Questions Regarding Balance Sheets and Assets Finance Essay

The first type of financial asset is in the form of a claim that is kept against the earnings or the money of a firm or even a household or the Government for that matter. It is also of the form of a certification, or a receipt, a legal file or one that it maintained as a database in the computer. A financial asset is now used in accordance with the technology that has developed of late. In many cases where the traditional approach is still being used, it is also of the form of currency. The relative importance of the financial assets has changed over the past five years with the use of improved technology that the world has. There are easier sources of transportation as compared to what used to be in initial times. The financial assets can be increased in diversities because their physical form is not all that important. They do not depreciate as it used to be one of the restrictions about five decades ago. Now that the amount of securities have changed over the past many years, it is sensible to include more number of financial assets. This is because there never used to be market forces like equity, debt and derivatives in the initial days. As the options of making money through financial assets have increased so much over the past five decades, there is more number of people interested in the same. The primary risk associated with different forms of securities as a representation of financial asset is different. For examples, the debts are of high risk for the company as they have to be paid at the earliest and the equity is of highest risk for the investors as they would be paid last. (Types of financial assets, 2010)

Question 10.

What is meant by a off- balance sheet activity? What are some of the forces responsible for them?

Off-balance sheet activities are those activities that are associated with the savings of a business which are not inclusive of loans or deposits. These activities are known to generate a good level of fees but at the same time, the liabilities or the assets that they produce or generally contingent in nature and they do not appear in the balance sheets without having the distinction of an actual asset or a liability which has a value or a cost associated with it. There are many examples of the same. Some of them include interest rate swaps, commitments in loans, resources that are associated with the selling of assets etc. The forces behind the off sheet activities are as follows: Improvement in Security Increment in Globalization Advancement in technology Innovation in the field of finance Deregulation

Question 11.

How does one distinguish between an off- balance sheet asset and an off balance sheet activities liability?

All those entities of businesses, households and even Governments that are representation of resources which would be of a future benefit are included amongst the off-balance financial assets. It indicates a positive signal even though it is not included in the balance sheet. The benefit with the off-balance asset lies in the fact that it is not included in calculating the taxes of the firm. These are some of the items that are not mentioned in the balance sheet but would certainly require a future payment to be made. There are many examples of the same. They are litigation; guarantees issued by firms for a better performance in the future, renegotiation especially that done with the Government. The above mentioned off-balance sheet assets and liabilities can be differentiated on the basis of the positive and the negative returns that they are bound to give in the future. Even though they are not mentioned in the balance sheet, an experienced personality in finance can make a distinction based on the future prospects. (Off-Balance Sheet Liability, 2010)

Question 12.

What are the main off balance sheet activities undertaken by commercial banks?

Due to the level of risk involved in the current financial markets, major commercial banks and even non-banking institutions, foreign institutions, and also many commercial banks have now started to use a number of ways of making non-traditional earnings as a source of income. So, there are many loan commitments and others as mentioned that are being used so as to make incomes. Amongst the mentioned activities, the major ones that are now being used predominantly by the commercial banks are as follows:

Interest Rate Swaps (SWAP)

This is a particular type of contract that is used to swap the rate of payment of interest from fixed to variable or even vice-versa. So, whenever there is a requirement to change a fixed rate of interest stream to that including a variable rate of interest stream, this commercial activity is adopted. The risks that are associated with the swaps is measured in terms of the swap in the rate of interest to the total assets of the company. One would generally consider a negative relationship between the measurement of swap and the rate of interest.

Question 14.

What is the difference between economies of scale and economies of scope?

Economies of scale deals with the change in the output as compared to the cost incurred. It must be acknowledged here that the economies of scale estimates the fact that the output can be more than doubled for having lesser than double cost incurred by the firm. There is also a contradiction which is mentioned as the fact that diseconomies of scale mean to double the output would require more than doubling in the cost. Hence, economy of scale is basically a function of the production as a measurement of the cost incurred in the same. As far as economies of scope is concerned, it deals with the fact that of two firms work in a joint manner, then the concerned output would be more than the sum of the output when two forms work individually. This takes into count the fact that a joint production would require only the work of a few laborers which when working in individual forms would only interfere with the jobs of the others. So, in other words the economies of scope notifies the total amount of resources for a particular joint firm is lesser than the individual firms which are only associated with spoiling the job. The terms say that it is always better to work as joint firms rather than individual firms so as to make maximum profits. The only fault that comes along is the risk that follows. So, the cost of economies of scope just involves the risk of working together. If this can be minimized, firms should work together.

Question 19.

How do small bank activities differ from large bank activities?

Small banks are basically involved in raising funds for businesses of a smaller level. These banks are mainly concerned with the investment of the form of foreign corporate investment, trade finance, facility of transactions internationally, and also foreign real estate. As far as the larger banks are concerned, they are basically involved in raising funds for businesses and also for registration with the Government authority of that country. Equities and debts and issues and then making sales of the same in the market are all done by the larger banks. Initially, the investment banks were indulged in more or less selling of securities but now they are also concerned with mergers and acquisitions. These banks did not deal with the general public in the past but now they have been doing that ever since the point of equality developed with the development of technology.

Question 20.

How has the performance of the commercial banking industry changed in the last decade?

The performance of commercial banks has changed drastically over the last many years. Initially, the commercial banks would simply be engaged in investment banking. But the conditions have changed drastically ever since. The reason for the same is that it also includes the functioning of underwriting, being an intermediary between investment in public and an issue of securities amongst them. They have also started to be engaged in mergers and acquisitions even with the corporate organizations, they have also started to act like brokers for the clients in other financial institutions and banks. The commercial banks have therefore started to use the change in technology much to their benefits and also of those of the clients. So, they have made it extremely easier for the general public with the introduction of the facilities as has been mentioned.

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