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Contents
About ExPress Notes
1. 2. 3. 4. 5. Management Control Systems Risk and Internal Control Review and Audit of Control Systems Management of Financial Risk Risk and Control in Information Systems
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7 11 24 27 48
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ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to CIMAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be
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an invaluable resource. You can find links to the most useful pages of the CIMA database that are relevant to your study on ExPand at www.theexpgroup.com.
Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage.
Have a quick look at the two most recent real CIMA exam papers to get a feel for examiners style. Dont use at this stage.
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand.
ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it!
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Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Avoid looking at them in detail, especially if the notes are very big. It will scare you.
Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc.
Leave at home.
Leave at home.
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ExPress Notes
Notes
Provide a base understanding of the most important areas of the syllabus only.
Notes
Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses
Notes
Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.
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Chapter 1
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Measuring activities both financial and non-financial based on relevant data provided by an effective management accounting system; Informing and supporting decisions relating to resource allocation; Providing communication to and motivating staff
The overall goal is to ensure that all efforts within the organization both individual and collective are defined and coordinated so that the objectives of the organization are fulfilled.
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Institutional school: Reporting systems develop in response to norms that are internal to the organization and/or influenced by other organizations in the same industry (associated with di Maggio and Powell)
Business structure and management accounting/control Management accounting/control systems must be appropriate to the structure of the businesses they serve. The way in which a business is organized e.g. a functional, divisional or network form has implications for the way in which performance is managed and measured. Modern approaches to business structure are integrative in nature, as they explicitly take into account the linkages between people, operations, strategy and technology.
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This applies to all types of organizations, whether centralized or decentralized, an irrespective of levels within the organization: Cost centres: Responsible for current expenses only; Revenue centres: Responsible for revenues, but not current expenses other than marketing expenses; Profit centres: Responsible for revenues and current expenses Investment centres: Responsible for revenues, current expenses and capital expenditure
Internal Failure Costs: Defects discovered before delivery (to the customer); External Failure Costs: Defects which reach the customer; Prevention Costs: Design, training and other efforts made to prevent defects from occurring n the first place; Appraisal Costs: Verification and control efforts to ensure that quality is achieved in products and services
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ExPress Notes
Chapter 2
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ExPress Notes
Enterprise Risk
Operational risk
Process risk People risk Systems risk Event risk Business risk Operational (or Operating) Risk
Financial risk
Credit risk Market (price) risk Gearing risk
One may view this category as including all risks that can arise in the course of operating a business, though by definition they are clearly distinguished from financial risks. It will be seen that the list of risks presented below can be expanded and sub-divided according to a particular companys specific circumstances. Process Risk This relates to the processes within a business and evaluates them from the standpoint of pure risks, as well as (a) economy, (b) efficiency and (c) effectiveness. People Risk All risks connected to human resources, including quality and sufficiency of staff, and issues of recruitment, training, compensation, honesty and morale. There is an important link to corporate culture and explicit and implicit attitudes displayed by management; i.e. how they cultivate risk awareness, or encourage profits with(out) regard to the methods employed in achieving them. Systems Risk Information systems and communications in the broadest sense of the term, including IT hard/software, capacity, reliability (back-up) and policies relating to accuracy, access (passwords) and data integrity.
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Event/Hazard Risk Risk of losses resulting from single events that may have a high or low impact. Natural disasters and human actions, whether intentional (terrorism) or not (accidents), fall within this category. Some companies may include fraud in this category though fraud and malfeasance are also clearly the result of the actions of people (see people risk). Business Risk This is a broad category with indistinct boundaries, but it generally covers risks to a companys ability to generate returns from its ordinary operations, including its strategy, business model, competitive position, political/legal environment (including regulatory/ compliance/ intellectual property), products, marketing, clients and reputation. Process, people and systems risks can be seen as being mainly internal in nature; the other risks are generally seen as being external.
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KEY KNOWLEDGE
Risk Mapping
KEY KNOWLEDGE
Severity
High
Detect/Monitor
Prevent source)
(at
Monitor
Low Likelihood
High
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KEY KNOWLEDGE
Refer back to the risk map: One could chart the above risk responses as a progression from upper right (High Severity/High Likelihood = Avoidance) to the lower left (Low Severity/Low Likelihood = Acceptance).
KEY KNOWLEDGE
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These elements are tied together by the culture of the organization (incl. attitudes to risk) and its management control and other systems. Objectives (strategy)
KEY KNOWLEDGE
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A system of monitoring the ERM process, including periodic evaluations as to whether the system is accomplishing its purpose, is indispensable. The costs of maintaining the system must be outweighed by the benefits. Management is accountable to shareholders, and other stakeholders, by a system of periodic reporting.
KEY KNOWLEDGE
The student is advised to refer also to CIMAs Risk Management Cycle (contained in CIMA publication Fraud Risk Management: A Guide to Good Practice): www.cimaglobal.com
The student might also refer to COSO (Committee of Sponsoring Organisations of the Treadway Commission) which addresses Enterprise Risk Management (ERM) through its eight Components and four Objectives categories. The Components are: Internal environment Objective setting Event identification Risk assessment Risk response Control activities
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KEY KNOWLEDGE
ERM Implementation
Defining Enterprise Risk Management (ERM) in conceptual terms is merely the first step. Moving from theory to practical implementation begins with: 1. The Board of Directors explicit responsibility for risk management oversight This may be accompanied by the establishment of a Risk Committee at the board level, or including the responsibility within the scope of the Audit Committee; 2. Creation of a risk management team under the leadership of a senior-level executive (Chief Risk Officer, CRO, or VP Risk) with a reporting line into the Board The real test of the effectiveness of a risk management process is measured by the degree to which: 3. The methods and norms of ERM are successfully disseminated throughout the organization. Effective implementation requires important commitments at all levels of the organization, manifested by: Clear written policies and procedures; Staff training;
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Disciplinary steps for violations; Constant management reinforcement (both in word and deed)
Internal Control
KEY KNOWLEDGE
The IIA (Institute of Internal Auditors) have provided the following useful definition: An internal control is any action taken by management to enhance the likelihood that established objectives and goals will be achieved. Management plans, organises and directs the performance of sufficient actions to provide reasonable assurance that objectives and goals will be achieved. Thus, control is the result of proper planning, organising and directing by management. The internal control function should be regarded as a process designed to provide reasonable (not absolute) assurance that the company is in a position to achieve its objectives; it should be integral to a companys operations, not an external imposition. Responsibilities include: Safeguarding of corporate assets; Checking the accuracy and reliability of corporate accounting data; Promoting operational efficiency; Ensuring adherence to accounting and financial control policies
KEY KNOWLEDGE
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KEY KNOWLEDGE
Types of Controls
Corporate controls = general policy statements, established core culture and overall monitoring procedures, corporate governance Management controls = planning and performance monitoring Business process controls = authorisation limits and reconciliation Transaction controls include = accuracy and completeness checks
You may use the mnemonic SOAPSPAM to generate ideas for types of control: Segregation of duties Organisational controls (eg set authority limits) Authorisation Physical Supervision Personnel, eg background checks Arithmetical and reconciliations Management the tone from the top, including existence of an internal audit department.
KEY KNOWLEDGE
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KEY KNOWLEDGE
The Turnbull committee recognised that while a sound internal control system cannot eliminate poor judgment in decision-making, it may minimize that risk to a significant degree. Further, the committee stated: Reviewing the effectiveness of internal controls is an essential part of the board's responsibilities; at the same time, Management is accountable to the board for monitoring the system of internal control and for providing assurance to the board that it has done so. The board is responsible for the disclosures on internal control in the company's annual report and accounts.
KEY KNOWLEDGE
Corporate Governance
There is an close connection between corporate governance and risk management: in order to fulfill its corporate governance role faithfully, the directors of the company have to ensure that there is in place at the company a robust system of internal controls and risk management systems. There are several models of corporate governance:
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Shareholder-based models: typical of the US and the UK; and Stakeholder-based: common on the Continent (Europe) and Japan
KEY KNOWLEDGE
KEY KNOWLEDGE
Some key features of the Combined Code include: Comply or explain: Deviations from the Code may be justified in particular circumstances; Board Composition: At least half the Board (excluding the chairman) should be independent non-executive directors; Separation of Chairman and CEO roles: These should not be exercised by the same individual;
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Non-Executive Directors duties: Include scrutinise the performance of management and satisfy themselves that financial controls and systems of risk management are robust and defensible; Executive remuneration: remuneration; No director should be involved in deciding his or her own
Audit Committee: At least three members, all be independent non-executive directors; Audit Committee role: Oversee the effectiveness of internal controls and to liaise with the internal and external auditors.
KEY KNOWLEDGE
Internal Audit
The role of the internal audit is to make sure that the companys internal controls are appropriate and working properly. Internal auditors are employees and report to management. However, they can also have a reporting line to the Audit committee of the board, so that their professional independence is not compromised.
KEY KNOWLEDGE
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Chapter 3
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Effective co-operation between the two sets of auditors can help to avoid unnecessary duplication of effort, with a consequent benefit of time and cost savings. However, it is important for the external auditor to always be aware of certain fundamental differences as indicated below: SCOPE APPROACH RESPONSIBILITY INTERNAL AUDITOR MANAGEMENT MANAGEMENT MANAGEMENT EXTERNAL AUDITOR ISAs + REGULATIONS ISAs + REGULATIONS SHAREHOLDERS
NB under Corporate Governance provisions, the head of internal audit should be appointed by and report to the Audit Committee. The Audit Committee should also be responsible for determining the nature and scope of the work of internal audit.
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TYPICAL AREAS OF INTERNAL AUDIT INVOLVEMENT These would include, but not be restricted to the following (any of which you need to be prepared to write briefly about): VFM audits (the 3 Es) IT audit Financial audit Operational audit
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Chapter 4
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PESTEL Analysis An analysis of the external macro environment. The organisation is unlikely to be able to influence these factors but it should have an awareness of the issues. Political - global, national and local changes and trends. Taxation policies. Relationships between certain countries. Economic - global, regional and local issues. Exchange rates. Link to topical issues such as global recession, current interest rates for funding. Social - changes in behavior and expectations in society. Demographics, lifestyle. Technological - changes including hardware, software, e-issues, materials and services. Global communications. Legal - changes and predicted changes to regional (e.g. EU) and national legislation. Regulatory bodies. Changes to employment law. Environmental what are the environmental considerations such as recycling, pollution, attitude of the media, customers, etc.
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A borrower planning to take a loan in 2 months (see diagram) can buy an FRA today (t=0) to protect against a rise in rates. The FRA contract rate is agreed at e.g. 3% (t=0). This becomes an 2x5 FRA at a price of 3% (2x5 means 2-by-5 and refers to the 2 and 3 month periods shown in the diagram above) If rates rise to e.g. 5% when the loan is taken (t=2), then the borrower gets 2% (53);
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If rates had dropped below 3% at t=2, then the borrower would have paid the difference
Examples of 3-month instruments include: Instrument Standard (notional) deposit amount 3-month Eurodollar USD 1 million 3-month Sterling GBP 500,000 3-month Euro EUR 1 million 3-month Euroswiss CHF 1 million 90-day US Treasury bill USD 1 million
Price quotation of Interest Rate Futures The price of an interest rate futures contract reflects the value of the underlying instrument traded in advance, i.e. before the underlying instrument takes effect (or when interest starts accruing). The prices are quoted as a discount from a par value of 100.
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A price of 92.00, for example, reflects an interest rate for an underlying deposit of 8% per annum (100 - 92.00 = 8.00). The higher the interest rate is, the larger the discount from the par value of 100, and therefore the lower the price of the future will be. (This is similar to how bond prices move, i.e. inversely to movements in interest rates.) Prices are quoted to one hundredth of 1%, or 0.01%; a price of 93.70, for example, reflects an interest rate of 6.30% (100 - 93.70). The price of a future can move up or down by increments of at least 0.01 (0.01%, which is the equivalent of one basis point, also called a tick). Purchase of an interest rate future Technically, the buyer of an interest rate future is buying a future money market deposit or placement (the underlying instrument) and is fixing in advance the interest rate (and, in effect, the stream of interest income) to be received. Settlement Date The settlement date of the future corresponds to the day on which the underlying instrument would begin, i.e. the deposit or placement takes effect. Market Price Dynamics As mentioned above, the value of a futures contract behaves similarly to a bond: if interest rates go up, then the value of the futures contract will decline, since the future (fixed) stream of interest income will have a lower value. The buyer of such a futures contract will incur a loss on the contract.
EXAMPLE
At the end of August, a dealer buys one 3-month Eurodollar interest rate futures contract which settles at the end of September. The market price of the contract is 93.50 (reflecting an interest rate of 6.50%). The futures contract has a daily quoted price, reflecting the
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market rate, and must be settled any time until the end of September, at which time the future expires (and the notional placement would commence). If interest rates fall to 5.00% in the middle of September, the futures price would rise to 95.00. The dealer could sell the future at this price. Alternatively, he could continue holding the future until the settlement date, at which point he would have to sell the future at the governing market price. If by settlement, interest rates had risen to 5.50%, then the dealer would obtain a price of 94.50. At the prices mentioned (above) the dealers net gain/loss would be: Sale at 95.00: 150 tick gain Sale at 94.50: 100 tick gain
The value of a tick for a 3-month Eurodollar contract is USD 25 (.01% x 1m x 3/12) The value of a tick for a 3-month Sterling contract is GBP 12.50 (.01% x 0.5m x 3/12) Use of Interest rate futures Interest rate futures allow buyers and sellers to: Hedge a position, i.e. protect themselves against a change in interest rates by fixing rates in advance of an intended transaction (depositors or borrowers); Take a position, i.e. to benefit from a change in interest rates, provided rates move in a favourable direction.
Hedging -- The Borrowers perspective The borrowers underlying position is cash short; if the price of cash (the interest rate) rises, then the borrower loses. The appropriate hedge transaction is one in which a rise in interest rates will result in a profit. Appropriate hedging strategy for a borrower: Sell futures.
Hedging -- The Depositors perspective The appropriate hedging strategy for a depositor: Buy futures.
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Settlement Terms All short terms interest rate futures contracts are settled by cash, i.e. the difference between the originally agreed price and the price at the time of closing the contract. Note: Long term (bond) futures are settled by physical delivery of the instrument, i.e. the seller delivers the bond to the buyer at the previously agreed price. Initial, maintenance and variation margins Before trading on an exchange, market participants are required to make a deposit (initial margin) to cover trading losses. On a daily basis, the potential gain or loss on the trading position is calculated and potential losses are counted against the margin. The amount of the margin may not fall below a minimum level (called the maintenance margin). Fluctuations in the level of required margin is referred to as variation margin.
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EXAMPLE
Two companies X and Y require financing in the same currency and for identical maturities. Their borrowing terms for fixed and floating rates are shown below:
Company
X Y
Fixed rate
5.7 6.0
Floating rate
3 month Libor + 10 3 month Libor + 20
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If X is looking for floating rate finance and Y fixed rate, then each could achieve the following borrowing terms via a swap: X: LIBOR p.a.; and Y: 5.90 % p.a. The above terms share benefits equally between the two companies (10 b.p. each) and no bank fees are assumed.
The above options are essentially short-term instruments. Interest rate guarantees can also be arranged for longer terms, for example to hedge medium-term borrowings and deposits (referred to as caps and floors).
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Exchange-traded interest rate options These contracts are structured as options to buy or sell interest rate futures contracts as the underlying asset. The value of the option is therefore based on the futures price, which in turn is based on the movement in interest rates (e.g. LIBOR). A company planning to borrow GBP can protect themselves against a rise in interest rates by buying put options (which gives the right to sell GBP interest rate futures) at a strike price reflecting the maximum rate to be paid (excluding the loan margin).
(ii)
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(iii)
Translation risk: This is the impact of changing exchange rates on the reporting of assets and liabilities within a group containing one or more foreign subsidiaries. Losses here are not necessarily realized in cash, but are reported as accounting losses due to exchange rate differences.
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The forward (fwd) points (or pips) are the difference between the spot and forward prices and are expressed as an adjustment to the spot price: GBPUSD Spot 6 mo Fwd points 1.4800 1.4810 217 -190
The forward points are the points by which the spot has to be adjusted to derive the forward rate When the points decline, from left to right, then they are deducted from the spot rate When the points increase, from left to right, then they are added to the spot rate The currency with the higher level of interest rates trades at a lower price (relative to the other currency) in the forward market.
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(d) Forward exchange contracts: Buying and selling currencies on a forward basis with banks; (e) Money market hedging: See example below; (f) Asset and liability management: Firms can actively adjust their assets and liabilities according to the currencies in which they are denominated so as to limit forex risk.
The net result is that GBP has been sold in advance for USD at GBPUSD 1.4583. Using the same market data as above, a money market hedge can be constructed for a company paying GBP 1m in 6 months: 1. Borrow USD 1,445,760 for 6 months at 2%; 2. Sell USD 1,445,760 and buy GBP 976,205 in the spot market; 3. Deposit GBP for 6 months at 4 7/8%;
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4. At maturity, repay USD 1,462,025 and receive GBP 1,000,000 Conclusion: The (implied) GBPUSD 6-month forward is 1.4620 Other types of derivatives include:
Futures compared to Forwards Buying, on 15 May, one contract of June EUR futures (against USD) at the market price of 1.4300 is the economic equivalent of buying EUR 100,000 against USD at a forward rate of 1.4300 as quoted by a bank on 15 May (trade date) for value (settlement) date in June corresponding to the future contract settlement date above. On the final day of trading a futures contract (2 working days before settlement date) the futures price will be the same as the corresponding spot rate. Futures used for hedging purposes Illustration Take the company expecting to receive GBP 1m after 6 months. The company now has a third possibility to hedge itself against a declining GBP: It can sell GBP futures. To hedges its GBP 1m long position using futures, consideration must be given to:
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Settlement date: The appropriate futures contract will not settle before the expected date of receipt of the currency inflow (GBP 1m); in other words, the future contract must cover the entire period of risk. No. of contracts: This is determined by dividing the amount to be hedged (in the above example, GBP 1m) by the standard size of a GBP contract (GBP 62,500); therefore, in the above case, 16 contracts will be sold. Closing out of the futures contract When the expected receipt of GBP 1m takes place, then the futures contract will have served its purpose and the futures position must be closed, or squared.
EXAMPLE
Assume GBP 1m was expected in August and the company hedged this exposure by selling 16 contracts of the September GBPUSD futures at a rate of 1.4585. Assume further that on the day (in August) that the GBP 1m is actually received: GBPUSD spot rate: September GBP futures: 1.4050 1.3980
Companys position at settlement date The GBP has depreciated against the USD. When received, the GBP 1m is sold at spot 1.4050 (proceeds are USD 1,405,000); The futures position is closed out by buying back (closing out) the 16 contracts at 1.3980: 16 contracts sold at 1.4585 = USD 1,458,500
The companys net receipt in selling GBP 1m is USD 1,465,500. Tick value In the example above, the smallest price movement in the GBP futures contract is either +/0.0001 USD per GBP. This smallest increment (up or down) is called a tick and is valued at USD 6.25 (GBP 62,500 x USD 0.0001).
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Counterparty Risks/Margin Requirements These risks are excluded by the exchange where currency futures are traded, as the exchange requires that all clients deposit in advance a cash amount known as margin to cover losses. Market (Price) risk When a client buys or sells a future, his position is subsequently marked-to-market on a daily basis and potential losses must be covered by the client by providing additional margin.
Settlement risk This is usually excluded for currency futures by cash settlement of the difference. Basis Risk This refers to situation where a hedge does not fit (or exactly offset the risk of) the underlying situation. This can occur due to a mismatch in maturities.
Swaps (long-term)
EXAMPLE
A US company is looking to expand in Japan and seeks finance of Yen 950m. It can borrow at the following fixed rates: USD 5.0% and JPY 3.0%. A Japanese company is seeking to buy an American company and seeks USD 10m of financing. It can borrow at the following fixed rates: USD 5.4% and JPY 2.5%. The current spot rate is USDJPY 95.00
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A fixed for fixed currency swap for 5 years would look like this: 1. 2. 3. 4. 5. The US company borrows the USD 10m (on behalf of the Japanese company); The Japanese company borrows Yen 950m (on behalf of the US company); The companies swap the principal amounts at the beginning at spot (USDJPY 95.00); During the 5 years, each company pays the others loan interest; At maturity, after 5 years, the companies re-swap the principal amounts at the original swap rate (95.00).
The savings of each party are the difference between what each would have had to pay on its own and what was effectively paid: The US company saves JPY 4.75m p.a. (950m x (3% - 2.5%)); The Japanese company saves USD 40,000 p.a. (10m x (5.4% - 5%))
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Increase in the Put value Increase in the Put value Increase in the Put value Decrease in the Put
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Purchasing power parity (PPP) The exchange rate at which the same good in two countries are priced at the same level. Interest rate parity theory (IRP) The theory (and mechanism) by which forward foreign exchange rates reflect the differences in interest rates of two currencies.
The Fisher formula is: 1+Nominal rate = (1+Real rate) x (1+Expected inflation rate). A countrys exchange rate will adjust to offset the inflationary impact on prices. The four theories (above) combine consistently to explain foreign exchange rates (spot and forward) and the link to interest rates. Exchange rate forecasting Using purchasing power parity:
The Big Mac costs USD 3.57 in the US and EUR 3.31 in Europe. PPP suggests that the EURUSD should be 1.08 (3.57/3.31). Any rate above (below) this means that the EUR is over (under)-valued. Using interest rate parity:
EURUSD spot rate is 1.3300; the EUR 1 year interest rate is 4% p.a.; the USD 1 year rate is 2% p.a.
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The implied EURUSD 1-year forward rate will be: 1.33 x (1.02/1.04) = 1.3044. Interest rates These are the prices borrowers and investors pay, resp. receive, for funds in the money and capital markets. Interest rate curves are normally upwardly sloping, showing that rates are higher the longer the maturity date. The difference in rates along the maturity curve can be explained by the:
1) Expectations theory: Investors expect higher interest rates in the future, if only to
offset inflation;
2) Liquidity preference: investors have to be compensated for not having the use of
meeting different investor preferences. Borrowers can move between these different markets for their funding.
Example....
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CIMA P3 Performance Strategy preceding two years. Initial recognised value Year-end valuation method Cost paid, transaction costs. including Initial cash advanced, plus transaction costs. Amortised cost, less impairments. Impaired value estimated using revised cash flows, discounted at the original discount rate when the investment was purchased. Profit or loss
ExPress Notes
Amortised cost, less impairments. Impaired value estimated using revised cash flows, discounted at the original discount rate when the investment was purchased. Profit or loss
Financial asset or liability held at fair value through profit or loss When used... Almost anything can be categorised as FVPL at its initial recognition (notably not debt issued by the entity itself). Securities held for trading will be classified as FVPL. Shares held for trading. be Cash paid to acquire. Transaction costs immediately written off to profit or loss. Fair value. Best achievable market price, not deducting anticipated selling costs (though at the lower end of the bid ask spread). Profit or loss
Available-for-sale financial assets A catch-all category. Anything not in either of the other categories will be AFSFA. Typically, where investor stands ready to sell the security but has no immediate plans to. Shares held for intermediate term investment. Cash paid to acquire. Transaction costs added to initial value of investment. Fair value. Best achievable market price, not deducting anticipated selling costs (though at the lower end of the bid ask spread). Initially gain or loss reported in equity until sold, when the gain or loss is recycled (ie reported again) in profit.
Example.... Example that cant categorised this way Initial recognised value
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Chapter 5
The basic requirements for an effective system of internal control do not of course change simply because a computer is brought into the business environment. However, computers bring with them their own additional control considerations. Specifically, internal control in a computer environment is normally considered under two main headings: 1. General Controls These relate to the environment within which computer systems are developed, operated and maintained. They will therefore be relevant to all
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applications. They are often sub-divided into administration controls and systems development controls. They may be either manual or programmed. 2. Application Controls These relate to those activities which have been computerised and are concerned with the completeness and accuracy of the processing of authorised data and the maintenance of computer files. As with general controls, they may be either manual or programmed. Essential features of any good system of internal control in a computer environment To help you in learning some of the important practical aspects of internal control systems in a computer environment we can again perhaps make use of a series of mnemonics.
GENERAL CONTROLS ADMINISTRATION CONTROLS (DOFF) Division of duties and responsibilities eg. between IT and user department staff Operator controls eg. use of passwords File controls eg. regular file back-ups Fire precautions and standby arrangements eg. contingency planning
GENERAL CONTROLS SYSTEMS DEVELOPMENT CONTROLS (CAST) Conversion procedures eg. parallel running Authorisation, acceptance and amendment procedures eg. sign off procedures Standardisation eg. use of SSADM Testing eg program logic checks
APPLICATION CONTROLS (IPOF) Input controls eg. data verification by means of double-keying Processing controls eg. data validation by means of check digit Output controls eg. actioning of error reports File maintenance controls eg. checking amendments to standing data
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Alternative audit approaches There are generally 3 main alternative approaches to the audit of a computerised accounting system:
1. Auditing around the computer Here the concentration of audit effort is on the inputs to and outputs from the clients computer system. 2. Auditing through the computer Making use of CAATs, principally: Test data Audit software eg. selection of data for further testing 3. Auditing within the computer Making use of embedded audit facilities such as: ITF Integrated Test Facility SCARF Systems Control and Review File
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1. Critical physical characteristics of the IT system The IT specialists assisting management in taking the IT investment decision should determine systems capacity and scalability requirements. 2. Total cost of IT systems ownership (TCO) The cost components are: Capital cost of hardware & software Operating cost of hardware & software 3. IT cost monitoring tools IT cost control is facilitated by existence of: Centralised IT acquisition policies Standardisation of IT hardware and software resources across the organisation, A system of tracking IT resources and configuration changes.
On the other hand, there are risks connected to out-sourcing: Dependence on the supplier and supplier performance (system failure); Breach of data confidentiality (banks would be particularly sensitive to this); Limits on the degree of possible system customization
(end of ExPress Notes)
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