31 Jan 2008 by Chetan Shah.

While parsing the OFAC SDN list provided by US Treasury, the alerts should be generated at the main entity level.

SDN list consists of a parent entity. The child/ren of this parent entity are the “AKAs” by which the organization or an individual is also known.

For example :

6365
Usama bin Muhammad bin Awad
BIN LADIN
Individual

SDT
SDGT

4227
a.k.a.
strong
BIN LADIN
Usama

4757
a.k.a.
strong
BIN LADEN
Usama

4771
a.k.a.
strong
BIN LADEN
Osama

4772
a.k.a.
strong
BIN LADIN
Osama

4773
a.k.a.
strong
BIN LADIN
Osama bin Muhammad bin Awad

If alerts are generated at a child level, possibly the system will generate more alerts or duplicate alerts. For large financial institutions this can create a lot of unnecessary work loads for Risk Analysts. This in turn creates a backlog of alerts to be looked at. Having backlogs of alerts creates a major financial/reputation risk for the institution as there may be a bad guy on their books but they could not take action in time because of them being severely backlogged on their alerts processing.

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28 Jan 2008 by Chetan Shah.

Never try to find out whether a company has a bad guy on their books by just matching a SDN list entry with the company customer data on basis of just first name and last name. You will be surprised how many “Jose Luis” you will find in your company database.

A better approach is to use date of birth in addition to the first name and last name. This rule will generate more accurate matches and your risk analysts will thank you for not generating “False Positive”

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28 Jan 2008 by Chetan Shah.

This might sound too much like software engineering but for any software application’s life cycle, data collection, metrics and analysis should be part of an ongoing process and different aspects of application data should be continuously harvested to understand which business rules have been really effective and which rules are not so effective. Requirements are typically written at a very initial stage of the application development and lot of business rules are perceived to be really effective and hence directly translated into technology requirements without having any solid metrics backing the requirements up.

A continuous loop back cycle (by doing data analysis) enables the application support team to come up with metrics and relevant data which they can present it back to business owners of the application and highlight what aspects of the application need to be improved and what aspects of the application can be sunsetted. This data can also be leverage for future generations of application or can also be used as input to organization’s multi generation plan.

Certainly this is not a very “cool” exercise from a developer perspective as it involves too much “SQL” but my definition of “cool” is : the system in context adds value to the business it supports. If an application uses state of art technology but does not do any good to the business partners, I think it is a waste of company’s limited/precious resources.

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26 Jan 2008 by Chetan Shah.

By selling a put, the seller is essentially promising the buyer of the put that she (the seller) will buy the underlying stock at the price mentioned in the put contract.

Anyone intending to buy a stock at a her predetermined price can sell an equivalent put and wait for the option to be assigned to her. By selling a put, the amount for which the put was sold is immediately credited to her account, thus lowering her cost basis for the stock.

Consider the following scenario :
Mary wants to buy 100 shares of XYZ company at $65 dollars. She does not want to pay anything more than that. In this scenario she can do either of the following.

#1 :
She can immediately place a limit “Buy” order for XYZ company at 65 dollars and wait for the stock price to hit 65. Whenever the stock hits 65, her order will executed and her account will be credited with 100 shares of XYZ company.

OR

#2 :
She can sell a XYZ 65 Put. Because she is selling a put, the market will compensate her for making this promise to the buyer. Let’s say the “put” in consideration is being sold for $1. By selling a promise to buy 100 XYZ company’s share at 65 dollars, the market will compensate her with 100 dollars. If someone exercises the put, she will then have to give the exerciser of the put, 6500 dollars.

If she follows this approach of buying the XYZ company’s stock her cost basis for 100 shares will be 6500 - 100 (she got by selling the put) = 6400 dollars.

However, every option has a expiry date attached to it. In the event of stock price not hitting 65, nobody will exercise the put and she will not be able to buy the shares at 65 dollars. But even in this case she made 100 dollars, by selling the put at $1.

So, if you only want to buy a stock at a predetermined price and are ready to wait (which I think every investor should) then taking #2 route is much better buying strategy. If you cannot buy the share at the predetermined price, at least you get some money by selling the put.

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25 Jan 2008 by Chetan Shah.

Options are security instruments which allow the holder of an option to exercise her right to either purchase or sell underlying security at a predetermined price before the expiration date. For simplicity sake, I will assume the underlying security are “stocks”.

There are 2 types of options : “Call” and a “Put”

Call : Gives the holder of this option a right to buy the stock at predetermined price. She can only exercise her rights as long as the option has not expired. To use options lingo - ABC Feb 08 65 Call means that this call option is for ABC company, which expires in Feb’08 and it gives the owner (buyer) of this option a right to buy ABC company’s stock at $65 dollars from seller of the option.

Put : Gives the holder of this option a right to sell the stock at predetermined price. She can only exercise her rights as long as the option has not expired. To use options lingo - ABC Feb 08 70 Put means that this Put option is for ABC company, which expires in Feb’08 and it gives the owner (buyer) of this option a right to sell ABC company’s stock at $70 dollars to the seller of the option.

It may sound a little bit complicated initially but it is not. Basically, it is a contract between two parties to execute a transaction before the expiration date. The seller of the option gives a promise to the buyer of the option. The buyer of the option pays the seller an amount, basically she (the buyer) is compensating the seller for making the promise.

Hypothetically speaking, if options were printed on a piece of paper, they would read something like this :

Call Option :

I promise to sell XYZ stock to the owner/buyer of this option at X price. This promise is only valid until (3rd Friday of January 08).

Put Option :

I promise to buy XYZ stock to the owner/buyer of this option at X price. This promise is only valid until (3rd Friday of January 08).

Typically, in US markets, for a given month the options expire on 3rd Friday of that month. American Options can be exercised any time before the expiration date, European options however can only be exercised “on” the expiration date.

Exercising an option : This means that the owner of the option is asking the seller of the option to fulfil her promise. If the owner of the options does not exercise his right before the expiration date, the option is worthless. I.e.: it does not have any monetary value.

I will write more on how options can be used to leverage existing stock position in your account later. A ton of options information exists on The Options Industry Council website.

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24 Jan 2008 by Chetan Shah.

Rental Property Closing Costs and Tax Deduction.

Unlike the main home scenario, in which one can deduct entire “points” amount paid towards getting a mortgage from their tax return in the year when the home was purchased, points amount paid cannot be directly deducted for rental property.

In case of rental property the “points” need to be amortized. I.e. : you have to deduct the points over the period of the loan. So for example : if you pay $3600 towards points for a 30 year fixed mortgage, you can claim (number of payments for the given tax year) * (3600/360) as the deduction amount. Related IRS information is here

Other closing costs (see below) should be added to the cost basis of the rental property and claimed as part of the depreciation.

Recording Fees
Legal Fees
Surveys
Title Insurance

Please be extra careful in determining the cost basis of the rental property as once you determine this you should not change the amount year over year (unless you do improvements to the property). The cost basis will determine by how much amount you can depreciate your rental property every year. Also, a point to note is that “Land” cost is not depreciable, hence you will have to deduct the land cost from the house purchase price. You can get the land cost from your city/county real estate records.

In a nutshell, points cannot be deducted as a whole in the first year when the rental property was purchased, they have to amortized over the period of the loan.

Most of the other closing costs can be added to the cost basis of the rental property and therefore can be claimed as depreciation every year.

Land cannot be depreciated.

For further details, please refer to IRS publication 527 (search for Cost Basis under depreciation)

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