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Letter R

  • Reinsurance

    Very suitable for reinsurance are derivatives. These contracts make it possible to reinsure, by way of these contracts, a position in assets or liabilities of the balance sheet or sub-ledger. By fixing the price they reinsure against a possible unfavourable development of prices. For example we plan that in a few months we will need a certain amount of USD. The present rate in the market of futures can be considered as advantageous, so we would like to purchase USD for this rate in a few months. Therefore we purchase futures for American dollars now. The purchase is conditioned by making a certain deposit (security). In some time, before we sell this term contract, we may be asked to send further means to our deposit account. This will happen if the USD weakens against the currency for which we are to buy the USD in future. If, on the other hand, the USD becomes stronger, then on the contrary we can even draw from the deposit account, because its balance increases. In several months after the purchase of the contract of futures we purchase dollars on the spot market and at the same time sell the contract of futures. If, against our original expectations, the USD has weakened, then the loss in the market of futures will be compensated by the profit from the purchase of USD in the spot market (we will purchase USD in the spot market more cheaply than the price of futures at the time of the purchase of futures). If, on the contrary, the USD has strengthened, then the profit in the market of futures will be compensated by the loss from the purchase of USD in the spot market (we will purchase USD in the spot market at a higher price than the price of futures at the time of the purchase of futures). After all, the term transaction arose exactly because of the need to cover positions.

  • Retail banking

    Retail banking is understood to mean the provision of services to the general public, i.e. the provision of credit repayable in instalments, mortgage loans, depositary services, etc. In comparison to wholesale banking retail banking encompasses a large spectrum of activities at many branches. Certain services offered by retail banking (e.g. credit cards) are highly profitable.

  • Risk

    Financial institutions and markets exist in a world of insecurity. A type of insecurity is the risk. There are several types of risk. Obviously the most important risk of financial markets is the credit risk, which means a risk of loss if the partner fails to honour his commitments according to the conditions of the contract. In the category of credit risk, the so-called settlement risk is sometimes specified, which is a risk of loss from a failure to settle a transaction. Another important risk is market risk, which is divided into interest, stock, commodity and rate risks. This is a risk of loss in the case of the small liquidity of markets (risk of market liquidity), or risk of momentary insolvency (risk of cashflow). Operational risk is a risk of risk in the case of human errors, fraud or imperfection of information systems. Legal risk is a risk of loss if a contract is not legally enforceable.

  • ROA

    Return on assets: an index which describes valorisation of the total assets, i.e. how much a unit of assets yields to the bank for a given period of time. The ratio of after-tax net profit to average activities.

  • ROE

    Return on equity: an index which says how much the capital of shareholders yields. The ratio of after-tax net profit to average funds of shareholders.

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