...RISK MANAGEMENT IN ISLAMIC BANKING AND FINANCE: THE ARAB FINANCE HOUSE EXAMPLE Bilal A. Fleifel A Thesis Submitted to the University of North Carolina Wilmington in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration Cameron School of Business University of North Carolina Wilmington 2009 Approved By Advisory Committee Howard Rasheed Cetin Ciner William H. Sackley Chair Accepted By DN: cn=Robert D. Roer, o=UNCW, ou=Dean of the Graduate School & Research, email=roer@uncw. edu, c=US Date: 2010.01.21 15:02:51 -05'00' ________________________ Dean, Graduate School TABLE OF CONTENTS TABLE OF CONTENTS ..................................................................................................... ii ABSTRACT........................................................................................................................ vi ACKNOWLEDGMENTS .................................................................................................. vii DEDICATION .................................................................................................................. viii LIST OF TABLES .............................................................................................................. ix LIST OF FIGURES...............................................................................................................x GLOSSARY .............................
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...capitals in the total financing of the firm’s assets. The main objective of financial management is to maximize the value of the equity shares of the firm. Given this objective, the firm has to choose that financing mix/capital structure that results in maximizing the wealth of the equity shareholders. Such a capital structure is called as the optimum capital structure. At the optimum capital structure, the weighted average cost of capital would be the minimum. The capital structure decision influences the value of the firm through its cost of capital and can affect the share of the earnings that pertain to the equity shareholders. Introduction to Capital Structure Theories There are 4 basic Capital Structure theories. They are: 1. Net Income Approach 2. Net Operating Income Approach 3. Modigliani-Miller (MM) Approach and 4. Traditional Approach Generally, the capital structure theories have the following assumptions: 1. There are no corporate taxes (this assumption has been removed later). 2. The firms use only 2 sources of financing namely perpetual debts ad equity shares 3. The firms pay 100% of the earnings as dividend. This means that the dividend pay-out ratio is 100% and there are no earnings that are retained by the firms. 4. The total assets are given which do not change and the investment decisions are assumed to be constant. 5. Business risk is constant over time and it is assumed that it is independent of the capital structure...
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...Systematic Risks (non-diversifiable) Systematic risks are risks that affect the entire market and not each single corporation; it is associated with the overall movement in the general market or economic. Systematic risk are also called as market risk, are non-diversifiable. According to Berk, DeMarzo and Harford (2012,p.337), systematic risks are risks that fluctuate through the market available news. These risks are difficult to be diversified even though the shareholder holds a portfolio since these risks affect the whole market. Systematic risks are included interest rate risk, inflation rate risk, market risk and exchange rate risk, recession, political risk, earthquake. Unsystematic Risks (diversifiable) Unsystematic risks are not affected by the economy but by the specific corporation. The fluctuation of share price of a particular corporation is due to the good or bad news announced by the corporation. It will increase when the corporation that had less earnings growth rate, and low morale or productivity of employees or a poor reputation of the corporation, vice versa. However, unsystematic risk can be diversified by shareholders who hold the portfolio when the stocks are negatively co-related. In fact, it means that when a particular event occurs that affects a specific corporation, the stock of other corporation will be unaffected and thus, the fluctuation of share price between two stocks can be offset. Unsystematic risks are included liquidity risk, operational...
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...International Financial Management Case Analysis of: The Continuing Transformation of Asahi Glass: Implementing EVA TABLE OF CONTENTS * BACKGROUND * CORPORATE GOVERNANCE * FEATURES IN ASIA * MAIN BANK * ORGANIZATIONAL CHANGE * IMPLEMENTING EVA 1. ADVANTAGES 2. DISADVANTAGES * PREFERENCE TO EVA * RECOMMENDATION Background Asahi Glass is an MNC, based in japan. Its products include flat glass, chemicals, and electronics and displays. It was reorganized by “Ishizu”. It captures annual sales of about 1.3 trillion and is considered largest global market leader in most of its product categories. It has almost more than 200 subsidiaries and operates in more than 25 countries. . The company reformed in corporate governance and the new management system for resource allocation and performance measurement is based on economic value added (EVA). In this case our analysis is focused on influence of bank system on corporation, corporate governance reform, difficulties the president faced in reform. Moreover, we also discuss EVA system, its effectiveness and pros and cons. Corporate Governance It is set of mechanism that describes the relationship between board of directors, top management and shareholders, means it takes into account the self-interested controllers of company. It also deals with agency problem. It contains two models: one is ‘control model’; that discusses control from inside boards...
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...University Intro to Finance Professor Michael Hamuicka March13, 2013 Understanding the Concepts Understanding the concepts of business is to know how the world works as defined by mathematical formulas and other representations of cause and effect in the physical world. Using ratios to be able to observe the world reason and draw accurate and rational conclusions. To understand how small businesses differ than large businesses it’s based on the current situation and future possibilities using profit seeking activities to convert factors of production into goods and services for customers in the market to achieve the business objectives. Liquidity is the ability to meet obligations when they are due. To measure your liquidity or your company’s success by meeting its short term obligation current assets to current liabilities Current asset include inventory product you sell and accounts receivable are your credit accounts Converting balances to cash Inventory turnover ratios can tell you how fast or slow the inventory is selling. Accounts receivable ratios can tell you if your customers are paying you or not. You need more assets than liabilities on your balance sheet at all times. How much cash a business generates and how much cash from core operations. The company will struggle to succeed if it has less money. Finical ratios are tools used for internal and external evaluations of the business performance Its effectiveness in business management for both large and...
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...areas: Laundry & Home Care, Beauty Care and Adhesive technologies (Henkel AG & Co. KGaA, 2012). From 2012 their sales values has recorded 3.410 million euros, gross profit of 1.073 million euros and a net income which had a major increase from 32 million euros made in 2011 to 591 million euros en 2012, following (Henkel AG & Co. KGaA, 2012). Fortunately, with a constant increase that the company have been having from its current assets, potential investor might be tempted to follow from close the progress of Henkel. This essay is also gives Henkel AG a much closer look of some of the financial values of the company in order to explain its progress to help having a better perspective of how are the performance management being a support for its evolution to incentive even more current and potential investors. Table of content Introduction 4 Cost of Equity 5 Market Beta 7 Cost of Debt 14 Weighted Average Cost of Capital (WACC) 17 Conclusion 18 References 19 Appendix 21 Introduction Due to the current economic status quo of business markets worldwide, many companies have lost their “feet”, in other worlds, the so assured stability they thought having, consequently, suffered a significantly decrease of demand and also a certain pressure from their shareholders regarding to the measures to be taken from the company to restore its reliability towards the market. However, there are financial and accounting procedures taken...
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...and Systematic Risk Neil Garrod University of Glasgow Dusan Mramor University of Ljubljana Address for correspondence: Neil Garrod, Department of Accounting and Finance, University of Glasgow, 65-71, Southpark Avenue, Glasgow G12 8LE, Scotland, U.K. Tel: 00-44-141-330-5426 e-mail: n.garrod@accfin.gla.ac.uk On Accounting Flows and Systematic Risk Abstract The body of work that relates accounting numbers to market measures of systematic equity risk was largely undertaken in the 1970s and early 1980s. More recent proposals on changes in accounting disclosure of risk mean that a rigorous theoretical model of the relationship between accounting measures and market measures of risk is timely. In this paper such a model is developed. In addition, the assumptions required to develop the model are explicitly identified. By so doing it becomes possible to identify the potential cross-sectional differences which drive the empirical relationship between accounting and market based measures of risk. The model developed highlights a clear relationship between accounting and market measures of risk which can be exploited in situations where accounting data alone is available. It also provides a framework within which the environmental factors leading to cross-sectional differences between companies can be further explored. On Accounting Flows and Systematic Risk I. Introduction ...
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...Risk Management Analysis for Air NZ Abstract Recent financial theories argued firms can increase their values through hedging by reducing taxable income, agency cost and the cost of financial distress. This report provides a qualitative and quantitative analysis of corporate risk management for the company Air New Zealand. We uses a time series OLS regression model. The fair value of derivatives is used as dependent variable to measure the extent of financial instrument usage. The result shows that the use of derivatives by Air NZ fails to add value to the company. FINA781 Report Page 1 1. Introduction Air New Zealand Limited is the national airline and flag carrier of New Zealand. Based in Auckland, New Zealand, the airline operates scheduled passenger flights to 56 destinations locally and internationally. Air New Zealand is a member of the Star Alliance global airline alliance, having joined in 1999. Air New Zealand originated in 1940 as Tasman Empire Airways Limited (TEAL), a flying boat company operating trans-Tasman flights between New Zealand and Australia. TEAL became wholly owned by the New Zealand government in 1965, whereupon it was renamed Air New Zealand. The airline was largely privatized in 1989, but returned to majority government ownership in 2001 after a failed tie up with Australian carrier Ansett Australia. As of 2008, Air New Zealand carries 11.7 million passengers annually. Do hedging create firm value has been a popular topic argued through...
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...Identify risks to agency operations Task 1 Find a newspaper/magazine/internet article that relates to one of the risks to agency operations (economic, financial, social, technology, human behaviour, occupational health and safety, legal, political, social, property and equipment, environmental and natural events). Using the table below, say how the subject of the article will possibly affect the business, it’s likelihood, consequences, level of risk and what steps could be taken to minimise or transfer the risk: |Newspaper/magazine/internet article: | | | |Business risk is the risk which is associated with core business activities, for example, Demand creation, supply, operations, production, raw | |material procurement etc. If an organization fails to properly manage these activities then the probability of impact of these failures on revenue| |becomes too high and the business can loose some part of its sales. Due to lower revenue the profits of business gets negatively impacted, | |particularly in case where Fixed Cost is very high the magnitude will be very high. | |while on the other side, financial risk is associated with the debt level...
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...CHAPTER 9 RISK AND RETURN FOCUS Our initial focus is on defining risk in financial terms and understanding how that concept fits into portfolio theory. As we gain a more sophisticated understanding of risk, we're able to focus on the concept of beta and how to apply it through the SML. PEDAGOGY The study of Risk and Return presents the biggest pedagogical challenge in basic finance. Therefore motivating the study and developing ideas patiently is especially important. Students are easily confused early in the discussion by the transition from the everyday notion of risk to its financial representation as variation in return. We therefore take pains to present these ideas carefully through an intuitive illustration. Risk and Return is also the area in which textbook treatments using mathematical statistics get students who aren't good at math into the most trouble. The approach used here presents statistical concepts graphically and in words to overcome this pedagogical roadblock. It's worth noting that while we minimize the statistics used in the theoretical development of the CAPM, we don't skimp on the algebraic math required to apply the SML. TEACHING OBJECTIVES Instruction should begin motivating the study of risk and return by explaining that higher long-term returns are available on equity than on debt but that there's an associated risk. Point out that the objective of investing is to take advantage of the high...
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...Risk and Return Concepts Prepared by: JQY Risk and Return Concepts • Measures of risk and returns • Portfolio risk and returns • CAPM Return – what is earned on an investment: the sum of income and capital gains generated by an investment. Risk – possibility of loss; the uncertainty that the anticipated return will not be achieved. Risk and Return? If you have PHP 1,000,000, will you invest in: 5% 20% Risk and Return General Rule of Thumb: More Risk = More Returns Less Risk = Less Returns It depends on the investor: Risk Seeking – prefers high risk investments Risk Neutral – willing to take on moderate risk Risk Averse – conservative, unwilling to take on high risk investments unless the returns justify and compensates for the high risk taken. Relative Risk & Returns of Asset Classes Source: http://www.weblivepro.com/articles/cpp/cppinfo.aspx Measures of Returns • Historical Returns ▫ Holding Period Return ▫ Alternative Measures Arithmetic Mean Geometric Mean Harmonic Mean • Expected Returns Measuring Historical Returns • Holding Period Return ▫ Total return on an asset or portfolio over the period during which it was held ▫ HPR = MV1 – MV0 + D MV0 MV1 = market value, end MV0 = market value, beginning D = cumulative cash distributions (at the end of period) • Annualized HPR ▫ (1 + HPR) ^ 1/n – 1 Measuring Historical Returns • Example: Mr. A bought an asset in 2005 for P100. He kept it...
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...ADVANCED INVESTMENTS Risk & return A1. Agents prefer more over less (nonsatiation). A2. Agents dislike risk (are risk averse). How should investors, given their preferences, invest their money? (normative) What can we say about how the market and (how its participants) actually operates (and invest)? (descriptive) Both revolve around the risk/return relationship and interact: information about how markets work influences investment decisions, which influences the market in its turn. The amount matters (mean and variance) and the relation with other factors (covariance) matters. , x = return distribution (magnitude), p = price, E = expectation (which captures and combines the probability that different outcomes can/will happen) and m = SDF and captures the relation with other factors and the reward required to bear the risk inherent in x (it indicates how much (marginal) utility the outcome has, which captures the role of when we like the payoff more, the conditions matter; it captures the premium needed for this specific risk). The SDF can be derived from the utility function, this gives: . The problem with this is determining marginal utility. In many cases, the SDF is a linear function of a factor (CAPM): That factor f captures when returns in situation A may be more pleasant than the same returns in situation B. Portfolio theory (Risk & return: theory – empirics) Uses assumption A1 and A2, and more: Investors: A3. Agents maximize utility...
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...University of Florence Faculty of Economy Master’s Degree in Bank, Insurance and Financial Markets Thesis in Applied Statistics for Banks and Insurances Credit Risk Models: Single Firm Default and Contagion Default Analysis Supervisor: P rof essor Fabrizio Cipollini Student: Marco Gambacciani Academic Year 2009/2010 Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Structural Models 1.1 Terminal Default . . . . . . . . . . . . 1.2 First Passage Models . . . . . . . . . . 1.2.1 The Black and Cox’s Model . . 1.2.2 Longstaff and Schwartz’s Model 1.2.3 Leland and Toft’s Model . . . . 1.2.4 Zhou’s Model . . . . . . . . . . 1.2.5 Random Threshold Model . . . 2 5 5 11 11 15 19 24 30 35 36 39 41 45 48 50 51 56 67 76 77 79 79 82 83 84 94 114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Modelli reduced form 2.1 Approach With An Homogenous Poisson Process . . 2.2 Approach With a Non-Homogenous Poisson Process 2.3 Approach with a Cox’s Process . . . . . . . . . . . . 2.4 Bond and Spread Valuation . . . . . . . . . . . . . . Models For The Correlation Between Defaults 3.1 Bottom-Up Models . . . . . . . . . . . . . 3.1.1 Structural Apporach . . . . . . . . 3.1.2 Intensity Models Approaches . . . 3.1.3 Approaches with...
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... |04 | |04 |Common Ways of Risk Handling |05-06 | |05 | |07-09 | | |Risks associated in Banking Services | | |06 |Bank Risk Management Systems |09-21 | |07 |Insurance Coverage |22-25 | |08 |Bibliography |26 | Executive summary The report has been prepared as a mandatory requirement of our course F-636 (Risk Management and Insurance). It is the summarized outcome of what we have learned till now in the sectors of managerial risk and insurance coverage. Executive summary present the clear vision of the report with different titles. I have divided the whole assignment into two major parts. First part shows how organization deals different types of risks and the second part shows different types of insurance...
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...WACC calculation? Why or why not? Answer: The cost of capital refers to the maximum rate of return a firm must earn on its investment so that the market value of company's equity shares will not drop. This is a consonance with the overall firm's objective of wealth maximization. WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC of a firm is a very important both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and will create positive net present value for stock owners. Thus, since the WACC is the minimum rate of return required by capital providers, the managers in the company should invest in the projects which generate returns in excess of WACC. We do not agree with Joanna Cohen’s calculation regarding the WACC from 3 aspects: 1) When Joanna Cohen computed the weights or proportions of debt and equity, she used the book value rather than the market value. The...
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