...Thesis for the Degree of Master of...? INCORPORATING LIQUIDITY RISK INTO VAR MODEL TO IMPROVE RISK MANAGEMENT AND APPLYING THE LIQUIDITY ADJUSTED VALUE AT RISK MODEL ON VIETNAMESE STOCK MARKET Student: Ten truong: Ten khoa hoc: September, 2012 INCORPORATING LIQUIDITY RISK INTO VAR MODEL TO IMPROVE RISK MANAGEMENT AND APPLYING THE LIQUIDITY ADJUSTED VALUE AT RISK MODEL ON VIETNAMESE STOCK MARKET by student Avised by Ten giao su Submitted to Ten khoa of Ten truong in the partial fulfilment of the requirements for the degree of Master of ...? Dissertation Committee ...Ten thanh vien hoi dong ABSTRACT In this paper, based on Bangia et. al (1999) Liquidity Adjusted Value at Risk, an explanation and demonstration for the importance of integrate liquidity risk component into Value at Risk Model are presented. The component is considered to be resulted from the exogenous liquidity risk, indeed, the bid-ask spread of a stock or a portfolio. This research is conducted from the analysis of an estimation of Value at Risk (VaR) and Liquidity adjusted Value at Risk for two portfolios containing stocks that are currently trading on Vietnamese Stock Market. After applying the Bangia Model to calculate, the backtesting will be executed to check the accuracy level of the results. The difference between the results of two portfolios, according to separate approaches will be the evidence to reach the conclusion of the research. Table of Contents List of...
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...LIQUIDITY MANAGEMENT 2.0 OBJECTIVES: In this unit, an attempt has been made to understand the following aspects of liquidity management: ● Definition of Liquidity ● Dimensions and Role of Liquidity Risk Management ● Measuring and Managing Liquidity ● Measurement of Liquidity through Ratio Analysis 2.1 INTRODUCTION: The objectives of ALM are two fold: ensuring profitability and ensuring liquidity. Liquidity which is represented by the quality and marketability of assets and liability exposes the organization to liquidity risk. Unlike other risks like interest rate risk, market risk, operational risk etc. that can threaten the very solvency of the bank, liquidity risk is a normal aspect of every day management of a financial institution. In extreme cases, liquidity problems translate into solvency risk problems. As such, bankers should be more aware of the need for bank liquidity. 2.2 DEFINITION: Banks need liquidity to meet deposit withdrawals and to fund loan demands. The variability of loan demand and variability of deposit determine a bank’s liquidity needs. Liquidity represents the bank’s ability to accommodate decreases in liability and to fund increases in assets. A bank is said to have sufficient liquidity when it can obtain sufficient funds either by increasing liabilities or by converting assets, promptly at a reasonable cost. 2.3 DIMENSIONS & ROLE OF LIQUID & RISK MANAGEMENT: Bank’s liquidity management is the process of generating...
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...1. Introduction 3 2.Company Profile- Brief Overview 3 2.1 Consumer banking: 6 3. Liquidity Risk: 7 3.1 Measuring Liquidity Risk –SCB 7 3.2 Measuring Credit Risk Exposure 10 3.3 Market Rate Risk 11 3.4 Value at Risk (VaR) 12 4. CAMEL RATING SYSTEM 13 1. Executive Summary International Banking can be defined as banking transactions crossing national boundaries. The activities involves like international lending; claims of domestic bank offices on foreign residents, claims of foreign bank offices on local residents, claims of domestic bank offices on domestic residents in foreign currency are the major activities involved in International Banking. The evolution of banking history dates back to 2000 BC in Assyria and Babylonia; while the modern banking systems originated in Renaissance Italy. The major incentive for the growth of international banking was migration of domestic customers who were MNE’s growing foreign activities and the impacts of regulatory differences. The report is comprised of Liquidity risks, market risks, credit risks of Standard Chartered Bank Plc. The company also demonstrates the firm efficiency of the firm using CAMEL RATING SCALE. The overview of the analysis states that the firm is operating proficiently under the guidelines of BASEL. Introduction According to Lewis & Davis (1987, p. 219), international banking is a denotation of cross-border and cross currency facets of banking business. They classify international banking into...
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...bank? What is Open Market Operation (OMO) of RBI? What is base rate of a bank, how it is different from BPLR (Banks Prime Lending Rate). What is Credit rating and how it helps banks in credit appraisal of company. What is the process of the credit rating? If client approaches you for a project loan than how you are going to assess the credit worthiness of the client (important ratios use for credit appraisal) dead services coverage ratio, interest coverage ratio, etc. If you are working with a bank then are the important ratios for credit appraisal? What are your strengths weakness for your banking jobs? Do your SWOT analysis for a bank job. What are the main functional areas in a bank for finance professionals (treasury related jobs, risk management, credit appraisal, loans indication, merchant banking). What is IRR, how it is used for project appraisal by a bank? What is loan indication? How it is done. What is under writing in this process? What is non-fund based financing by a bank, how it is different from fund based financing while analyzing the balance sheet of our bank, where we can see the details of non-fund based financing by the bank. How to analyze the balance sheet of our bank (financial performance of a bank, what are the...
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...EBB20603 RISK MANAGEMENT IN ISLAMIC FINANCIAL INSTITUTIONS DR. FEKRI ALI MOHAMMED SHAWTERI (IF70) REPORT CIMB ISLAMIC BANK BERHAD REPORTED BY: Nur Atteya Amanda binti Amirudin 62289214273 Syamimi Fatihah binti Mohd Sobri 62289214372 Nur Aizat binti Mun 62289214006 Norhafiza binti Alalguring 62289214119 Noor Rahimah binti Abdul Rauf 62289214281 TABLE OF CONTENTS NO | TOPIC | PAGES | 1.0 | Introduction | 3 | 2.0 | Bank Profile | 5 | 3.0 | Financial Analysis | 7 | 4.0 | Credit Risk | 14 | 5.0 | Liquidity Risk | 24 | 6.0 | Operational Risk | 27 | 7.0 | Market Risk | 30 | 8.0 | Shariah Risk | 34 | 9.0 | Capital Requirement | 36 | 10.0 | Conclusion | 39 | 11.0 | References | 39 | 1.0 INTRODUCTION CIMB Islamic was officially launched by Malaysia’s Bank Negara Governor Tan Sri Dato' Dr Zeti Akhtar Aziz in June 2003. Since then, CIMB Islamic has won numerous accolades for its innovative Shariah-compliant solutions. It providing the consumer market with an Islamic alternative for deposit accounts and financing. CIMB Islamic offers a range of deposit and investment products to help manage business cash flow and cash reserves more effectively such as Wadiah Current Account-I, Fixed Return Income Account-I, and Special Investment Account-I. The money will only be invested in Shariah-Compliant activities. In the context risk, risk refers to the probability of loss. Risk actually elucidates the probability that an actual return on an investment will be lower...
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...Cash Management Policy Lawrence Sports can reduce future difficulties by improving productivity of cash flows and monitoring market securities. This can be done by implementing a cash management policy that will work to ensure there is enough cash for transactions and also ensure there are not excess amounts of cash. The policy will establish sound cash management practices, allowing for the efficient application of cash, consistent with Lawrence Sports company objectives. Reviewing cash balances and adjusting appropriation drawdowns will be done so on a regular basis. Market securities will be considered because they too are liquid in terms of funds and can be moved quickly and cheaply (Emery & Finnerty, 2007). A working cash limit will depict the maximum amount of cash that is necessary to meet commitments that are associated with regular payments. The financial officer will be responsible for monitoring account activity and balances so there is enough cash to meet company obligations as they become due. Reviewing balances and adjusting appropriation drawdowns will be done so on a regular basis. The policy will also work to maintain adequate financial booking hence cash related transactions will be recorded and approved by those individuals delegated for making approvals. Lawrence sports must work to process cash disbursement transactions promptly and also reconcile all cash daily. Evaluation of the Risk The learning team recommends Lawrence Sports use the cash management...
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...A Treasurer's Guide to Money Market Funds 2012 The World Behind Fitch’s MMF Ratings by Charlotte Quiniou, CFA, Director in Fitch Ratings Fund and Asset Manager Rating Group Fitch money market fund (MMF) rating is far more than just a stamp on a fund. Its value for investors comes from the depth and breadth of the underpinning rating analysis and process. A key component of a Fitch MMF rating is also the regular, independent surveillance performed by Fitch’s analysts, which supports ongoing dialogue with fund managers, so that systematic mechanical reactions are avoided. To better serve investors, Fitch provides information on rated MMFs and developments in the money market industry, notably based on MMF surveillance information, through freely available periodic publications and online tools. A Disciplined procedures ensure consistency Fitch conducts analysis and assigns ratings on MMFs following a consistent, disciplined process that is applied globally. The diagram in Figure 1 provides a summary view of the major steps followed by Fitch when assigning or reviewing a MMF rating. At the start of the rating process, each MMF is assigned to a group of two analysts: the primary (or lead) analyst, and the secondary (or back-up) analyst. Analysts are responsible for leading the analysis and formulating a rating recommendation. The primary analyst is typically responsible for the continuous surveillance of the rating, once it has been assigned, and maintaining the...
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...Financial Risk: Key Fundamentals and Case Studies Leonard Chumo, CFA, FRM Strathmore University GARP Chapter Meeting 29th July 2011 Agenda 1. Background 2. Credit Risk and the Case of Washington Mutual 3. Operational Risk and the Case of Rogue Brokers in Kenya and Barings 4. Market Risk and the Case of LTCM 5. Liquidity Risk and the Case of Northern Rock 6. Q&A BACKGROUND Main Types of Financial Risk Risk Type Definition Credit Risk The potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Market Risk The risk that movements in market prices will adversely affect the value of on- or off-balance sheet positions. The risk is attributable to movements in interest rates, foreign exchange (FX) rates, equity prices or prices of commodities. Operational Risk Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The definition includes legal risk, but excludes reputational and strategic risk. Liquidity Risk Liquidity is the ability to fund increases in assets and meet obligations as they become due. It is crucial to the ongoing viability of any organization. Source: Financial Stability Institute CREDIT RISK AND THE CASE OF WASHINGTON MUTUAL Sources of Credit Risk Apart from traditional types of loans, credit risk can also be found in a bank's: Investment portfolio ...
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...Institutional Asset and Liability Management Group Assignment Words counting: Executive Summary The purpose of this report is to critically evaluate that Bank of Queensland’s liquidity and credit risk management during 2000 and 2010. The report first deals with liquidity risk. It starts with analysing liquidity risk by using various ratios such as quick ratio, financing gap etc. It then followed by evaluate the management of liquidity risk within 11years respectively. After comparing the actual ratio and real management, recommendations are provided. Similar analysis to credit risk, it is first analysed through expert system, loan credit rating and derivative financial instruments to evaluate BOE’s credit risk management. Finally, recommendations for improving risk management are provided. Most information we obtained from the company annual reports, bank homepages, textbook and relevant database such as Finanalysis and Bankscope. Thus, the information we provided is reliable. Table of Content 1. Introduction……………………………………………………………………………… 5 1.1 Background of Bank of Queensland …………………………………………………5 1.2 Structure……………………………………………………………………………… 5 2. Liquidity Risk………………………………………………………………………… 6 2.1 Causes of liquidity Risk………………………………………………………………6 2.2 Measurement of liquidity risk………………………………………………………8 2.2.1 Quick ratio………………………………………………………………………… 8 ...
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...AMBIT RISK MANAGEMENT & COMPLIANCE LIquIdITy RISK – New Lessons and Old Lessons TABLE Of CONTENTS 2 3 12 14 14 14 17 19 Introduction Measuring Liquidity Risk Managing Liquidity Risk Standby Liquidity Reserve Syndication, Sales and Securitization Tactics for Liability Diversification Other Liability Management Tactics Conclusion Liquidity Risk- New Lessons and Old Lessons 2 INTROduCTION The flight to quality that began in 2007 reminded many banks of the importance of liquidity risk management. While maintaining ample liquidity for significant stresses is a costly proposition, there is a balance to be struck between short-term earnings and long-term survival. The crisis also reminded us that liquidity risk is a consequential risk. However, this time, none of the usual suspects such as credit and trading losses triggered the liquidity stresses. Instead, liquidity problems resulted from the belated recognition of risk in mortgagebacked securities which led to a massive flight to quality and, for some banks, the need to fund off-balance sheet commitments. While the initial cause of both problems was excessive exuberance in uS residential mortgage underwriting, problems quickly spread. 3 Liquidity Risk- New Lessons and Old Lessons I. MEASuRING LIquIdITy RISK In today’s complex product market, some banks have far more complex liquidity risks than others. Smaller, conservatively-run banks tend to make greater...
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..................................................................................................................................1 A. Strengthening the global capital framework ....................................................................2 1. 2. 3. 4. Raising the quality, consistency and transparency of the capital base ..................2 Enhancing risk coverage........................................................................................3 Supplementing the risk-based capital requirement with a leverage ratio ...............4 Reducing procyclicality and promoting countercyclical buffers ..............................5 Cyclicality of the minimum requirement .................................................................5 Forward looking provisioning .................................................................................6 Capital conservation...............................................................................................6 Excess credit growth ..............................................................................................7 5. B. 1. 2. 3. C. D. I. Addressing systemic risk and interconnectedness...
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...Managing Risk at Commercial Bank 1. Interest Rate Risk Interest Rate Risk (IRR) is the impact on interest income of the Bank due to possible changes in market interest rates as compared to current level. IRR constitutes the most significant component of market risk exposure of the Banking Book. Hence, the Bank monitors IRR on an ongoing basis giving due consideration to re-pricing characteristics of all assets and liabilities. Rate shocks of different magnitudes are applied to all assets and liabilities at regular intervals and the impact is monitored to ensure that the Bank’s earnings are within internally set parameters. Decisions to exceed such parameters taken at 2. Foreign Exchange Risk Foreign Exchange Risk is the possible impact on earnings and capital due to fluctuations in exchange rates. This may arise as a result of existing maturity mismatches of foreign currency positions. The Bank is exposed to foreign exchange risk, whenever it undertakes transactions in any currency other than Bank’s base currency, i.e. Sri Lankan Rupee (LKR). Risk tolerance limits for FX exposures set by the Bank, which are more stringent compared to the regulatory limits of Central Bank of Sri Lanka (CBSL) parameters, ensure that the Bank maintains the un-hedged FX positions at an acceptable level to prevent potential losses from adverse fluctuations in FX rates. The Bank is also exposed to FX Risk due to both FX...
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...Market risk management D 1) Sensitivity analysis for foreign exchange risk Foreign currency risk Foreign exchange risk arises from the movements in exchange rates that adversely affect the revaluation of the Group and the foreign currency positions. Considering that other risk variables remain constant, the foreign currency revaluation sensitivity for the Group and the Bank on their unhedged position. 1% appreciation (-) n 1% depreciation (+) Interpretation of Impact The Group and the Bank measure the foreign exchange sensitivity based on the foreign exchange net open positions (including foreign exchange structural position) under an adverse movement in all foreign currencies against reporting currency (MYR). The result implies that the Group and the Bank may be subject to additional translation (loss)/gain if MYR appreciated/depreciated against other currencies and vice versa. E) Liquidity risk management 1. Liquidity risk management overview -Liquidity management Liquidity is the ability of the Group to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. Generally, there are two types of liquidity risk which are funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that the firm will not be able to meet efficiently both expected and unexpected current and future cash flow needs without affecting either daily operations or the financial condition of the firm. Market ...
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...------------------------------------------------- ------------------------------------------------- PROFITABILITY RATIO ANALYSIS: Najmun Nahar Srity Return on Asset (ROA): ID.No.091-11-924 Figure: Return on Asset (ROA) Interpretation: ROA (Return on Asset): ROA is a indicator of managerial efficiency, it indicates how capable the management of bank has been converting the institution’s assets into net earnings. In this example, the DBBL earned in year 2010 is 1.989693165 and in 2009 is 1.39102595.The Premier Bank in year 2010 is 2.632 and 2009 is 2.2988, which means the 2010 is than the 2009 by using tk. 100 of assets. Here we see that Premier Bank is higher on ROA, SO Premier bank is better than DBBL. Return on Equity (ROE): Figure: Return on Equity (ROE) Interpretation: ROE (Return on Equity): ROE is measure of rate of return following to this bank’s shareholder. If approximates the net benefit that the stockholder have received from investing their capital in the bank. For this example, DBBL shareholders will get 2010 is 28.63057606 and 2009 is 26.1431769. The Premier Bank shareholders get in 2010 is $28.0636 and 2009 is 23.4650, which mean the...
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..... 2 Annex 1 Explanation of the NSFR common disclosure template......................................................................... 5 Annex 2 Instructions for completion of the NSFR common disclosure template ......................................... 7 Net Stable Funding Ratio disclosure standards iii Net Stable Funding Ratio disclosure standards Introduction 1. The fundamental role of banks in financial intermediation makes them inherently vulnerable to liquidity risk, of both an institution-specific and market nature. Financial market developments have increased the complexity of liquidity risk and its management. During the early “liquidity phase” of the financial crisis that began in 2007, many banks – despite meeting the capital requirements then in effect – experienced difficulties because they did not prudently manage their liquidity. The difficulties experienced by some banks arose from failures to observe the basic principles of liquidity risk measurement and management. 2....
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