Terms Beginning With 'c'

Crack Spread

A crack spread is a distinction in cost between a refined item (or group of items) and raw petroleum. It is utilised as a market indicator of economic situations. It roughly estimates the price difference between the cost incurred in processing light crude through a cracking design processing plant to convert it in fractions of refined petroleum product. Normally, a crack is characterised in terms of single specific raw material and product. As an example, Hexane can be cracked into Butane and Ethene. This example can show how much the cost of the individual item has changed from as a raw material to a cracked petroleum product.

Understanding Crack Spread:

In the petroleum industry, the refiners' profit is mainly linked with the spread or the margin between the crude oil prices and the prices of refined products. Crude oil is used as a raw material for the production of refined petrochemical products which are sold to the users. The process of conversion of raw material to user-centric petroleum products is commonly referred to as "Cracking". And, that's why the hedge between this input cost and output prices is called "Crack Spread".  Most of the times, the refinery professionals are concerned about this spread or gap.

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Crack Spread Variation:

Like most of the manufacturing industries, the operation of refineries is also dependent on two markets:

  • the raw material market which supplies crude oil as a raw material for the operation of refineries and
  • the other market is finished product selling market which the refiners use to sell their produced petroleum products.

The demand, supply and production economics of both the raw material and the end product’s market is independent. Refiners are the connecting links between both the markets and might face enormous risk when any of the markets face instability. For example, if the crude oil price rises but the prices of petroleum products remain the same or even decline, the risk for refiners increases and crack spread contracts.

Various other scenarios may also appear in the market, which can lead to increased crude oil prices like geopolitical issues, economics, environmental issues and foreign policy. These scenarios will limit the raw material supply to refiners and put them into a higher level of risk.

Crack Spread Hedging:

There are numerous ways to manage the risk associated with hanging on both sides of the market, as in the case of refiners. Since, there are a number of factors in which the operation of a refinery are dependent like demand, supply, plant-type, the configuration of refining plant and raw material that can be used in the plant. So, there are various types of Crack Spreads available to help refiners hedge various ratios of crude and refined products.

  • 1:1 Crack Spread:

It is the most commonly used crack spread in which the profit of a refinery is solely dependent on the price difference of selling petroleum products and buying crude oil. Refiners used to buy crude oil, refine it and sell the refined products to the consumers. If refiners expect a raw material price hike while the product prices to fall, they will sell most of the stored products and will stock maximum raw material hedging a wide crack spread.

On the other hand, sometimes when the operations of the refinery are shut due to annual maintenance or any other issues, refiners reverse the strategy by buying petroleum products and selling crude oil. Refiners sell their excess stored crude oil at relatively higher on-spot prices in the market as it was purchased by them during price dips, and they buy products to supply their present orders and customers.

  • 3:2:1 and 5:3:2 Crack Spreads:

There are two other types of crack spreads which are commonly used by refiners. One is 3:2:1 crack spread in which every three barrels of crude oil is refined to make two barrels of gasoline and one barrel of distillate fuel. The other one is 5:3:2 which uses 5 barrels of crude to produce 3 barrels of gasoline and 2 barrels of heating oil.

Crack Spread as Market Indicator:

Regardless of whether one is directly associated with exchanging the crack spread or not, it can go about as a helpful market signal on potential value moves in both the oil and refined item market. In the event that the crack spread broadens altogether, which means the cost of refined items is dominating the cost of oil. Additionally, if the spread is excessively close, financial specialists consider that to be an indication that refiners will dip the production to limit the supply and lift the selling prices and setting back the profit margin. This, obviously, might have an adverse effect on the crude oil market.

Components Affecting Crack Spread:

There are numerous factors that can affect the width of Crack Spread. Some of them are enlisted below:

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In the recent past, the absolute return approach of Investing has turned out to be one of the fastest-growing investment strategies worldwide. A lot of financial advisors talk about such investments providing absolute returns. So, what exactly are the “Absolute Returns” and are they are promising? What is meant by Absolute return? Absolute return computes the increase or decrease, in an asset over a period of time, as a proportion of the original investment amount. The focus here is only on that specific asset or portfolio and not related market events. Absolute returns only consider the price movement for any specified time period. Absolute return, reckons an investment’s performance without considering the expanse of time for which investment was committed. Absolute returns can be computed for a quarter, semi- annual, annual period, 3-year duration or more. Absolute Returns are independent of Market movements and thus do not draw relative comparisons. It is one of the most commonly used investment performance metric in Hedge Funds and Mutual Funds. How to compute Absolute return? Suppose an investor Mr. Rich, invested AUD 50,000 5 years back, and the current value of his investment is AUD 75,000. The Absolute return on Mr. Rich’s investment would be 50 %, calculated using- Copyright © 2021 Kalkine Media Pty Ltd Copyright © 2021 Kalkine Media Pty Ltd So, Copyright © 2021 Kalkine Media Pty Ltd Absolute returns are just returns from point of time to other. The notion of an 'absolute return' seems very attractive to get investors’ attention as it ignores the relative market movement and promises an appreciation with zero correlation to markets. Anyhow, Absolute Return technique of computing investment yields is an apt way of calculating return on investment, predominantly in the early stages. There are numerous other types of return metrics an investor can look for later on. Major 4 types mattering most to investors being –  Absolute Return, Relative Return, Total Return & CAGR. What is the difference between Absolute Return, Relative Return, Total Return & CAGR? Absolute return refers to the gain/ loss in a single investment asset/ portfolio but to comprehend how their investments are acting relative to various market yardsticks, relative return is taken into consideration.   Relative return is the excess or deficit an asset achieves over a timeframe matched to a market index. Benchmark Return – Absolute return, gives the Relative return also called sometimes as alpha. Example, if S&P index gives a 10% return during a given period and one’s investment portfolio gives an absolute return of 12% then relative return on investment is positive/ excess 2%. Total returns take into account the effect of intermittent incomes as well as dividends. For example, in an equity investment of AUD 200 having current value AUD 240, the company also declares a dividend of AUD 10 during the year. Total returns will take into account this $10 dividend too. Thus, Total returns on the investment of AUD 200 now will be 25.00% = {(240+10-200)/200} x 100 Absolute and Total returns are easy to calculate as performance metrics, but the real challenge is when comparisons are drawn based on time period of return. Here comes in CAGR, it takes into account the term of the investment too, thus giving a more correct and comparable picture. It is computed as: CAGR (%) = Absolute Return / Investment period (equated in years) Consider for example, two investment options: One where investor earns absolute returns of 10% in 24 months and another where investor earns 5% absolute returns in 9-month duration. So, CAGR would be- For option one: CAGR = 5.00% i.e.  10%/2 (24 months/12 months is equals to 2 years) For option two: CAGR = 6.66% i.e. 5%/0.75 (9 months/12 months is equals to 0.75 years) What’s wrong with just measuring investment performance using Absolute Returns? Absolute returns will only tell an investor how much his/her investments grew by; they do not tell anything about the speed at which investments grew. When people talk about their real estate investments and say, “I bought that house for X in the year 2004. It’s worth 4X today! It has quadrupled in 17 years.” This is an application of absolute return. The drawback here is that it takes into account only the capital appreciation and doesn’t draw comparison with options having different time horizons. Investors can rely on this measure of investment performance only if they are looking for higher returns, without bothering how fast they were generated. Absolute return also doesn’t convey much about an investment compared to relative markets. Then, why do Hedge Fund/ Mutual Fund Managers choose an Investment strategy based on Absolute returns? Absolute returns should be used at times when investors are willing to shoulder some risk in exchange for a prospective to earn excess returns. This is irrespective of the timeframe and Fund administrators who measure portfolio performance in relation of an absolute return typically aim to develop a portfolio that is spread across asset categories, topography, and economic phases. They are looking for below mentioned points in their portfolios- Positive returns- An absolute returns approach of investment targets at producing positive returns at all costs, irrespective of the upside & downside market movements. Independent of yardsticks- The returns are in absolute terms and not in comparison to a benchmark yield or a market index. Diversification of portfolio- With the intention of distribution of risk, among different investment options producing positive returns in diverse ways a mixed bag of absolute return assets give a diversified investment portfolio. Less volatility- The total risk of investment is spread across the different asset held in such a portfolio. Ensuring less overall volatility in collective returns. Actively adjustable to market movements– Usually, investments look for positive returns with zero market correlation. Market shares a negative correlation with absolute return investments and vice versa. In any investment atmosphere, there are varied investment strategies and goals. Absolute return investment strategies are looking to avoid systemic risks using unconventional assets and derivatives, short selling, arbitrage and leverage. It is appropriate for investors who are prepared to bear risk for short and long-term gains.

What is data warehousing? Data warehousing is defined as the method of gathering & handling data from different sources to get meaningful output and insights. Data warehousing is central to the BI system and is built for data analysis and reporting. Source: © nfo40555 | Megapixl.com In simple terms, a data warehouse is a large collection of data utilized by businesses to make investment decisions. What are the characteristics of data warehousing? Data warehouse has supported businesses in making informed decisions efficiently. Some of its key features are highlighted below: The data in a data warehouse is structured for easy access, and there is high-speed query performance. The end users generally look for high speed and faster response time – two features present in data warehousing. Large amount of historical data is used. Data warehouse provides a large amount of data for a particular query. The data load comprises various sources & transformations. What are the benefits of data warehousing? The Companies which used data warehousing for analytics and business intelligence found several advantages. Below are some of them: Better Data: When data sources are linked to a data warehouse, the Company can collect consistent and relevant data from the source. Also, the user would not have to worry about the consistency and accessibility of the data. Thus, it ensures data quality and integrity for sound decision making. Faster  decisions: Through data warehousing, it is possible to make quicker decisions as the data available is in a consistent format. It offers analytical power and a comprehensive dataset to base decisions on tough truths. Thus, the people involved in decision making do not have to rely on hunches, incomplete data, and poor quality data. It also reduces the risk of delivering slow and inaccurate data. How does a data warehouse work? A data warehouse is like a central repository where the data comes from various sources. The data streams into the data warehouse from the transactional system and other relational databases. These data could either be structured, semi-structured or unstructured. These data get processed, altered, and consumed in a way that the end-user can gain access to the processed data in the data warehouse via business intelligence (BI) devices, SQL clients and spreadsheets. A data warehouse merges the data that comes from various sources into a complete database. The biggest advantage of this merged data is that the Company can analyze the data more holistically. It also makes the process of data mining smooth. Copyright © 2021 Kalkine Media Pty Ltd. Component of a data warehouse A data warehouse can be divided into four components. These are: Load Manager Load Manager, also known as the front component, does operations related to the mining and loading the data into a data warehouse. Load manager transforms the data for entering into Data warehouse. Warehouse Manager The warehouse manager manages the data within the data warehouse. It analyses data to confirm that the data in the data warehouse is steady. It also conducts operations such as the creation of indexes and views, generation of denormalization and aggregations, modifying and integrating the source data. Query Manager Query Manager is a backend component that does operations concerning the supervision of user queries. End-User access tools End-User access tools comprise data reporting, query tools, application development tools, EIS tools, data mining tools, and OLAP tools. Roles of Data Warehouse Tools and Utilities The tools and utilities in a data warehouse are used for: Data extraction: The data extraction process involves gathering data from heterogeneous sources. Data cleaning: Data cleaning consists of searching for any error in the data. Data transformation: Data transformation process involves changing the data into a data warehouse setup. Data loading: This process involves data sorting, recapping, consolidating, verifying integrity. Refreshing: This process requires revising data sources to the warehouse. Application of data warehouse Data warehouse plays a considerable role across multiple sectors. Some of the sectors it caters to are highlighted below. Aviation sector In the aviation sector, a data warehouse’s role can be seen in crew assignment, route profitability analysis, any promotional activity. Banking Industry In the banking sector, the focus is on risk management, policy reversal, customer data analysis, market trends, government rules and regulations and making financial decision. Through a data warehouse, banks can manage the resources available on the deck effectively. Banks also take the help of a data warehouse to do market research, analyze the products they offer, develop marketing programs. Retail industry Retailers act as an intermediary between the producers and the customers. Hence, these retailers use a data warehouse to maintain the records of both producers as well as the customer to maintain their existence in the market. Data warehouses help track inventory, advertisement promotions, tracking customer buying trends and many more. Healthcare industry In the healthcare industry, a data warehouse is used to predict the outcome of any test and taking relevant action accordingly. Data warehouses help them to generate patient treatment report, offer medical services, track the medicine inventory. Many patients visiting hospital have health insurance. Through a data warehouse, hospitals maintain the list of insurance providers. Investment and insurance sector In the insurance and investment sector, the role of data warehouse becomes important in tracking the data pattern, customer trend and market movement.      Services sector In the services sector, a data warehouse is used for maintaining financial records, studying the revenue pattern, customer profiling, resource management and human resource management. Telecom The telecom sector uses a data warehouse in the promotion of its offerings, making sales decision, distribution decision, features to include in case they decide to launch a new product based on the customer requirement.   Hospitality The hospitality sector involves hotel and restaurant services, car rental services etc. In this sector, the companies use a data warehouse to study the customer feedback on the various services offered and accordingly design and evaluate their advertising and promotion campaigns.

What is depreciation? Depreciation is an accounting method used to allocate the cost of a tangible asset to the books of accounts over the useful life of the asset. It is essentially the accounting for wear and tear on the asset over its useful life.  Depreciation also refers to the value of the asset that has been used over time. Assets of a firm that are used for over a one-year period largely include physical assets. Although firms incur expense while purchasing these assets, the expenses are not charged in the income statement.  Such assets are recorded in the balance sheet of the firm and are expensed on the income statement as depreciation expense over time during the life of the asset. The tax authorities also decide the useful life of assets because overstating depreciation expense can lower tax liability.  Now assets come in two variety: tangible assets and intangible assets. As the name suggests tangible, the tangible assets can be touched, such as equipment, machinery, computers, vehicles etc. Depreciation is used to expense the tangible assets of a firm.  Intangible assets cannot be touched and include assets like licenses, copyrights, patents, brand names, logos etc. Amortisation of assets is an accounting method similar to depreciation used to expense intangible assets.  Long-term assets are the source of generating revenue for firms over a long period of time, therefore the cost of acquiring tangible long-term assets is not expensed fully at the time of purchases and is expensed over the life of the asset.  As the asset is used over periods, the carrying value of an asset in the balance sheet is reduced over time. Carrying value of an asset is the original cost minus accumulated depreciation on the asset over time.  Since the cost of acquiring the long-term tangible asset is not expensed fully at the time of purchase and is expensed over its useful life, the depreciation expense is a non-cash charge because actual cash outgo was incurred at the time of purchase.  But depreciation expense reduces the reported earnings of the company as it is charged on the income statement of the firm. Since the expenses are deducted from the revenue of the firm, the tax liability of the firm is also reduced.  What are the methods of depreciation? Straight-line method The straight-line method is the most common method of depreciating an asset over its life. Under this method, the recurring depreciating amount of the asset remains constant and is not changed over the life of the asset.  For example, a firm buys a machine for $10000 with a salvage value of $2000, and the useful life of the asset is ten years. The depreciable value of the asset will be $8000, which is the cost of machine minus salvage value.  Now the firm will depreciate the $8000 each year at a rate of $800 per year. The per-year depreciation charge of $800 is the depreciable value of the asset divided by the useful life of the asset (8000/10).  Double declining balance depreciation method  It is an accelerated type of depreciation method. Under this method, the depreciation expense in higher in the beginning years and gradually reduces over the life of an asset. It also reflects that assets are more valuable in the early years of production compared to later years.  In this method, the subsequent depreciation charges after the initial charge are calculated using the ending balance of the asset in the last period. Ending balance of the asset is the original cost of the asset less accumulated depreciation. Also, the depreciation factor in this method is twice of the straight-line method. Depreciation expense = (100%/Useful life of asset) x 2 Why is depreciation due diligence important? Depreciation can be used to manipulate the financials of the company. Overstating and understating depreciation charges directly impacts the profit of the company. When a firm is charging less depreciation than required, it would directly increase the profits of the firm.  When depreciation expense is lesser than the actual expense, the income statement will record lower amount of expenses, therefore the deductions from revenue will lesser and profits will increase.  Investors also assess whether the useful life of asset used in calculating the depreciation of firm is appropriate or not. The companies should use an appropriate useful life of the asset. When the useful life of the asset is increased, the depreciation charges will spread across an increased number of years.  As a result, the depreciation expenses during the life of an asset would be understated since the actual life of an asset is less than recorded. Investors prefer checking the number of years used as the useful life of an asset.  Sometimes firms may choose to change the method of depreciation. Although it could be appropriate when actual business conditions don’t match the method adopted, there remains a possibility that the decision to change the method could be driven by the motive to manipulate depreciation expenses.  Companies may seek to keep the assets in the balance sheet even though the asset is of no use. This will help the company to keep incurring depreciation expense on the income statement and reduce the tax liability of the business.  When the value of assets of the company has appreciated in light of the market environment, the balance sheet value of the asset will also increase. When the balance sheet value of an asset is increased, the depreciation charges should also increase. Therefore, appreciation in the value of an asset should also increase depreciation expense for the company. 

What is Immunization? Immunization is the process of developing immunity or resistance in an individual against an infectious disease by administering a potent vaccine. Vaccines stimulate an individual’s immune system to protect the individual against subsequent disease or infection. Moreover, immunization is an established way to control and eliminate infectious diseases that could be life-threatening. According to the World Health Organization (WHO), immunization is estimated to prevent between 2 to 3 million fatalities every year. The process is commonly recognized as the most successful and cost-effective health interventions, with established strategies making it available to even the most hard-to-reach population as well as susceptible people. World Immunization Week takes place every year during the last week of April from 24 to 30 April. Immunization Week is a worldwide public health campaign for increasing consciousness and rates of immunization against vaccine-preventable infections across the world. Immunization helps to protect millions of lives each year. How Does Vaccination Work? Vaccines are used for immunization of people against infectious diseases causing illness, serious disability or even death. In the human body, vaccines develop a defense mechanism against the disease. Thus, a vaccinated person for a specific condition is unlikely to get affected by the same disease again.   Vaccines comprise of a similar virus or germ that is responsible for the infection. However, the virus in the vaccine has been inactivated, killed, or weakened so that it does not make people sick. Some vaccines contain only a portion of the virus. When a person gets immunized, the body is misled into thinking that it has been infected and the immune system makes antibodies to kill the viruses. These antibodies remain in the body of a vaccinated person for a prolonged period and remember to fight the virus and hence prevent the infection. If the virus from the disease enters the immunized person’s body in the future, the antibodies kill the virus before the person can become sick. Most of the individuals are completely protected against the infection after immunization. However, in a few cases, there are risks that people who are immunized could still get the infection because they are only partially protected from the vaccine. However, this is a rare condition and is only common in individuals with several medical conditions affecting the immune system. Vaccination is the best approach to prevent the spread of infectious diseases with no medical treatment. Like drugs, vaccines also undergo different stages of clinical trials before receiving an approval for commercialization from the respective regulatory authorities. Vaccine candidates are initially given to healthy volunteers to ensure the candidate is safe to use. What is Herd Immunity? Immunization protects the infections and aids in preventing the spread of certain diseases in the larger population. When more individuals in a community are immunized, fewer people get sick because the virus has a fewer number of people to infect, and if someone does not have the infection, they cannot spread it further. Some people cannot get immunized, so ensuring that maximum people in a community are fully vaccinated will help protect the whole community, including those that cannot be vaccinated. This is known as herd immunity. When no one is immunized, contagious diseases can spread in the community rapidly. However, when some people are immunized, the disease can affect a smaller group of people, those who are not protected. But, when most of the community gets immunized, very few community members will get the infection because of herd immunity. To achieve herd or community immunity against any infection, a community must have between 74-95% of the people immunized, depending upon the severity of the infection. The individuals that might be vulnerable to diseases are known as susceptible, for instance, people with impaired or weak immune systems. These individuals might not be able to get vaccinations or may not build immunity even after having been vaccinated. In this case, the only protection against specific infections is for others to get vaccinated, so the diseases are less common. To know whether herd immunity can help combat the ongoing COVID-19 pandemic, click here. What are the Benefits of Immunization? Immunization is the most simple and effective way of protecting people and community from any contagious disease. Immunization works by activating the immune system of the body to fight against specific diseases. If a vaccinated individual comes in contact with the viruses causing these diseases, their immune system is capable of responding more effectively. A glance at the benefits of immunization- Immunization either prevents the disease from developing or reduces its severity. Immunization prevents people and community from getting infections for which there are no medical treatments. These infections can trigger serious complications and even mortality. If exposure to an infection occurs in a community, there is little to no risk of an epidemic if the individuals in the community have been immunized. Immunization can help to protect vulnerable or susceptive individuals from any contagious disease. Difference between Immunization and Vaccination Most of the times, both the terms immunization and vaccination are used interchangeably. However, their meanings are not precisely the same. In vaccination, a potential vaccine is administered to the individual. Immunization is how the body reacts after the vaccine is administered. A vaccine stimulates the immune system of the body so that it can recognize the infection and protect the vaccinated person from future diseases. After the immunization process, a person becomes immune to the viruses causing that infection.

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