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on Corporate Finance |
| By: | Jochen R. Andritzky; Manmohan Singh |
| Abstract: | Credit default swaps (CDS) provide the buyer with insurance against certain types of credit events by entitling him to exchange any of the bonds permitted as deliverable against their par value. Unlike bonds, whose risk spreads are assumed to be the product of default risk and loss rate, CDS are par instruments, and their spreads reflect the partial recovery of the delivered bond's face value. This paper addresses the implications of the difference between bond and CDS spreads and shows the extent to which the recovery assumption matters for determining CDS spreads. A no-arbitrage argument is applied to extract recovery rates from CDS and bond markets, using data from Brazil's distress in 2002-03. Results are related to the observation that preemptive restructurings are now more common than straight defaults in sovereign bond markets and that this leads to a decoupling of CDS and bond spreads. |
| Keywords: | Credit default swaps , Brazil , recovery value , default risk , Credit risk , Brazil , Risk premium , Bond markets , Prices , |
| Date: | 2006–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/254&r=cfn |
| By: | Michael G. Papaioannou |
| Abstract: | Measuring and managing exchange rate risk exposure is important for reducing a firm's vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm's exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical versus strategical and passive versus active hedging. In addition, it outlines a set of widely accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by U.S. firms. |
| Keywords: | Financial risk , financial management , foreign exchange hedging , exchange hedging , corporate hedging practices , Financial risk , Risk management , Foreign exchange , Exchange rates , Industry , Economic models , |
| Date: | 2006–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/255&r=cfn |
| By: | Alexander Klemm |
| Abstract: | This paper provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice. In the recent past, ACE systems have been used in Austria, Croatia, and Italy. Brazil still applies a variant of such a system and Belgium introduced one this year. This paper summarizes the empirical literature on past ACE systems, and provides a theoretical and empirical assessment of the Brazilian ACE variant. The main finding is that the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility. Despite the reduction in the tax preference for debt finance, capital structures have not changed much, but dividends have increased. Investment appears to have benefited from the reform, although the extent to which this was due to the new structure rather than the tax cut is unclear. |
| Keywords: | ACE , tax reform , corporate income tax , Tax systems , Tax reforms , Income taxes , Profits , |
| Date: | 2006–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/259&r=cfn |
| By: | Philippe D Karam; Doug Hostland |
| Abstract: | This paper documents the specification of a model that was constructed to assess debt sustainability in emerging market economies. Key features of the model include external and fiscal sectors, which allow assessment of external and public debt in a unified framework; public and external debt, which both have an explicit maturity structure along with a distinction between denomination in domestic versus foreign currency to facilitate debt management analysis; monetary and fiscal policy, which are endogenous and specified using explicit forward-looking policy rules; an endogenous risk premium on public and external debt; and a mechanism for invoking a sudden stop in private capital flows. The paper provides an overview of the basic structure of the model, outlines the methodology used to calibrate the parameters, and illustrates the key properties of the model with reference to dynamic responses of selected variables to shocks of interest. |
| Keywords: | Debt sustainability , dynamic analysis , Monte Carlo simulations , Debt sustainability analysis , Emerging markets , Economic models , |
| Date: | 2006–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/268&r=cfn |
| By: | Hiroko Oura; Andreas Jobst; Charles Frederick Kramer; Catriona Purfield |
| Abstract: | Asian equity markets have grown significantly in size since the early 1990s, driven by strong international investor inflows, growing regional financial integration, capital account liberalization, and structural improvements to markets. The development of equity markets provides a more diversified set of channels for financial intermediation to support growth, thus bolstering medium-term financial stability. At the same time, as highlighted by the May-June 2006 market corrections, the increasing role of stock markets potentially changes the nature of macroeconomic and financial stability risks, as well as the policy requirements for dealing with these risks. |
| Keywords: | Equity markets , Asian financial markets , financial integration , financial stability , international capital markets , Stock markets , Asia , Capital markets , Financial stability , International capital markets , |
| Date: | 2006–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/266&r=cfn |
| By: | Benoît Mercereau |
| Abstract: | Holding foreign assets reduces the volatility of a country's income by allowing countries to share risk. Yet, financial integration is limited in Asia. This paper estimates how much Australia and other countries in the Asia-Pacific region would gain from greater financial integration. The results suggest that these welfare gains are large, which argues in favor of a progressive capital account liberalization across the region. |
| Keywords: | Risk-sharing , international diversification , regional integration , Risk management , Australia , Asia and Pacific , Capital account liberalization , Foreign investment , Financial systems , |
| Date: | 2006–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/267&r=cfn |