Commonly Used Terms in Derivative Market
February 12, 2025
Amazon and FedEx have traditionally had a love-hate relationship. On the one hand, Amazon is one of the biggest customers of FedEx, whereas, on the other hand, it is also one of their biggest competitors. Amazon has already made its intentions clear. In the long run, they do not want to be associated with FedEx, […]
The Price Earnings Growth (PEG) Ratio is one of the first variations that were made to the Price to Earnings Ratio to make it more meaningful. The full form of the PEG Ratio is Price Earnings Growth ratio. Instead of being a two way comparison between price and earnings, the PEG ratio makes a three […]
Whenever companies need to raise money by accessing the public markets, they have to use the services of investment banks. This is because investment bankers have a readymade network which they use to sell securities to the general public. Investment banks are the central character for a company if it needs to go public. It […]
It is important for investors investing in fixed-income securities to be aware of restrictive covenants. This is because restrictive covenants can have a huge negative impact on the valuation as well as the liquidity of the debt. Bond indentures are detailed legal documents that can have many covenants which prove to be restrictive. However, there […]
In the previous article, we studied the cost modeling process. We understood the various steps which have to be undertaken in order to model costs. However, we also need to understand that cost modeling is an iterative process. This means that a company creates a cost model, runs the numbers, compares those numbers with their […]
Money laundering is a heinous crime. Although it does not directly lead to loss of human lives, it allows money to reach the hands of wrong individuals. The proceeds from money laundering end up in the hands of gangsters, warlords, drug dealers and terror groups. No financial institutions would want to enable such transactions. However, many times hedge funds unwittingly become part of such transactions. In this article, we will understand how hedge funds can identify and avoid dealing with money launderers.
Hedge funds are requested to take a declaration from their clients verifying that the money being invested has not been realized as a result of criminal or illegal activities. Also, hedge funds are required to ask their customers to give a declaration that their name does not feature on the list of high risk investors. In case their name appears on such a list, hedge funds are instructed to not accept money from them.
For instance A makes an investment in a hedge fund and while withdrawing the amount asks for the money to be deposited in B’s account. B then makes a separate investment and while withdrawing gets the money credited to C’s account. This process is repeated several times until a huge web of transactions is created to obscure the relationship between the sender and the receiver. To counter this problem, hedge funds must ensure that they only transfer money back to the same entity or person who invested with them. When people ask for their interests to br transferred to third parties that should be a definite red flag and must raise an alarm.
Hedge funds must therefore be very careful as to whom they accept money from. Failure to know the background of their customers is likely to get these funds involved in major legal hassles. Although, they are free from most regulations, they still have to be careful to not be part to felonies like money laundering.
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