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Business and Economics > Investments: Options

You are looking at 1 - 10 of 15 items for :

  • Type: Journal Issue x
  • Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill x
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Cover IMF Working Papers
Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
Chang Ma and Mr. Fabian Valencia
Over the past two decades, Mexico has hedged oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.
Keywords:
WP; strike price; present discounted value; Hedging; Commodity exporters; Sovereign debt; Default; welfare gain; hedging economy; cost premium; bond price; hedging program; default incentive; hedging increases social welfare; commodity-price swing; Oil prices; Personal income; Options; Asset prices; Global; oil price risk; B welfare; oil price process; averse investor; Income
Cover IMF Staff Country Reports
Mexico: Selected Issues
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper analyzes transmission of monetary policy rates to lending and deposit rates in Mexico. The results show that transmission of the policy rate to market rates is statistically significant in all cases, except for mortgage rates. For sight deposits, pass-through is low, with a 1 percentage point increase in the policy rate leading to a 0.2 percentage point rise in the deposit rate. For term deposits the pass-through is stronger, but remains below unity at 0.7. The pass-through to both lending and deposit rates is very rapid. The dynamic specifications show that pass-through is significant in either the current or the following month, and the long-term impact is achieved during the second month.
Keywords:
ISCR; CR; strike price; monetary policy; mortgage rate; price differential; open economy; core inflation; term deposit rate; oil-price process; price bond; oil price persistence; target rate; headline inflation; oil-price shock; differenced interest rates; oil-price volatility; Central bank policy rate; Oil prices; Deposit rates; Hedging; Options; Global; Phillips curve
Cover IMF Working Papers
Operative Principles of Islamic Derivatives: Towards a Coherent Theory
Mr. Juan Sole and Andreas Jobst
Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari'ah-compliant structures. Islamic finance is governed by the shari'ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The paper explains the fundamental legal principles underpinning Islamic finance with a view towards developing a cohesive theory of derivatives subject to shari'ahprinciples. After critically reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, the paper offers an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law.
Keywords:
WP; capital market; asset ownership; reference asset; derivatives transaction; asset performance; terms agreement; derivatives; Islamic risk management; Islamic finance; shari’ah compliance; sukuk; mudaraba; ijarah; murabaha; riba; istisna; gharar; maisir; maslaha; derivative element; purchase price; asset transfer; cash settlement; Islamic law; fair value; Futures; Options; Hedging; Currencies; Global
Cover IMF Working Papers
Next Generation System-Wide Liquidity Stress Testing
Mr. Claus Puhr, Mr. Andre O Santos, Mr. Christian Schmieder, Salih N. Neftci, Mr. Benjamin Neudorfer, Mr. Stefan W. Schmitz, and Mr. Heiko Hesse
A framework to run system-wide, balance sheet data-based liquidity stress tests is presented. The liquidity framework includes three elements: (a) a module to simulate the impact of bank run scenarios; (b) a module to assess risks arising from maturity transformation and rollover risks, implemented either in a simplified manner or as a fully-fledged cash flow-based approach; and (c) a framework to link liquidity and solvency risks. The framework also allows the simulation of how banks cope with upcoming regulatory changes (Basel III), and accommodates differences in data availability. A case study shows the impact of a "Lehman" type event for stylized banks.
Keywords:
WP; bank; solvency; Fixed income securities; option pricing theory; financial markets; puttable bond; extendible bond; discount bond; bond futures; interest rate derivative market; Bonds; Options; Asset prices; Sovereign bonds; Short term interest rates
Cover IMF Working Papers
Country Insurance Using Financial Instruments
Mr. Luca A Ricci, Mr. Marcos d Chamon, and Ms. Yuanyan S Zhang
The availability of financial instruments related to indices that track global financial conditions and risk appetite can potentially offer countries alternative options to insure against external shocks. This paper shows that while these instruments can explain much of the in-sample variation in borrowing spreads, this fails to materialize in hedging strategies that work well out-of-sample during tranquil times. However, positions on instruments such as those tracking the US High Yield Spread, the VIX, and especially other emerging market CDS spreads can substantially offset adverse movements in own spreads during times of systemic crises. Moreover, high risk countries seem to gain more, as their underlying weaknesses makes them more vulnerable to external shocks. Overall, the limited value in tranquil times, coupled with political economy arguments and innovation costs could justify the limited interest for this type of hedging in practice
Keywords:
WP; hedging strategy; hedge ratio; government bond; hedging performance; hedging; financial innovation; country insurance; contagion; sudden stop; systemic risks; CDX index; EMBI spread; interest rate; Emerging and frontier financial markets; Yield curve; Options; Global; Africa
Cover Policy Papers
Key Developments in IMF Policy Work--October 12, 2008-April 22, 2009
International Monetary Fund
This paper summarizes key developments in the Fund’s policy work since the 2008 Annual Meetings. Table 1 presents key conclusions of policy initiatives. Table 2 provides a progress report on implementation of the Fund’s surveillance priorities.
Keywords:
PP; The Fund; lending; financing; Fund resource; risk management framework; Gra lending toolkit; IMF overhaul; fund's policy; financing capacity; fund's Facilities; Financial sector; Early warning systems; Options; Special Data Dissemination Standard (SDDS); Global
Cover IMF Working Papers
Recent Advances in Credit Risk Modeling
Jose Giancarlo Gasha, Mr. Andre O Santos, Mr. Jorge A Chan-Lau, Mr. Carlos I. Medeiros, Mr. Marcos R Souto, and Christian Capuano
As is well known, most models of credit risk have failed to measure the credit risks in the context of the global financial crisis. In this context, financial industry representatives, regulators and academics worldwide have given new impetus to efforts to improve credit risk modeling for countries, corporations, financial institutions, and financial instruments. The paper summarizes some of the recent advances in this regard. It considers modifications of structural models, including of the classical Merton model, and efforts to reconcile the structural and the reduced-form models. It also discusses the reassessment of the default correlations using copulas, the pricing of credit index options, and the determination of the prices of distressed debt and estimation of recovery values.
Keywords:
WP; index option; market price
Cover IMF Working Papers
Financial Instruments to Hedge Commodity Price Risk for Developing Countries
Miss Yinqiu Lu and Salih N. Neftci
Many developing economies are heavily exposed to commodity markets, leaving them vulnerable to the vagaries of international commodity prices. This paper examines the use of commodity options-including plain vanilla, risk reversal, and barrier options-to hedge such risk. It then proposes the use of a new structured product-a sovereign Eurobond with an embedded option on a specific commodity price. By extracting commodity price risk out of the bond, such an instrument insulates the bond default risk from commodity price movements, allowing it to be marketed at a lower credit spread. The product is also designed to help developing countries establish a credit derivatives market, which would in turn enhance the marketability and liquidity of sovereign bonds.
Keywords:
WP; commodity price; price; investment bank; strike price
Cover IMF Working Papers
Pricing and Hedging of Contingent Credit Lines
Ms. Elena Loukoianova, Salih N. Neftci, and Mr. Sunil Sharma
Contingent credit lines (CCLs) are widely used in bank lending and also play an important role in the functioning of short-term capital markets. Yet, their pricing and hedging has not received much attention in the finance literature. Using a financial engineering approach, the paper analyzes the structure of simple CCLs, examines methods for their pricing, and discusses the problems faced in hedging CCL portfolios.
Keywords:
WP; credit risk; forward rate; Contingent credit line (CCL); pricing; hedging; CCL price; CCL contract; CCL structure; CCL facility; financial condition; CP market; companies credit-worthiness; CCL characteristic; Lines of credit; Loans; Options; Credit
Cover IMF Working Papers
Hedging Foreign Exchange Risk in Chile: Markets and Instruments
Mr. Jorge A Chan-Lau
Policy makers have expressed interest in fostering the development of local foreign exchange derivatives markets with a view to reducing risks arising from currency mismatches between assets and liabilities in the corporate sector. This paper assesses foreign exchange exposure in the corporate sector in Chile, analyzes the current state of the foreign exchange derivatives market in Chile, and argues that liquid and developed foreign exchange derivatives markets can help promote financial stability.
Keywords:
WP; market; currency; option contract; derivative instrument; foreign currency