Wine storage,Suppose that you are a banker responsible for approving corporate loan. 9 firms are seeking secured loans. They offer the following assets as collateral:
a.Firm A, a refiner offers a storage tank full of jet fuel.
b.Firm B, a wine wholesaler offers 1,000 cases of Beaujolais Nouveau, located in a warehouse
c.Firm C, a stationer, offers an Accounts Receivable for office supplies sold to the city of Bordeaux
d.Firm D, a bookstore, offers its entire inventory of 15,000 used books
e.Firm E, wholesale grocer, offers 20,000 kilos of bananas
f.Firm F, a retail chain, offers its inventory of television sets
g.Firm G, a jeweler, offers 100 ounces of gold
h.Firm H, securities dealer, offers its portfolio of French Government Bonds
i.Firm I, a boat builder, offers a half completed luxury yacht. The yacht will take four months more to complete.
Which of the assets are most likely to be good collateral? Which are likely to be bad collateral? Please explain thoroughly.
Daniel T // Dec 11, 2010 at 4:36 am
H, the government bonds are the safest and most easily converted security.
Nearly all of the others are likely to have problems as collateral as the resale value may vary or the item may spoil or be depleted. Even the gold will fluctuate in price and be used as part of the jewelers manufacturing process.
Muga Wa Kabbz // Dec 11, 2010 at 4:36 am
1) Good collateral would be 100 ounces of gold. Gold is over 730 US dollars an ounce, so it’s a good hedge and it has a ready market.
b) FRench government bonds may not be as reliable as US government bonds, so although it sounds good, I would not consider it because it is backed by a government, which is foreign to me.
2) Bad collateral would be 20,000 kilos of bananas because it is a perishable item. If you took it as collateral it would rot before you even knew that you needed it to hedge a defaulted loan.
3) Half completed luxury yacht is also bad collateral because it is unfinished. If you had to use it to hedge a loan default you would have to spend more money and time to complete it, not to mention the tiny market of a limited number of buyers who would be interested in buying it. You would actually go at a loss if you used this one as a hedge against a defaulted loan.