Loan advice

To construct an efficient portfolio, the investor must be able to quantify risk and provide the necessary inputs. As will be explained in the next series of posts, there are three key inputs that are needed: future expected return (or simply expected return), variance of asset returns, and correlation (or covariance) of asset returns.
There are a wide range of approaches to obtain the expected return of assets. Investors can employ various analytical tools that will be discussed throughout this blog to derive the future expected return of an asset. For example, we will see that there are various asset pricing models that provide expected return estimates based on factors that historically have been found to systematically affect the return on all assets. Investors can use historical average returns as their estimate of future expected returns. Investors can modify historical average returns with their judgment of the future to obtain a future expected return. Another approach is for investors to simply use their intuition without any formal analysis to come up with the future expected return.
This input can be obtained for each asset by calculating the historical variance of asset returns. There are sophisticated time series statistical techniques that can be used to improve the estimated variance of asset returns. Some investors calculate the historical variance of asset returns and adjust them based on their intuition.
The covariance (or correlation) of returns is a measure of how the return of two assets vary together. Typically, investors use historical covariances of asset returns as an estimate of future covariances. But why is a covariance of asset returns needed? As will be explained, the covariance is important because the variance of a portfolio’s return depends on it and the key to diversification is the covariance of asset returns.

Most of the currency crises of the 1990s happened against soft currency pegs. In the wake of the Asian currency crisis, I made a stab at creating a model which focused on how exchange rates typically performed in the run to and after the break down of a pegged exchange rate regime. For good or ill, the Classic Emerging Market Currency Crisis (CEMC) model was the result. To be sure, the title is a mouthful, but for the most part it tells the story of most emerging market currency crises during the 1990s and thus may serve as a useful barometer should any such crises be experienced going forward. This can be broken down into five phases during which the currency crisis takes place:
1. Capital inflows and real currency appreciation
2. Fundamental deterioration and inevitable currency collapse
3. A positive current account swing and a liquidity-based rally
4. The economy hits bottom; a period of consolidation
5. The fundamental rally
A key aspect of these crises was the relationship between the real exchange rate and the external balance. In floating exchange rate regimes, economic imbalances are usually smoothed out over time. In pegged exchange rate regimes, they can build up to unsustainable levels, thus forcing the collapse of the exchange rate peg, if not checked by changes in macroeconomic policy.

The signal grid and the risk appetite indicator should be the two main tools of the currency strategist. There are however other aspects of the currency markets that still have to be considered. For instance, the type of exchange rate regime is an important consideration as it can have a significantly different impact on the economy depending on what type of regime is being used. The latest fashion within the official community in Washington DC is to advocate the so-called “bi-polar” world of exchange rates, supporting the idea that in a world of free capital markets only the hardest currency peg or a completely free-floating currency are appropriate, and that anything else is unsustainable. It seems likely that this will ultimately give way to a new trend, whereby there are significantly less currencies, all of which are freely floating. As far as currency market practitioners are concerned, key questions that a corporate executive or an investor must ask if they are exposed to a currency peg regime are:
Does the currency peg itself contribute to macroeconomic stability?
What is the degree of participation in global capital flows of the country concerned?
Is the currency peg at the right value?
Most soft or semi-pegged exchange rate regimes have gone, voluntarily or otherwise. If you have currency exposure to a pegged exchange rate regime and you are concerned about currency risk, the rule to remember is that you should hedge when the market has no interest in hedging and thus when risk premiums are low. By the time the market is keen to hedge currency risk, liquidity and price conditions will have deteriorated and it will be too late to obtain anything but the most expensive of currency protection.
The beauty of freely floating exchange rates is that they act as a self-adjusting mechanism, transmitting changes in fundamental dynamics across the economy. In that sense, a freely floating exchange rate regime cannot be defeated, unlike a pegged exchange rate regime. That said, they can still be highly volatile at times.

When there is no clear, unequivocal signal from the signal grid, that is when not all four signals are pointing in the same direction, currency traders and investors can still boost their total return by using a risk appetite indicator to gauge overall market sentiment in terms of “risky” or “safe” assets, both in terms of putting on new positions and in terms of measuring their existing positions. Risk sentiment can be divided up into three levels:
Risk-seeking/stable
Risk-neutral
Risk-aversion/unstable
When the indicator is in risk-seeking or risk-neutral mode, be long a basket of higher carry currencies, either in the developed or emerging markets. Conversely, when it is in risk-aversion mode, obviously having moved there from risk-neutral, cut and reverse the position, going short the carry basket of currencies. Risk appetite has become an increasingly important concept not just because of the need to create more accurate models for forecasting short-term currency moves, but also because the last few years have shown a marked pick-up in cross-asset market volatility. There are several risk appetite indicators created by the private sector for this purpose. Not just currency traders or speculators can use this. A risk appetite indicator can be a crucial tool for corporate Treasurers and institutional investors, not least in providing them with an informed context within which their exposure exists.

At the time of a financial crisis, whether you’ve lost your job or got some unexpected bil to pay, you can fix your problems by taking out a short-term payday loan. It is a good solution, provided that you are able to pay back the amount you borrow on time. Payday loans must be used responsibly, otherwise the borrowers can get into more financial difficulties. Payday loan lenders offer bad credit loans with instant approval which aredelivered the very same day you apply. Some lenders don’t run a credit check but it’s not a rule. Some don verify your employment, taking your word on the amount of your income and so on. You have to watch out and go with reliable lenders such as Faxless Loans 24, which delivers cash fast with no hidden fees.

When it comes to lifestyle, everyone has different goals and ideas of what they want and how they want to live. We all want to own nice things, go on nice vacations, and keep up with the latest trends in clothes and technology, but knowing when enough is enough is a hard line for most people to draw.  The sad thing is that most people that have all the great stuff, are usually not paying for it in cash, people are getting further and further into debt to subsidize their shopping addictions and their lack of patience. I recently came across a young couple who was on vacation, who after one too many drinks admitted to taking out a car title loan to fund their vacation. That particular event is what led me to write this blog. I was baffled, I have personally been in many financial binds, so I can relate to having money issues. But having money issues and risking your car to go on vacation is two really crazy ideas to me.

For shopoholics, or compulsive spenders, spending money, worse of all, money they don’t have, is comforting to them. Just the fact that they are able to have these things, even though they had to borrow money for it, makes them feel like they are wealthy in a sense. When that couple blurted out their secret out of drunken stupor, I immediately saw the look on their faces change, like they had just realized that they would be in for it when the little fantasy is over. But just as quickly brushed it off, so they wouldn’t have to feel the consequences of their actions right away. So many Americans suffer the same fate, everyone want’s what they can’t have, no one is willing to work to save towards what they want, but rather, get it now and pay the price for it later. Many people have gotten into very bad financial debt because they live way above their means.

So many people fail to realize all of the conflict that over spending can cause. Relationships suffer because of it, sometimes even self esteem. Because for the people who thrive on material things but can’t afford it, they actually suffer personally and have a poor self image because of it. Not being able to afford things, makes compulsive spenders very unhappy. What they fail to realize is the benefits that would come from living life on a budget.  Being able to take control of personal finances can help to rid your life of a lot of conflict. The art of being frugal can keep peace of mind and make one more focused on goals to create a sense of well being and control in life . Beginning by making a simple change in spending habits, and keeping track of expenses is a great way to become aware. Staying away from online payday loans and saving toward goals is a great way to escape the need to want to purchase everyhting by credit card. Lastly, learn to let go of material things, those things will not bring happiness, it’s only a temporary feeling.

If you own stocks you may or may not know that you are able to use your stocks as collateral to get a loan. This is a great way for anyone to get a loan without going through the bank and having to deal with the lengthy process of bank applications.  If you chose to borrow money this way, it may be a little lengthy as well, but you will be able to receive a larger sum of money.  If you are however, experiencing an emergency and find that you need the money quickly and are just needing a small amount of money maybe up to $1000, you may want to consider using a pay day loan in it’s place. This could be a great option for someone who needs money in between their monthly income. However, back to our original topic, if you have investments in stocks, you have many more options for loans and may be able to use them for larger purchases.

If you do find yourself in need of a larger sum of money and happen to be invested in stocks, you have the option of using your stock as collateral towards a loan. Before going ahead and choosing this method of loan, it’s important to understand the specifics and the details of what the process entail. Usually people who borrow against their stocks are looking for a larger amount of money, $5000 and up.  You can basically borrow a percentage of your existing stock at the prime rate with 1 or 2% added as a service fee to borrow against it. The great thing about this is that your stock will not be lost. After the loan is paid back in full, you have full access and control to your stocks. Attaining a loan through stock ownership, is a fairly straight forward process. A lot of people will use this money for large purchases such as buying a house, sometimes a car, and possibly also other bigger investments.  They may do this at their own risk or under the supervision of a financial broker.

A stock loan can be a great alternative to a traditional loan, or selling your valuable property in exchange for money. Stock loans are not as risky as some other options out there, they come with little liability, if you default on your payments, the lender can only collect  your stock and you can keep the proceeds of the loan.  If you are interested in taking out a stock loan from your portfolio, your biggest worry will be finding a reputable lender. Your first step should be to research companies that will help you with stock loans, get quotes and make comparisons and find out the implications and terms of the loan. Also, talk to a financial advisor if you can, they are good at helping people with tough financial decisions to make. It is very important at this stage in the game to read every detail pertaining to your loan and keep an eye out for any hidden fees or unexpected surprises.

Most commercial real estate loans are essentially collateral-based lending, despite protestations by bankers to the contrary. Cashflow analyses are usually based on sales (for developers) and rental yields (for investors). Both depend on the level of real estate prices. If prices drop developers will have to cut their expected asking prices and higher rental yields from lower prices are unlikely to be sustainable. Tenants will demand that their rental payments are cut.
Loans to developers of large prestige projects are generally higher risk than are those to developers specializing in small-scale landed residential developments. Many loans to real estate investment companies have bullet structures whereby there are no principal repayments until “term”. In many instances there is a real difference between “economic” term and legal term as defined in a loan agreement. Many loans to companies holding real estate for investment purposes are simply rolled over at term and in practice have more in common with perpetuities than term loans.

Loans to small companies terrify management at many larger banks and in many countries a small number of banks tend to specialize in lending to these segments:

They are sufficiently large individually to require personal attention. This is not the case with retail loans where little or no attempt is made to take account of changing borrower circumstances. They are made to companies operating in many diverse manufacturing and service businesses. This means that they are not readily amenable to statistical analysis nor does the bank have the in-house expertise to assess prospects for all these sectors. They are sufficiently large collectively that a high level of losses on loans made to companies in this segment would have a material impact on a bank’s financial position. As a group, SMEs are hit disproportionately hard by economic downturns. This can be seen by the massive increase in failures of companies in this segment as reported by bankruptcy figures through recessions.
They are sufficiently small that they fall outside the scope of rating agencies’ coverage.
Their business risks are not well diversified and losing one major customer may be sufficient to cause an otherwise healthy company to fail.
Collateral values often depend on the company operating as a going concern.
In most instances a single bank is the major financial creditor. There can be safety in numbers, at least for credit officers, where the borrower has defaulted.

Banks have many different types of exposure to larger corporates including the following:

Credit products. Direct loans to the holding companies or subsidiaries of the group, syndicated loans and facilities. Some of these loans may be in foreign currency and booked in overseas branches. The bank may also hold some of the company’s commercial paper and bonds.

Guarantees. Guarantees for letters of credit and so on. The main company of an extended group may have taken loans itself and also have acted as a guarantor for loans made to subsidiaries, associates or other companies with which it has a relationship. Derivatives. A bank may have multiple exposures in the form of derivatives such as interest rate and foreign currency swaps, futures and forward contracts. At any given moment in time some of these positions may result in a credit risk where the bank is a net receiver. Positions where a bank is a net payer and there is no current credit risk may change over time and the bank becomes a net receiver. Settlement exposures. The bank is also likely to have short-term exposures from ongoing settlement of trades and other customer-driven transactions. The level of these exposures will vary from day to day and is normally subject to bank-imposed limits.
For large complex groups collateral and guarantees also pose specific problems and for larger companies that have better credit ratings than the banks themselves many short-term exposures will in practice be unsecured at the group level.
In developed markets virtually all large corporates are subject to credit rating agency scrutiny and while this does not completely remove the responsibility for the bank to perform its own credit risk assessment these will be largely based on work already done by the rating agencies.
Some common errors that banks make are assuming that a company is too large to fail, that the government will honor historic but implicit guarantees and bail out creditors to partic- ular companies and a failure to ensure that cross-border group-level guarantees are legally enforceable.
Large companies that default are only very rarely liquidated and restructuring agreements usually involve scores and even hundreds of financial creditors, multiple legal actions and claims. They can drag on for years and result in considerable legal and other costs.
Default probabilities can be estimated from historic bond default data, where this is avail- able. Losses on secured loans and derivative positions can be estimated based on the volatility of the prices of pledged collateral and recovery rates.