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In the servicization business model, a service-oriented manufacturer sells the service derived from its products. Because of the special compensation method, a service-oriented manufacturer is more likely to be underfunded. A Stackelberg game is formulated to investigate the interaction among a bank, a manufacturer, and an operator, in which two financing strategies are considered: bank financing and guaranteed (internal) financing. The difference between these two strategies is who bears the bankruptcy risk of the manufacturer. With bank financing, the bank bears the risk and determines the interest rate, while under guaranteed financing, the operator sets a guaranteed financing interest rate. We find that under bank financing, the low operating efficiency of the manufacturer increases the bank's share of the supply chain benefits. In particular, the service-oriented manufacturer can rarely be financed if the bankruptcy risk is high. However, under guaranteed financing, the operator may, interestingly, even subsidise a manufacturer with high operating efficiency. In this situation, a high bankruptcy risk could incentivize the manufacturer to improve its operating efficiency for the sake of the subsidy. Practically, guaranteed financing could coordinate the supply chain through interest rate adjustments or subsidies when facing different risk levels, which could improve both firms' benefits. [ABSTRACT FROM AUTHOR]

For mortgage originators, managing interest rate exposures is crucial for maintaining profitability and compliance. This article demonstrates how mortgage originators assess and manage these exposures, starting with an explanation of key terms and concepts related to mortgages and mortgage-backed securities. The focus then shifts to various instruments and strategies for hedging against interest rate risks, aiming to optimize sales proceeds and profit margins while ensuring regulatory compliance. In addition to these strategies, the critical factors to consider when selecting the appropriate hedging techniques are discussed. These factors include the institution's objectives, market conditions, and the specific risks associated with the mortgage pipeline. The importance of tailoring hedging strategies to align with the institution's goals, whether that involves minimizing basis risk, managing convexity, or dynamically adjusting hedges as market conditions evolve is explained. The article provides a comprehensive overview of pipeline hedging practices, including the use of derivatives, and offers insights into the selection and application of hedging instruments, making it a useful guide for both beginners and seasoned professionals in the mortgage industry. [ABSTRACT FROM AUTHOR]

The main purpose of this paper is to investigate the city-level data on mortgage rates of banks which may hide significant information about the monetary transmission mechanism. This study, by regional housing loans and risks data, investigates the behaviour of banks after a monetary policy tightening. By using the structural vector autoregressive model with the counterfactual impulse response function and the spatial regression model, our results show that monetary tightening causes mortgage rates to rise. This response is mainly driven by price and credit risks. Consequently, these housing activities have a significant effect on mortgage rates, by amplifying the shock from the tightening monetary policy. The latter result provides evidence that financial intermediation and regional housing risks play an important role in the interest rate channel. [ABSTRACT FROM AUTHOR]

A scientific assessment of the sensitivity of the Chinese coal market has become an important research topic. This paper combines Gaussian Process Regression (GPR) and Sobol sensitivity analysis to construct a GPR–Sobol hybrid model innovatively applied to the Chinese coal market, thus addressing a gap in the economic applications of this method. The model is used to analyze the sensitivity of factors influencing coal prices in China. The GPR–Sobol model effectively handles nonlinear relationships, enabling an in-depth exploration of key factors affecting price volatility and quantifying their impacts, thus overcoming the limitations of traditional econometric models in nonlinear data processing. The results indicate that economic growth, energy prices, interest rates, exchange rates, and uncertainty factors exhibit high sensitivity and significantly impact coal price fluctuations in China. Coal prices in northwest China are more sensitive to interest rates and geopolitical risks, while prices in east and south China are more responsive to exchange rates but less so to economic policy uncertainty. Additionally, coal prices in north, south, and east China are highly sensitive to international energy prices, indicating that coal prices are dominated by the global energy market, yet their weak response to macroeconomic indicators suggests these regions is still insufficiently mature. [ABSTRACT FROM AUTHOR]

Equity-indexed annuities (EIAs) with investment guarantees are pension products sensitive to changes in the interest rate environment. A flexible and common choice for modelling this risk factor is a Hull–White model in its G2++ variant. We investigate the valuation of EIAs in this model setting and extend the literature by introducing a more efficient framework for Monte-Carlo simulation. In addition, we build on previous work by adapting an approach based on scenario matrices to a two-factor G2++ model. This method does not rely on simulations or on Fourier transformations. In numerical studies, we demonstrate its fast convergence and the limitations of techniques relying on the independence of annual returns and the central limit theorem. [ABSTRACT FROM AUTHOR]

The study aims to substantiate the mutual influence of banking risks during the financial crisis by the empirical assessment of data from post-Soviet countries. Empirical substantiation of the mechanism of mutual banking risks within the crisis periods was based on a consecutive verification of the statistical significance of regression models. Firstly, the influence of foreign exchange risk on credit risk and liquidity risk is determined. Secondly, the causality between liquidity risk and credit risk is checked. Next, the impact of foreign exchange, credit and liquidity risks on interest rate risk is evaluated. As a result, the influence of the specified banking risks on solvency is determined, which is evaluated in this study by the indicator of equity capital adequacy. The results of the analysis have proved that in the post-Soviet economies (except the Baltic countries), foreign ex-change risk caused an increase in credit risk and did not have a statistically significant effect on liquidity risk. An in-crease in credit risk caused an increase in banking liquidity, which revealed the effect of replacing income assets with liquid ones during the crisis. The level of liquidity affects the interest rate risk (spread level); in Ukraine, the level of the spread is also negatively affected by credit risk. The level of solvency of banks is determined by their liquidity. In post-Soviet developing countries, the level of solvency is negatively affected by credit risk. The economic literature pays the main attention to the formalization of relationships between credit and interest risks, between credit risk and liquidity risk. In this aspect, we expanded the object of scientific research on banking risks, as we considered the empirical relationships between the main types of banking risks. The obtained empirical results can be useful for regulatory authorities when strategizing micro- and macro-prudential policy instruments. [ABSTRACT FROM AUTHOR]

Purpose: To determine whether banks are able to hedge interest rate risk by matching interest income and expense betas each year, or only on average over longer time periods. Design/methodology/approach: We use state-space methods to estimate time-varying income and expense betas at the yearly frequency. Findings: We find evidence that banks do match interest income to expense betas at the annual frequency, and the largest banks do the best job of matching interest income to expense sensitivities over time. Conversely, the smallest banks have the largest lag in matching interest income betas to changes in expense betas and have the largest net interest margins (NIM) sensitivity to the short-term rates. Originality/value: Previous research was limited to constant deposit betas. [ABSTRACT FROM AUTHOR]

The financial service professional who wants to abide by a code of ethics and comply with other regulatory responsibilities can find a confusing array of product features and illustration assumptions when presenting indexed universal life insurance in the context of premiums financed by an outside lender. The inability of the illustration software to estimate the likelihood of the forecast numbers as presented, the insurance company’s right to change nonguaranteed elements, and interest rate and other risks associated with loans in general make for a daunting challenge for one so motivated. This article seeks to identify principal product features, capture the limitations associated with indexed universal life illustrations, and introduce the possibility of a better approach. [ABSTRACT FROM AUTHOR]

This paper studies the determinants of net interest margin and of the exposure to the interest rate risk of a sample of 125 local Italian banks during the period 2006-2018. Relative to prior literature, to take advantage of the unprecedented interest rate environment determined by European Central Bank (ECB)'s unconventional monetary policy measures, we consider two sub-periods: 2006-2011 and 2012-2018. Banks' net interest margin increases with the intensity of maturity transformation, with a larger effect in the years 2012-2018, and with their exposure to interest rate risk. At this specific regard, we shed more light than previous studies by distinguishing among three sources of this risk, namely the one referred to the loans issuing and deposits collecting activity, the one stemming from the securities portfolio, and the one associated with derivatives positions. Maturity transformation is associated with an increase in interest rate risk exposure, again with an impact that is stronger over the years 2012-2018. Funding from the ECB is associated with a higher interest rate risk exposure in the years 2006-2011, while it results in a reduction in the second part of the analysed period. We argue that ECB’s (targeted) long-term refinancing operations lead to higher funding stability and strengthen banks’ capacity to withstand potential upward shocks in interest rates. The opposite occurs for the deposits held by our sample bank at the ECB

This article estimates the weighted average cost of capital (WACC) for the energy sector in Ecuador, a country with a dollarized economy and illiquid stock markets. Thus, reference companies in the region were taken, and at the same time combined with characteristics of national companies, establishing a useful methodology, which makes sense with the acceptable discount rates in the Ecuadorian economy. For the above, four estimation alternatives were used. In method one, the traditional WACC formula was applied using interest rates and risk premiums from the U.S. market, which resulted in an overestimation due to the double penalty of the country risk and the U.S. market premium. Method two adjusted the market risk premium to consider only the Ecuador-specific risk premium, thus avoiding the double penalty. In method three, the credit default swap (CDS) was used to calculate the country risk premium, and the CDS was excluded from the nominal interest rate, avoiding redundancies. Finally, method four combined the U.S. interest rate with the CDS directly to calculate the market risk premium, more accurately reflecting local economic conditions in a dollarized economy. The WACC results range from 12.63% to 29.70%. In addition, a dummy variable was controlled for during the pandemic period. This article highlights the need for methodologies adapted to emerging markets, since traditional approaches would overestimate the WACC. [ABSTRACT FROM AUTHOR]

This article demonstrates the use of foreign-exchange (FX) derivatives in portfolio management, highlighting the strategic applications of FX forwards, futures, swaps, and options. It begins by detailing how these derivatives help institutional investors mitigate the adverse effects of currency fluctuations on internationally diversified portfolios. A significant focus is placed on currency hedging with derivatives overlays, which consolidate currency exposures across asset classes into a centralized management function, thereby enhancing overall risk management. The article also delves into the strategic uses of FX options, which offer flexible, tailored risk management strategies crucial for handling the complex dynamics of global financial markets. Through real-world examples and theoretical insights, the article illustrates the critical role of FX derivatives in stabilizing portfolio returns and managing exposure to currency risks. [ABSTRACT FROM AUTHOR]

In 2022, various Chinese regulatory authorities, including the China Securities Regulatory Commission (CSRC) and the State‐owned Assets Supervision and Administration Commission (SASAC), jointly issued documents and convened seminars at the Shanghai and Shenzhen Stock Exchanges to highlight the importance of credit protection tools, particularly credit risk mitigation warrants (CRMWs), to bolster corporate bond market financing. However, empirical research on the factors influencing CRMW prices in the Chinese market remains scarce. This study examines the factors affecting CRMW creation prices using a sample of CRMWs issued between 2018 and 2023 and analyzes the macroeconomic factors, characteristics of the underlying issuers, and related financial instruments. This study employs Shapley decomposition to evaluate the contribution of each variable. The findings reveal that, on the macroeconomic front, the year‐on‐year GDP growth rate from the previous quarter and the loan balance of financial institutions significantly and negatively impact CRMW prices. Regarding the underlying issuers, the issuer's credit rating and return on net assets significantly negatively affect CRMW prices, whereas the asset–liability ratio and issuer age have a significant positive impact. Additionally, related financial instruments such as bond interest rates and the risk mitigation certificate term positively contribute to the coverage of the underlying bond term and have a significant positive impact on CRMW prices. [ABSTRACT FROM AUTHOR]

This research aims to test and analyze the influence of interest rate risk and credit risk on profitability (empirical study of banking companies listed on the Indonesian Stock Exchange). The population in this study was 43 companies obtained using a purposive sampling method on Banking companies during the 2020-2022 period and based on predetermined criteria, a sample of 34 manufacturing companies listed on the Indonesia Stock Exchange was obtained. The total sample data for the 2020-2022 period is 102 samples. The analysis method used is multiple linear analysis with the help of SPSS software. The research results show that interest rate risk have a positive and significant effect on the profitability of banking companies listed on the Indonesian Stock Exchange in 2020-2022. And credit risk has a negative and significant impact on profitability in banking companies listed on the Indonesian Stock Exchange in 2020-2022. [ABSTRACT FROM AUTHOR]

The paper focuses on China's onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Following a review of China's bond market, a simple theoretical model of push and pull factors driving bond flows is built. It represents a foundation for the empirical analysis on drivers of bond flows into China. Static and time-varying models are estimated to explain the importance of push and pull factors in China's bond market. While China-specific pull factors, such as domestic economic growth and asset returns, are important drivers of flows, the results reveal that global push factors, such as US interest rates and risk aversion, have recently gained significance as drivers of flows into China. The results confirm China's continued bond market deepening and integration with the rest of the world, which may have financial stability implications. Therefore, increased awareness regarding bond market developments in China is warranted. [ABSTRACT FROM AUTHOR]

We show that the supply of U.S. life annuities is constrained by interest rate risk. We identify this effect using annuity prices offered by life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management—conditional on the effect of adverse selection—accounts for about half of annuity markups, or 8 percentage points. The contribution of interest rate risk to annuity markups sharply increased after the Global Financial Crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment. [ABSTRACT FROM AUTHOR]

The study aims to substantiate the mutual influence of banking risks during the financial crisis by the empirical assessment of data from post-Soviet countries. Empirical substantiation of the mechanism of mutual banking risks within the crisis periods was based on a consecutive verification of the statistical significance of regression models. Firstly, the influence of foreign exchange risk on credit risk and liquidity risk is determined. Secondly, the causality between liquidity risk and credit risk is checked. Next, the impact of foreign exchange, credit and liquidity risks on interest rate risk is evaluated. As a result, the influence of the specified banking risks on solvency is determined, which is evaluated in this study by the indicator of equity capital adequacy. The results of the analysis have proved that in the post-Soviet economies (except the Baltic countries), foreign exchange risk caused an increase in credit risk and did not have a statistically significant effect on liquidity risk. An increase in credit risk caused an increase in banking liquidity, which revealed the effect of replacing income assets with liquid ones during the crisis. The level of liquidity affects the interest rate risk (spread level); in Ukraine, the level of the spread is also negatively affected by credit risk. The level of solvency of banks is determined by their liquidity. In post-Soviet developing countries, the level of solvency is negatively affected by credit risk. The economic literature pays the main attention to the formalization of relationships between credit and interest risks, between credit risk and liquidity risk. In this aspect, we expanded the object of scientific research on banking risks, as we considered the empirical relationships between the main types of banking risks. The obtained empirical results can be useful for regulatory authorities when strategizing micro- and macro-prudential policy instruments.

The Merton (On the pricing of corporate debt: The risk structure of interest rates. J. Finance, 1974, 29, 449–470) model is often considered the simplest structural model of default. Its famous modification developed by KMV is also widely used and well understood by both practitioners and academics. However, as the underlying asset process is driven by a diffusion process, the Merton model suffers from the well-known issue of the vanishing of credit spreads for progressively shorter maturities. To overcome such shortfall, several modifications have been proposed in the literature; however, none of these, despite succeeding at better pricing spreads and explaining default dynamics, are able to retain the simplicity of the Merton model. In this paper, we propose a new structural model of default driven by an additive process whose pricing formulas are as simple as – if not even simpler than – those of the Merton model. We named such model the Carr model of default after Peter Carr, given his recent passing and the fact that the underlying asset distribution is the one introduced in Carr and Torricelli (Additive logistic processes in option pricing. Finance Stoch., 2021, 25, 689–724) and Carr and Maglione (Compound option pricing and the Roll-Geske-Whaley formula under the conjugate-power Dagum distribution. J. Deriv., 2022, 31, 1–32). We first provide pricing formulas for the firm's claims and credit spreads, and then discuss a general theory of change of measure for such processes in order to introduce a distance-to-default version of this newly-introduced model. Finally, we empirically test the Carr versus the Merton model and document the far better ability of the Carr model to reproduce CDS spreads as well as explain their cross-sectional and time-series variation. [ABSTRACT FROM AUTHOR]

In an unstable political and economic situation, enterprises are increasingly faced with such a problem as financial risks. The issues of assessing and managing financial risks have long been quite relevant and are constantly being studied in the context of economic transformation. One of the main risks that reflects the activities of food industry enterprises is interest rate risk. First of all, this is associated with the use of borrowed funds in their activities. In the balance sheet structure, they are reflected in such indicators as long-term liabilities and collateral, current liabilities. Long-term liabilities are liabilities granted or received for a period of more than one year. First of all, they assume the presence of long-term loans, which are one of the reasons for the occurrence of financial risks. The article examines the structure of long-term liabilities by sectors of the economy. Food industry enterprises account for about 4% of long-term liabilities in the entire economy. But, despite this rather insignificant value, the issue of the impact of liabilities on financial stability remains quite important. The main task is to identify those industries that all depend on borrowed funds, which are a source of replenishment of the financial resources of the enterprise. According to statistics, these are the production of oil and animal fats (20 to 35% of long-term liabilities of the entire food industry), the production of meat and meat products (from 22 to 50%), the production of dairy products (from 5 to 8%). All industries have certain sharp structural shifts during the period of the beginning of the full-scale invasion of 2022. An integral part of the analysis of the impact of long-term liabilities is the assessment of their share in the capital structure of enterprises of the above-separated industries. According to the results of the study, enterprises producing oil and animal fats, as well as meat and meat products, have almost the same level of long-term liabilities and equity in the structure of financial resources. Only at the enterprises producing dairy products does equity prevail. Analysis of this component once again confirms that financial risks are very important for the food industry. [ABSTRACT FROM AUTHOR]

The article discusses the Bank of England's (BoE) plan to slow down its quantitative tightening (QT) process, which involves reducing the amount of government bonds (gilts) held in the Bank's asset purchase facility (APF). While there is a consensus that the APF rundown can be achieved through redemptions of these gilt holdings, the author disagrees and expects QT to continue at its current pace. The article explores the arguments for and against slowing down the APF rundown, including concerns about losses from gilt sales, the impact on interest rates, and the government's fiscal rules. The BoE is likely to steadily reduce gilt holdings until they reach zero, using short-term repos as an alternative. However, uncertainties remain regarding the smooth expansion of repos and the impact on short-term interest rates. [Extracted from the article]

We examine the nonlinear relationship between interest rates on bank risk-taking behavior in South Africa between 2008:q1 and 2022:q3 using nonlinear autoregressive distributive lag (NARDL) and quantile autoregressive distributive lag (QARDL) models. Whilst the preliminary estimates from linear ARDL produce results adhering to conventional theory, the NARDL and QARDL analysis shows that the relationship between the variables is more complex. On one hand, the NARDL model shows that the phase of monetary policy (cyclical asymmetries) is important in determining the pass-through effects of interest rates on bank risk behavior. We find that both contractionary and expansionary monetary policy increases long-term risk through decreased liquidity for the former and increased non-performing loans for the latter. On the other hand, the QARDL model shows that the level of bank risk behavior (location asymmetries) is also important in determining the impact of interest rates on bank risk behavior. We find that interest rates affect bank risk behavior in 'medium-to-high risk environments' for unsecured loans and lending and in 'medium-to-low risk environments' for liquidity. Overall, these results enable us to recommend ways in which the SARB can strengthen its monitoring mechanisms given the multifaceted impact of interest rates on bank risk-taking. [ABSTRACT FROM AUTHOR]

The need of the study is to concentrates on the growth and performance of HDFC Bank and to calculate the growth and performance by using asset and liability management and to know the management of nonperforming assets. Bank manages the risk of Asset liability disparity by matching the assets and liabilities according to the maturity pattern or the corresponding period [2016-20], by hedging and by securitization. ALM is concerned with strategic management of Balance Sheet by giving due weight age to market risks viz. Liquidity Risk, Interest Rate Risk & Currency Risk. [ABSTRACT FROM AUTHOR]

We quantify the impact of risk‐based and nonrisk‐based intermediary constraints (IC) on the term structure of covered interest rate parity (CIP) violations. Using a stochastic discount factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model‐implied and observed derivative prices reflects the impact of nonrisk‐based IC because our SDF incorporates risk‐based IC. There is no wedge at short horizons, while the wedge accounts for 40% of long‐term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF‐implied interest rate is a weighted average of collateralized and uncollateralized interest rates. [ABSTRACT FROM AUTHOR]

The article seeks to provide innovative measures aimed at addressing the delivery of affordable housing market in South Africa in view of diminishing fiscus and rising interest rates. It defines the mortgage finance trends in South Africa through analysis of primary data from financial institutions to establish the level of activity and contrarians. Upon understanding the market challenges, the author recommends sound proposition with respect to engineering responsive interventions diversify with respect to demand and supply side blockages in the Affordable Housing Market in South Africa. Based on the findings, the author has found that interest rate increases have hurt the property market activity greatly and lenders in turn also apply very stringent underwriting standards at the height of high interest rate cycles. Furthermore, it has been established the mortgage credit impairments have increased resulting in significant credit loss as the majority of low- and middle-income households are overindebted and mortgage debtors are on the verge of being foreclosed on due to the risk of default. The article concludes by providing recommendations as interventions and measures aimed at upscaling the delivery of affordable housing in South Africa. [ABSTRACT FROM AUTHOR]

Hedging requires adequacy and timing. This paper finds that banks did not systematically ignore balance‐sheet risks like Silicon Valley Bank (SVB), and instead exercised risk management by asymmetrically increasing hedging activity when security losses increase and scaling back hedging activity as security losses reverse. Banks also hedge against bank runs when risk increases due to a combination of security losses and funding risks from unsecured deposits. Findings suggest SVB's mistakes are idiosyncratic. Results suggest that nonstress test banks target balance‐sheet risks when hedging, stabilizing themselves from interest rate shocks transmitted through fixed‐income securities. Scrutiny of rules‐based outliers like SVB is preferable to increased regulatory burden for all nonstress test banks. [ABSTRACT FROM AUTHOR]

Purpose: Interest rate derivatives (IRDs) are the essential components of financial risk management and are used across various industry sectors. The objective is to analyze the differences in approach to managing interest rate risks between the Indian corporates that execute IRDs and the ones that do not. Design/methodology/approach: Interest rate fluctuations require Indian corporates to hedge their exposures in foreign currency interest rates. This is all the more true for mid-sized corporates because of their balance sheet exposures. Additionally, they may not have the resources to formulate risk management policies. This paper analyzes data collected from financial statements of a diverse set of companies that use IRD and helps in formulating such a strategy. Findings: The results indicate significant differences for some of the parameters like information asymmetry and agency cost between users and non-users of IRDs. The study further suggests causality between users of derivatives and parameters like size, growth and debt. Research limitations/implications: The study compares users and non-users of IRDs, thereby identifying factors unique to users of IRDs. It also studies causality relations which explain the motivation to do IRDs. Thus, it enables risk managers to use this as a reference point to decide on their strategies. Originality/value: While there are multiple studies across geographies and sectors including commercial banks in India on the usage of interest rate swaps, this study focuses on Indian mid-tier corporates. Furthermore, the study distinguishes between users and non-users based on financial parameters, which in turn would provide a framework for decision-hedging strategies. [ABSTRACT FROM AUTHOR]

As revealed by the failures of three regional banks in the spring of 2023, bank runs are not a thing of the past. To inform the ongoing discussion of the appropriate regulatory response, we examine trends in the banking industry over the last twenty-five years. On the liability side of bank balance sheets, deposits—and especially uninsured deposits—have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and toward longer-term securities such as mortgage-backed securities and long-term Treasuries. These trends appear to be related, in the sense that banks with the most rapid growth in deposits have seen the biggest declines in loans as a share of assets. Thus, while the banks that failed in early 2023 were arguably extreme cases, they reflect broader trends, especially among larger banks. We construct a simple model to help assess the main regulatory options to reduce the risk of destabilizing bank runs—expanding deposit insurance and strengthening liquidity regulation—and argue that the industry trends we document favor the latter option. Using the model, we offer some design considerations for modifying the liquidity coverage ratio so as to require banks to pre-position sufficient collateral—largely in the form of short-term government securities—at the Federal Reserve's discount window to ensure they have enough liquidity to withstand a run on their uninsured deposits. We also comment briefly on some other regulatory implications of our findings, including for interest rate risk regulation and merger policy. [ABSTRACT FROM AUTHOR]

For some time now, Solvency II requires that insurance companies calculate minimum capital requirements to face the risk of insolvency, either in accordance with the Standard Formula or using a full or partial Internal Model. An Internal Model must be based on a market-consistent valuation of assets and liabilities at a 1-year time span, where a real-world probabilistic structure is used for the first year of projection. In this paper, we describe the major risks of a non-life insurance company, i.e. the non-life underwriting risk and market risk, and their interactions, focusing on the non-life premium risk, equity risk, and interest rate risk. This analysis is made using some well-known stochastic models in the financial-actuarial literature and practical insurance business, i.e. the Collective Risk Model for non-life premium risk, the Geometric Brownian Motion for equity risk, and a real-world version of the G2++ Model for interest rate risk, where parameters are calibrated on current and real market data. Finally, we illustrate a case study on a single-line and a multi-line insurance company in order to see how the risk drivers behave in both a stand-alone and an aggregate framework. [ABSTRACT FROM AUTHOR]

For the preservation and appreciation of pension funds, the optimal investment strategy for DC pension plan with interest rate risk and volatility risk was studied. Assumed that the financial market consists of a risk-free asset and a stock, where the price process of the stock followed the hybrid stochastic volatility(Heston-Hull-White) model. Setting the salary of pension plan members was stochastic. Based on maximizing the expected utility of terminal wealth, the corresponding HJB (Hamilton-Jacob-Bellman) equation was established, and the optimal investment strategy was obtained under the CARA utility function, and numerical examples were given to characterize the effects of financial parameters on the optimal investment strategy. The result shows that with the increase of the risk aversion coefficient, the investment proportion in the stock decreases, and the interest rate risk and volatility risk have a significant impact on the optimal investment strategy for DC pension plan. The result can provide guidance for fund managers. [ABSTRACT FROM AUTHOR]

We investigate the cause of the increase in mortgage investments by pension funds after the financial crisis. We show that, after the introduction of the new financial assessment framework in 2015, funds that experienced larger reductions in the funding ratio during the 2008–2012 crisis invested more in mortgages. We test the hypothesis that a past recovery mode has motivated pension funds to invest more in mortgages after the crisis. Funds that seek to further hedge their interest rate risks aim for a different risk/return investment profile. Mortgages could contribute to a less risky portfolio, as they have become even safer since the introduction of several new regulations in 2013. Recovery modes after the crisis combined with the new framework are a cause of the recent surge in mortgage holding by pension funds; we find that this led to a 39% increase in their mortgage investments, despite the fact that these are still low relative to the overall investments of pension funds. [ABSTRACT FROM AUTHOR]

Usage of derivatives have steadily and gradually increased in India by their wide adoption across corporate entities. However, there exist sharp contrast among various segments and sectors. Key factors that are enablers and deterrents of selection and application of such instruments by the business organizations have been assessed in the present paper. Essentially a handful of research publications are used as secondary resources to deal with the topic. Besides some common paper, research works across non-financial segment, IT sector and multiple sectors have been duly reviewed. It is found that usage of derivatives have some critical features in Indian context as against the developed economies. Generally the common risk factors associated with business organization force them to adopt a risk management policy framework, whereas decisions reading derivatives are linked with firms capacity, level of perception, financial performance level usually measured by key ratios, international transactions and currency rate fluctuations, market linked factors ad interest rate, volatility in earnings & cash flows are transaction costs identified to be the primary concerns. Tax burden and policy level issues and regulation are also found to be critical in specific cases. Many such factors are having varied impact across sectors and industries. [ABSTRACT FROM AUTHOR]

Financial risk management in the realm of international business holds immense significance within the global marketplace. This study delves into the diverse financial risks encountered by multinational corporations (MNCs) as they operate across various markets. These risks encompass currency exchange fluctuations, interest rate fluctuations, political and regulatory uncertainties, market volatility, and credit vulnerabilities. The study assesses the efficacy of conventional financial risk management methods in addressing these challenges and investigates how geopolitical dynamics influence risk management strategies for MNCs. The research methodology adopts a descriptive approach utilizing secondary sources, emphasizing structured data presentation relevant to present-day conditions. The analysis covers the nature and origins of financial risks, established risk management practices, and the impact of geopolitical variables on risk management strategies. The findings highlight the critical role of proactive risk assessment, holistic risk mitigation tactics, and the ability to adapt to geopolitical shifts in ensuring sustainable financial outcomes in international business endeavors. [ABSTRACT FROM AUTHOR]

The purpose of the study is to develop the theory of hedging, generalize approaches to the formation of effective risk hedging strategies, and provide recommendations for the implementation of international banks' experience in Ukrainian practice. It is proved that in the process of choosing effective strategies, it is advisable to distinguish three types of financial risk hedging: a) operational hedging (balance sheet) to ensure operational flexibility; b) market hedging (external), which involves the use of derivatives as instruments to hedge profit volatility; c) contract hedging (contractual clauses, embedded derivatives. Based on the analysis of the reports of 250 banks, it was found that Bank of America, JPMorgan Chase & Co., Goldman Sachs, Morgan Stanley, and Citigroup are the market makers in the most developed US futures market. Horizontal analysis of the balance sheets of these banks showed that although the share of derivatives designated as hedging instruments is insignificant (less than 1%) relative to term contracts recognized as trading instruments, the hedging effect is significantly higher than the gains on the trading portfolio. It was found that in international practice, the dominant direction is the hedging of interest rate risk (the share of which varies between banks from 42.52% to 61.26%), in the structure of hedging instruments, interest rate swaps prevail. The share of currency derivatives varies from 18.67% to 41.45%. Interest rate risk is hedged by over-the-counter bilateral term contracts for active operations, currency risk hedging equally covers the risks of passive and active operations. The regression analysis revealed that private credit and trading assets have an inverse effect on regional hedging exposure, and debt instruments have a direct effect. The study provides a basis for assessing the potential of using innovative risk-hedging instruments by Ukrainian banks. [ABSTRACT FROM AUTHOR]

Using the structural approach to derive tax-adjusted duration for defaultable bonds under stochastic interest rate process, we thoroughly investigate the effects of personal taxes, default risk, and their interaction on bond duration. The simulation results show that default risk reduces duration, while personal taxes increase duration. Premium amortization and discount accretion further enhance the positive impact of personal taxes on duration. The interactive effect of default risk and personal taxes on duration depends on which effect dominates. Also, the tax effect on duration changes with bond features, bond issuers' debt policy, and interest rate level. Our empirical results validate the positive tax effect on duration by showing that duration of corporate bonds is significantly longer than that of municipal counterparts with the same credit rating, coupon rate, and maturity. Our study provides timely information on how to accurately measure interest rate risk under the current circumstance that interest rate is increasing substantially from the low level and personal taxes are expected to increase. [ABSTRACT FROM AUTHOR]

This paper investigates the robust time-consistent investment strategy for the defined contribution pension plan with a minimum guarantee in a stochastic interest rate and stochastic inflation environment under the mean-variance criterion. To protect the purchasing power of pension members after retirement, the amount of the minimum guarantee is assumed to be adjusted with the stochastic interest rate and inflation level in the model. The fund manager is considered as ambiguity averse, and her objective is to prevent herself from the worst-case scenario and ensure that the fund wealth exceeds the minimum guarantee at retirement. The ambiguity-averse manager is allowed to invest in a financial market consisting of four assets: a risk-free asset, a nominal zero-coupon bond, an inflation-indexed bond and a stock. The nominal zero-coupon bond and the inflation-indexed bond are designed to hedge against interest rate risk and inflation risk. Following the robust optimal control theory, both the robust time-consistent strategy and the equilibrium value function are derived by an introduction of an auxiliary problem. Some degenerate cases are also provided. Finally, a numerical simulation demonstrates the results obtained. [ABSTRACT FROM AUTHOR]

Having effective and efficient financing is one of the most critical steps in accelerating public infrastructure development, including toll roads. This study aims to identify critical success factors (CSFs) for implementing toll infrastructure financing in Indonesia. Thirty-three CSFs have been identified from the literature review. A Delphi survey was conducted involving a panel of experts in the infrastructure industry. Based on the survey, it is known that the internal rate of return, affordability, investment decisions, commercial banks, financing costs, interest rate risk, control of cash flow, contract scope, and principles of risk transfer are important factors for implementing toll infrastructure financing in Indonesia. This study fills research gaps by developing a CSF model for successful toll road infrastructure financing in Indonesian PPPs, considering private perspectives and aiming to provide insights for investors and enhance understanding of country profiles in developing countries. The focus on toll road implementation in Indonesia contributes to a comprehensive understanding of CSFs for PPPs in the country. [ABSTRACT FROM AUTHOR]

Interest rate market risk faced by China's commercial banks is increasing after the announcement that the interest rate marketisation is completed. This paper examines the Value-at-Risk, and statistical properties in the daily price return of Shanghai banks' overnight offered rate. The study applies two-stage approaches, combining GARCH-type models with extreme value theory. Firstly, the Markov regime switching model is used to test the regime states of the series. Secondly, the performance of different VaR models are examined. Results show that the extreme value approach estimates better at the 99% confidence level. The EGARCH-GED model is the most suitable of the employed GARCH-type models. The back-testing results support the idea that the approach used in this study is appropriate for improving commercial banks' daily risk management. This paper applies the GARCH-EVT method for interest rate measurement after China's interest rate marketisation and added regime analysis of interest rate. Suggested policy implications will help formulate policies that guide the activities of commercial banks in China. [ABSTRACT FROM AUTHOR]

The interest rate risk of commercial banks is closely related to the effectiveness of the LPR mechanism. In this paper, the interest rate market is divided into three stages according to the process of interest rate marketization, and a six-sector New Keynesian MS-DSGE model is constructed by adding monetary regulation variables. The parameters in the model that are influenced by interest rate marketization and the new LPR mechanism are transformed by Markov zone transformation. The interest rate risk of commercial banks is measured by the impulse response functions of uncertain interest rate shocks to the interest rate sensitivity gap and the duration gap, and the volatility characteristics of interest rate risk in different stages of interest rate marketization are compared and analyzed. The results show that in the third stage (2019-present), the LPR mechanism is transformed from old to new. Under the δR = 0.5 shock, the commercial lending interest rate tends to stabilize around 0.00038, and the borrowing interest rate tends to 0 in all 3 differentiated target parameters in the 10th period. For this reason, the differentiated interest rate pricing behaviors of commercial banks should be considered comprehensively, and the LPR target should be set reasonably so as to get the optimal policy effect.