Forex Trading News

Stand By Letters of Credit (SBLC’s)

2012-04-04T09:54:00.000-07:00

Value
conversion depends on many factors, some fixed, some floating such as:

Type of Letter of Credit varies and includes
(SBLC, ILC, LC, Pay Order, etc.)

It is Usually viewed as a SBLC is the
Better Bank Instrument

SBLCs are issued on a Bank-to-Bank Basis
only

The Issuing Bank Rating as well as location
(branch) of Bank

Who is issuing the instrument - individual,
company, government, etc.

Instrument Must Be in US Dollars only

Bank Policy

Market Conditions

Client Anticipation of Return

Place Transaction Occurs

What is done with ‘Cash’ after conversion
- this is becoming a paramount issue with banks converting the instrument,
the preferred and acceptable method is to deposit a portion of the redeemed
funds with the honoring bank, usually not less than 20% for a period of
not less than six (6) months.

Hints

These types of Bank Instruments can be
issued to individuals, corporations, trust, pension funds, endowments,
non profit organizations, or to any payable entity.

Individuals who hold such an instrument
may have problems with 3rd party transactions or banks.

LC, ILC, or SBLC are often times issued
for the sale and purchase of tangible assets.

It is often easier to raise a 'Credit
Line' than convert the instrument to CASH!

Fluctuating World Market Conditions set
the pace and determine the trading value, if any.

Usually most every instrument can be converted,
however, some are just Not desirable Trading Instruments on the current
World Market.

Certain Required "Documentation'
is needed for this type of transaction.

U.S. Certificate of Deposits (CD’s)

2012-04-04T09:51:00.001-07:00

Certificate of Deposits (CD’s) - outside
of USA, these are usually referred to

as ‘Fixed Deposits’ - Raise a ‘Credit Line’ against them or ‘Cash’ them
out right.

The
'Value Conversion' depends on many factors, some fixed, some floating
such as

Type of CD (time, maturity date, ownership,
value, etc.)

Issuing Bank Rating as well as location
(branch) of U.S. Bank

Physical Location of the Original CD
- Safety Deposit Box, Corporate Office Safe, Home, etc.

If an Agent, Security House, or Third
Party Bank is Holding the CD’s

CD's Must be Clean and Clear - No Encumbrances
or Liens

Market Conditions

Bank Policy

Currency Fluctuation, if wanted converted
to other than US dollars

Client Anticipation of Return

Place Transaction Occurs

What is done with "Cash" after conversion

This is becoming a paramount issue with banks converting the instrument,
the preferred and acceptable method is to deposit a portion of the redeemed
funds with the honoring bank, usually not less than 20% for a period of
not less than six (6) months.

Hints

Most CD's are usually issued to individuals.

CD's may be held by a trust, foundation,
endowment, corporation, or nonprofit entity.

It is often easier to raise a 'Credit
Line' than convert the instrument to CASH!

Fluctuating World Market Conditions set
the pace and determine the trading value, if any.

Usually most every instrument can be converted,
however, some are just Not desirable Trading Instruments on the current
World Market.

Certain Required "Documentation'
is needed for this type of transaction.

Documentary and Standby Letters of Credit

2012-04-04T09:45:00.001-07:00

Effective January 1, 1999, banks may incorporate, by reference, the International Standby Practices, referred to as ISP 98, into their standby letters of credit.1 In doing so, banks will supplement and vary Article 5 of the Uniform Commercial Code ("UCC"),2 which governs letters of credit in most of the United States, and replace, as to such credits, the Uniform Customs and Practices ("UCP"),3 a statement of practices published by the International Chamber of Commerce ("ICC") that is nearly universally incorporated by reference into letters of credit. The purpose of this article is to describe when ISP 98 applies and how certain of its rules follow or vary from the UCC and the UCP.

Documentary and Standby Letters of Credit
Letter of credit law and practice, until quite recently, has evolved with the use of letters of credit in commercial sale of goods transactions. Stated simplistically, letters of credit have enabled sellers, unwilling to rely simply upon the promise of the buyers to pay for goods once the goods are loaded on board a vessel destined to the buyer’s country, to be assured that they can obtain payment once those goods are so loaded. A seller may present the agreed shipping documents to, and thereby obtain payment from, a bank whose undertaking to make such payment would be primary and independent of the contract between the seller and his buyer.

The letter of credit (or credit) is part of a three-party relationship in a commercial transaction: (1) the contract between the parties (applicant and beneficiary) pursuant to which one party (the applicant) is obligated to obtain the credit for the benefit of the other (the beneficiary), (2) the contract between the applicant and the person whom the applicant asks to issue the credit (the issuer), usually a bank or other financial institution, and (3) the undertaking by the issuer in favor of the beneficiary, to honor a presentation by payment or delivery of an item of value. The undertaking of the issuer in the letter of credit, however, is primary and must be honored without any claim, counter claim, setoff or defense that the issuer or the applicant may have against the beneficiary. This ‘independence’ of the letter of credit from the transaction between the applicant and the beneficiary is its special feature.

A letter of credit will be either a documentary or standby credit. Common to all credits is that the issuer undertakes to pay or give an item of value against a specific document or documents which accompany the request for payment. Such payment can be at the time of presentation, known as at sight, or at a later time, known as deferred payment. The issuer can give an item of value, such as a bill of exchange drawn on the bank, also payable at sight or at a later time. The documentary credit specifies the documents that must accompany the presentation, such as an invoice, bill of lading and insurance certificate. With a standby credit the presentation required by the undertaking may be the request for payment itself, with or without other documents. Frequently, a standby credit is given to support an obligation of the applicant: the beneficiary can obtain payment under the standby credit by presenting a simple demand, as specified in the credit, to the issuer. Standby credits are also used to support an obligation by the applicant to make an advance payment; they are used as bid bonds to support the bidder’s duty to execute a contract; they are used a credit support in loan transactions to ensure repayment by the borrower; and they may be used as a method of obtaining direct payment under a contract. Standby credits, as in the preceding examples, are performance, financial or direct pay undertakings.

As both documentary and standby credits are undertakings to pay against the presentation of one or more documents, the distinction between them is nowhere precisely stated and probably unnecessary to state. The UCP states that it applies to both types of credit without defining them (the definition was unnecessary). Similarly, the UCC, which applies to both, has no need to distinguish the two. ISP 98 states that it applies to standby letters of credit without defining them. In practice, the parties will determine whether a credit is a standby by choosing to incorporate ISP 98 or not. If they do, it will be subject to the special rules in ISP 98 applicable to standby credits; if not, they will presumably choose the UCP and the credit will be subject to that regime, which was developed principally for documentary credits.

Typical suggestion for a Due Diligence Checklist

2012-04-04T09:43:00.000-07:00

CORPORATE ORGANIZATION
1. Articles of Incorporation
2. Bylaws
3. Recent Changes in Corporate Structure
4. Shareholder List
  1. Show Number of Outstanding Shares
    and Percent Owned
  2. Stock Option or Share Appreciation
    Rights Plans
5. Parent, Subsidiaries and Affiliates
6. Shareholder’s Agreements
7. Minutes of the Board of Directors
BUSINESS INFORMATION
1. Product Offering
2. Depreciation Method
3. Patents
4. Management Information System
MARKETING
1. Pricing Strategy
2. Patents
3. Distribution Channels
4. Promotion Tactics
5. Customer Base
  1. Top Ten Customers By Product
    Line - Showing Volume
  2. Market Share By Product Line
BUSINESS PLAN
1. Most Recent Five Year Business Plan
2. Prior Business Plan
FINANCIAL STATEMENTS
1. 5 Years of Historical Audited Statements
  1. Income Statement

Sec Interpretation: Use of Electronic Media

2012-04-04T09:40:00.002-07:00

Online Private Offerings under Regulation D
Broad use of the Internet for exempt securities offerings under Regulation D is problematic because of the requirement that these offerings not involve a general solicitation or advertising. When we first considered whether exempt offerings could be conducted over the Internet, we concluded that an issuer's unrestricted, and therefore publicly available, Internet web site would not be consistent with the restriction on general solicitation and advertising. Specifically, the 1995 Release included an example indicating that an issuer's use of an Internet web site in connection with a purported private offering would constitute a "general solicitation" and therefore disqualify the offering as "private."

Subsequently, the Divisions of Corporation Finance and Market Regulation issued interpretive guidance to a registered broker-dealer and its affiliate, IPONET, that planned to invite previously unknown prospective investors to complete a questionnaire posted on the affiliate's Internet web site "as a means of building a customer base and database of accredited and sophisticated investors" for the broker-dealer. A password-restricted web page permitting access to private offerings would become available to a prospective investor only after the affiliated broker-dealer determined that the investor was "accredited" or "sophisticated" within the meaning of Regulation D. Additionally, a prospective investor could purchase securities only in offerings that were posted on the restricted web site after the investor had been qualified by the affiliated broker-dealer as an accredited or sophisticated investor and had opened an account with the broker-dealer. The Divisions' interpretive letter was based on an important and well-known principle established over a decade ago: a general solicitation is not present when there is a pre-existing, substantive relationship between an issuer, or its broker-dealer, and the offerees.

We understand that some entities have engaged in practices that deviate substantially from the facts in the IPONET interpretive letter. Specifically, third-party service providers who are neither registered broker-dealers nor affiliated with registered broker-dealers have established web sites that generally invite prospective investors to qualify as accredited or sophisticated as a prelude to participation, on an access-restricted basis, in limited or private offerings transmitted on those web sites.

Frauds, Phonies and Scams

2012-04-04T09:40:00.001-07:00

The Bureau of the Public Debt and the rest of the United States Department of the Treasury (collectively, "we" or "us") are aware of a number of fraudulent schemes (we like to call them "scams") that involve what are claimed to be securities issued or backed by us or any other part of the United States Government. These scams have been directed at banks, charities, companies, and even individuals, by individuals or organizations seeking payment on the fraudulent securities. These pages will alert you to these scams and help you protect yourself from being taken in. If you want to search for a particular term or scam, you can use our site's search engine by clicking on the find button on the left bar. However, we recommend that you look at all of these pages in order, particularly the first page, "How Marketable Treasury Securities Really Work." The better you understand our securities, the less likely it is that you'll be taken in.

Information on Financial Scandals

2012-04-04T09:38:00.002-07:00

This page contains links to important sources of information on financial scandals, corruption and fraud, miscellaneous articles on this topic, organisations providing advice and useful sources for further research.

General Sources on Corruption or Alleged Financial Wrong-Doing

Offshore Business News & Research OBNR provides offshore business information on companies and individuals operating in countries where independent and accurate information is often difficult to obtain. Since the launch of its investigative newsletters in February, 1997, the company has exposed numerous frauds in the Bermuda-Caribbean region.

Crimenet Links to Crime, Law Enforcement and Espionage Sites Although it is not specifically devoted to financial crimes this site might be of interest to people who wish to follow up related topics.

Research Committee on Political Finance and Corruption Part of the International Political Science Association.

Business and Financial Ethics Internet Resource Center The Centre is a library of on-line information concerning business and financial ethics sponsored by the Stuart School of Business at the Illinois Institute of Technology.

The Independent Banking Advisory Service IBAS exists to give advice to people who are having problems with banks in Britain.

National Association of Bank/Insurance Customers An independent self help group for all private and commercial users of UK bank and insurance services.

National Westminster Bank Fraud A web site created by Umang Malhotra to publicise his disputes with the National Westminster Bank.

Corruption et criminalité économique A large selection of links from the Strategic Road site which also covers many related topics. There are also details of books in French on corruption.

J. Orlin Grabbe's Home Page Grabbe is a prolific writer on the subject of shady financial dealings and related topics.

Shmuel Vaknin's Macedonian Experience Site Vaknin is an Israeli economist. His site has several articles on financial scandals, including one on the typology of financial scandals. Although many of Vaknin's articles deal with the Macedonian economy he claims that the Macedonian economic experience is so generic and so widespread, so varied and so concentrated - that it really served as an ideal laboratory.

Stock Detective Stock Detective ventures into dens of dubious dealings to uncover the truth for all investors.

TheTruthseeker.com An Interactive Online Magazine and E-mail service site with a mission to expose the underbelly of Wall Street.

Mario's Cyberspace Station A website covering espionage, political wrong-doing, and corruption. It is the creation of Mario Profaca, a Croatian journalist. Among the pages are ones on scandalous money and dirty money.

Internet Scambusters A free electronic newsletter on Internet-based scams. The site has links to other relevant sites.

Money Fraud: Financial Scandals An About.Com feature with links to sources of information.

AuditNet's Fraud/Investigative Resources Links selected by Jim Kaplan of AuditNet.

Government Accountability Project The mission of the US Government Accountability Project is to protect the public interest and promote government and corporate accountability by advancing occupational free speech, defending whistleblowers and empowering citizen activists. The site includes some links to whistleblower sites in other countries.

Funding mega dollar projects utilizing bank guarantees (BG's) or other bank instruments

2010-08-29T04:33:00.000-07:00

Another option for 'Funding Mega Dollar Projects' is to use Bank Guarantees (BG's), or similar Bank Instruments.

This is an excellent option for 3rd world countries. The government has a prime 'Bank' issue the Bank Guarantee to the Developer who was awarded the 'Project'. This can be for any type of project:

B.O.T. - Build, Operate, and Transfer
B.O.O. - Build, Operate, and Own
Environmental Project
Construction Project
Hospital or Medical Facility
ManufacEagle Tradersg Facility
Development Project
Quasi Government Project
Government Project
Nature and Natural Preservation Projects - Save the Rain Forest, Plant Tree Farms, etc.
Other

In principal this is how it works
The client may composite the value of the 'Contract' into a series of transactions utilizing Bank Guarantees (BG's) or similar Bank Instruments, whereby they (the client) do large project amounts ranging in increments of 20 to 100 million US Dollars utilizing corresponding Bank Instrument amounts.

However, the cash value (actual conversion amount) of each BG or Bank Instrument must be paid in full at time of every transaction for each of these larger projects. This is done in phases (stages over a period of time) during a predetermined schedule or life of the project.

The basic criteria would be a project or a series of projects rolled into one entity with a contract value of 200 million US dollars and above.

Example
Since projects are generally time phased for payments, the first payment on a 200 million US Dollar project could be 20m. The client would have issued a Bank Instrument such as a BG for 20m. The 'Bank Instrument', such as a BG, is then converted to real working dollars based on the market value of the instrument at the time.

Corporate Promissory Notes (Continue....2)

2010-08-29T04:32:00.000-07:00

Helpful hints:

CPN's are usually issued by a corporation as collateral or for the sole purpose of raising capital (liquid assets in the form of cash).

CPN's held by individuals are highly questioned by banks throughout the world. It is generally easier to raise a 'Credit Line' than convert this type of instrument into CASH!

Fluctuating World Market Conditions set the pace and determine the trading value, if any.

Usually most every instrument can be converted, however, some are just Not desirable

Trading Instruments on the current World Market.

Substantiated "Documentation' is needed for this type of transaction.

The Following Corporate Promissory Notes are very difficult to do at the present, and only a 'Credit Line' could be raised:

Any CPN issued from any Corporation in Indonesian unless backed by a Major World Bank.

Any CPN issued from any Corporation in Thailand unless backed by a Major World Bank.

Any CPN issued from any Corporation in Philippines unless backed by a Major World Bank.

Any CPN issued from any Corporation in Malaysia unless backed by a Major World Bank.

Any CPN issued from Corporation in Russia unless backed by a Major World Bank.

Any CPN held by an Individual in lieu of a company, trust, corporation, endowment, or
nonprofit entity.

The Following CPN's Are NOT Currently Tradable:

CPN's issued from Vietnam

CPN's issued from Cambodia

CPN's issued from Laos

CPN's issued from Burma

Important Notice:
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applied to Any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Corporate Promissory Notes (Continue....1)

2010-08-29T04:27:00.000-07:00

Corporate Promissory Notes (CPN's) - Issued by Major Corporations, usually public listed and underwritten by a Bank or Underwriter. This can be any foreign bank, or a Central Bank from country of origin.

Convert to Cash like handling a BG or raise a Credit Line.

Value conversion depends on many factors, some fixed, some floating such as…

Type of Promissory Note (time, maturity date, ownership, value, etc.)

Issuing Corporate Rating (preferably a Dunn and Bradstreet or similar Credit Rating)

Underwriting or Guarantor Bank and their Rating (Central Bank of a Government, Local in
Country Bank, Foreign Worldwide Bank, etc.)

Agent, Underwriter, Security House, or Bank Holding Promissory Note

What type of ‘Currency’, US Dollars is always preferred, but most others are acceptable

Market Conditions

Bank Policy or Underwriter Policy

Politics

Ownership, and Type of Restrictions, if any

Currency Fluctuation, if not already in US dollars

Client Anticipation of Return

Place Transaction Occurs

What is done with ‘Cash’ after conversion - this is becoming a paramount issue with banks or security houses converting the instrument, the preferred and acceptable method is to deposit a portion of the redeemed funds with the honoring bank or security house, usually as follows...

(1) For a 'Bank' not less than 50% for a period of not less than six (6) months.
(2) For a 'Security Trading House' not less than 30% either reinvested in other
types of asset portfolio management (stocks, bonds, mutual funds, etc.)
or in their money market fund.

Corporate Medium Term Notes (MTNs)

2010-08-29T04:26:00.002-07:00

"Corporate MTNs", are simple one mechanism available to selling off Corporate Debt. These 'Corporate MTNs' are sold and traded on the Open Market, just like any other stock, security, or bank instrument.

It is often very advantageous for a company to sell off their "Debt."

Some advantages are:

(1) Getting Rid of the Debt
(2) Raising Capital
(3) Better Market Exposure
(4) Freeing Up Assets to Pursue Other Things

IN A FINANCIAL WORLD GONE CRAZY, DEBT IS AN 'ASSET'

Dr. Money's Team is ready to assist You:

(1) Creating the avenue to Sell "New Bonds"
(2) Arranging to Sell "Existing Bonds"

Important Notice:
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Corporate Bonds

2010-08-29T04:26:00.001-07:00

"Corporate Bonds", are simple one mechanism available to selling off Corporate Debt. These 'Bonds' are sold and traded on the Open Market, just like any other stock, security, or bank instrument.

It is often very advantageous for a company to sell off their "Debt."

Some advantages are:

(1) Getting Rid of the Debt
(2) Raising Capital
(3) Better Market Exposure
(4) Freeing Up Assets to Pursue Other Things

The Eagle Traders is ready to assist You:

(1) Creating the avenue to Sell "New Bonds"
(2) Arranging to Sell "Existing Bonds"

Important Notice:
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to Any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Bank Guarantees (BG’s)

2010-08-29T04:22:00.000-07:00

Bank Guarantees (BG’s) - Raise a Credit Line or Cash them in for real dollars.

Value conversion depends on many factors, some fixed, some floating such as…

Ownership of BG - Corporate or Private - Corporate is Highly Preferred

The Type of BG

Issuing Bank Rating as well as location (branch) of Bank Issuing the BG

Physical Location of the Original BG - Safety Deposit Box, Corporate Office Safe, Home, etc.

If an Agent, Security House, or Third Party Bank is Holding BG’s

BG must be in US Dollars only

Market Conditions

Bank Policy

Client anticipation of return

Place transaction occurS

What is done with ‘Cash’ after conversion - this is becoming a paramount issue with banks
converting the instrument, the preferred and acceptable method is to deposit a portion
of the redeemed funds with the honoring bank, usually not less than 50% for a period
of not less than six (6) months.

Some Helpful Hints Before Starting....

BG's are usually issued by a corporation as collateral.

BG's held by individuals are highly questioned by banks throughout the world.

It is generally easier to raise a 'Credit Line' than convert the instrument to CASH!

Fluctuating World Market Conditions set the pace and determine the trading value, if any.

Usually most every instrument can be converted, however, some are just Not desirable

Trading Instruments on the current World Market.
Substantiated "Documentation' is needed for this type of transaction.

The Following Bank Guarantees are very difficult to do at the present, and only a 'Credit Line' could be raised:

1. Any BG issued from any Indonesian Bank

2. Any BG issued from any Thailand Bank

3. Any BG issued from any Philippine Bank

4. Any BG issued from any Malaysian Bank

Any BG held by an Individual in lieu of a company, trust, corporation, or nonprofit entity

The Following BG's Are NOT Currently Tradable:

1. BG's issued from Russia

2. BG's issued from Vietnam

3. BG's issued from Cambodia

4. BG's issued from Laos

5. BG's issued from Burma

Important Notice:

It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to Any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Capital Markets

2010-08-29T04:20:00.002-07:00

Short-term investments and borrowing are driven by the available rates in the market for these products and services. Likewise, long-term rates in the debt and equity markets will determine the cost of capital for an organization. This section provides sites which offer information to the treasurer on various rates for different segments of the market.

The Federal Reserve Bank of New York provides one of the better sites for daily rates on commercial paper (CP) and foreign exchange (FX). Daily rates are available for dealer-placed and direct-placed commercial paper plus 36 foreign currencies. These are the noon buying rates "as certified by the New York Federal Reserve Bank for customs purposes." All of the rates shown are expressed in terms of foreign currency values (e.g., 118.33 yen/dollar) except for U.K. Sterling rates which are shown in terms of U.S. dollars per pound. In addition, you can access the New York Federal Reserve's 10:00 A.M. midpoint (between buying and selling rates) foreign exchange rates daily for major currencies expressed in foreign currency units:

1. Pound Sterling (expressed in US$ equivalents)
2. Canadian Dollar
3. French Franc
4. German Mark
5. Swiss Franc
6. Japanese Yen
7. Dutch Guilder
8. Belgian Franc
9. Italian Lira
10. Swedish Krone
11. Norwegian Krone
12. Danish Krone

Section 1109.32

2010-08-29T04:20:00.001-07:00

A BANK MAY INVEST IN ANY OF THE FOLLOWING:

(1) BONDS, BILLS, NOTES, OR OTHER DEBT SECURITIES OF THE UNITED STATES OR FOR WHICH THE FULL FAITH AND CREDIT OF THE UNITED STATES IS PLEDGED FOR PAYMENT OF PRINCIPAL AND INTEREST;

(2) BONDS, NOTES, OR OTHER DEBT SECURITIES ISSUED BY THIS STATE, OR ANY STATE OF THE UNITED STATES, THAT ARE THE DIRECT OBLIGATION OF THE ISSUER AND FOR WHICH THE FULL FAITH AND CREDIT OF THE ISSUER IS PLEDGED TO PROVIDE PAYMENT OF THE PRINCIPAL AND INTEREST;

(3) BONDS, NOTES, OR OTHER DEBT SECURITIES OF ANY COUNTY, MUNICIPAL CORPORATION, TOWNSHIP, SCHOOL DISTRICT, IMPROVEMENT DISTRICT, SEWER DISTRICT, OR OTHER SUBDIVISION OF THIS STATE OR ANY OTHER STATE OF THE UNITED STATES, THAT ARE THE DIRECT OBLIGATION OF THE COUNTY OR THE SUBDIVISION ISSUING THEM AND FOR WHICH THE FULL FAITH AND CREDIT OF THE ISSUING COUNTY OR SUBDIVISION IS PLEDGED TO PROVIDE PAYMENT OF PRINCIPAL AND INTEREST;

(4) BONDS OR OTHER DEBT OBLIGATIONS ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE UNITED STATES, REGARDLESS OF THE GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST BY THE UNITED STATES;

(5) SUBJECT TO CONDITIONS AND RESTRICTIONS THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS MAY PRESCRIBE, BONDS, DEBENTURES, AND OTHER DEBT SECURITIES ISSUED BY ANY COUNTRY OR MULTINATIONAL ORGANIZATION THAT ARE THE DIRECT OBLIGATION OF THE ISSUING

A brief history of bond valuation

2010-08-29T04:18:00.002-07:00

The value of any bond is the present value of its expected cash flows. This sounds simple: Determine the cash flows and then discount those cash flows at an appropriate rate. In practice, it’s not so simple for two reasons. First, holding aside the possibility of default, it is not easy to determine the cash flows for bonds with embedded options. Because the exercise of options embedded in a bond depends on the future course of interest rates, the cash flow is a priori uncertain. The issuer of a callable bond can alter the cash flows to the investor by calling the bond, while the investor in a putable bond can alter the cash flows by putting the bond. The future course of interest rates determines when and if the party granted the option is likely to alter the cash flows.

A second complication is determining the rate at which to discount the expected cash flows. The usual starting point is the yield available on Treasury securities. Appropriate spreads must be added to those Treasury yields to reflect additional risks to which the investor is exposed. Determining the appropriate spread is not simple, and is beyond the scope of this article. The ad hoc process for valuing an option-free bond (i.e., a bond with no options) once was to discount all cash flows at a rate equal to the yield offered on a new full-coupon bond of the same maturity. Suppose, for example, that one needs to value a 10-year option-free bond. If the yield to] maturity of an on-the-run 10-year bond of given credit quality is 8%, then the value of the bond under consideration would be taken to be the present value of its cash flows, all discounted at 8%.

According to this approach, the rate used to discount the cash flows of a 10-year current-coupon bond would be the same rate as that used to discount the cash flow of a 10-year zero-coupon bond. Conversely, discounting the cash flows of bonds with different maturities would require different discount rates. This approach makes little sense because it does not consider the cash flow characteristics of the bonds. Consider, for example, a portfolio of bonds of similar quality but different maturities. Imagine two equal cash flows occurring, say, five years hence, one coming from a 30-year bond and the other coming from a 10-year bond. Why should these two cash flows have different discount rates and hence different present values?

Given the drawback of the ad hoc approach to bond valuation, greater recognition has been given to the fact that any bond should be thought of as a package of cash flows, with each cash flow viewed as a zero-coupon instrument maEagle Tradersg on the date it will be received. Thus, rather than using a single discount rate, one should use multiple discount rates, discounting each cash flow at its own rate.

One difficulty with implementing this approach is that there may not exist zero-coupon securities from which to derive every discount rate of interest. Even in the absence of zero-coupon securities, however, arbitrage arguments can be used to generate the theoretical zero-coupon rate that an issuer would have to pay were it to issue zeros of every maturity. Using these theoretical zero-coupon rates, more popularly referred to as theoretical spot rates, the theoretical value of a bond can be determined. When dealer firms began stripping of full-coupon Treasury securities in August 1982, the actual prices of Treasury securities began moving toward their theoretical values.

Another challenge remains, however—determining the theoretical value of a bond with an embedded option. In the early 1980s, practitioners came to recognize that an option-bearing bond should be viewed as a package of cash flows (i.e., a package of zero-coupon instruments) plus a package of options on those cash flows. For example, a callable bond can be viewed as a package of cash flows plus a package of call options on those cash flows. As such, the position of an investor in a callable bond can be viewed as:

Long a Callable Bond = Long an Option-Free Bond + Short a Call Option on the Bond.

In terms of the value of a callable bond, this means:

Value of Callable Bond = Value of an Option-Free Bond - Value of a Call Option on the Bond.

But this also means that

Value of an Option-Free Bond = Value of Callable Bond + Value of a Call Option on the Bond.

An early procedure to determine the fairness of a callable bond’s market price was to isolate the implied value of its underlying option-free bond by adding an estimate of the embedded call option’s value to the bond's market price. The former value could be estimated by applying option pricing theory as applied to interest rate options.

This insight led to the first generation of valuation models that sought to value a callable bond by estimating the value of the call option. However, estimation of the call option embedded in callable bonds is not that simple. For example, suppose a 20-year bond is not callable for five years after which time it becomes callable at any time on 30-days notice.

Model for valuing bonds and embedded options

2010-08-29T04:18:00.001-07:00

Background
One can value a bond by discounting each of its cash flows at its own zero-coupon ("spot") rate. This procedure if equivalent to discounting the cash flows at a sequence of one-period forward rates. When a bond has one of more embedded options, however, its cash flow is uncertain. If a callable bond is called by the issuer, for example, its cash flow will be truncated.

To value such a bond, one must consider the volatility of interest rates, as their volatility will affect the possibility of the call option being exercised. One can do so by constructing a binomial interest rate tree that models the random evolution of future interest rates. The volatility-dependent one-period forward rates produced by this tree can be used to discount the cash flows of any bond in order to arrive at a bond value.

Given the values of bonds with and without an embedded option, one can obtain the value of the embedded option itself. The procedure can be used to value multiple or interrelated embedded options, as well as stand-alone risk control instruments such as swaps, swaptions, caps and floors.

Introduction
In the good old days, bond valuation was relatively simple. Not only did interest rates exhibit little day-to-day volatility, but in the long run they inevitably drifted up, rather than down. Thus the ubiquitous call option on long-term corporate bonds hardly ever required the attention of the financial manager. Those days are gone. Today, investors face volatile interest rates, a historically steep yield curve, and complex bond structures with one or more embedded options. The framework used to value bonds in a relatively stable interest rate environment is inappropriate for valuing bonds today. This article sets forth a general model that can be used to value any bond in any interest rate environment.

The mechanics of bank SLCS and guarantees

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The driving force behind the financial instruments under discussion in this paper is the U.S. government through its monetary agency, the Federal Reserve Board. The U.S. dollar is the basis of the world's liquidity system since all other currencies base their exchange rate on it. Quite simply this means that the U.S. is the world's central banker. As the world's central banker, the U.S. has an enormous responsibility to maintain stability in the world's monetary system. As well, the U.S. as the most powerful nation has accepted the role as the champion and promoter of democracy in all of its endeavors. While the U.S. has many tools to do this, one in particular is relevant for the purposes of this discussion.

The Federal Reserve Board (Fed) uses two financial instruments to control and utilize the amount of U.S. dollars in circulation internationally: Standby Letters of Credit (SLC) and Bank Guarantees (BG).

The Fed's domestic tools to control credit creation are interest rate policy, open market operations, reserve ratio policy and moral persuasion. In the domestic context, these tools are not always as effective as the Fed would like them to be. Part of the reason for the less than perfect effectiveness is due to the substantial stock of U.S. dollars in foreign jurisdictions. Several of the Fed's domestic tools cannot be used by it in other countries. For examples, the Fed cannot change foreign reserve ratios.

Furthermore, a significant amount of credit creation occurs in U.S. dollars in foreign countries, particularly in the Eurodollar market.

ICC endorsement of the UNCITRAL Convention on Independent Guarantees and Stand-by Letters of Credit

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On the unanimous consent of its Commission on Banking Technique and Practice, the International Chamber of Commerce endorses the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit.

Since its earliest years, ICC has provided important international leadership in the field of international banking operations, particularly as a forum for developing rules of practice. Since 1933, the Uniform Customs and Practice for Documentary Credits (UCP), in its various revisions, has become a universally recognized standard, stating and establishing custom and practice for letters of credit.

In this process, the United Nations Commission on International Trade Law (UNCITRAL), by its endorsement of the subsequent UCP versions, provided an important bridge to those countries who were at the time unable to participate directly in the work of ICC. Other ICC rules, such as Incoterms, have also been endorsed by UNCITRAL, which has contributed to their international acceptance.

ICC rules cannot be fully effective in all countries without their being recognized under local law. In this respect, the recent work of UNCITRAL on the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit provides an important impetus to attain this objective. The Convention sets forth the basic principles of law for independent undertakings in a manner which fully assures their independent nature, which guarantees widest possible party autonomy and which establishes a uniform international legal standard for limits to the exception for fraudulent or abusive drawings.

ICC appreciates that the Convention was drafted in full recognition of the role of the various ICC rules in this field, that the UNCITRAL Working Group was directly and indirectly influenced by, and in turn influenced, the revision of the UCP, ICC's Uniform Rules for Demand Guarantees (URDG) and its recently adopted rules on International Standby Practices (ISP 98). ICC also notes that the UN Convention expressly defers to international banking practice as represented by ICC rules.

History and Development of Bank Instruments (Continue....2)

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Marshall plan - lMF - World Bank and Bank of International Settlements
The Bretton Woods Convention produced the Marshall Plan, the Bank for Reconstruction and development known as the World Bank. the International Monetary Fund (IMF) and the Bank of International Settlements (BIS). These four would re-establish and revitalize the economies of the western nations. The World Bank would borrow from rich nations and lend to poorer nations. The IMF working closely with the World Bank, with a pool of funds, controlled by a board of governors. would initiate currency adjustments and maintain the exchange rates among national currencies within defined limits. The Bank of International Settlements would then function as a "central bank" to the world.

The International Monetary Fund was to be a lender to the central bank of countries which were experiencing a deficit in the balance of payments. By lending money to that country's central bank, the IMF provided currency, allowing the underdeveloped country to continue in business. building up is export base until it achieved a positive balance of payments. Then, that nation's central bank could repay the money borrowed from the lMF, with a small amount of interest and continue on its own as an economically viable nation. If the country experienced an economic contraction, the IMF would be standing ready to make another loan to carry it through.

Bank of International Settlements
The Bank of International Settlements (BIS) was created as a new central bank to the central banks of each nation. It was organized along the lines of the U.S. Federal Reserve System and it's principally responsible for the orderly settlement of transactions among the central banks of individual countries. In addition, it sets standards for capital adequacy among the central banks and coordinates the orderly distribution of a sufficient supply of currency in circulation necessary to support international trade and commerce.

The Bank of International Settlements is controlled by the Basel Committee which is comprised of ministers sent from each of the G-10 nations central banks.

History and Development of Bank Instruments (Continue....1)

2010-08-29T04:14:00.000-07:00

Introduction
Picture the world at war in 1944. All of Europe, except for Switzerland, is pounding its infrastructure, manufacEagle Tradersg base and population into rubble and death. Asia is locked into a monumental straggle which is destroying Japan, China, and the Pacific Rim countries. North Africa, the Baltic's, and the Mediterranean countries are clutched in a life and death struggle in the fight to throw off the yoke of occupation. A world gone mad! Economic destruction, mad, human misery and dislocation exists on a scale never before experienced in human history. What went wrong? How could the world rebuild and recover from such devastation? How could another war be avoided?

Keynes, Harry White and Bretton Woods
This was the world as it existed in July 1944 when a relatively small group of 130 of the western worlds most accomplished economic, social and political minds met in upstate New Hampshire at a small vacation town called Bretton Woods. John Maynard Keynes, the man who had predicted the current catastrophe in his book, The Economic Consequences of the Peace, written in 1920, was about to become the principal architect of the post-World War II reconstruction Keynes presented a rather radical plan to rebuild the worlds economy, and hopefully avoid a third world war. This time the world listened, for Keynes and his supporters were the only ones who had a plan that in any way seemed grand enough in foresight and scope to have a chance at being successful. Yet Keynes had to fight hard to convince those rooted in conventional economic theories and partisan political doctrines to adopt his proposals. In the end, Keynes was able to sell about two-thirds of his proposals through sheer force of will and the support of the United States Secretary of the Treasury, Harry Dexter White.

At the hart of Keynes proposals were two basic principals: first the Allies must rebuild the Axis Countries, not exploit them as had been done after WW 1; second, a new international monetary system must be established, headed by a strong international banking system and a common world currency not tied to a gold standard.

Keynes went on to reason that Europe and Asia were in complete economic devastation with their means of production seriously crippled, their trade economies destroyed and their treasuries in deep dept. If the world economy was to emerge from its current state, it obviously needed to expand. This expansion would be limited if paper currency were still anchored to gold.

The United States, Canada, Switzerland and Australia were the only industrialized western countries to have their economies, banking systems and treasuries intact and fully operational. The enormous issue at the Bretton Woods Convention in 1944 was how to completely rebuild the European and Asian economies on a sufficiently solid basis to foster the establishment of stable, prosperous pro-democratic governments.

At the time, the majority of the world's gold supply, hence its wealth, was concentrated in the hands of the United States, Switzerland and Canada. A system had to be established to democratize trade and wealth; and redistribute, or recycle, currency from strong trade surplus countries back into countries with weak or negative trade surpluses. Otherwise, the majority of the world's wealth would remain concentrated in the hands of a few nations while the rest of the world would remain in poverty.

Keynes and White proposed that the United States supported by Canada and Switzerland would become the banker to the world, and the U.S. Dollar would replace the pound sterling as the the medium of international trade. He also suggested that the dollar's value be tied to the good faith and credit of the U.S. Government not to gold or silver, as had traditionally been the support for a nation's currency.

Keynes concept of how to accomplish all of this was radical for its time, but was based upon the centuries old framework of import/export finance. This form of finance was used to support certain sectors of international commerce which did not use gold as collateral, but rather their own good faith and credit, backed by letters of credit, avals, or guarantees.

Keynes reasoned that even if his plans to rebuild the world's economy were adopted at the Bretton Woods Convention, remaining on a Gold standard would seriously restrict the flexibility of governments to increase the money supply. The rate of increase of currency would not be sufficient to insure the continued successful expansion of international commerce over the long term. This condition could lead to a severe economic crisis, which, in turn, could even lead to another world war. However, the economic ministers and politicians present at the convention feared loss of control over their own national economies, as well as, run-away inflation, unless a "hard-currency" standard were adopted.

The Convention accepted Keynes' basic economic plan, but opted for a gold-backed currency as a standard of exchange. The "official" price of gold was set at its pre-WW II level of $ 35.00 per ounce One U.S. Dollar would purchase 1/35 an ounce of gold. The U.S. dollar would become the standard world currency, and the value of all other currencies in the western. non-communist world would be tied to the U.S. dollar as the medium of exchange.

Historical Bonds: Names You Should Know

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Historical bonds
Bonds that were once valid obligations of American entities but are now worthless as securities and only collected and traded as memorabilia -- are quickly becoming a favorite tool of scam artists. Here are several things that you should know about them:

Three Lies Used to Perpetrate Historical Bond Fraud:

Lie 1 : Historical bonds are payable in gold.

Lie 2: Historical bonds are backed by the Treasury Department.

Lie 3: The Treasury Department has established a federal sinking fund to retire historical bonds.

How Scam Artists Use Bogus Third-Party Valuations to Trick Investors
Scam artists are selling historical bonds to unsophisticated investors at inflated prices far exceeding their fair value as collectibles. They often use third-party valuations, which state that the bonds are worth million or billions of dollars each, to do so. These valuations or authentications, which are often referred to as "hypothecated" or "hypothetical," are completely bogus. A typical valuation will falsely overstate the value of these bonds by assuming erroneously that, notwithstanding the unenforceability of the gold clauses contained in the bonds, as well as the defunct and bankrupt status of most of the bonds' issuers, some person or entity is obligated to redeem the bonds in gold bullion.

Scam artists using such valuations may also make the false assertion that while perhaps not payable today in gold or in money, the bonds are used in high-yield trading programs in the United States, offshore and in Europe. In several cases, the third parties issuing the valuations appear to be working in conjunction with the scam artists. All of these false assertions have been used to defraud investors into paying as much as $150,000 for historical bonds that regularly trade for $25.

Fraudulent Cash and Railroad Bond Program Operator List
Part I consists of those individuals who, through their own words and deeds, have proven themselves cons to unwary investors and have been reported to the various authorities for their Securities Violations. Part II consists of the business names through which these individual have been known to operate. Pertinent notes are sometimes annotated to clarify level of involvement in the fraud and how interconnected.

Extreme caution should be exercised in transactions that may utilize these individuals. Deception has been utilized to cover their involvement in many a transaction by hiding behind other parties. Latest is to, now more than ever, hide under a completely new "front man" and place their "Program" with parties published herein. This list is not all-inclusive and should not be viewed as such.

The author of this publication, Henry R. Wentworth, has spent years developing the database contained herein. His second publication, Bank Debentures: Names You Should Know, contains a database with a focus on the market for ‘bank Debentures.’

Warning from the IMF against financial schemes misusing its name

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In view of widespread and continuing inquiries from individuals and companies who have been approached by parties in connection with offers of participation in various financial instruments and schemes promising high returns and unauthorizedly using the name of the International Monetary Fund (IMF), the Treasurer of the IMF today again warned potential investors to beware of such schemes. He had already issued warnings in the past (see News Brief Number 94/5, published February 23, 1994 and News Brief Number 94/11, published May 13, 1994). Today he reiterated that the IMF does not issue or guarantee any obligations called "Prime Bank Notes," "Prime Bank Guarantees," "Bill of Exchange," or "Bill of Equity," or extend any credit lines through commercial banks or other agencies. Moreover, the IMF does not guarantee debentures or other financial instruments issued by a member country or any other entity. It does not sponsor investment programs, "high-yield financial programs," or issue to countries or to outside parties an "IMF Number," "IMF Country Registration Number," or an "IMF Approval Number for Projects."

Other examples of bogus instruments often featured in such schemes which unauthorizedly use the name of the IMF are:

* fictitious stand-by letters of credit--falsely portrayed as risk-free and sanctioned by the IMF;

* securities allegedly backed by the IMF; and

* bonds supposedly issued by the IMF.

The IMF is an intergovernmental organization whose financial transactions and operations are carried out directly with its member countries and only through a fiscal agency designated by each member for this purpose (such as the member's Central Bank or its Ministry of Finance). The IMF does not operate through other agents and it does not endorse the activities of any bank, financial institution, or other public or private agency.

Standby Letters of Credit: The Private Primary Market

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Designed to provide much of the information required for conducting a due diligence investigation.

Lender/Investors are skeptical of opportunities that offer above-market returns. If significant capital is required, little information is readily available with which to conduct a due diligence investigation, there is little motivation for committing funds.

Issues Covered

* A letter from the Securities and Exchange Commission, (S.E.C) stating that letters of credit are exempt from registration under the Securities Act of 1933.

* An opinion from the U.S Supreme Court stating that letters of credit, when acquired for cash, are the equivalent of a deposit liability.

* A legal historical example of a clean standby letter of credit, the text of which is clean of any requirements of documentation of nonperformance or default for the beneficiary to obtain payment.

* A discussion of the role of the International Chamber of Commerce in encouraging more equitable practices in the area of standby letters of credit.

* A discussion of case law and legal writing showing that pertaining law has developed away from domestic concepts and structures, and that it is a fallacy to think in terms of a comprehensive body of domestic law on LOC and especially in terms of diversity of national laws.

* A discussion of transmission, authenticity and the operative instrument; how it is determined when a transmission is authentic and legal.

* The issuance of standby LOC involves the separation of many of the services associated with lending, such as credit risk evaluation and underwriting, from funding.

* Banks argue that they are in the risk management business - whether on or off the balance sheet.

* An important difference between a standby LOC and conventional financing with uninsured depositors is that a standby LOC beneficiary retains the loan in the event of bank failure as opposed to having to stand in line with the FDIC and other creditors to recover the remaining assets of the bank.

* The greatest motivation for off-balance sheet banking is the opportunity cost of funding assets with reservable deposits without a binding capital constraint.

* In issuing an off-balance sheet instrument, the bank acts as a third party in a commercial transaction, substituting the bank's credit worthiness for that of its customer to facilitate exchange while sharing some of its risk with the lender/investor.

* In effect, banks are willing to rent their credit standing or borrow credit analysis to lender/investors by guaranteeing the payment of principal and interest-which may be of value to a bank customer who is not well known or established. This enables a bank to receive an underwriting fee that can bolster current profits without tieing up capital.

* A bank may not be asked to issue a guarantee unless it is perceived by the market to be strong.

* How a standby LOC is similar to an uninsured deposit and subordinated note in that it's value varies inversely with the credit risk of the bank.

* The incentive to the lender/investor? The return on this arrangement is likely to be greater than that of a deposit while still maintaining insurance against loss.

* The types of entities who acquire standby LOC.

* A discussion of repurchase programs and credit-enhanced loan transactions.

EVERY STATEMENT IN THESE REFERENCES EITHER A LEGAL PRECEDENT, REPORT OR LETTER ISSUED BY A GOVERNMENT AGENCY, TRADE PUBLICATION OR KNOWN ENTITY IN BANKING AND FINANCE.

The Prime Bank Instrument Raises Its (Ugly) Head Again

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May 8, 1998 - The Vancouver Sun newspaper ran a story about a couple who lost $70,000 Canadian in a prime bank instrument program. Their's is not an isolated case.

Selling the sizzle is what these fraudsters are good at, and the good ones ply their trade with all the finesse and confidence of Wall Street promoters. The prime bank note or bank roll program has been around for years, but like the Nigerian Scam, it continues to catch new victims. According to the International Chamber of Commerce's commercial crime bureau, it involves $10 million US daily in North America alone.

The Sun story explained how Bob and Robin Blanchard borrowed the money to invest in the program in 1995 after signing a non-disclosure statement to prevent them from talking about the deal with anyone, including lawyers, financial advisors because they were joining " a priviledged group getting in on a very exclusive investment" which relies on secrecy.

What makes gives the scam it's allure is the idea that those who partake are joining an elite group of investors with access to extremely valuable and highly confidential information. Although there are a number of variations, the principle is the same. The big banks around the world lend each other money by issuing notes with face values of $100 million or more. These notes can be re-sold number of times at a discount (profit) to other lenders so that the original issuer can reap a handsome profit in a relatively short time. The figure commonly bandied about is 30% per month. The term of the notes vary from 30 days to a year or more.

Small investors must pool their money to build it up to a minimum $10 to $100 million so brokers get involved. Often a tax haven country is used to add to the intrigue and no tax need be paid by the shrewd investor, or at least that is what they are told.

To make the story more believeable, the names of large, well-known international banks like Barclays, Lloyds Bank and Chase Manhatten are used.

To the scrupulous investor there are some danger signals that should tip you off.

1. You are told as an investor and not a principle (you don't have $10 million US) you have no personal security. The broker will tell you that there is no need to worry because every penny is secured by an LC (Letter of Credit) or other guaranteed bank certificate.

2. You are told not to phone the bank who's name you are given because they cannot acknowledge the existence of such an arrangement unless you are the principle.

3. There is a high degree of trust necessary. The broker will tell you that he has no interest in stealing your money because he makes enough from the deal already, and besides, he wants to have you participate in the next program so you and he can get rich together.

4. You are told not to seek professional advice because the information is reserved only for those who participate in the program. Strangely few if any lawyers or professional advisors are invited into the program.

Often exotic sounding banking terms are bandied around that are confusing to all but the professional banker or investor. This is done to intentionally confuse and intimidate the victim so that they feel too self-conscious to ask questions. You might even be shown what appear to be high quality documents purporting to be from genuine lending institutions but there is no way to check their authenticity. Usually they are either worthless or forged.

The sad part is that the victim may not fully appreciate their true fate until years later. The brokers will keep the dream alive by saying that the profits have been re-invested and may even attempt to lure the victim into another scheme before they realize what they are into.