Assignment on Nostro and Vostro Accounts

Nostro and vostro accounts
Nostro and vostro (Italian, from Latin, noster and voster; English, ‘ours’ and ‘yours’) are accounting terms used to distinguish an account held for another entity from an account another entity holds. The entities in question are almost always, but need not be, banks.
A Nostro account is a specific designation for a type of banking account that shows who the owner of the capital is. As part of the financial jargon common to the banking industry, banks have started to use the terms “Nostro” and “Vostro” to differentiate between different types of accounts. A Nostro account belongs to the party who is keeping track of it. A Vostro account is an account where money is being held by an outside party. These distinctions help banks and other financial holders keep track of what is due to an investor or depositor.
An example of a Nostro account is when a bank customer puts his or her money into a bank. The bank is then holding the money for the customer. The customer can call that account a Nostro account because they own the money in the account. The bank calls it a Vostro account because it is the customer’s money that the bank is holding.
Origins
It helps to recall that the term account refers to a record of transactions, whether current, past or future, and whether in money, or shares, or other countable commodities. Originally a bank account just meant the record kept by a banker of the money they were holding on behalf of a customer, and how that changed as the customer made deposits and withdrawals (the money itself probably being in the form of specie, such as gold and silver coin).
Some customers will keep their own records of their transactions, for instance, so they can check for errors by the bank. That record kept by the customer is also an account, of the money the bank is holding for them. When that customer is another bank, since they also keep other accounts (of the money they are holding for their customers) there is a need to clearly differentiate between these two types of accounts.
The terms nostro and vostro remove the potential ambiguity when referring to these two separate accounts of the same balance and set of transactions. Speaking from the bank’s point-of-view:
• A nostro is our account of our money, held by you
• A vostro is our account of your money, held by us
Note that all “bank accounts” as the term is normally understood, including personal or corporate checking, loan, and savings accounts, are treated as vostros by the bank. They also regard as vostro purely internal funds such as treasury, trading and suspense accounts; although there is no “you” in the sense of an external customer, the money is still “held by us”.

Accounting Conventions
A bank counts a nostro account with a credit balance as a cash asset in its balance sheet. Conversely, a vostro account with a credit balance (i.e. a deposit) is a liability, and a vostro with a debit balance (a loan) is an asset. Thus in many banks a credit entry on an account (“CR”) is regarded as negative movement, and a debit (“DR”) is positive – the reverse of usual commercial accounting conventions.
With the advent of computerised accounting, nostros and vostros just need to have opposite signs within any one bank’s accounting system; that is, if a nostro in credit has a positive sign, then a vostro in credit must have a negative sign. This allows for a reconciliation by summing all accounts to zero (a trial balance) – the basic premise of double-entry bookkeeping.
Typical usage
Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit.

What Does Nostro Account Mean?
An account that a bank holds with a foreign bank. Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn’t need to be converted. Nostro is derived from the latin term “ours.”

Explain the working of nostro and vostro accounts for fund transfer with example?

International accounting procedures between Local banks and overseas banks often involve the use of nostro and vostro accounts. A nostro (means “ours” in Latin) account is an account maintained by a Local bank with a foreign bank that allows the Local bank to buy foreign currency. A vostro (means “yours” in Latin) account is an account maintained by an overseas bank with a Local bank that allows the overseas bank to purchase Local currency. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the Country’s (Local)Bank and foreign banks.
Example : When X (Buyer) a trader in Base Country wants to purchase $5000 worth of goods by paying cash. Mr.X deposits the cash in his local bank in the country’s currency for the corresponding amount ($5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. US Dollars. Thus facilitating the trade between X & Y. IF Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X’s country.

What are the Diferences between Nostro and Vostro Account?

Vostro Account: Account held by a foreign bank in a domestic bank is called vostro account. For example UBS of Switzerland opening an account in SBI in India, this is vostro account for SBI India.

Nostro Account: Account held by a particular domestic bank in a foreign bank is called Nostro account. Here in the above example given in Vostro account the same account is a Nostro account for UBS Switzerland, or if SBI India opens an account in UBS Switzerland then that account is a Nostro account for SBI India. Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn’t need to be converted.
Vostro Account: Account held by a foreign bank in a domestic bank is called vostro account. For example UBS of Switzerland opening an account in SBI in India, this is vostro account for SBI India.

Nostro Account: Account held by a particular domestic bank in a foreign bank is calledNostro account. Here in the above example given in Vostro account the same account isa nostro account for UBS Switzerland, or if SBI India opens an account in UBSSwitzerland then that account is a Nostro account for SBI India. Nostro accounts areusually in the currency of the foreign country. This allows for easy cash managementbecause currency doesn’t need to be converted.

What is stock?

Stock or Share is the smallest part of ownership of an asset/company/firm. For example you have a shop worth of Tk.10,000/= Now if you divide the ownership of the shop in 100 parts then every part will be worth of 100tk. Now each of the part is called a share/stock. Now if you buy 10 part/share from that 100part then you are partially an owner of the shop/firm/company.

How it can be traded?

For example if you want to transfer your part of ownership of the firm to other then you should sale the deed of ownership to someone else. In that case you have to maintain some papers. For example a sale deed will be signed and the deed will be registered in government registry office.

In case of stock when you buy stock/share of a certain company you will be given a share certificate. This certificate certifies that you own that much part of the company. And you have to register your ownership certificate with company’s register. But due to some problems with paper certificate – (such as copied certificate, maintenance of huge paper certificates) a new system of electronic stock is made. In this system your stock is preserved in an electronic system rather delivering you the paper shares. And you don’t need to register your ownership. The ownership is automatically transfered to you and preserved in an automatic system. This system is called Central Depository Bangladesh Limited (CDBL). I will describe this CDBL system in details later.

What is stock exchange?

Stock exchange is a organized place or arrangement where the buyer and seller is brought together so they can buy sale their stocks/share. For example Dhaka Stock Exchange has a electronic trading system called TESA and Chittagong Stock Exchange has an electronic trading system called VECTOR. These two system work as an arrangement to help buy/sale of listed securities.

What is broker?

A broker is an intermediary who works as an media to bring together buyer and seller. And it takes commission form the buy/sales made. A broker must be listed member of any stock exchange (i.e- DSE, CSE).

What is a listed company or unlisted company?

Companies or firms which are listed with stock exchanges are called listed public limited company. On the other hand firms/companies those are not listed with any of the stock excanges are un-listed companies.

Can you buy stock/share of unlisted companies?

Definitely you can. But in that case you have to go the traditional method of buying or selling process. For example at present if you want to buy sahre of Grameen phone you have ot go to Telinor who is the major 62% share owner of Grameen phone or to the Grameen telecome which is a subsidiary of Grameen bank who owns 38% of the Grameen phone shares and negotiate with them so that they sale their shares to you. If they agree to sale any share/stock to you then you can buy it and you have to go to register of joint stock companies and register your ownership there. But the whole system will work avoiding the stock exchange as still it is an unlisted company.

What is Securities and Exchange Commission (SEC)?

It is the regulatory body of Bangladesh capital market. For your information stock exchanges are called capital market as companies raise capital from here. SEC defines working process and rules and policies under which the stock exchanges will operate.

What is the face value (FV) of a stock?

This is the value assigned to a smallest part of ownership of a company. For example in case of the previous example i gave the Face Value of a share of that shop is 100tk.

What is the market value (MV) of a stock?

When someone sees a good business prospect of a company then he may be will to buy it other than the face value. It may be a higher price. For example at present SALAM still mill’s stock is trading around 190tk. So its market value (MV) is 190tk now.

What is market lot (ML)?

Every firm has millions of stock in the market. If every piece of stock is traded separately it will generate tedious clerical job and the system won’t support so many trades per day. Moreover the trading cost per trade will be intolerable. To face such problem stocks of different companies are traded in bunches. Then every bunch is traded in the market. Every bunch is called a lot (market lot). For example you have to buy at least 50 stocks at a time in a bunch if you want to buy GQ ball pen’s stock. So the market lot (ML) gor GQ ball pen’s stock is 50.

What is Earning Per Share (EPS)?

Earning per share indicates how much profit is earned per share. For example if GQ ball pen is divided in 10 million stock and GQ ball pen makes a profit of 100million tk then earning per share of GQ company is (100million tk / 10 million shares = 10tk.) 10tk. EPS is calculated through dividing the total profit buy total number of securities/stock.

What is Price Earning Ratio (PER)?

It indicates that what is the price of a stock in relation to EPS. Say GQ ball pens price is now 140 tk in the market and it’s EPS is 10tk. Then it’s price earning ratio (PER) is (140tk/10tk) 14 times. It also indicates that if someone buy a GQ ball pen stock for 140tk today the company will earn the same amount of earning for that stock in 14years.

What is dividend?

Its the portion of profit given to the shareholders. Dividend is usually expressed in percentage basis or per share basis. For example now if GQ company declares a 80% dividend to the shareholders it indicates that every shareholder will get 8tk per share. Dividend is calculated on Face Value not on the market value. The dividend declaration depends on the profit earned by the company, companies pay out ratio, investing policy etc.

What is Stock dividend?

In some cases company may earn some profit. But it may need some extra money for further growth of the company. In that case the company may retain the profit earned. It wont declare cash dividend. Rather it will declare stock dividend. In that case an investor will get a few more stock of that company for free. For example if GQ declares a 80% stock dividend it means if you hold 100stock of GQ ball pen you will get 80stock for free. This is a very nice system for company growth. In this system company can retain its needed cash for further investment and stock holders also get some benefit.

What is Right issue?

In some cases business may need immediate money in the middle of the year or for any reason. May be it need some more cash for business growth. In that case the company can issue fresh share in the market. But according to regulation the existing shareholders have the priority to buy the shares. So when the company decides to issue new shares in the market at first it offers the shares to existing shareholders of the company. As existing shareholders get the shares according to their right it is called right issue. But if the existing shareholders decline to buy the new shares the company can issue the shares to general public as fresh IPO.

Dividend yield

Dividend yield is the return calculated on your buying price resulting from declared dividend. If ACI company declares a 23% dividend and you buy ACI stock for 230tk. In that case you will receive 2.3tk as dividend (Face value of ACI stock is 10tk so 23% on 10tk. is 2.3tk). But as you bought the stock for 230tk your return is not 23% rather your return is 2.3/230=1% only. This is called dividend yield.

Circuit Breaker

This is an automated system introduced by both DSE and CSE. In this system a specific stock can not increase or decrease more than a specific percentage point. For example say previous days close price of Power Grid company was 710tk. and the circuit breaker is 10%. It means Power Grid will not rise more than 10% today even it won’t fall more than 10% today. So in a single day it’s highest price can be 710+710*10%=781tk and the lowest price will be 639tk. This system is introduced to tackle unusual volatility in the stock market.

LTP

Last Trade Price of a specific company in a day. The latest trade took place in this price.

Volume

Volume indicates how many stock of a specific company is traded in a single trading day.

High Price

This is the highest price of a stock in a single trading day.

Low Price

This is the lowest trade price in a single trading day.

Trade

It indicates how many transaction of a single stock took place in a day.

52 Weeks Range

It means that what was the highest and lowest price of a stock in last 52 weeks. For example if today (28/03/2008) ACI’s 52 weeks range shows 62-235 it means that ACI stock was traded lowest at 62 tk in last 52weeks and highest 235tk in last 52weeks. Usually it is updated every month on DSE website.

IPO

Initial Public Offering. When any company offers their stock to general public for the first time it is called Initial Public Offering. A company can offer stock to the public again and again. Those are called Public Offering.

Private Placement

When a company sells it’s shares to institutional or individual investors through private negotiation rather offering their shares to the public it is called private placement.

Technical Analysis

Technical analysis means analyzing a stocks price trend based on its recent past trade pattern (investigating volume, price trend, high, low, close etc). People try to identify near-future-up-trend of any stock and invest in it so that when the price will go up he can make profit.

Fundamental Analysis

This sort of analysis is done based on the company fundamentals- (EPS, Dividend, NAV etc.) In this case peoples try to identify the true value of a stock rather the price trend. When someone identifies a stock is undervalued s/he consider that market will recognize the value shortly and the price will go up. And s/he invests in that particular stock in advance to reap profit from increased value when the market will recognize the value.

Comparative Valuation

I wrote on it earlier. Just read that. If you cant find that post just type the topic- “Comparative Valuation” in the search box and search it. You’ll get it.

Intrinsic Value

This means that what is the true value of a stock. Fundamental analysts try to identify this value.

What Does Free Cash Flow – FCF Mean?
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it’s tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:

It can also be calculated by taking operating cash flow and subtracting capital expenditures.

Some believe that Wall Street focuses myopically on earnings while ignoring the “real” cash that a firm generates. Earnings can often be clouded by accounting gimmicks, but it’s tougher to fake cash flow. For this reason, some investors believe that FCF gives a much clearer view of the ability to generate cash (and thus profits).

It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.

What Does Free Cash Flow To Equity – FCFE Mean?
This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment.

Calculated as: FCFE = Net Income – Net Capital Expenditure – Change in Net Working Capital + New Debt – Debt Repayment

FCFE is often used by analysts in an attempt to determine the value of a company.

This alternative method of valuation gained popularity as the dividend discount model’s usefulness became increasingly questionable.

What Does Free Cash Flow For The Firm – FCFF Mean?
A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.

Calculated as:

This is a measurement of a company’s profitability after all expenses and reinvestments. It’s one of the many benchmarks used to compare and analyze financial health.

A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening – it could be a sign that the company may have some deeper problems.

What Does Free Cash Flow Per Share Mean?
A measure of a company’s financial flexibility that is determined by dividing free cash flow by the total number of shares outstanding. This measure serves as a proxy for measuring changes in earnings per share.

Calculated as:

This measure signals a company’s ability to pay debt, pay dividends, buy back stock and facilitate the growth of business. Also, the free cash flow per share can be used to give a preliminary prediction concerning future share prices. For example, when a firm’s share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up, because a high cash flow per share value means that earnings per share should potentially be high as well.

What Does Working Capital Mean?
It is a measure of both a company’s efficiency and its short-term financial health. The working capital ratio is calculated as:

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

It is also known as “net working capital”, or the “working capital ratio”.

If a company’s current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company’s sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company’s underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company’s obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company’s operations.

What Does Valuation Mean?
The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.

For example, an analyst valuing a company may look at the company’s management, the composition of its capital structure, prospect of future earnings, and market value of assets.

Judging the contributions of a company’s management would be more of a subjective valuation technique, while calculating intrinsic value based on future earnings would be an objective technique.

What Does Asset Valuation Mean?
The process of determining the current worth of a portfolio, company, investment, or balance sheet item.

The tools used for asset valuation include quantitative methods and statistics, financial statement analysis, ratio analysis, fundamental analysis, and valuation economics.

What Does Capital Structure Mean?
A mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

A company’s proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm’s debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

What Does Intrinsic Value Mean?
1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.

2. For call options, this is the difference between the underlying stock’s price and the strike price. For put options, it is the difference between the strike price and the underlying stock’s price. In the case of both puts and calls, if the respective difference value is negative, the instrinsic value is given as zero.

1. For example, value investors that follow fundamental analysis look at both qualitative (business model, governance, target market factors etc.) and quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation.

2. Intrinsic value in options is the in-the-money portion of the option’s premium. For example, If a call options strike price is $15 and the underlying stock’s market price is at $25, then the intrinsic value of the call option is $10. An option is usually never worth less than what an option holder can receive if the option is exercised.

What Does Market Value Mean?
1. The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. Also known as “market price”.

2. The market capitalization plus the market value of debt. Sometimes referred to as “total market value”.

1. In the context of securities, market value is often different from book value because the market takes into account future growth potential. Most investors who use fundamental analysis to pick stocks look at a company’s market value and then determine whether or not the market value is adequate or if it’s undervalued in comparison to it’s book value, net assets or some other measure.

What Does Book Value Mean?
1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation.

2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on.

Also known as “net book value (NBV)”.

In the U.K., book value is known as “net asset value”.

Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.

2. By being compared to the company’s market value, the book value can indicate whether a stock is under- or overpriced.

3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.

What Does Fair Market Value Mean?
The price that a given property or asset would fetch in the marketplace, subject to the following conditions:

1. Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.

2. A reasonable time period is given for the transaction to be completed.

Given these conditions, an asset’s fair market value should represent an accurate valuation or assessment of its worth.

Fair market values are widely used across many areas of commerce. For example, municipal property taxes are often assessed based on the fair market value of the owner’s property. Depending upon how many years the owner has owned the home, the difference between the purchase price and the residence’s fair market value can be substantial.

Fair market values are often used in the insurance industry as well. For example, when an insurance claim is made as a result of a car accident, the insurance company covering the damage to the owner’s vehicle will usually cover damages up to the fair market value of the automobile.

What Does Fundamental Analysis Mean?
A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security’s current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis.

Fundamental analysis is about using real data to evaluate a security’s value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

For example, an investor can perform fundamental analysis on a bond’s value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.

One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

What Does Technical Analysis Mean?
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst’s decision would be based on the patterns or activity of people going into each store.

What Does Horizontal Analysis Mean?
A procedure in fundamental analysis in which an analyst compares ratios or line items in a company’s financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration.

For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using horizontal analysis. Horizontal analysis can be used on any item in a company’s financials (from revenues to earnings per share), and is useful when comparing the performance of various companies.

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