nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒01‒06
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Pricing of Credit Default Swaps During Distress By Jochen R. Andritzky; Manmohan Singh
  2. Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms By Michael G. Papaioannou
  3. Asian Equity Markets: Growth, Opportunities, and Challenges By Hiroko Oura; Andreas Jobst; Charles Frederick Kramer; Catriona Purfield

  1. 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=fmk
  2. 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=fmk
  3. 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=fmk

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