versa limitations of the rsithe rsi compares bullish and bearish price momentum and displays the results in an oscillator placed beneath a price chart like most technical indicators its signals are most reliable when they conform to the long term trend true reversal signals are rare and can be difficult to separate from false alarms a false positive for example would be a bullish crossover followed by a sudden decline in a stock a false negative would be a situation where there is a bearish crossover yet the stock suddenly accelerated upward since the indicator displays momentum it can stay overbought or oversold for a long time when an asset has significant momentum in either direction therefore the rsi is most useful in an oscillating market a trading range where the asset price is alternating between bullish and bearish movements | |
what does rsi mean | the relative strength index rsi measures the price momentum of a stock or other security the basic idea behind the rsi is to measure how quickly traders are bidding the price of the security up or down the rsi plots this result on a scale of 0 to 100 readings below 30 generally indicate that the stock is oversold while readings above 70 indicate that it is overbought traders will often place this rsi chart below the price chart for the security so they can compare its recent momentum against its market price | |
should i buy when rsi is low | some traders consider it a buy signal if a security s rsi reading moves below 30 this is based on the idea that the security has been oversold and is therefore poised for a rebound however the reliability of this signal will depend in part on the overall context if the security is caught in a significant downtrend then it might continue trading at an oversold level for quite some time traders in that situation might delay buying until they see other technical indicators confirm their buy signal | |
what happens when rsi is high | as the relative strength index is mainly used to determine whether a security is overbought or oversold a high rsi reading can mean that a security is overbought and the price may drop therefore it can be a signal to sell the security | |
what is the difference between rsi and moving average convergence divergence macd | rsi and moving average convergence divergence macd are both momentum measurements that can help traders understand a security s recent trading activity however they accomplish this goal in different ways in essence the macd works by smoothing out the security s recent price movements and comparing that medium term trend line to a short term trend line showing its more recent price changes traders can then base their buy and sell decisions on whether the short term trend line rises above or below the medium term trend line | |
what is a relative valuation model | a relative valuation model is a business valuation method that compares a company s value to that of its competitors or industry peers to assess the firm s financial worth relative valuation models are an alternative to absolute value models which try to determine a company s intrinsic worth based on its estimated future free cash flows discounted to their present value without any reference to another company or industry average like absolute value models investors may use relative valuation models when determining whether a company s stock is a good buy understanding relative valuation modelsthere are many different types of relative valuation ratios such as price to free cash flow enterprise value ev operating margin price to cash flow for real estate and price to sales p s for retail 12one of the most popular relative valuation multiples is the price to earnings p e ratio it is calculated by dividing stock price by earnings per share eps and is expressed as a company s share price as a multiple of its earnings a company with a high p e ratio is trading at a higher price per dollar of earnings than its peers and is considered overvalued likewise a company with a low p e ratio is trading at a lower price per dollar of eps and is considered undervalued this framework can be carried out with any multiple of price to gauge relative market value therefore if the average p e for an industry is 10x and a particular company in that industry is trading at 5x earnings it is relatively undervalued to its peers 3one of the most common metrics in relative valuation models is the p e or price to earnings ratio this is calculated by dividing a company s stock price by its annual earnings per share relative valuation model vs absolute valuation modelrelative valuation uses multiples averages ratios and benchmarks to determine a firm s value 45 a benchmark may be selected by finding an industry wide average and that average is then used to determine relative value an absolute measure on the other hand makes no external reference to a benchmark or average a company s market capitalization which is the aggregate market value of all of its outstanding shares is expressed as a plain dollar amount and tells you little about its relative value of course with enough absolute valuation measures in hand across several firms relative inferences can be drawn in addition to providing a gauge for relative value the p e ratio allows analysts to back into the price that a stock should be trading at based on its peers for example if the average p e for the specialty retail industry is 20x it means the average price of stock from a company in the industry trades at 20 times its eps assume company a trades for 50 in the market and has an eps of 2 the p e ratio is calculated by dividing 50 by 2 which is 25x this is higher than the industry average of 20x which means company a is overvalued if company a were trading at 20 times its eps the industry average it would be trading at a price of 40 which is the relative value in other words based on the industry average company a is trading at a price that is 10 higher than it should be representing an opportunity to sell because of the importance of developing an accurate benchmark or industry average it is important to only compare companies in the same industry and market capitalization when calculating relative values | |
what are the assumptions of relative valuation models | relative valuation models assume that companies that operate in the same business sector will have similar cost structures and market conditions this makes it possible to make reliable comparisons between two competing companies based on their profit margins cash flow sales and other metrics | |
what are the limitations of relative valuation models | one limitation of relative valuation models is that they assume similar businesses will face the same market conditions while this is true to a point competing companies often pursue different strategies and target different markets meaning that it is not always possible to produce an apples to apples comparison in addition relative valuation models tend to rely on past financial statements which are not always reliable predictors of future results | |
how do you value a business | business valuation is a major element of corporate financed used to measure the value of a company before mergers acquisitions and public offerings in order to value the business analysts will examine a company s financials to determine its assets liabilities capital structure the amount of stocks and bonds issued cash flows and other investments to produce an objective valuatio for the company the bottom linea relative valuation model compares the value of similar companies in the same market segment based on comparable metrics like cash flow and earnings it is possible to determine if a company uses its resources more or less effectively than its competitors | |
what is relative value | relative value is a method of determining an asset s worth that takes into account the value of similar assets this is in contrast with absolute value which looks only at an asset s intrinsic value and does not compare it to other assets the price to earnings ratio p e ratio is a popular valuation method that can be used to measure the relative value of stocks understanding relative valuevalue investors examine the financial statements of competing companies before deciding where to invest their money they look at relevant footnotes management commentary and economic data to assess the stock s value relative to its peers steps in relative valuation may include benefits of relative valuationinvestors must always choose among the investments that are actually available at any given time and relative valuation helps them to do that by 2019 it was easy to look back at the prices of most u s stocks in 2009 and realize that they were undervalued however that does not help one to choose better investments today that is where a relative valuation method like the stock market capitalization to gdp ratio shines the world bank maintains data on stock market capitalization as a percentage of gdp for many nations covering several decades with u s stocks near record highs in terms of stock market capitalization as a percentage of gdp in 2019 stocks in most other countries were relatively inexpensive investors must always choose among the investments that are actually available at any given time and relative valuation helps them to do that criticism of relative valuationthe primary flaw of relative valuation is that it may condemn investors to making the best of a bad situation when limited to a single asset class relative valuation can do little more than reduce losses in extreme circumstances for example value funds generally did much better than the s p 500 during the 2000 2002 bear market unfortunately most of them still lost money relative valuation vs intrinsic valuationrelative valuation is one of two important methods of placing a monetary value on a company the other is intrinsic valuation investors might be familiar with the discounted cash flows dcf method for determining the intrinsic value of a company while relative valuation incorporates many multiples a dcf model uses a company s future free cash flow projections and discounts them that is achieved by using a required annual rate eventually an analyst will arrive at a present value estimate which can then be used to evaluate the potential for investment if the dcf value is higher than the cost of the investment the opportunity may be a good one an example of relative valueconsider the following table of financial information comparing microsoft to other technology firms companymarket capitalization millions net income millions price to earnings pe ratiomicrosoft 666 154 22 11330 5oracle 197 500 9 91320 5vmware 52 420 1 18646 8based on the above relative value analysis results microsoft is overvalued relative to oracle however microsoft is also undervalued relative to vmware | |
what is the relative vigor index | the relative vigor index rvi is a momentum indicator used in technical analysis it measures the strength of a trend by comparing a security s closing price to its trading range while smoothing the results using a simple moving average sma the rvi s usefulness is based on the observed tendency for prices to close higher than they open during uptrends and to close lower than they open in downtrends image by sabrina jiang investopedia 2021the formula for the relative vigor index rvi the rvi formula may look complicated but it is really fairly intuitive numerator a 2 b 2 c d 6 denominator e 2 f 2 g h 6 rvi sma of numerator for n periods sma of denominator for n periods signal line rvi 2 i 2 j k 6 where a close open b close open one bar prior to a c close open one bar prior to b d close open one bar prior to c e high low of bar a f high low of bar b g high low of bar c h high low of bar d i rvi value one bar prior j rvi value one bar prior to i k rvi value one bar prior to j n minutes hours days weeks months begin aligned text numerator frac a 2 times b 2 times c d 6 7pt text denominator frac e 2 times f 2 times g h 6 7pt text rvi frac text sma of numerator for n periods text sma of denominator for n periods 7pt qquad text signal line frac text rvi 2 times i 2 times j k 6 7pt textbf where a text close text open b text close text open one bar prior to a c text close text open one bar prior to b d text close text open one bar prior to c e text high text low of bar a f text high text low of bar b g text high text low of bar c h text high text low of bar d i text rvi value one bar prior j text rvi value one bar prior to i k text rvi value one bar prior to j n text minutes hours days weeks months end aligned numerator 6a 2 b 2 c d denominator 6e 2 f 2 g h rvi sma of denominator for n periodssma of numerator for n periods signal line 6rvi 2 i 2 j k where a close openb close open one bar prior to ac close open one bar prior to bd close open one bar prior to ce high low of bar af high low of bar bg high low of bar ch high low of bar di rvi value one bar priorj rvi value one bar prior to ik rvi value one bar prior to jn minutes hours days weeks months | |
what does the relative vigor index rvi tell you | the rvi indicator is calculated in a similar fashion to the stochastics oscillator but it compares the close relative to the open rather than comparing the close relative to the low traders expect the rvi value to rise as the bullish trend gains momentum because in this positive setting a security s closing price tends to be at the top of the range while the open is near the low of the range in other words during an uptrend prices often close higher than they open while during a downtrend prices often close lower than they open the rvi is interpreted in the same way as many other oscillators such as moving average convergence divergence macd or the relative strength index rsi while oscillators tend to fluctuate between set levels they may remain at extreme levels over a prolonged period of time so that interpretation must be undertaken in a broad context to be actionable the rvi is instead a centered oscillator and not a banded trend following oscillator which means that it s typically displayed above or below the price chart moving around a center line rather than the actual price it s a good idea to use the rvi indicator in conjunction with other forms of technical analysis in order to find the highest probability outcomes 1example of how to use the relative vigor index rvi a trader might examine potential changes in a trend with the rvi indicator by looking for divergences with the current price the trader would then identify specific entry and exit points with traditional trendlines and chart patterns the two most popular trading signals include the rvi works best in trending markets it tends to generate false signals in rangebound markets results can be improved by setting longer term lookback periods which help to reduce the impact of whipsaws and short term countertrends | |
what is technical analysis in trading | technical analysis is a trading strategy that uses data on statistical trends to evaluate trends and make investment or trading decisions it focuses on the study of price and volume using data from price movements and trading volume to analyze how trends are likely to change this is different from fundamental analysis which uses data about the company underlying the asset to make investment or trading decisions | |
is the relative vigor index a leading or lagging indicator | the relative vigor index is considered a leading indicator meaning it changes before the trend changes the rvi signals that a trend change is likely in the future when its value diverges from the current behavior of the asset s price | |
what type of indicator is the relative vigor index | the relative vigor index is a momentum indicator these are leading indicators that evaluate the speed of price changes over time other types of technical indicators include trend indicators lagging mean reversion indicators lagging relative strength indicators leading and volume indicators leading or lagging | |
what is relevant cost | relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions the concept of relevant cost is used to eliminate unnecessary data that could complicate the decision making process as an example relevant cost is used to determine whether to sell or keep a business unit the opposite of a relevant cost is a sunk cost which has already been incurred regardless of the outcome of the current decision example of relevant costassume for example a passenger rushes up to the ticket counter to purchase a ticket for a flight that is leaving in 25 minutes the airline needs to consider the relevant costs to make a decision about the ticket price almost all of the costs related to adding the extra passenger have already been incurred including the plane fuel airport gate fee and the salary and benefits for the entire plane s crew because these costs have already been incurred they are sunk costs or irrelevant costs the only additional cost is the labor to load the passenger s luggage and any food that is served mid flight so the airline bases the last minute ticket pricing decision on just a few small costs types of relevant cost decisionsa big decision for a manager is whether to close a business unit or continue to operate it and relevant costs are the basis for the decision assume for example a chain of retail sporting goods stores is considering closing a group of stores catering to the outdoor sports market the relevant costs are the costs that can be eliminated due to the closure as well as the revenue lost when the stores are closed if the costs to be eliminated are greater than the revenue lost the outdoor stores should be closed make vs buy decisions are often an issue for a company that requires component parts to create a finished product for example a furniture manufacturer is considering an outside vendor to assemble and stain wood cabinets which would then be finished in house by adding handles and other details the relevant costs in this decision are the variable costs incurred by the manufacturer to make the wood cabinets and the price paid to the outside vendor if the vendor can provide the component part at a lower cost the furniture manufacturer outsources the work a special order occurs when a customer places an order near the end of the month and prior sales have already covered the fixed cost of production for the month if a client wants a price quote for a special order management only considers the variable costs to produce the goods specifically material and labor costs fixed costs such as a factory lease or manager salaries are irrelevant because the firm has already paid for those costs with prior sales if the business decides not to produce the order the costs associated with its production are considered avoidable costs | |
what is a relief rally | a relief rally is a respite from a broader market sell off that results in temporarily higher securities prices relief rallies often occur when anticipated negative news winds up being positive or less severe than expected a relief rally is one type of bear market rally market participants price in many different types of events such as the release of a company s quarterly earnings report election results interest rate changes and new industry regulations any of these events can trigger a relief rally when the news is not as bad as expected relief rallies happen in many different asset classes such as stocks bonds and commodities understanding a relief rallya relief rally often happens amid a secular decline in the market or persistent selling pressure that lasts for multiple days relief rallies happen for individual stocks as well slightly better than expected financial results sometimes ignite relief rallies for beaten down stocks with a long history of missing analyst expectations for many quarters sometimes even a lower than expected loss can ignite a relief rally or they might be triggered by a more positive tone on a company conference call with analysts part of the reason is that slightly good news sometimes causes short sellers to buy stock to cover their positions which can trigger a short covering this is done as short sellers look to avoid further losses as prices rise because bear markets last for long periods of time they can exact an emotional drain on investors hoping for a market turnaround hence the relief when signs of a bounce appear market advisors warn against emotional responses to market volatility as investors may panic and make judgment errors regarding their holdings identifying a relief rally can be challenging even for experienced traders in many cases such a rally can last for weeks or even months before the continuation of a longer term downward trend special considerationsa relief rally does not necessarily spell the end of a secular decline however both the aftermath of the dotcom bubble and the 2007 2008 financial crisis saw several relief rallies for stocks only to see renewed fears push market prices lower again sharp relief rallies that occur in otherwise bearish markets are sometimes called a dead cat bounce or sucker s rally this type of rally may fool some into thinking there is a reversal in the trend only to find the bear market continuing soon after | |
what is a remittance | a remittance is money that is sent from one party to another broadly speaking any payment of an invoice or a bill can be called a remittance however the term is most often used nowadays to describe a sum of money sent by someone working abroad to their family back home the term is derived from the word remit which means to send back investopedia madelyn goodnightunderstanding remittancesremittances can be money sent as payment for a bill however most remittances involve sending money to relatives they are often sent by foreign workers to family members in their home countries the most common way of making a remittance is by using an electronic payment system through a bank or an electronic money transfer service such as western union people who use these options are generally charged a fee transfers can take as little as ten minutes to reach the recipient remittances play an increasingly large role in the economies of small and developing countries they also play an important role in disaster relief often exceeding official development assistance oda they help raise the standard of living for people in low income nations and help combat global poverty in fact since the late 1990s remittances have exceeded development aid and in some cases make up a significant portion of a country s gross domestic product gdp according to the world bank s migration and development brief 508 billion in remittances were sent to low and middle income countries in 2020 this was followed by 605 billion in 2021 in 2019 they reached a then all time high of 548 billion but declined thereafter due to the covid pandemic 12remittances to these countries is expected to grow to 630 billion in 2022 and 659 billion in 2023 the amount is larger than the foreign direct investment and official aid funds sent to these countries excluding china 1remittances are also used to help those living in less developed nations open bank accounts a trend that helps promote economic development | |
how to send a remittance | remittances typically are sent using an electronic payment system or service remittances can also be sent by u s postal service money order for international money orders 3remittance feesfees to send money internationally vary according to the provider and the service the global average cost of sending a 200 remittance in the first quarter of 2021 according to the world bank it costs more to send remittances through banks than through digital channels or money transfer services 6financial impact of remittancesthe 2020 economic crisis and covid 19 had a severe impact on migrant workers and their families back home the world bank estimated in late 2020 that remittances to family members would drop by 14 in 2020 compared to pre epidemic levels it foresaw rising unemployment among migrants a slowing of new migrations and an increase in returns of migrants to their home countries 7there is a concern about the high cost of global remittances especially with the elevated drive towards global financial inclusion to promote transparency some countries limit remittances to bank wire transfers but banks are the most expensive transfer channel and wire transfers in particular are among the highest cost according to the world bank in the first quarter of 2021 average remittance costs for transfers to the middle east and north africa fell to 6 3 from 7 a year earlier in sub saharan africa costs averaged 8 down from 8 9 for the same period in latin america costs averaged 5 5 down from 6 6for low income countries or those with struggling economies remittances represent one of the largest sources of income for the native population in 2015 for example mexicans abroad sent more than 24 billion back home which was more money than the country generated from selling oil 8the collapse of the venezuelan economy caused an enormous migration to other nations and a corresponding increase in remittances to family members left behind in 2017 more than 1 5 billion in remittances were sent to family members remaining in the beleaguered country 9the top remittance recipient countries in 2021 were india 89 billion followed by mexico 54 billion and china 53 billion 10special considerationsthere are concerns among financial intelligence units that remittances are one of the ways in which money can be laundered or violent activities like terrorism can be sponsored the methodology countries use to record the amount of money people receive via remittances is rarely made public while the majority of value transfers occur via web or wire where they can be tracked easily a fair amount of money is transferred in ways that are harder to follow recent fintech financial technology waves in international money transfers are forcing fees down rising players include payoneer wise and worldremit regulation and oversight continue to be strengthened to ensure a more secure movement of funds | |
what is a remittance | a remittance is money sent from one person or entity to another it can be money sent for payment of a bill for example however today it s more commonly seen as money sent by a person in one country to relatives or friends in another | |
how do i send a remittance | you can send it by visiting your bank and requesting a wire transfer or ach transfer or you can send it using a money transfer service that specializes in transfers domestic and international you can use an app such as paypal to send a remittance to another country these electronic services move money quickly often within a day if you prefer you can always send a money order by u s mail but how soon it will arrive at its destination depends on which service you use e g first class international mail or express mail | |
what s the difference between a remittance and a payment | although a remittance can be a payment sent in response to receiving a bill it s a term that s also used to describe funds sent internationally for instance when money is sent by someone in the u s to family or friends in another country they are sending a remittance the bottom lineremittances are sent all across the globe in huge amounts they play a very important role in the economies of various low to middle income nations as well in disaster relief the amounts that are transferred yearly can exceed the gdps of some countries remittances can be expensive to send that s a concern for organizations such as the world bank because funds sent home by migrants have greatly complemented government cash transfer programs to support families suffering economic hardships 6reducing the costs and encouraging the flow of remittances to households in countries where they provide economic relief should be a focus of government policies around the world | |
what is remuneration | remuneration is the total compensation received by an employee including base salary bonuses commission payments overtime pay and any other monetary benefits that the employee receives perks such as an on site gym or vacation time aren t counted as compensation because they don t involve money paid to the employee however benefits such as the use of a company car may count as remuneration and may be taxable income tips although they are paid by customers rather than employers count as compensation determining compensationat the executive level remuneration can include options bonuses expense accounts and other forms of compensation detailed in an employment contract the total depends on many factors including if it s remuneration it s generally taxable the irs has a guide to taxation of fringe benefits types of remunerationthe most common type of remuneration is in the form of wages or salary many sales positions offer a commission on sales or a percentage of the amount sold positions in the food service and hospitality industries often rely on tips as the minimum wage for these jobs is usually substantially less than the state s general minimum wage other benefits may include health insurance retirement plan matching contributions sick days personal days and reimbursement for work related travel or other expenses a company anxious to attract a person with a unique skillset or an outstanding reputation may offer yet another type of remuneration the golden hello this is a signing bonus due when the employee starts the job the golden parachute guarantees an executive a generous payout in case of termination and is written into a contract before the job begins another type of remuneration at the executive level is deferred compensation which sets aside a portion of an employee s earnings to be redeemed later one example is a retirement plan that includes an employer matching a certain amount contributed by an employee remuneration may also refer to the benefits an employee receives from the company such as health insurance coverage gym memberships and the use of a company mobile device or car minimum wage lawsthe minimum wage is the lowest remuneration employers can legally pay most employees the minimum wage varies by state although the state minimum must at least equal the federal minimum wage of 7 25 per hour as of jan 2024 22 states increased their minimum wages those with hourly rates of 15 00 or more include maryland new jersey new york california connecticut massachusetts and washington washington state boasts the highest state minimum wage of 16 28 in the united states 47 8 of all workers earn less than 15 an hour and reside in one of twenty states that still use the federal minimum wage of 7 25 an hour 1 | |
what does remuneration mean according to the irs | remuneration is the total amount paid to an employee it may include a salary or hourly rate bonuses commissions or any other payment according to the irs remuneration is the total of earnings and other taxable benefits and allowances 2 | |
what is the difference between salary and remuneration | salary is a form of remuneration for many salary and remuneration are the same they are paid a flat salary or hourly rate for their work for others salary is only one part of remuneration salespeople may receive a small salary plus income from commissions based on their sales |
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