...Brief Introduction of Financial Risk Management Financial risk management is an interdiscipline with various researching subfields including the studies of mathematical methods to maximum the profits, quantitative analysis of financial databases and investment decisions. In other words, it is aimed to bridge the gap between mathematical theories and practical financial analysing tools (Nawrocki 1999). It could also be defined as“Living with the possibility that future events may cause adverse effects” (Kloman 1999). Risk and profit are always an integral. The variety of risks including portfolio risk, credit risk and liquidity risk became a financial conundrum which equalled to a group of destructive nuclear bombs hidden in the monetary market. Consequently, the risk management represents the core competence in insurance and banking industries. With the innovation of IT technology, more advanced computer software has been introduced in financial area which results that the risk management has made impressive strides in last decade. As the academic field mature constantly, the abstract mathematical and statistic concepts reifies to accessible programs which could predict the trends of investment returns, for example, the expected earnings at the end of next week after buying certain amount of stock at next Monday (Chapman 1996, iv). The origin of risk management could date back to the game theories introduced by two French mathematicians...
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...8. Timetable 9 9. Problems of the Fact 10 10. Conclusion 10 11. Reference 11 12. Appendix 12 Abstract Commercial Banks are the most dominant financial institutions in the domain of commerce and industry. The efficiency of commercial banks is dependent on their ability to mobilize fund profitability, which can enhance their corporate value. There can be few, if any, parts of the economy in which risk management is more important than the financial sector. Financial institutions account for a sizeable number of the world's leading companies and have a critical role to play in the economics of every country and thus in world economic order as a whole. The research will be focusing on the case study method by interviewing the concerned person that will provide detailed analysis of such Bangladeshi commercial banks of the country as their business operation is being centered on taking risks in conditions of uncertainty. The process with such focus on how outcomes relate to effective risk management will be deemed important. The results should achieve in answering such issues and problems presented based on research findings and information researches to support whatever data is gathered respectively. In this research we shall try to focus on how risk management i.e. firms’ financial valuation to its customer and management to added corporate value, may...
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...same way. Nevertheless, a good relationship with their lead regulator is vital to its success. Therefore, most of the banks’ design of internal risk management systems will reflect in terms of the core elements, the risk evaluation process used by the regulator. Q - What does the «three lines of defence» model involve? * The Business - It’s accountable for the ownership and day-to-day management and control of operational risk. Responsible for implementing processes in compliance with group policies. * Operational Risk – Implementation and maintenance of the operational risk framework, tools and methodologies. * Group Internal Audit – Providing independent assurance on the design, adequacy and defectiveness of group’s system of internal controls. Q - How are risk exposures measured within RBS? What are the main limitations of the measurement techniques used by the bank? It’s usually the Group of Directors who set the overall risks appetite and philosophy and they all participate in discussing the strategy, performance and the financial risk management of the organization. This kind of system brings some disadvantages as the CEOs may dominate decision-making. There might be a high degree of cynicism among the investors about the statements of risk management that appear in the annual reports. Q - Which are the key risk...
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...different outcomes, risk and how to manage it has become a critical issue. The recent global financial crisis served as a reminder that risk management and how the same is practiced is fundamental if performance objectives are to be consistentlyachieved. It has emerged that as business owners and managers strive to improve and sustain performance they are now also required to consider what risk management practices their organizations have adopted to avoid falling short of their strategic objectives. This is even more so in the financial services sector which was the most affected during the recent financial crisis. The objectives of this study were to analyze the risk management practices undertaken by Commercial Banks in Kenya and to determine and assess the effect of these risk management practices on their financial performance. The risks facing financial institutions are mainly classified into; strategic, operational, credit and market risks. In managing these risks, the risk management approach adopted by the owners and/or management was influenced by the organizational culture and support, whether or not risk management is integrated in the setting of organizational objectives, whether there is a documented risk management policy or framework, how the risk identification process is conducted, the risk analysis process, evaluation and treatment of risk; risk monitoring and review; and last but not least ensuring that there is effective risk management. In order to carry out...
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...LONDON SCHOOL OF BUSINESS AND FINANCE CREDIT RISK MANAGEMENT OF NON-BANKING FINANCIAL INSTITTUTION IN GHANA (A CASE STUDY OF TF FINANCIAL SERVICES) BY STEPHEN KWADWO NTIRI A Thesis Submitted to the London School of Business and Finance in Partial Fulfilment of the Requirement for the MBA Degree in Financial Services MARCH 2010 DECLARATION I Stephen Kwadwo Ntiri hereby declare that except for references to other people’s work, which have duly been acknowledged, the work presented here was carried out by me, MBA student of Financial Servies at the London School of Business and Finance (LSBF), under the supervision of Randolph Metz-Johnson. I also declare that this work has never been submitted partially or wholly to any other institution for the award of a certificate. …………………………………………… ……………... Stephen Kwadwo Ntiri Date (Student) ………………………………………… …………… Randolph Metz-Johnson Date (Supervisor) Dedication This research project is dedicated to Almighty God for His abundant blessings and protection given me throughout this study, and also to my family for the support I received from them. Acknowledgement I am most grateful to Almighty God who through His infinite mercy and love guided me throughout the duration of the programme. I wish to acknowledge the help and encouragement I got from the entire staff of TF Financial Services, especially Mr. Benjamin Turkson, which has enabled me to complete this work. I also want to thank my wife, Esther Yamoaba...
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...The Implications of Risk Management Information Systems for the Organization of Financial Firms Michael S. Gibson* Federal Reserve Board Abstract Financial dealer firms have invested heavily in recent years to develop information systems for risk measurement. I take it as given that technological progress is likely to continue at a rapid pace, making it less expensive for financial firms to assemble risk information. I look beyond questions of risk measurement methodology to investigate the implications of risk management information systems. By examining several theoretical models of the firm in the presence of asymmetric information, I explore how a financial firm’s capital budgeting, incentive compensation, capital structure, and risk management activities are likely to change as it becomes less costly to assemble risk information. I also explore the likely effects of the falling cost of assembling risk information on a financial firm’s organizational structure. Two common themes emerge: centralization within the firm and increased disclosure of risk information outside the firm are both likely to increase. 1 Introduction Financial dealer firms have invested heavily in recent years to develop information systems for risk measurement and management.1 These systems gather data on a firm’s risk positions and compute statistical measurements, such as Value-atRisk, to assess the magnitude of the risks faced by the firm. Increasingly, the uses of these...
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...How Corporations use Risk Management to Influence Financial Decision Making Holman Skinner Keiser University Dr. Tim Drake Business Research Writing: DBA700 10/16/2012 How Corporations use Risk Management to Influence Financial Decision Making Introduction Corporations make financial decisions that pose a risk to the everyday operations of a business everyday. Risk management comes into play with financial decisions when it is important to enabling organizations to reduce exposures to financial decision making, and measuring risk throughout the organization (Lai, Wang, & Yu, 2009). This research study will focus on the topic of how corporations use risk management to influence financial decision making. This research will answer the research problem, research questions, address the theoretical framework. Statement of Problem The problem the study focuses is centered on focuses on how corporations can avoid making bad decisions when ultizing utilizing risk management in making financial decision making. For instance, some corporations not taking risk management seriously has resulted in inefficient use of capital, increased liabilities, and reputation risk (Chemobai, Jorion, & Yu, 2011). Furthermore, when a firm is not willing to go through risk management, this will create an uncertain atmosphere that leads to lack of guidance for the organization and poor decision making. Moreover, a lack of certainty can cause confusion as to what...
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...Effectiveness of Credit Risk Management on the Financial Performance of Philippine Universal Banks Marylet H. Ilagan Master in Business Administration Lyceum of the Philippines University-Batangas Effectiveness of Credit Risk Management on the Financial Performance of Philippine Universal Banks Banks are considered to be in the business to safeguard money and other valuable of the clients; provide loans, credit and payment services; and even offer investment and insurance products. This financial institution is also critical in handling and surviving different types of risks. The issue on credit risk has greater concern on the level of perceived risk from business conditions, since this risk most likely prompts bankruptcy. The turmoil in the banking industry highlights the effectiveness of credit risk management. Credit risk management is a structured approach to managing uncertainties through risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources (Achou & Tenguh, 2008). Its quality is the main indicator of the bank’s financial soundness. Boahene et all (2012) stressed that default of loans and advances shows serious setbacks not only for borrowers and lenders but also to the entire economy of a country. Studies of banking crises all over the world have shown that poor loans (asset quality) are the key factor of bank failures. In one of the published...
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...ESSENTIALS of Financial Risk Management Karen A. Horcher John Wiley & Sons, Inc. ESSENTIALS of Financial Risk Management Essentials Series The Essentials Series was created for busy business advisory and corporate professionals. The books in this series were designed so that these busy professionals can quickly acquire knowledge and skills in core business areas. Each book provides need-to-have fundamentals for those professionals who must: Get up to speed quickly, because they have been promoted to a new position or have broadened their responsibility scope • • Manage a new functional area • Brush up on new developments in their area of responsibility • Add more value to their company or clients Other books in this series include: Essentials of Accounts Payable, Mary S. Schaeffer Essentials of Balanced Scorecard, Mohan Nair Essentials of Capacity Management, Reginald Tomas Yu-Lee Essentials of Capital Budgeting, James Sagner Essentials of Cash Flow, H. A. Schaeffer, Jr. Essentials of Corporate Performance Measurement, George T. Friedlob, Lydia L. F. Schleifer, and Franklin J. Plewa, Jr. Essentials of Cost Management, Joe and Catherine Stenzel Essentials of Credit, Collections, and Accounts Receivable, Mary S. Schaeffer Essentials of CRM: A Guide to Customer Relationship Management, Bryan Bergeron Essentials of Financial Analysis, George T. Friedlob and Lydia L. F. Schleifer Essentials of Financial Risk Management, Karen A. Horcher ...
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...Foreign Exchange Risk Management Michael Highfill Liberty University BUSI 620 – B05 LUO Dr. Mike Thirtle July 6, 2012 Foreign Exchange Risk Management Introduction Foreign exchange (FX) is a risk factor that must be considered by all firms that wish to enter, grow, and succeed in the global marketplace. Although most U.S. exporters prefer to sell their goods in U.S. dollars, creditworthy foreign buyers are increasingly demanding to pay in their local currencies (“Foreign Exchange Risk Management”, n.d.). Therefore, this currency exchange adds risk to any global trade that must be accounted for and managed, for a firm to remain competitive in the global marketplace. Definitions Foreign Exchange Risk Before we begin our discussion, we must define a working definition of foreign exchange risk. Global commerce is facilitated through foreign exchange markets. These markets affect global commerce in two ways. First, importers exchange their domestic currency for foreign currency, in order to purchase international goods. Second, multinational companies exchange profits earned in foreign currencies for domestic currency to use in their home nation. The foreign currency exchange market is made up of corporations, governments, and private individuals who trade international currencies among themselves (Bofah, n.d.a). The exchange rates for currency pairs such as the United States (U.S.) dollar and the Euro (USD/EUR)...
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...JONATHAN MUROMBA 2012178104 FINANCIAL RISK MANAGEMENT Management of Financial Institutions and The Banking Crisis Risk is uncertainty. The more risk one takes, the more he or she stands to lose or gain. One cannot expect high returns without taking substantial risks. The outcomes are thrown open to uncertainty. In general, when we talk about risk, we focus on financial risk. In financial terms, it is the risk that a company or individual could lose some or all of the original investment, possibly resulting in inadequate cash flow to meet financial obligations. All wise investments follow risk consideration. To be successful, every investor must be able to identify and understand the types of risk they face across their entire portfolio. Therefore, risk can present great opportunities for those who understand and know how to manage it. Advances in risk management theory have had a tremendous impact on global economic development. Now there are powerful ways to analyze risks and make stable decisions about the future. We can identify and measure different types of risk, and decide which ones to take and which ones to avoid and it is of paramount importance to take note that if if not properly managed, risks can lead to disastrous outcomes or even to the demise of institutions In the United Kingdom (UK), the repercussions of the banking crisis affecting the financial sector became an issue of a wider economy. In January 2009, it was confirmed that the UK officially entered...
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...NBER WORKING PAPER SERIES FINANCIAL RISK MEASUREMENT FOR FINANCIAL RISK MANAGEMENT Torben G. Andersen Tim Bollerslev Peter F. Christoffersen Francis X. Diebold Working Paper 18084 http://www.nber.org/papers/w18084 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2012 Forthcoming in Handbook of the Economics of Finance, Volume 2, North Holland, an imprint of Elsevier. For helpful comments we thank Hal Cole and Dongho Song. For research support, Andersen, Bollerslev and Diebold thank the National Science Foundation (U.S.), and Christoffersen thanks the Social Sciences and Humanities Research Council (Canada). We appreciate support from CREATES funded by the Danish National Science Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2012 by Torben G. Andersen, Tim Bollerslev, Peter F. Christoffersen, and Francis X. Diebold. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Financial Risk Measurement for Financial Risk Management Torben G. Andersen, Tim Bollerslev, Peter F. Christoffersen, and...
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...TABLE OF CONTENTS QUESTION 1 2 QUESTION 2 3 QUESTION 3 4 QUESTION 4 5 QUESTION 5 6 QUESTION 1 The investor is entering into a short forward contract to sell 100,000 British pounds (GBP) for U.S. dollars (USD) at an exchange rate of of 1.9000 USD per GBP, which means he/she has locked in the selling price 1.9000 USD per pound to be realized for the British pounds no matter what the exchange rate is in the market at the end of the contract. As a result, the investor will make a gain if the exchange rate goes down less than 1.9000 USD per pound, and make a loss if the exchange rate goes up more than 1.9000 USD per pound at the end of the contract, as the investor need to buy the GBP at the spot price (market price) to fulfill his/her contractual obligation. Therefore, if a) at the end of contract, the exchange rate is 1.8900USD, the investor makes a gain 100,000 GBP*(1.9000-1.890) = 1,000 USD out of the contract. b) at the end of the contract, the exchange rate is 1.9200USD, the investor makes a loss 100,000 GBP * (1.900-1.9200)= -2,000 USD by entering the forward contract. QUESTION 2 Total Profit calculation as following: Oct. 24, 2009, Sell April 2010 futures price=$0.912 per pound; Jan.21, 2010, Close out its position at price=$0.883 per pound; Contract size=40,000 pounds of cattle per contract This leads to a profit of 40,000* (0.912-0.883) = $1,160 The tax treatments are different for a hedger and...
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...Chapter 1 Introduction http://www.educba.com/commodities-market/?lang=nl Two ways to invest: • Option: you have the right to buy or sell something. • Future: is a forward contract. The quantity and price is predetermind. Derivatives exchange (derivatenbeurs) is a market where individuals trade standardized contracts that have been defined by the exchange. Open outcry system: traders physically meeting on the floor of the exchange. Elektronic trading: traders entering their desired trades at a computer. The over-the-counter market is an important alternative to exchanges and measured in terms of the total volume of trading. It is a telephone and computer linked network for dealers. Forward contract is an agreement to buy or sell an asset at a certain future time for a certain price. Spot contract is an agreement tot buy or sell an asset today. One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. See figure 1.2 Future contract is an agreement between two parties to buy or seel an asset at a certain time for a certain price. Futures are normally traded on an exchange. Options are traded both on exchanges and in the over-the-counter market. A call option gives the older the right to buy the underlying...
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...Midterm Practice Problems From Review Session: 11/9/2012 Ch 8 From Chapter 8, I went over problems 8.7, 8.9 (Answers in back of the book) and problems 8.16, 8.17, which you have answers from Homework solutions. Make sure you know the duration and convexity equations, and how the bond price changes due to a change in yield/ ___________________________________________________________________________________ Ch 9 From Chapter 9, I went over problems 9.6, 9.9, 9.10 (Answers in the back of the book) and 9.13. VaR problems in my mind break down into three parts: Normally distributed, the “stair cummulative dist function”, and the autoregressive model. Be familiar with how to solve all three. 9.13. Suppose that daily changes for a portfolio have first-order correlation with correlation parameter 0.12. The 10-day VaR, calculated by multiplying the one-day VaR by , is $2 million. What is a better estimate of the VaR that takes account of autocorrelation? The correct multiplier for the variance is 10 + 2 × 9 × 0.12 + 2 × 8 × 0.122 + 2 × 7 × 0.123 + . . . + 2 × 0.129 = 10.417 The estimate of VaR should be increased to = 2.229 _________________________________________________________________________________ Ch 10 From Chapter 10, I went over 10.11, 10.12 (Answers in Book). While many of the formulas here look complicated, when it comes down to it, many parts of these questions in the book are just “plug-and-chug” questions. Here is 10.21 in case you tried it out for...
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