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Banking Industry and Managing Funds - Research Paper Example

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This paper "Banking Industry and Managing Funds" focuses on the fact that the forecast about an increase in the Interest Rates within six (6) months brought about the need to plan for the bank in response to negative effects on profitability and the Net Worth…
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Banking Industry and Managing Funds
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Download file to see previous pages This result suggests that the majority of banks should focus more on the core business (loans and deposits) instead of viewing the asset and liability management as the profit centre ( Pinheiro V.L.  &  Ferreira, M.,2008, Abstract)”.
Hedging Costs would include the funds needed for the Margin Requirement of the transaction. This involves tying up 10 % to 30 % of the total amount of the hedged position. There are commission costs of transaction execution on top of that. And the company that brokered or arranged the transaction will also be paid 1 % to 3 % of the hedging contract for one year. The bank will also incur the cost of funds or lost income based on the interest rate factored on those other costs because the funds could be placed to earn interest instead of being paid for hedging. (The Benche, 2010, Web)
Options Contracts, on the other hand, which is a right to exchange a fixed amount of one currency for a fixed amount of another within a predetermined period, will cost 3 % to 5 % of the contract value.
Macro Hedging, on the other hand, was made very popular by Billionaire George Soros who utilized the strategy of Global Macro Hedging. “Soros assumed (correctly) that the Bank of England would not support the pound participation in the European Exchange Rate Mechanism (ERM) indefinitely by jacking up interest rates in an economy already in recession. Soros made $1 billion overnight when the Bank of England let the British currency devalue( Vardy, N 2010.Web).”
Investing in a Hedge Fund, on the other hand, should consider that such an Investment fund is limited to high net worth investors. The bank has to pay a performance fee to its Investment Manager, 1 5 to 2 % management fee to be paid annually, plus 20 % of the returns made from the asset, according to Hedge Funds Studies in 2006. (TopQualityEssays.com, 2009, Web)
Following all these information, the given facts of the Case Study were considered to arrive at a logical analysis about a bank that needs to hedge in preparation for a forecasted interest increase within the next 6 months. ...Download file to see next pagesRead More
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