Risk Management, Strategic Thinking and Leadership in the Financial Services Industry (eBook)

Foreword 6
Preface 8
Acknowledgment 10
Contents 12
Part I: Economic Outlook and Expectations for the Financial Services Industry 15
Global Economic Outlook 16
1 Introduction 16
2 Literature Review 17
2.1 Global Outlook 17
2.2 Global Outlook of Developed Economies: USA, Japan, Euro Zone 19
2.3 Global Outlook of Emerging National Economies: Brazil, Russia, India, China and South Africa 20
3 Conclusion 22
References 23
Sustainable and Inclusive Finance in Turkey 24
1 Introduction 24
2 Review of Literature 27
3 Inclusive Finance in Developing Countries 27
3.1 Inclusive Finance in Turkey 30
4 Conclusion 33
References 34
Monetary Policy Divergence and Central Banking in the New Era 37
1 Introduction 37
1.1 The World Economy: A New Normal? 39
1.2 The Inflation Outlook 41
2 Policy Implementation 42
2.1 Policy Options 43
2.2 Monetary Policy Divergence 43
2.2.1 Tightening Countries Such as the US and the UK 45
2.2.2 Expanding Countries 46
2.2.3 Implications for the EMs 49
3 Central Banking in the New Era 50
4 Concluding Remarks 51
References 52
In Looking into the Foreign Exchange Risk Management 54
1 Introduction 54
2 The Financial Risks of International Trade and Investment 56
2.1 Economic Risk 56
2.2 Transaction Risk 57
2.3 Translation Risk 57
3 Measuring Economic, Transaction and Translation Exposure 58
3.1 Measuring Economic Exposure 58
3.2 Measuring Transaction Exposure 59
3.3 Measuring Translation Exposure 60
4 Hedging Foreign Exchange Risk: The Details of Risk Management 61
4.1 Invoice Currency 61
4.2 Matching 62
4.3 Netting 62
4.4 Leading and Lagging 63
4.5 Forward Contract 63
4.6 Options 64
4.7 Swaps 65
4.8 Currency Futures 66
5 Risk in Foreign Currency Borrowing: Indian Perspective 66
6 Conclusion 68
References 68
The Link Between Dollarization and Its Determinants in Turkey 70
1 Introduction 70
2 Studies on Dollarization: A Literature Overview 72
3 Data and Methodology 74
4 Empirical Findings 75
4.1 Geweke (1982) Measure of Linear Feedback 76
4.2 Frequency Domain Granger Causality 76
4.3 Comovement Analysis 79
5 Conclusion 81
References 82
Enhancing the Risk Management Functions in Banking: Capital Allocation and Banking Regulations 84
1 Introduction 84
2 The Role of Capital Key Banking Risks
3 Regulatory Capital Versus Economic Capital in Banking 86
4 Banking Regulations on Capital Requirement 87
4.1 Basel I 88
4.2 Basel II 89
4.3 Basel III 90
5 Literature Review on Economic Impact of Capital Requirements 92
6 Conclusion 94
References 95
Part II: Managing Risks in Capital Markets 97
The Calibration of Market Risk Measures During Period of Economic Downturn: Market Risks and Measures 98
1 Introduction 99
2 Methodology 101
2.1 The Generalised Extreme Value Distribution 101
2.2 Generalised Pareto Distribution 102
2.3 Definition of Copula Distribution 104
2.4 Estimation of Copula Parameters 105
2.5 Sklar´s Theorem 106
3 Empirical Analysis 107
4 Conclusion 110
References 110
Computation of Operational Value at Risk Using the Severity Distribution Model Based on Bayesian Method with Gibbs Sampler 112
1 Introduction 112
2 Basic Indicator Approach 114
3 Standardised Approach 114
4 Pitfalls of the Basic Indicator and Standardised Approaches 116
5 The Advanced Measurement Approach 118
6 Using the Convolution Technique to Build the Total Annual Loss Distribution 119
7 Modelling Loss Frequency and Severity Distributions 120
7.1 Loss Frequency Distribution 120
7.2 Loss Severity Distribution 121
8 Estimation of the Loss Distribution´s Parameters 121
9 Bayesian Method 122
9.1 Bayesian Estimation of the Loss Frequency: Poisson Distribution 123
9.2 Bayesian Estimation of Loss Severity: The Body part with Lognormal Distribution 124
9.3 Bayesian Estimation of the Loss Severity: The Tail Part with the Generalised Pareto Distribution 125
9.4 Simulating the Posterior Distribution: The Gibbs Sampler 126
10 The Overall Annual Loss Distribution Using Copula Function 127
10.1 Sklar (1959) Theorem 127
11 Empirical Analysis with Simulated Data 128
12 Conclusion 129
References 130
Liquidity Risk and Optimal Redemption Policies for Illiquid Investments 131
1 Introduction 131
2 Optimal Redemption Policies for Hedge Fund Investments 133
3 Setting and Notation 134
4 Dynamic Programming Setup 137
5 Structure of the Optimal Redemption Policy 138
6 Monotonicity of the Critical Values 146
7 Conclusion and Future Research 147
References 148
Credit Derivatives, Their Risks and Role in Global Financial Crisis 150
1 Introduction 150
2 Types of Credit Derivatives 151
2.1 Credit Default Swaps 151
2.2 Total Return Swaps 153
2.3 Credit-Linked Notes (CLN) 153
2.4 Credit Spread Options 154
2.5 Collateralized Debt Obligations (CDOs) 154
3 Size of Credit Derivatives Market 156
4 Risks Associated With Credit Derivatives 158
4.1 Credit Risk 158
4.2 Counterparty Risk 159
4.3 Systemic Risk 159
4.4 Transaction Risk 160
4.5 Liquidity Risk 160
5 Credit Derivatives and Their Role in Global Financial Crisis 160
6 Conclusion 162
References 163
An Approach to Measure Financial Risk Relative Indices: A Case Study of Indonesian Insurance Companies 165
1 Introduction 166
2 Data and Methodology 167
3 Descriptive Statistic and Calculation of Relative Risk Indices by CFA 171
4 Conclusion 178
References 178
Part III: Volatility, Hedging and Strategy in Risky Environment 180
Extreme Value Theory in Finance: A Way to Forecast Unexpected Circumstances 181
1 Introduction 181
2 Theoretical Background of EVT 183
2.1 Generalized Extreme Value (GEV) Distribution 183
2.2 Block Maxima Method 186
2.3 rth Largest Order Models 187
2.4 The Peaks-Over-Threshold Method 187
3 EVT in Finance 188
3.1 Financial Stress Tests with Copula 191
3.2 Utilizing EVT for Crisis/Stress Event Classification 191
4 Conclusion 192
References 192
Value at Risk Performance of Emerging Market Equity Portfolios During the Fed´s Tapering 195
1 Introduction 195
2 The Impact of Fed´s Tapering Announcements on Emerging Market Economies 197
3 Literature Review 198
4 Methodology 201
4.1 Variance Covariance VaR 201
4.2 Historical Simulations 202
4.3 Back Testing 203
5 Data of the Equity Portfolios and Results 204
6 Data of Equally Weighted Emerging Equity-US Bond Portfolios and Results 205
7 Discussion 208
8 Conclusion 208
References 212
Jumps and Earnings Announcement: Empirical Evidence fromAn Emerging Market Using High Frequency Data 214
1 Introduction 215
2 Summary of Literature 216
3 Methodology 218
3.1 Data 218
3.2 Jump Detection Procedure 218
3.3 Estimation of Abnormal Returns 219
4 Empirical Findings 220
5 Conclusion 222
References 224
Hedging Scenarios Under Competition: Exploring the Impact of Competitors´ Hedging Practices 227
1 Introduction 227
2 Literature Review 229
2.1 Hedging and Risk Management 229
2.2 Game Theoretic Dynamic Models 231
3 Definitions and the Model 232
3.1 The Parameters and Actions 232
3.2 The Single Period Model 233
4 Simulations 236
4.1 Experiment Setup 236
4.2 Simulation Results 237
4.3 Interpretation of Simulation Results 239
5 Conclusion 243
References 244
Option Strategies and Exotic Options: Tools for Hedging or Source of Financial Instability? 246
1 Introduction 246
2 Option Contracts 247
2.1 Option Types 247
2.1.1 Call Options 248
2.1.2 Put Options 248
2.1.3 Maximum Profit and Loss for the Parties in Option Contracts 248
2.2 Option Pricing Models 248
2.2.1 Binomial Model 248
2.2.2 Black-Scholes Model 249
2.3 Greeks 250
2.3.1 Delta 250
2.3.2 Theta 250
2.3.3 Gamma 251
2.3.4 Rho 251
2.3.5 Vega 251
3 Option Strategies 251
3.1 Strategies with Ownership of Underlying Securities 251
3.1.1 Covered Call 252
3.1.2 Protective Put 252
3.2 Bullish Strategies 252
3.2.1 Bull Call Spread 252
3.3 Bearish Strategies 252
3.3.1 Bear Call Spread 253
3.4 Strategies in Untrendy Markets 253
3.4.1 Butterfly Spreads 253
3.5 Strategies in Trendy Markets 253
3.5.1 Straddle 253
3.5.2 Strangle 254
4 Exotic Options 254
4.1 Look Back Options 254
4.2 Barrier Options 255
5 Conclusion 256
References 257
Part IV: Risk-Based Audit and the Structured Finance 259
Risk Based Internal Audit 260
1 Introduction 260
2 Audit Types 261
2.1 Audit Types by Purpose 261
2.1.1 Audit of Financial Statements 261
2.1.2 Compliance Audit 261
2.1.3 Operational Audit 262
2.2 Audit Types by Scope 262
2.2.1 Mandatory Audit 262
2.2.2 Arbitrary Audit 262
2.2.3 Permanent Audit 262
2.2.4 Limited Audit 262
2.2.5 Special Audit 263
2.3 Types of Audit by Status 263
2.3.1 External Audit 263
2.3.2 Internal Audit 263
2.3.3 Public Audit 263
3 Internal Audit Concept 263
3.1 Types of Internal Audit 264
3.2 Benefits of Internal Audit 265
4 Risk and Risk Management 265
4.1 Uncertainty and Risk 265
4.2 Types of Risk 266
4.3 Corporate Risk Management 267
5 Risk Based Internal Audit 268
5.1 Definition and Scope of Risk-Based Internal Audit 268
5.2 Comparison of Traditional Internal Audit and Risk-Based Internal Audit 269
5.3 Risk Assessment and Recording of the Risks 270
5.3.1 Qualitative Analysis 270
5.3.2 Quantitative Analysis 271
5.3.3 Possibility-Effect Analysis 272
5.3.4 Risk Matrix 272
6 Conclusion 273
References 274
Recent Financial Crisis and the Structured Finance: Accounting Perspective for Future 275
1 Introduction: Overview of Structuring 275
2 Triggers of Financial Shock 278
3 The Rationale of Default Correlation and Systematic Risk 279
4 Accounting Perspective: M2M or Historical Cost? 280
5 Conclusion 282
References 282
Compliance and Reporting Trends: Essential Strategies 284
1 Introduction 284
2 Background 286
3 Literature Review 287
4 Conclusion 292
References 292
Developing a Risk Management Framework and Risk Assessment for Non-profit Organizations: A Case Study 294
1 Introduction 294
2 Literature Review 295
3 Risk Management for NPOs 296
4 Case Studies 297
4.1 Risk Identification 297
4.2 Risk Quantification 298
4.3 Risk Evaluation 299
4.4 Risk Mitigation 303
5 Conclusions 304
References 304
Part V: Culture and Leadership in Risk Management 306
Giving Risk Management Culture a Role in Strategic Planning 307
1 Introduction 307
2 Global Financial Institutions and Risk Management 308
3 Risk Management Culture 310
4 The Role of Risk Management Culture in Strategic Planning 313
5 Conclusion 315
References 316
Agile Intrapreneurship in Volatile Business Environment: Changing Roles of Financial Managers and Risk Takers According to Sch... 318
1 Introduction 319
2 Schumpeterian Innovation and Endogenous Growth 321
2.1 The Relation Between Innovation and Investment 322
2.2 From Labourer to Schumpeterian Entrepreneur 324
2.3 Neo-Schumpeterian Approach 326
2.4 Endogenous Growth Approach and Human Capital 327
3 Intrapreneurship from the Perspective of the Contemporary Management and Organization Approach 328
3.1 Organizational Intrapreneurship 328
3.2 Lean Management and Lean Startup 328
3.3 Strategic and Agile Management 330
4 Changing Roles of Managers in Organizations 331
4.1 Differences Between Leaders and Managers 331
4.2 Current Leadership Styles 332
4.3 Expanding Roles of Financial Risk Takers and Chief Financial Officers 333
5 Conclusion 334
References 335
Emerging Trends in the Post-Regulatory Environment: The Importance of Instilling Trust 339
1 Introduction 339
2 Background 343
3 Literature Review 345
4 Conclusion 346
References 347
The Effect of National Culture on Corporate Financial Decisions 349
1 Introduction 349
2 The Role of Culture/National Culture in Corporate Decision Making 350
3 Hofstede´s Dimensions of National Culture and Financial Decision-Making 351
4 Methodology and Data 354
5 Results 357
6 Conclusion 359
Appendix 361
References 361
Human Side of Strategic Alliances, Cooperations and Manoeuvrings During Recession and Crisis 363
1 Introduction 363
2 Effects of Crises on Organizations and Employees 366
3 Human Factor in Crisis Management 367
3.1 Developing Resistance Against Crisis 368
3.2 The Role of Employees in Strategic Crisis Planning 369
3.3 Effectiveness of Organizational Communication in Recession and Re-organization 370
4 Capacities and Strategic Manoeuvres that Provide Adaptation to Sudden Changes by Organizational Learning 371
4.1 Reactions of Employees During Re-Organization Process 372
4.2 From Classical Management to Lean Organizations for Adaptation to Sudden Changes 372
4.3 The Behaviours of Employees During the Stages of Strategic Alliances, Merger and Acquisition Process 373
5 Conclusion 375
References 376