In: Finance
Nonbank Finance and Derivatives: List and explain 4 types of nonbank financing. Explain the 4 types of derivatives and give an example of each.
Four types of non banking financial are as follows-
A. Joint ventures and partnerships-one way to increase resources through joint venture with another business and it will help in increasing the capacity and access to the new markets along with availability of Greater technical expertise
B. Commercial loan providers-these commercial loan providers are non banking Financial institutions and they provide financial services like loan and credit facilities but they don't have a bankers licence. They cannot take deposits from public or offer normal banking facilities.
C. Factoring and invoice discounting-these are all methods to improve business cash flow and it is used to raise fund against invoices. This can be used to generate short term finance by use of its own receivables.
D. Crowdfunding-this is a process in which a number of people who will be investing and lending along with contributing small amount of money to the business.it helps in setting up with the profile of the project and using a social media and other networks of family and friends to raise money.
Four types of derivative are as follows-
A. Futures-these are standardized contracts and they are listed on the exchanges and they are continuously traded and they are done to negate the counterparty credit risk.
in the future contracts, both the buyer as well as seller will not be entering into agreement with one another and they will be entering in agreement with exchanges.
A contract to sell future of Dow Jones in April 2020.
B. Forward contracts-these are customised contracts and they are the oldest form of the derivative, it is an agreement to sell something at a future date and the prices at which transaction will be taking place will be decided in the present. It is not done on the exchange and it is done between two counterparties.
Entering into a forward contract to negate risk due to transaction risk is an example of forward contract.
C. Options are a type of derivative which are used to provide the holder of the option with the right to buy or sell at a particular date. Options contract binds one party and it lets the other party decide at a later date. There can be two types of option -call option as well as a put option.
Call option on Apple is an example of option.
D. Swaps-these are the types of derivative which will enable the participants to exchange their stream of cash flows. One party will switch and uncertain cash flows with a certain cash flows like interest rate swap.
Interest rate swap with option of exchanging the fixed rate with floating rate is an example of swap.