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The IUP Journal of Financial Risk Management

September'10
Focus

The financial crisis across the globe has prompted researchers to study the various aspects of credit in the system. In the first paper of this issue, “Vulnerability of Risk Management Systems in Credit Spread Widening Scenarios”,

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Vulnerability of Risk Management Systems in Credit Spread Widening Scenarios
Enhancements in CreditRisk+ Model Satendramani Tiwari
Downside Risk of Derivative Portfolios with Mean-Reverting Underlyings
Can Technical Analysis Predict the Movement of Futures Prices?
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Vulnerability of Risk Management Systems in Credit Spread Widening Scenarios

-- Aldo Letizia

During 2008, the sudden widening of credit spreads led to a rapid decrease in the value of many financial assets, revealing a general shortage of capital for many financial institutions, with some critical peaks that required fund injection and public bailouts. The evidence of a substantial underestimation of the risk related to a general credit spread widening leads to investigate the reason why risk management systems, in the early stage of the financial crisis, were not able to capture the accumulation of such a high potential of losses. Primarily, it is questioned whether the most unexpected event was the magnitude of the spread widening or, rather, the extent of the price reaction to that factor. The present work is mainly focused on the second front. In particular, it explores the possibility of including in the pricing techniques of financial instruments, a treatment of expected losses that is aligned with the most common methodologies for credit risk evaluation. The refinement of the cash flow mapping techniques leads to detect how, in the phases of severe credit spread widening, modified duration could result in an inaccurate measurement of interest rate risk, but primarily it does not recognize the spread risk in the floater component of a portfolio. A slight revision of the evaluation models allows to identify two specific sensitivity measures, to interest rate and credit spread changes, both functional to the improvement of risk management systems, in order to make them highly sensitive to the spread risk effect.

Article Price : Rs.50

Enhancements in CreditRisk+ Model Satendramani Tiwari

According to Basel II guidelines, all financial institutions should have proper quantitative tools to manage and control the credit risk. CreditRisk+ model developed by Credit Suisse Financial Products (CSFP) is one of the most widely used models for calculating credit value-at-risk. CreditRisk+ is a good choice for many banks for calculating portfolio credit value-at-risk, because this model requires limited amount of inputs and is formulated with limited assumptions. There has been a large amount of research work on CreditRisk+ to enhance its capabilities and features. This paper aims to suggest a parallel computing-based Monte-Carlo simulation, for a very large portfolio using the CreditRisk+ infrastructure, to calculate the portfolio loss distribution.

Article Price : Rs.50

Downside Risk of Derivative Portfolios with Mean-Reverting Underlyings

-- Patrick L Leoni

The paper analyzes the sensitivity of the downside risk of a standard derivatives portfolio to a change in the mean-reversion level of its underlyings. From Monte-Carlo simulation, it is found that the higher the intensity of mean-reversion, the lower the probability of reaching a predetermined loss level. This phenomenon appears to be more statistically significant for large loss levels. It is also found that the higher the mean-reversion intensity of the underlyings, the longer the expected time to reach the given loss levels. The simulations suggest that selecting underlyings with high mean-reversion effect is a natural way to reduce the downside risk of the widely traded assets, without involving costly and restrictive managerial intervention.

Article Price : Rs.50

Can Technical Analysis Predict the Movement of Futures Prices?

-- Noor Azlinna Azizan and Jacinta Chan Phooi M'ng

This paper presents a study of technical analysis trading rules that generate abnormal returns for futures prices. It reports abnormal returns over and above that generated by the passive buy-and-hold policy for FKLI, FCPO, Soyoil, Soybean and Corn futures for the periods tested. This research devises a new technical analysis trading model, Bollinger Bands Z-Test (BBZ), using standard deviation. It proposes that BBZ attempts to capture large price movements which happen beyond 1 standard deviation. The mechanical buy signal is above +1 standard deviation and sell signal is below - 1 standard deviation. For the period 12/15/1995-12/31/2008, BBZ yields a return of 1,048.6 points for FKLI in comparison to the passive buy-and-hold policy which yields a negative return of _110.5 points. The returns obtained using optimized BBZ for FCPO, Soyoil, Soybean and Corn futures for the year 2008 are 1,119, 27, 522 and 328 points respectively.

Article Price : Rs.50
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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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Financial Risk Management