Devendrakumar Rajendran - A Blog to Oracle Financials World

Futures Contract is determined without extra cost Future has right and obligation for both buyer and seller Quantities, Unit Price, and Tenure are Pre-determined Options Options comes with extra purchase cost - premium has to be paid for. Options has right but does not have obligation- Parties can use call or put method as optional Buying and selling depends on parties wish to use for or not Both the methods are widely used by companies to minimize their financial risk. Its a hedging tool to minimize the risk exposure of underlying assets Widely used in capital markets in stock trading and commodities Capital value can be protected to a certain extent if market goes down and abnormal and if market goes high- buyers will have a option to buy at lesser price than at the usual selling price in the market.

Futures and options are widely used in financial markets to minimize the risk of underlying asset price. Example Company procures raw material of Rs.100 for their manufacturing and price suddenly increase into Rs 130 within 3 months of time. This has several impacts for manufacturers to produce their goods and sell it in the Market. This price fluctuation will disrupts the business operations. So to avoid these kind of circumstances company will initiate a future contract agreement with their sellers to supply goods at predetermined price at specified intervals of time irrespective of disruption in prices in the market. Now lets look at the scenario- if company booked their future purchase order agreement with seller. Price of commodity is Rs 100 and agreement period is 1 year If price of commodity goes to Rs 130- Buyer don't have to incur the loss of increase in price hike in raw material- since seller ships goods at agreed price in the contract irrespective of market price. If pr

Reverse Factoring is also referred as supply chain finance. Only difference between factoring and reverse factoring is who originates the factor transaction. If supplier initiates it by selling their accounts receivable then its factoring If ordering party initiates with factor agent (third party) then its a reverse factoring. Example- American company sells tonnes of soya/corns per trade with Dhofar Cattle feed and raises commerical invoice of 1 Million USD and invoice due date is 90 days from the date of purchase. Dhofar cattle feed (Buyer) can initiate a request with banks/financial institutions indicating fund 80% of invoice value before due date to its sellers in this arrangement banks will fund to seller based on buyers instruction and charges nominal fees from seller Advantages for seller- Working capital and cash flows immediately Reduced risk Cash flow at less interest charges Advantages for buyer- Maintain good relationship with sel

Factoring is one of the popular method used by business to improve their working capital requirements This type of finance is referred as debtor finance in which business sells its accounts receivable(invoices) to third party and it is referred as factoring at discounted rate. A business sometimes need of cash instantly- Inorder to meet the cash needs business will sometimes factor its receivables assets to meet the present Factoring is sale of receivables to third party - complete selling of accounts receivable invoice Invoice discounting on the other hand refers borrowing that involves use of accounts receivable assets as collateral of loan Three parties involved in factoring 1. factor one who purchases receivable 2. one who sells the receivable 3. debtor who is liable of payment for goods and services rendered Example Entrust DataCard sells card printing solutions to Bank of America and raised commercial invoice value of $500,000 USD and invoice d

Payment File Formats ISOXML - standard based XML set by ISO organization- Most of global clients prefer to go with this format EDIFACT Paymul- Electronic Data Interchange format set by industry of commerce and trade united nations PEXR2002-xml and flat - SAP standards- Intermediatory document (IDOC) - Preferred mainly by SAP customers MT101- Payment file message contains single payment transaction and standards set by Swift. This message supports only in Swift FIN channel Most of the banks also supports their own/ proprietary file formats that enables ease of use and market access for auto integration Account statement file formats MT940 and MT942 - Prior Day and Intra Day statements offerings by Swift standards CAMT53 and 54 -Prior Day and Intra day statements - standards set by ISO organization BAI2PD and BAI2ID - Prior Day and Intra day statements - standards set out by banking administration institute EDIFACT statements- UN standards

FileAct is a channel that enables communication between financial institution/banks and big corporates to automate payments, collections, trade, and securities services FileAct by default provides cryptographic services- Hence, files that are transmitted over the network is safe and secure Its a open community where corporates can subscribe with swift network and reach correspondent bank Integration and IT costs can be reduced through automatic integration with banks and financial institutions Corporates can use single channel to communicate with multiple banks and access to multiple markets FileAct provides two types of services, Store and Forward Real Time Corporates and Banks deal with requestor and responder domain names to send and receive files Swift FileAct supports all types of fileformats and attachments. Message type can be classified through request types FileAct supports both the flows (Corporate to bank) and (bank to Corporate)