Contributing Member of the Accounting & Financial Analysis Councils

GLG News by this Author

GLG News is now G+ Insights

G+ is a community for professionals, academics and entrepreneurs to connect through online discussions and in-person meetings. You will continue to see G+ Insights (formerly GLG News) here as well as on the G+ website, where you can share and discuss the G+ Insights you read.

Bubbleburst of derivative market and its consequences

November 3, 2008

Analysis of:The $1,300 Trillion Derivative Market | maxkapital.blogspot.com

The derivative market has grown to such a massive proportion due to the speculative activities and the intention of the players to make quick profit.  The market operation in derivatives requires only the margin money which is about one tenth of the value of underlying security, the expansion of credit in the derivative market depends on the liquidity flow and each operator's ability for risk taking.  However, simultanous credit expansion in the economy, flow of funds from productive investment to speculative operations, and the reckless operations of several big players had fuelled the expansion of derivative market out of proportion, and its ultimate collapse.   The operators inject more and more funds into the derivative trading, which reduces the availability of funds/credits in other economic areas, and the failure of some of the operators triggers the fire, and the collapse of the market, effecting normal economic activities badly. 

Method of Valuation of Assets - How useful in preventing the turmoil.

October 10, 2008

Analysis of:Alls Fair: The Crisis and Fair-Value Accounting | www.cfo.com

In the present context, Mr. John McCain rightly says that "Fair value rules may be exacerbating the credit crunch", since the market reacts and stabilizes on sentiments. While strictly applying the valuation rule of mark to market accounting, the assets held by the investment companies will be vaued at current market rates which has already fallen considerably.  For those assets, which are valued at mark-to-model accounting would still find a dilemma in its valuation, and if the assets are valued at distress sale price, it would take several companies towards failure, as the investors will line-up for the redemption of their investment at throw-away prices, which will automatically reduce the possibility of survival of several investment banks.   Those "sound" assets that had suffered undue valuation may be allowed to be suspended, so that there is always a possibility of better recoveries, but liquidity is the factor to be considered in such a situation. 

Value Accounting - a must in the current economic scenario.

October 3, 2008

Analysis of:Politicians rail against fair value accounting | www.ft.com

Failure of several investment banks together with some insurance companies clearly indicate that the investment banking system need to be modified so that the short-comings and irregularities are capped at the beginning itself, and should not be allowed to grow to such a proposition that it becomes impossible for the institutions to come out of such financial crisis. The fair value accounting stipulates the valuation of the holdings of the companies at current market price, however it should also be kept in mind that while making such valuation, the uncovered/un-hedged position of contracts which may bring losses in the event of adverse market movements to be strictly taken care of.  Further, the persons who are in charge of the operations should be asked to provide answers/ testimony to understand and report the financial issues and implications of the investments.  An in-depth analysis will help uncover the trends and the steps need to be taken. 

Page : 11 to 3 of 3