Investors reinsure against possible unfavourable developments in future prices. Very suitable for reinsurance are derivatives.
These contracts make it possible for investors to reinsure their positions in assets or liabilities of the balance sheet or sub-ledger. The most commonly used instrument in this area is futures.
Example: We plan that in a few months we will need a certain amount of USD. The present rate in the futures market can be considered as advantageous, so we would like to purchase USD for this rate in a few months. Therefore we purchase futures for American dollars now.
In several months after the purchase of the contract of futures we purchase dollars on the spot market and at the same time sell the contract of futures. If, against our original expectations, the USD has weakened, then the loss in the market of futures will be compensated by the profit from the purchase of USD in the spot market (we will purchase USD in the spot market more cheaply than the price of futures at the time of the purchase of futures).
If, on the contrary, the USD has strengthened, then the profit in the market of futures will be compensated by the loss from the purchase of USD in the spot market (we will purchase USD in the spot market at a higher price than the price of futures at the time of the purchase of futures).
Retail banking is understood to mean the provision of services to the general public, i.e. the provision of credit repayable in instalments, mortgage loans, depositary services, etc.
In comparison to wholesale banking retail banking encompasses a large spectrum of activities at many branches. Certain services offered by retail banking (e.g. credit cards) are highly profitable.
Financial institutions and markets exist in a world of insecurity that brings certain risks.
The most significant risk of financial markets is the credit risk, which means a risk of loss if the partner fails to honour his commitments according to the conditions of the contract. In the category of credit risk, the so-called settlement risk is sometimes specified, which is a risk of loss from a failure to settle a transaction.
Another important risk is market risk, which is divided into the following risks:
This is a risk of loss in the case of the small liquidity of markets (risk of market liquidity), or risk of momentary insolvency (risk of cash flow).
Operational risk is a risk of risk in the case of human errors, fraud or imperfection of information systems.
Legal risk is a risk of loss if a contract is not legally enforceable.
Return On Assets is an index which describes how much the capital of shareholders will generate. It is determined as the ratio of after-tax net profit to average shareholder funds.
Return on equity is an index which says how much the capital of shareholders yields. It is determined as the ratio of after-tax net profit to average funds of shareholders.