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Measuring Financial Cash Flow and Term Structure Dynamics
in Turbulent Global Markets
-- Cornelis A Los
Financial turbulence is a phenomenon usually occurs in anti-persistent markets. In contrast, financial crises tend to occur
in persistent markets. A relationship can be established between these two extreme long memory phenomena and the older
financial concept of (il-)liquidity. The measurement of the degree of market persistence and the measurement of the degree of
market liquidity are related. To accomplish the scientific research objectives of measurement, analysis and simulation of different
degrees of financial liquidity in the financial markets, this paper proposes to reformulate and reinterpret the classical laws of
fluid mechanics into financial cash flow mechanics. The end results of these reformulations and reinterpretations are useful,
and often already familiar, quantifiable financial quantities, which will assist in the measurement, analysis, and
proper characterization of modern dynamic financial markets in ways that classical comparative static financial-economic
analyses simply do not allow. The motivation for this study is directly derived from the currently increased turmoil in the globally
linked financial markets, caused by the valuation adjustments emerging from the sharply adjusting residential housing markets,
which are transmitted with increased speed via the swap markets, in particular the Credit Default Swap (CDS) markets.
© 2008 IUP . All Rights Reserved.
Fair Price Estimation of Basket Default Swap: Evidence
from Japanese Market
- - Fathi Abid and Nader Naifar
The aim of this paper is to estimate the fair spread of reconstituted basket credit default swap using Japanese market
data. The value of these instruments depends on a number of factors including credit rating of the obligors in the basket,
recovery rates, intensity of default, basket size, and the correlation of obligors in the basket. A fundamental part of the pricing
framework is the estimation of the instantaneous default probabilities for each obligor. As default probabilities depend on the credit
quality of the considered obligor, well-calibrated credit curves are a main ingredient for constructing default times. Similarly, the
choice of copula for modeling the correlation of obligors in the basket and the choice of procedures for rare-event simulation
govern the pricing of basket credit derivatives. The study has several practical implications that are of value to the financial
hedgers and engineers, financial regulators, government regulators, central banks, and financial risk managers.
© 2008 IUP . All Rights Reserved.
Operational Risk Management Framework
at Banks in India
- - B S Bodla and Richa Verma
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events. In recent years, failure of the banks due to operational risk has compelled the policymakers (Basel and the RBI, in
India) to devise prudent risk management mechanism. In this regard, the RBI had issued guidelines on operational risk
management on October 15, 2005. This paper is designed to study the implementation of the risk management framework and
operational risk management framework by the commercial banks. To achieve the objective, a primary survey was conducted. The
results show that irrespective of sector and size of bank, the risk management and the operational risk management framework of
banks in India are on the right track and they are based on the RBI's guidelines issued in this regard. Many banks have set up
risk management committees for the management of risks (credit, market, and operational). Credit risk is the most important
risk faced by the schedule commercial banks in India. In order to manage the operational risk, many banks have designed
operational risk management framework on the lines of Basel Accords. The `board of directors' and `operational risk
management committees' are responsible for the management of this risk in many banks, and the task of identification and assessment
of operational risk in many banks is based on the experience of bankers. As per the RBI guidelines, banks in India are
following Basic Indicator Approach (BIA) for operational risk capital charge calculation.
© 2008 IUP . All Rights Reserved.
Credit Risk Models for Managing Bank's Agricultural
Loan Portfolio
- - Arindam Bandyopadhyay
This paper develops a credit scoring model for agricultural loan portfolio of a large public sector bank in India and
suggests how such a model would help the bank to mitigate risk in agricultural lending. The logistic model developed in this study
captures the major risk drivers in agricultural loan portfolio and designed to be consistent with Basel II, including consideration
given to forecasting accuracy and model applicability. The significant risk factors are facility type, cropping pattern,
borrower characters, cost of living, regional locations and collateral/security type beside borrowers' financial capacity and leverage
position. The study also shows how agricultural exposures can be typically managed on a portfolio basis which will not only enable
the bank to diversify the risk and optimize the profit in the business, but also will strengthen banker-borrower relationship
and enables the bank to expand its reach to farmers because of transparency in loan decision making process.
©
2008 IUP . All Rights Reserved.
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