These must be the darkest moments for the world financial markets. Or at least so it seems for the people born after the 1920s. And that is quite a lot of us! The first paper in this issue is directly derived from the currently increased turmoil in the globally linked global 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.

The first paper, "Measuring Financial Cash Flow and Term Structure Dynamics in Turbulent Global Markets" by Cornelis A Los, is about financial turbulence which is a phenomenon occurring in anti-persistent markets and about financial crises which tend to occur in persistent markets. The author establishes a relationship between these two extreme long memory phenomena and the older financial concept of (il-)liquidity. The author reformulates and reinterprets the classical laws of fluid mechanics into financial cash flow mechanics. The results assist with 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 second paper, "Fair Price Estimation of Basket Default Swap: Evidence from Japanese Market" by Fathi Abid and Nader Naifar, aims at estimating the fair spread of reconstituted basket credit default swap using Japanese market data. The value of this instrument 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 for financial hedgers and engineers, financial regulators, government regulators, central banks, and financial risk managers.

The third paper, "Operational Risk Management Framework at Banks in India" by B S Bodla and Richa Verma, studies the implementation of the risk management framework and operational risk management framework by commercial banks in India. To achieve the objective, a primary survey was conducted. The results indicate that irrespective of sector and size of the bank, risk management and operational risk management framework of banks in India is on the right track and it is fully 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). Among them, credit risk is the most important risk faced by the scheduled commercial banks in India. In order to manage the operational risk, many banks have designed operational risk management framework on 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. In line with the RBI guidelines, banks in India are following Basic Indicator Approach for operational risk capital charge calculations.

The last paper, "Credit Risk Models for Managing Bank's Agricultural Loan Portfolio" by Arindam Bandyopadhyay, 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 in mitigating risks in agricultural lending. The logistic model, developed in this study, reflects major risk characteristics of Indian agricultural sector, loans and borrowers, and designed to be consistent with Basel II, including consideration given to forecasting accuracy and model applicability. This study shows how agricultural exposures can typically be managed on a portfolio basis which will not only enable the bank to diversify the risk and optimize profit in the business, but also will strengthen banker-borrower relationship and enable the bank to expand its reach to farmers because of transparency in loan decision-making process.

-- Nupur Hetamsaria
Consulting Editor.