Banking Risk Management

Banking Risk Management Credit Risk Models The Black-Scholes-Merton Model There are various credit risk models, which have been proposed by researchers in order to reduce the risks associated with future transactions. One of these models is the BSM framework structured models. This model was proposed by Merton in 1974. He derived the value of an option from a company, which could default loan repayment (Merton, 1974).Advertising We will write a custom essay sample on Banking Risk Management specifically for you for only $16.05 $11/page Learn More The Black-Scholes-Merton model assumes that there is a latent firm asset value, which is determined by the company’s future cash flows. This model is used to determine the firm’s debt and equity value. This model includes components, such as risk free interest rates, asset payment ratio, and asset risk premium. Merton (1974) argues that the asset return rate and the risk free interest rates are the constants which are non-sto chastic. The model also assumes that the company’s capital structure relates to a pure equity and a single zero coupon debt, which matures within a given time. Incase of a default experienced by a company, the stock price of the defaulting firm is expected to go to zero. According to this model, the debtor is assumed to be a seller in the European put option. On the other hand, the equity holder is assumed to be a buyer of European call option (Merton, 1974). The model uses the Black –Scholes option pricing in order to determine the relationship between the equity market value and the bond market value. Shibita and Yamada (2009) proposed the BSM structural model to a bank, which was just this side of bankruptcy. This helped the bank in its recovery processes. According to Shibata and Yamada (2009), the banks choice to continue operating or be liquidated plays a vital role on the losses of the loan. They assumed that this decision should be made severally at a certain t ime after the bankruptcy. Individual-level reduced-form models This refers to the models which are not of the class of structural models. At the individual level, a reduced form model can also be described as the credit scoring one. This model was developed by Altman (1968). The credit scoring model uses linear and binomial models to regress the defaults among companies.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More It identifies various accounting components, which have statistical explanatory capability, in order to differentiate between the defaulting and non defaulting firms. After estimating the coefficients of the model, the loan applicants are given a Z-score in order to classify them as good or bad. Several decades after its proposal, the credit scoring model got a significant development. Altaman and Saunders (1998) discussed the wide spread of the individual level mode l and its major developments over the years. Altman and Narayanan (1997) evaluated the historical accounting variables used in the credit scoring models across the world. According to them, most of the studies proposed the use of financial ratios, which determine profitability, and liquidity. These financial ratios may include market value equity/debt, (EBIT)/sales as well as working capital/debt. Altman (2005) proposed a scoring system known as Emerging Market Score Model to use to define the emerging corporate bonds. Portfolio reduced form models These models were proposed by Jarrow and Turnbull (1992). According to them, the idea of these models is related to the concept of risk neutral. Risk neutral is a common technique used to predict the probability of the future cash flow. It helps in computing the asset prices by using risk neutral default probabilities. Jarrow and Turnbull (1992) used the idea of risk neutral to develop the credit risk premium which is also known as the cr edit spread. They decomposed the credit risk premium into two components. Poisson /Cox process model This is a subclass of the portfolio reduced form models. It was developed by Jarrow and Turnbull (1995), and it can be described as the simplest model of the portfolio reduced form model. In this approach, the default process is assumed to be a Poisson process with a constant intensity where the default time is exponentially distributed. Markov chain model This is a credit risk model, which was originally proposed by Jarrow et al. (1997). This model considers the default event as the absorbing state and the default period as the first period when the Markov chain hits the absorbing state.Advertising We will write a custom essay sample on Banking Risk Management specifically for you for only $16.05 $11/page Learn More Factor model This is a credit risk model, which puts into consideration two vectors of explanation variables. The first vector is a set of macr o economic variables, such as interest rate, inflation rate, money supply growth as well as GDP growth. This vector explains the systematic risk, which causes default events. The second vector involves a set of firm-specific variables, which determine individual risk. According to Pederzoli and Torricelli (2005), the variables are considered simultaneously. Conclusion The credit risk models have various shortcomings. For instance, the BSM framework structural model consists of several simplified assumption in its derivation. The simplified assumptions restrict the applied value of the model. This has made the subsequent researchers focus on reducing these assumptions. The individual level reduced form models may not pick up fast moving developments in borrowers conditions. This is because the model uses explanatory variables, which are based on accounting data. According to Agarwal and Taffler’s (2008), credit scoring models, such as Altman’s Z-score, may not be used t o forecast distress as compared to the structural models. References Altman, E 2005, An emerging market credit scoring system for corporate bonds,  Journal of Emerging Markets Review, vol. 6, no. 4, pp. 311-323. Altman, E, Saunders, A 1998, Credit risk measurement: Developments over the last 20 years, Journal of Banking and Finance, vol. 21, pp. 1721-1742. Gordy, MB, 2000, A comparative anatomy of credit risk models, Journal of Banking  and Finance, pp.119-149.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Jarrow, R, Turnbull, S 1997 A Markov model for the term structure of credit risk spreads, Review of Financial Studies, vol. 10, no. 2, pp. 481–523. Merton, C 1974. On the pricing of corporate debt: The risk structure of interest rates.  The Journal of Finance, vol. 29, no. 2, pp. 449–470. Saunders, A Allen, L 2002, Credit risk measurement: New Approaches to Value at  Risk and Other Paradigms. John Wiley Sons, New York.

bowlbys deprivation hypothesis essays

bowlbys deprivation hypothesis essays Evaluate Bowlbys Deprivation Hypothesis In his hypothesis, Bowlby believed that an infants failure to attach to a primary caregiver would have long term effects. This essay will attempt to evaluate Bowlbys deprivation hypothesis. Firstly, the terms attachment and deprivation will be defined. Following that, a full definition of the hypothesis will be made, and then an attempt will be made to describe and understand the studies and period of history that lead to Bowlbys ideas and the influence they generated. A full evaluation will be made of his deprivation hypothesis, including detailed criticisms of his theory. Finally, conclusions will be drawn to show if Bowlbys deprivation hypothesis can still retain any credibility. The first task is to define the terms attachment and deprivation. In 1973 the leading attachment psychologist, Mary Ainsworth, pointed out that Attachment is an affectional tie that one person forms to another person, binding them together in space, and enduring over time. Deprivation can occur when there is insufficient opportunity for interaction with a mother figure (privation), when there is insufficient interaction with mother (masked deprivation), or when there are repeated breaches of ties with mother figures. In 1949, the World Health Organisation became concerned about the number of homeless children, or children who were growing up in institutions as a result of the war years. They commissioned Bowlby to look into this matter, and to report to them whether these children were likely to be suffering from their experiences, and what the best kind of upbringing for such children was. Bowlby concluded that a warm intimate and continuing relationship with a mother figure is an essential precondition for mental health. Maternal deprivation or a disturbed emotional attachment between mother and child was said to cause i...

Proctor & Gamble (Pakistan) Essay Example | Topics and Well Written Essays - 5250 words

Proctor & Gamble (Pakistan) - Essay Example One of the most persistent drivers of corporate strategy is the macro-environment that has been explained through the PESTEL analysis. Indeed government policies can effect both supply side and the demand side factors. From P&G’s perspective it is not only the total demand that will be affected by such policies but also have bearing on its distributive policies. Factors like taxation or legislation on wage conditions or employment are all very relevant. But these are direct influences. Other indirect factors that affect the consumer’s income levels will be equally significant contributors that need to be watched and adjustments will have to be made to accommodate these in future strategies. The Five Force analysis has expounded the basis of strategy in relation to the industry environment and the likely impact on P&G’s performance. The company has a few traditional as well as contemporary competitors that take a sizable share of the market. All across the industr y the product range is quite similar as in the consumer industry worldwide. Since there is little difference to choose from, it is the buyer’s perception that assumes importance in this market.