Loan: Difference between revisions
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Relevant to [[Prime brokerage]]. | Relevant to [[Prime brokerage]]. | ||
====The ubiquity of financing==== | |||
Much of what goes on in the trading markets, in one way or another, is — this is going to sound obvious but bear with me — financing. [[Margin lending|Margin loan]]s, [[collateralisation]], [[rehypothecation]], [[securitisation]] and [[monetisation]] are obvious kinds, but many instruments that ''don’t'' seem to involve financing are often disguised financing arrangements. [[A swap as a loan|Swap]]s, [[option]]s and [[Futures|future]]s – in these instruments, one pays someone else — your broker — to finance physical assets for you. | |||
Bearing this in mind helps us understand how financial products work. | |||
This is the singular beauty of the fungible [[negotiable instrument]]. It allows you to lend to another person, and — without interrupting that loan — to stop lending to them, or to participate the loan to someone else. And, at any moment, get the loaned money back if you need it. | |||
Take an ordinary loan: you pay a sum to a borrower against her promise to repay, with interest, at a fixed term in the future. In return you get an asset — it is a funny, theoretical kind of “asset”: an intangible promise, but you can record it on your balance sheet: it is worth something. | |||
Holding that promise is expensive, though. This ties up capital you could use for other things. You have locked in your return on that capital at the agreed interest rate. This is unlikely to thrill your shareholders, unless your leverage ratio is high — but even if it is, as long as that asset sits quietly on your balance sheet, it isn't doing anyone much good. The mantra of financialisation is that one should be able to take any asset and raise money against it — or convert it into cash. | |||
Let's say I see an opportunity to make a return better than 3%. If I can raise money against my loan, I can keep my 3% return and invest my capi | |||
{{sa}} | {{sa}} | ||
*[[Revolving credit facility]] | *[[Revolving credit facility]] | ||
{{c|Prime Brokerage}} | *[[Finance contract envy]]{{c|Prime Brokerage}} | ||
{{Nld}} | |||
Latest revision as of 13:48, 20 October 2024
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Banking basics
A recap of a few things you’d think financial professionals ought to know
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Borrowed money. Indebtedness. Even Specified Indebtedness. Relevant when considering cross default.
Relevant to Prime brokerage.
The ubiquity of financing
Much of what goes on in the trading markets, in one way or another, is — this is going to sound obvious but bear with me — financing. Margin loans, collateralisation, rehypothecation, securitisation and monetisation are obvious kinds, but many instruments that don’t seem to involve financing are often disguised financing arrangements. Swaps, options and futures – in these instruments, one pays someone else — your broker — to finance physical assets for you.
Bearing this in mind helps us understand how financial products work. This is the singular beauty of the fungible negotiable instrument. It allows you to lend to another person, and — without interrupting that loan — to stop lending to them, or to participate the loan to someone else. And, at any moment, get the loaned money back if you need it. Take an ordinary loan: you pay a sum to a borrower against her promise to repay, with interest, at a fixed term in the future. In return you get an asset — it is a funny, theoretical kind of “asset”: an intangible promise, but you can record it on your balance sheet: it is worth something.
Holding that promise is expensive, though. This ties up capital you could use for other things. You have locked in your return on that capital at the agreed interest rate. This is unlikely to thrill your shareholders, unless your leverage ratio is high — but even if it is, as long as that asset sits quietly on your balance sheet, it isn't doing anyone much good. The mantra of financialisation is that one should be able to take any asset and raise money against it — or convert it into cash.
Let's say I see an opportunity to make a return better than 3%. If I can raise money against my loan, I can keep my 3% return and invest my capi