What is Credit Default Swap?

Hi Frnds,
Once i Was Reading NewsPaper,I found this word CREDIT DEFAULT SWAP

But I was Confused,During that time,
So, I surfed Internet a Lot and Finally Posting this Topic.


What is Credit Default Swap?
It is similar to Insurance ,if i am worried about DEFAULT.


Example:
Suppose I invested in Company's A bond.Lets Say my Investment is 10Crore Rs.
Also,I am Worried that,Company A may Default.

So,What Can We DO???

One Option is To Sell this Bond.
Other Option is enter into CREDIT DEFAULT SWAP.

Simply Credit Default Swap is Insurance Contract.
So,We Need a Company B ,which provides this Insurance.

I will pay monthly some Money(usually % of the Bond value) to Company B.
So,In Future if Company A is Defaulted,then Company B will pay my 10 Crores.

ALL ABOUT FISCAL DEFICIT?

when i usually read a Newspaper,I generally came across a word of "FISCAL DEFICIT" so many times.

So many doubts came across my mind,
Like
What is Fiscal Deficit?
Why Country is worrying about Fiscal Deficit?

Once i clear these doubts,some more doubts aroused in my mind,
I will point those new doubts as you move down.


First of All,
What is Fiscal Deficit?

Every Year Govt Plans for its income and expenditure for the following year,This is known UNION BUDGET.
Budget is said to be Fiscal Deficit,if govt planning to spend more than its income.


UNITS OF FISCAL DEFICIT?

Fiscal Deficit is measured with % of GDP.
ex Fiscal Deficit=5.9% of GDP.





How the Govt will get these extra funds??
Govt manages these funds BY BORROWING.
they can borrow from other countries or from citizens itself.

Since the govt borrowed the money,so it had to be repaid with certain interest.
So,this money is collected by govt in the form of TAXES.


WHY SHOULD borrow money?? (IS FISCAL DEFICIT is good ??)
Yes,Fiscal deficit is good for Country's economy ,if it is within LIMITS.

Because,if we use Those borrowing funds to improve facilites of country,which leads to increase in Production of economy.
example,if we spend funds in improving agricultural facilites like irrigation facilites,storages etc,so that our agriculture production increase,
which means our country's economy is raised.

WHY COUNTRY IS WORRYING ABOUT FISCAL DEFICIT??
Country will be in disaster if FISCAL DEFICIT is too WIDE (i.e too large)



we know that,
Fiscal Deficit= Govt Spending-Govt Income
It means that,Govt is spending those funds,in the unproductive areas(areas which doesnt increase economic productivity) or/both Govt is not collecting TAXES (govt's income) effectively,

which leads to inflation.

WHY IT LEADS TO INFLATION??
I Hope you can figure out the answer,based on above knowledge.
If you still cant figure out,Dont hesitate ,just comment below.
I will explain it eloquently.


Do comment
Because,It is energy for me,to post more topics.
It will boost me,to help you.

How RBI Controls Monetary Policy or Inflation ??? ( Part 2)

In this Post ,I will explain How RBI controls Inflation ?

As we know that,Inflation come because of Either Demand increases or Supply Decreases(Infact,shortage of Supply).
So,If RBI is able to Reduce the Money in the Hands of Public,which means Reducing ability to Buy ,i.e Indirectly Reducing Demand.

Since Demand is Reduced,So Price fluctuation will be in limits.


So,How to Reduce Demand of Public?????

RBI can reduce Demand of Public by
Increasing REPO RATE
if RBI increases REPO rate,Then Banks will also increase Intrest Rates of LOANs,
So the Public will PostPone their Plans (buying CAR or HOME etc etc)
Also Banks will increase the Rates of Depositors,(Saving account interest Rate)
So,the Public will prefer to save their money for better Return.

But RBI is Tuning from SUPPLY SIDE of Monetary Policy,which is effecting PUBLIC DEMAND SIDE.


EVEN CRR does the similar Job??
At this point,Some may get the doubt,EVEN CRR does the similar Job
i.e If CRR is increased,then money with Banks are Reduced,So again effecting Supply ,which will eventually reduce DEMAND of PUBLIC.

But RBI most of the times,uses this Tool,when there is MORE LIQUIDITY in the BANKS ,

Didnt Understood this Line??Let me explain

LIQUDITY means banks have more money with them,
that means,they will give more loans to the Customers,which is not good for economy.

Why giving more loans,is not good for economy??
Because,Banks(mostly Private Banks) will give loans to the customers who are not fulfilling the sureties(generally assets) upto the mark,
And after some years,if that customer defaulted(unable to pay),then the Asset with the bank will come under NPA(Non Performing Asset).

NPAs are not counted in Economy.

So,The Banks have to Auction that asset,if the Customer is unable to pay the money.


So,In Short

Repo Rate/Reverse Repo rate are used to control Inflation
CRR is used to Control Liqudity in Banks.

Hope every body is understood.
 

How RBI Controls Monetary Policy or Inflation ??? ( Part 1)

This is the most Frequent question asked by Banks to the Bank POs.
Answer to this question gives the First impression to the interviewer.So every aspirant must know this Topic to be precise,without confusion.

Before to this Topic,you need to know some more terms,which will help to make your base strong.
They are,
Repo Rate
Reverse Repo Rate
Cash Reserve Ratio (CRR)
Statutory Liqudity Ratio (SRR) 


Repo Rate:
It it the Rate at which Central Bank (RBI) gives money to National Banks (example SBI,BOB,allahabad bank etc)

Reverse Repo Rate:
Rate at which RBI take money from Banks

Obviously, Repo Rate is always greater than Reverse Repo Rate.

Cash Reserve Ratio:
Nationalized Banks (SBI,Bank of Baroda,HDFC etc ) are required to deposits to RBI in the form cash.
This minimum ratio is known as CRR.

For example,If SBI has 100/- and CRR is 6% then SBI had to deposit 6/- with RBI and Only 94/- are available with Bank i.e Only 94/- are used by bank to give loans etc.(assuming SLR=0 in this example)



Statutory Liqudity Ratio:
It is the minimum amount the  bank must keep them in the form of GOLD,BONDS .



Hope you understand these Basic terminologies.
Since this Post became little longer,so I will explain remaining in my next post.

I prefer to make small post.

DEMAND-SUPPLY

When i was in my 7th class,I read about Demand and Supply relation in my Economics subject.
At that time,I dont know what are they.

At that time,i just mugged them.also didnt have any curiosity to learn it.

First of All,whole science is dependent on NEWTON LAWS
Similarly,Whole Economics,MBA,Finance is dependent on SUPPLY-DEMAND relation.

In this Post,I will try to explain
1.What is demand and supply?
2.What is Inflation?
3.What is Deflation?
4.What is HyperInflation?


Demand-Supply relation:
It states that,

If Demand of an Item is High (or increasing) and Supply remains constant,it means the Cost of an Item will also increase and vice versa.

Similarly,if supply of item is Less,but Demand remains Constant,it means the Cost of an item will Increase
and vice versa.

Why is that???
let explain it with example.

lets intial stage is
A shopkeeper has 10 mangoes,he sells mangoes at 10/- each and 10 persons came to his shop to buy.

On next day,say 50 persons came to buy them.
What he will Do??
He will just increase the Cost of mangoes because his idea is, "A PERSON WHO REALLY NEEDS MANGO WILL BUY IT.


Inflation:
Inflation is Price Rise.
In hindi (Mehengayi).
Inflation is depedent on SUPPLY and DEMAND Relation.




Deflation:
Just Opposite of PRICE RISE.


Inflation should not be Zero.
it must be positive.
because if Inflation is zero,it means neither SUPPLY NOR DEMAND increased or both increased propotionally.
Lets take example of Onions,
if the cost of onion is same even after 1 year.It means neither the demand nor supply increased.
Which means,Supply is constant.
It implies,Production is constant.
which means,Country didnt developed since 1 year.
which is not a good indicator for Country's economy.

Just imagine same example,with whole economy i.e all products into picture.how adversely affects ones country's economy.

So inflation should be positive but in limits.



Hyperinflation:
As I said the last line,Inflation should be positve but in limits.
Just imagine,If inflation is not in limits.
if inflation increased exponentially,then it said to be HYPERINFLATION.

HYPERINFLATION is disastrous for Country.

If RBI Prints money and give it to everybody??

Did you ever got a doubt ,why dont our govt print whole money and give it to public,so that every body will be RICH???

Lets assume,Govt prints the whole money and give it to whole public (personally,from beggar to rich person)

So,every body is rich now.
Since i have desire to buy a CAR ,so tomorrow i will go to the showroom to buy it.But there would me so many other persons like me (who have the similar desire)


On first day,Every body buy the car. Shopkeeper is happy,
On second day,again 100 persons came to buy car, they were sold.
Shopkeeper is still happy now.

On third day,Stock of car is decreased now,200 persons came there but shopkeeper unable to provide a car to every body ,because of less stock

So next day shopkeeper ordered,again same process repeats.

COmpany of CAR has two options,
(from SUPPLY-DEMAND relation..........do you what is dis??? if not follow this link)

1.Increase the cost of car
2. INCREASE the SUPPLY of CAR


 CASE 1:
 So,COMPANY OF CAR will have to increase the COST of CAR (by say 10K),because DEMAND is more
 (The one who really needs the car will only buy it,not the one who has a DESIRE to buy,so he will increase the cost of car)

but again most of person will be able to buy it,so again COST OF CAR increases,

so again cost of car increases,again and again.

so the CAR which is available at 3L ,will be now 5L-6L (double of intial )
this known HYPERINFLATION 



CASE 2: Increase the Production of CARS

Lets the company didnt increased the price,so it decied to increase the production of CARS.

So,they need more resources for production,and more machinery,

and, machinery cannot be increased in 1 night....its a very very slow process.

so to tackle situation,company will adjust with their machinery (as they have earlier)
so overtime has to be done by employees to meet the requirements.
even if employee do the work for 24hrs,they wont meet the demand of CARS.



So,the only option left with them is to increase the price of CAR.
which is known as hyperinflation