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Benefits and detractors of credit risk


The objective of this research is to examine the control of credit risk threat in financial institutions. Credit risk control in financial institutions starts with the organization of sound lending principles and an efficient structure for handling threats (Jorion, 1997). Guidelines, industry-specific requirements and recommendations, together with risk focus boundaries are designed under the guidance of risk control committees and departments (Bluhm, Overbeck & Wagner, 2016).

Credit risk, also known as counterparty threat is the possibility of loss due to a debtor’s non-repayment of a loan or other history of credits (either the principal or interest (coupon) or even both). Also, credit risk threat is most simply defined as the potential that a financial loan client or counterparty won’t succeed to meet their responsibilities with respect to agreed terms.

In most financial institutions, financial loans are the biggest and most obvious source of credit rating threat. However, other sources of credit risk exist throughout other sections and products of a bank. They consist of actions in the financial and trading books, and those both on and off the balance sheet. Banks are progressively experiencing credit risk threat or counterparty threat in various financial instruments they offer other than financial loans. These consist of bankers’ acceptances, interbank dealings, trade financing, forex trading dealings, economical futures trading, trades, ties, stocks, options and the agreement of transactions.

Credit risk research (finance risk research, loan default rate analysis) and credit risk control are important to banks which provide economical loans to businesses and individuals. Credit risk can occur for various reasons: bank mortgages (or home loans), automobile purchase economical situation, credit card buys, installment purchases, and so on. Credit loans and trading facilities are situations that have the danger of leading to losses due to defaults. To know the danger level of credit users, credit providers normally collect large amount of information on debtors. Mathematical techniques can be used to analyze or determine threat stages involved in credits, economic situations, and economical loans, thus standard threat stages. While banks have faced prolems over the years for a multitude of factors, the major cause of serious banking problems continues to be proportional to lax credit standards for debtors and counterparties, poor portfolio threat control, lack of attention to changes in economic factors (interest prices, inflation prices, etc.)

In modern times, the flow of credit in global marketplaces has slowed from a glacial pace to a virtual standstill and credit marketplaces threaten to stay that way despite immense amounts of cash being pumped into various economies by their government authorities and central banks around the world. Credit risk is a problem faced by economical institutions all over the entire world and the question mostly asked is “what will it take for financial institutions to regain enough confidence in the economic climate to get credit score marketplaces moving again?”


Both policymakers and writers have placed significant fault for the Panic of 2008 – the international economic trouble that achieved full strength in that year – on over-the-counter (“OTC”) derivatives (Gerding, 2009). In turn, legal and policy reactions to the problems, such as the Dodd-Frank Act, have presented many new limitations on these particular economical equipments. Among other things, the Dodd-Frank Act prevents future government relief of certain organizations that trade in derivatives, requires the main cleaning of many derivatives, and allows government authorities to set new security specifications for types that are excused from those main cleaning specifications (Gerding, 2009).

Yet, a research of both the role of types in the economic problems and the new rules regulating derivatives, must avoid artwork with too wide concepts. Several misunderstandings endanger to mix up both the most serious threats resulting from derivatives and the regulating reaction. A certain varieties of derivatives – especially credit score types – cause particular concerns because of their ability to increase make use of throughout the economic system. Credit derivatives  are a form of mixture, whose value is based on the money risk of another firm or economical instrument (Omarova, 2009) . However, the full economic consequences of the higher make use of from credit score types are often themselves not fully fleshed out. Many commentators have focused on how improved make use of, whether arising from credit score types or otherwise, magnifies the frailty of banking organizations. To be sure, excessively utilized banking organizations represent an important concern.

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Moreover, by linking one standard bank to another, credit score derivatives can increase counterparty threat, or the threat of one party to economical transaction defaulting on its obligations. The web created by banking organizations entering into complex credit score derivatives with one another in series raises the specter of utilized organizations falling like dominoes (Huang & Huang, 2012). The potential incidents of failing banks and other economical firms represents one form of system threat. It was this scenario that apparently animated the extraordinary federal bailout of the insurance giant AIG, which had underwritten hundreds of billions of dollars in credit score derivatives that proved assures to other large banking organizations. The emerging failure of the firm left a myriad of other banking organizations with enormous exposure (Posner, 2009).

Yet this potential domino effect of counterparty risk is but one side of the coin of the consequences of credit score derivatives and their ability to lead to leverage. What the above research, however briefly summarized, fails to capture are the macroeconomic results of credit score derivatives. Writers need to aim to move beyond the research into the counterparty risk of derivatives to explore these macroeconomic results. By allowing banking organizations – those organizations that borrow to lend – to enhance make use of, credit score derivatives can operate to boost the overall amount of assets in markets. This increase in assets can be thought of as helping the overall supply of money in a market, which can have a number of significant economic effects (Posner, 2009). By improving leverage and assets, credit score derivatives can fuel rises in resource costs and even bubbles. Rising resource costs can then mask mistakes in pricing credit score derivatives and in assessing the risk of make use of in the economical state. Furthermore, the use of credit score derivatives by banking institutions can contribute to a cycle of leveraging and deleveraging in the economy.

Advantages of credit risk

Many types of credit rating threats exist, which sometimes are known as in specific terminology. Any improvement in costs associated with a client not paying as decided can be loosely classified as credit rating threat. For example, even if credit cards customer does end up not paying his bill, if the lender has to make selection calls or resort to a selection agency, this increment on price is a version of credit risk. More specifically, “default risk” is the danger that the celebration does not and cannot pay as decided (over and above a simple increment in selection cost) and is sometimes generally known as “counter-party threat.” When the client is a government, credit rating threat is often generally known as “sovereign threat.”

Companies, government authorities and all types of lenders take part in credit ranking research to determine to what level they face credit ranking risk associated with their investment strategies. In with a weight of the pros and cons for making a certain type of investment, firms utilize in-house applications to recommend on reducing and preventing threat (or shifting it elsewhere) or use third party help, like analyzing ranking agencies’ estimates of credit reliability from companies like Standard & Poor’s, Moody’s, Fitch Scores and others. After banks using their models and the advice of others to position customers according to the threat, they apply this knowledge to reduce credit ranking threat.

Creditors use a variety of means to lessen and control credit score threat. One way lenders decrease credit score threat is by using “risk-based pricing,” in which lenders charge higher rates to debtors with more perceived credit score threat. Another way is with “agreements,” whereby lenders apply stipulations to credit, such as debtors must periodically report on their finances, or such that debtors must repay the financing in full after certain events (like changes in the customer’s debt-to-equity ratio or other financial debt ratios). Another method is diversification, which can decrease credit score threat to lenders as well as a diversified client pool is less likely to standard simultaneously, leaving the creditor without hope of recovery. Besides these, many companies utilize credit score insurance or credit score derivatives, such as “credit standard swaps,” in an attempt to transfer threat to other companies.

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In this report we have been able to define credit risk that is faced by financial institutions. These are threats whereby the bank clients can either default in the financial obligations to the bank or the bank having to incur additional costs so as to recover from the client. Credit derivatives have also been looked at. Their effect on interest rates has also been expounded on. Credit risk has also its own advantages. Financial institutions that embrace it and put in place strict strategies to contain it will be prosperous.


Bluhm, C., Overbeck, L., & Wagner, C. (2016). Introduction to credit risk modeling. Crc Press.

Gerding, E. F. (2009). Deregulation pas de deux: Dual regulatory classes of financial institutions and the path to financial crisis in Sweden and the United States. NEXUS, 15, 135.


Huang, J. Z., & Huang, M. (2012). How much of the corporate-treasury yield spread is due to credit risk?. Review of Asset Pricing Studies, 2(2), 153-202.


Jorion, P. (1997). Value at risk (pp. 1-4). McGraw-Hill, New York


Omarova, S. T. (2009). The Quiet Metamorphosis: How Derivatives Changed the’Business of Banking’. University Miami Law Review, 63, 1041.

Posner, R. A. (2009). A failure of capitalism: The crisis of’08 and the descent into depression. Harvard University Press


Accounting Information System

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A  credit union is developing a new AIS. The internal auditors suggest planning the systems development process in accordance with the SDLC concept. The following nine items are identified as major systems development activities that will have to be completed.


  1. Arrange the nine items in the sequence in which they should logically occur.


  1. User specifications
  2. Technical specifications
  3. Systems survey
  4. Programming
  5. System test
  6. Post-implementation planning
  7. Implementation planning
  8. conversion
  9. User procedures and training

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  1. One major activity is to convert data files from the old system to the new one. List three types of file conversion documentation that would be of particular interest to an auditor. (CMA Examination, adapted)


  1. Parallel running
  2. Phased conversion
  3. Direct changeover

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Implementing and Evaluating the Future at Galaxy Toys, Inc.

Management class due Saturday 12/16/2017 See attached document Needs to be a grade of 93% or better

Assignment 3: Implementing and Evaluating the Future at Galaxy Toys, Inc. (Week 8)



Continuing with the saga of Galaxy Toys, Inc., the third assignment covers the last three functions of the P-O-L-C, Organizing, Leading and Controlling.  Students will look at the production floor of Galaxy Toys, Inc. through the lens of the organizing function, create an organizational chart, and assess the decision-making authority associated with the organizational structure.  Students will then assess change, discuss motivation from a leadership perspective, and delve into the control function by looking and projecting specifications, interpreting data, and assessing corrective measures.

In completing this assignment, students will demonstrate an understanding of the major content areas of the course and use critical thinking and writing skills.



Outcome Met by Completing This Assignment:

  • integrate management theories and principles into management practices
  • organize human, physical, and financial resources for the effective and efficient attainment of organization goals
  • demonstrate leadership skills by communicating a shared vision, motivating and empowering others, and creating a culture of ethical decision-making and innovation
  • develop measures and assess outcomes against plans and standards to improve organizational effectiveness
  • identify the essential characteristics of decision making and indicate the range and types of decisions a manager makes

NOTE:  All submitted work is to be your original work. You may not use any work from another student, the Internet or an online clearinghouse.  You are expected to understand the Academic Dishonesty and Plagiarism Policy, and know that it is your responsibility to learn about instructor and general academic expectations with regard to proper citation of sources as specified in the APA Publication Manual, 6th Ed. (Students are held accountable for in-text citations and an associated reference list only). 


Step 1:  Preparation for the Assignment



Step 2:  How to Set Up the Paper


Create a Word or Rich Text Format (RTF) document that is double-spaced, 12-point font.  The final product will be between 8-10 pages in length excluding the title page and reference page and appendix.  Write clearly and concisely.


Use the following format:


  • Create a title page with title, your name, the course, the instructor’s name and date;
  • Introduction
  • Part One
  • Part Two
  • Part Three


Step 3:  Create the introductory paragraph.

The introductory paragraph is the first paragraph of the paper but is typically written after writing the body of the paper (Questions students responded to above).  View this website to learn how to write an introductory paragraph:  http://www.writing.ucsb.edu/faculty/donelan/intro.html


Part One

Step 4:  Organizing

Now, that the major short term production goals and objectives have been determined, for Project MMTJE1 it is time for implementation of the plan.  The process starts with the production manager, Itza Yu.  Yu has been tasked with the job of organizing a plan for implementing the production goals.  This plan is part of the organizing function.  The production managers of each plant will execute Itza Yu’s organization scheme.  Doing so requires managers to organize the people, resources, and capital to begin production in a way that will implement the short-term production goals in the most cost efficient, quality oriented, and timely manner as possible.  The project is designed to have Itza Yu create an organizational plan for him and the other branch managers to follow.

  • Explain the role of a manager in the organizing phase of the POLC.  Be sure to explain in detail howthe manager takes the goals and objectives set out in the planning stage and establishes the organization of resources that will complete the goals.


Step 5:  Organizing People, Physical Resources and Money

Assume the Role of Itza Yu.  Carefully read and review each area.

Money: The budget for each production department at Galaxy is $650,000 per year. This is an increase over last year of $300,000 to accommodate the new production costs of MMTJE1.  Salaries of existing personnel and physical resources are currently running effectively under budget by $10,000.Yu does not want to touch this cushion.

People: Current positions on the plant floor are filled. Turnover is infrequent. Yu anticipates that the following new personnel will need to be hired:  Four trained print operators with computer expertise per shift ($40,000 salary each) and one new IT person ($65,000 salary) to liaise with the IT department software and workers on the floor.  Yu also anticipates that training for backup personnel for existing staff ($25,000 cost) is likely but is not sure at this point if more education than current personnel have will be required.

Physical Resources: Existing: Two conveyor lines with 100 foot clearance for printers and forklift, pallets and people to easily work with the product, 4 compatible computers (between the 4 branches), and upgraded printers at approximately $1500 per computer. Needed: Four printers ($6100 each including software and 14 hours of training for each branch), 2 additional computers ($6000 for both), printer material for the creation of the toy and packaging, service contract for the computer (years material is estimated at costing $40,000   and prototype material costs estimated at $4,000.


Step 6:  Organizing People, Physical Resources and Money

Yu must make initial notes before finalizing his plans for production.  First, he must prioritize the objectives so that the work can flow easily. Yu has decided that the following four objectives are the most important.

Short Term Objectives:
·         1.5 million Toys will begin production by January 2018.
      ·    Each plant must produce 375,000 toys by May 31, 2018.
      ·    Prototype toy trials will be completed and approved by QC by October 31, 2017.
      ·    Shipment to customers will begin June 2018.


Bearing in mind the research material above, Yu must organize the three areas: physical, monetary, and human resources in concert to complete the tasks.  In one page, answer the following questions to create Yu’s notes for his first Branch Manager’s meeting. Yu hopes that this will give the other branch managers some preliminary idea of how the project will operate.  

  • Look at the short-term objectives identified above.  Which objective of the four listed must be accomplished first?  Why?  Prioritize the remaining objectives.
  • For each objective, use the above research by Yu to identify at least five (5) tasks that must be completed to accomplish each objective (at least 20 in total).



Part Two

Step 7:   Leading Motivation

During production, older line staff and machine workers began to see the speed and accuracy with which the 3D printers make the MMJTE1 toys.  An obvious concern began to surface among the workers, “Will I still have a job next year?”   Morale of plant workers began to suffer.  Itza Yu knows that this concern must be addressed and morale needs to be improved.  Yu also knows that the business must innovate to keep growing. The workers concern is a real one.


Acting as Joyce Barnhart, what advice should she give to Yu.

  • In discussing the advice, first identify the reasons for the morale problem, explaining why and how motivation relates to change.  Be sure to address change and the worker’s reaction to implementing change. 
  • Discuss the actual ideas and the specific ways Yu should take to motivate his existing employees in an effort that will build morale and keep production levels on track for the current contracts and the new project.


Part Three

Step 8:   Control:

Read critically and analyze the following scenario:

The following chart displays the results of the first year’s production of MMTJE1.  The table was created from data supplied by the company’s entire production department managed by Keith as a means of controlling production output.  It will be used by the VP in his evaluation of areas of improvement, change, or success to processes used by the production department in the production of MMTJE1.  The chart describes the standard goal (identified as standard) set by the department and the result each branch obtained.  A comparison of the standard to the results allows the reader to form conclusions about the success or failure of the production department to meet the goals envisioned by the company. It also allows the reader to recognize patterns from the data from which conclusions can be drawn as to the relationship between elements (e.g. cost expended vs time expended; those who spent more time had a higher cost).

Answer the following required elements making sure that the facts of the scenario and the course readings support the reasoning of the answers provided.

 Measurable Factors Standard Toledo Dayton White Plains Huntsville Juarez
Cost 5.56 5.67 5.87 5.45 5.52 5.01
Time 2.36 2.32 2.46 2.31 2.32 2.69
Quality Control Problem Ratio (per 500 units) 1 2.5 4 1.5 1.75 8.75
Training Time (per hour) 30 35 38 45 48 25
Shipping Problems/Damage (per 10,000 units) 1 0.333 0.222 0.133 0.178 0.4
3D Problems (per 10,000 units) 0.2 0.25 0.286 0.111 0.1 0.4
Total Number of Pieces Produced per year 375,000 435,000 455,000 550,000 525,000 378,000

Step 9:  Standard Specifications

Yu compares the standard specifications data set from the chart with the results for each of the five branches.  Yu has to interpret the results.

  • Interpret the one-year data production results for the MMJTE1 found in the chart above.
  • Draw conclusions from the data.  What does the data tell Yu about the production of the new toy?  Examine each standard and explain the results that Yu conclude.  Make sure to detail the areas that need improvement as well as those positive conclusions that the data suggests.


Step 10:  Corrective Action

  • Define what “corrective action” means to the manager in the control function of the POLC.
  • Do you suggest Yu and his fellow managers take, if any, corrective action for this report?  Be sure to discuss all the options a manager can take in addition to corrective action.

Step 11:  Long-Term Planning

Read critically and analyze the following scenario:

The next meeting of the long-term planning team for Galaxy Toys is scheduled for next week. All the VPs will be there.  Everyone must give a report about the success of the “Moon Mission Jupiter’s Europa 1” toy roll out and the success or failure of the long-term goals and objectives.

Keith video conferences with his branch managers once the production results were released. The data looked good to Keith but he wanted to get additional “human” feedback on the data.  The managers seemed to all talk at once.  All the managers felt that the project was well worth the effort.  They saw great potential for production of all the products.   It appears that several managers felt that training on the 3D printer was the biggest problem.  Back up trained personnel in Huntsville and capable-trained personnel in Mexico was a real problem.  There was a lack of skilled IT people in these areas. The Mexico manager, Hernando Gonzalez, said that they lost their trained personnel to a software company almost from the start and had difficulties finding replacements.  The company that supplied the 3D printers provided initial training but follow up training thereafter proved a problem when original staff was lost.  Gonzalez explained that there was a serious shortage of skilled IT personnel in Juarez.  Consequently, finding qualified workers and keeping people without paying more than the budget permitted was a major problem.  It took Gonzalez four months to train four of his workers to do the job.  Thus, both the production and the IT departments lost money.  However, Gonzalez said that once they got started the workers caught up quickly so he saw tremendous potential for the future.

Step 12:  Prepare Three Recommendations for Keith to Take to the Long-Term Planning Meeting.

  • Explain the relationship between the control function and long-term planning
  • Use the conclusions drawn from the table in Step 8 as well as Keith’s notes from the meeting (noted above) with the branch managers on the production results to identify at least three recommendations that have potential concern for the long-term goals of the company.
  • Explain why and how each of the recommendations chosen would affect the future long-term strategic planning of Galaxy. Be sure to make sure the recommendations have long-term implications rather than solving project issues.



Up to 7 pages


Notes from last assignment 2 grade 77.5%

You provided a good reason for goals and objectives but did not select correct goals and objective.

A summary paragraph restates the main topics of the paper.  Make sure to leave a reader with a sense that the paper is complete.