risks resulting from uncertainty of prices

risks resulting from uncertainty of prices

QUESTION 8

In low and middle-income nations, the risks resulting from uncertainty of prices pose serious threats to traders and farmers. In these developing countries, the risks brought about by price uncertainty are increasingly borne by traders and farmers and not by the government or consumers. Prices are subject to variations that are quite unpredictable, with direct and indirect costs. The National Statistical Office (NSO) of India has set the nominal growth rate at 7.5% for this fiscal year, which will end in March 2020, the worst to be recorded since 1975. This has been caused by a budgeted fiscal deficit of 7 trillion compared to the now low GDP number of 204 trillion. The result is a fiscal deficit ratio of up to 3.5% of GDP. This fiscal slippage during times of slow growth does not come surprisingly; early warning signs of the sustainability of debt and its repayment have already started to show up, causing major concerns in India’s bond markets.

The thought that an investor would give payment to loan money over any period, for over three decades was more or less theoretical up to 2009. During that year, in the height of the financial crisis, Sweden’s Central Bank dropped its overnight deposit rate to -0.25%. Today, the majority of the bonds in Europe and Japan, upward of as much as 30% of all investment-grade debt all over the world, carry negative yields to maturity. This phenomenon is not only limited to short maturities.

India’s 10-year yield to maturity rates for government bonds is expected to continue dropping while it’s already in its negatives. There are quite several explanations that have led to this menace in the fixed-income world with the primary driver been Central Bank policy. Traditional monetary policy, which includes almost zero reserve rates, has proven not to be in a position to stimulate economic growth. With this, the Central Bank of India is finding ways to penalize commercial banks storing their reserves. It is done through injecting money into the economy and forceful lending. An associated drop in values of currency is also a deliberate move to stimulate economic growth in countries where exports support growth.

Monetary accommodation gets further reduced, making bond purchases at a decrease of nearly 1 trillion in the subsequent year. The flow of private investment is a necessity to fund borrowings, especially from the Indian government. There will be periods of frequent volatility of more significant interest rates. The high yield bond returns get expected to get challenged by an unwind of accommodation from the central bank. These events do not necessarily mean the deterioration of credit fundamentals. Economists in Citi predict an increase of 57% in the European government bonds meaning that one risk may lift yield possibly over the near term boosting new insurance.

Central Banks are also executing quantitative easing pushing up prices of the longer-dated bonds while pushing down yields. Buying bonds by the Central Bank of India has been so rampant that it’s effectively eliminating private debt ownership, thus reducing the available sovereign debt in India.

Worsening these issues is the demand for income by investors. While chasing after income all over, yield-starved investors are bidding up the prices of the bonds. This includes institutional investors that are tasked with investment-grade responsibilities, and also demand from passive strategies which have fixed allocations to sovereign debt.

Citibank, N.A. should charge Carrier only 3% for international transaction fees.

Question 9

Citibank, N.A., has a fully operating office in Mumbai India. In case of payment delays, the bank should contact its head office in India and consult with the management on what could be the cause and what should otherwise get done. The company has the right to withhold information regarding the issues due to public relations policies set before. Upon getting complaints on a specific delay, Citi mostly issues an apology on behalf of the company to the clients while making sure they have teams on the case working out a solution as soon as they possibly can. Most delays result from changes made by the City concerning payment cycles. In City, it is the Human Resource Manager that is well equipped in the de-escalation of delay related frustrations from clients, ensuring a repeat of the latter does not occur in the future.

The United States government should be in a position to help when a customer of Citibank, N.A., has any challenge regarding the bank. To operate in the US, the bank gets therefore regulated by the Federal Reserve Bank, which one can contact for further consultations.

Question10

Carrier is mandated to continue with the transaction as earlier structured since the payment is made or otherwise on its way to been finalized. This action is solely based on the initial wishes of the client via Citi. Thus, after a delay, the default instructions concerning the transaction take effect. The carrier is mandated by law to continue delivery of said shipment under the pre-agreed upon bill and endorsements. The carrier is also enabled to cancel a transaction in the event a fraudulent negotiation is at risk of play. In the event the transaction occurs without the bill presentation has occurred requires the consignee to furnish a bond exempting the carrier or indemnifying them against possible loss.

I would recommend the Carrier to start accepting online payments since we live in a digitized era. Payments through cryptocurrency are faster and more secure since the data is stored in online ledgers. The timely verification of electronic billing eases the process of shipment delivery while reducing the risk carriers are put under, especially in cases of delayed billings.

Question 11

Trade finance alludes to financial transactions, either local or international, which relate to finance and global trade. These financial transactions include lending, factoring, issuing credit letters, and insurance. Approximately 80-90% of global trade relies on trade finance. Almost every time goods and services are exchanged across borders, some form of trade finance is involved.

The biggest challenge with trade finance is the volumes of paper documents making up the information flow. Banks are, therefore, seeking other alternatives to reduce costs and increase the efficiency of information flow through replacing paper documents with digital data flows. Another challenge is the scarcity of trade financing in low income and developing countries leaving them at risk of liquidity shortages and general reassessment risks, which lead to a financial crisis. Trade and export financing get faced with risks like currency exposure, manufacturing risks, and transport risks.

This digitization of global transactions is done through the adoption of blockchain technology. A blockchain is a structure of data that allows for the creation of a digital ledger of transactions which are distributed among a digital network by using cryptography. In this way, every participant on the network can securely amend that particular ledger without the centralization of authority.

Blockchain promises to have the ability to streamline the trade finance process. It means Blockchain can reduce processing time significantly, eliminate the rampant use of paper while saving money through ensuring transparency, security, and trust. It also removes bad actors and forces everyone to play fair in a new transparent way of doing business that will virtually eliminate the risk of manipulation by participants along the chain.

The creation of an end-to-end trade finance network for banks and their clients is facilitating trade finance directly between parties and increasing efficiency in the market. Making it easier to exchange trade-related data and deliver financing to the entire ecosystem, such a trade finance network has the potential to prove itself as a game-changer.

Benefits of Blockchain Technology in trade finance:

1. Efficiency

Transactions are completed directly through parties where no intermediary is required, and the information is digitized.

The ability to operate clear contracts automatically triggers commercial actions.

1. Traceability

It helps in tracking assets and goods and where they are residing currently

• Transparency

When commercial transparency is increased, there are reduced delays in commerce

Transaction details against the agreements improve the trust further

1. Audit ability

Every transaction is recorded indefinitely as well as subsequently

It also provides an audit trail for the assets life between the parties

1. Security

There is the assurance of the authenticity of the information. It is because every transaction has to be verified within the network independently.

1. Collaboration

Trade finance related data is shared easily and securely by each party.