Showing papers on "Financial risk published in 1986"
TL;DR: The hedge ratio as discussed by the authors measures the risk-minimizing position in the traded commodity in relation to the position that would have been taken had the desired commodity been traded, and the position is k own as a "cross-hedge" (see Working [17] and Anerson and Danthine [2]).
Abstract: A company's financial performance often depends on the uncertain price of a commodity or financial instrument. For example, a lumber distributor might enter into a fixed-price contract for a particular variety of lumber; or a cable manufacturer might have a short position in copper; or a firm might have debt whose interest rate is linked to the prime rate. Although modem theories of valuation lead some people to conclude that non-market risk (unsystematic risk) need not be hedged, elimination of all non-essential risk is indeed a desirable goal, so long as it can be achieved at reasonable cost. Companies have good reason to be concerned about the total risk that they face. Total risk causes concern among those whose relationships with the firm are not diversified, such as employees, customers, and suppliers. In addition, reducing operating risks permits a company to accept greater financial risk through leverage, which brings with it the tax advantages of debt. (For a fuller discussion, see Adler and Dumas [1], Shapiro and Titman [14], Doherty [4], and Dufey and Srinivasulu [5].) Quite often, hedging is not just a simple matter of "locking in" a price or a rate, since the relevant commodity might not be traded in a futures market (for example, there are no futures in the prime interest rate); even when it is, there may still be differences between the nature of the firm's exposure and the futures contract (the firm may need to deliver in June, but there is no June contract). In circumstances like these, a question arises as to whether the futures contracts that are traded can help to minimize the overall risk faced. Note that we do not need to restrict the hedging possibilities to a futures position that exactly matches the unit size of the exposure. For example, it is clear that other things being equal, the more volatile the firm's exposure, the larger its futures position should be. The size of the risk-minimizing position in the traded commodity in relation to the position that would have been taken had the desired commodity been traded is known as the "hedge ratio," and the position is k own as a "cross-hedge" (see Working [17] and Anerson and Danthine [2]). The appropriate hedge ratio can be determined accurately if the joint probability distribution for all the relevant random variables is known, for then it is simply a problem of mathematics, but the usual practical
36 citations
TL;DR: In this paper, the authors show that high operating leverage is a principal source of financial risk and that grants to reduce initial capital costs are more effective in reducing risk than guaranteed investment security.
18 citations
TL;DR: In this article, a stochastic model of capitalization is presented, which takes into account the financial risk in the actuarial processes, and a new principle of premium calculation for the capitalization operations based on the equality between backward reserve and conditional expectation of the forward reserve is presented.
Abstract: This paper presents a stochastic model of capitalization which takes mto account the financial risk in the actuarial processes. We first introduce a stochastic differential equation which allows us to define the capitalization and actuahzation processes. We use these concepts to present a new principle of premium calculation for the capitalization operations, based on the equality between backward reserve and conditional expectation of the forward reserve. A generalization of the classical Thiele equation in life insurance is also given. Numerical examples dlustrate the model.
12 citations
TL;DR: In this paper, a study of the farm firm integrates long run investment and financial decisions, and short run production and marketing decisions into a single decision framework that includes both time and risk.
Abstract: This study of the farm firm integrates long run investment and financial decisions, and short-run production and marketing decisions into a single decision framework that includes both time and risk. The results suggest that the use of various strategies for managing market risks allow the entrepreneur to accept more risk in investing and producing; and that an integrated analysis of production, marketing and investment-financing alternatives is essential to make accurate recommendations about risk management strategies. Risk management is receiving much more attention in the literature. Most studies focus on short-run production or marketing decisions; exceptions are studies of risk in farm growth models by Barry and Willman, Kaiser and Boehlje, Batterham, and Chen. This study adds long-run investment and financial decisions to broaden the scope of risk analysis. Specific
12 citations
TL;DR: In this article, a theoretical model of optimal firm production and some dimensions of financial decisions in cash and futures markets con- isks are presented for corn and soybeans in Georgia.
Abstract: only with price risk (Ward and Fletcher; Peck). Subsequently, research has considered Incorporation of futures markets into the Peck) Subseqently, research has considered theory of the firm under uncertainty has re- production and price risks (Rolfo), price and ceived considerable attention in risk manrisks (Harris and Baker) and price agement. A theoretical model of optimal firm production, and some dimensions of financial decisions in cash and futures markets con- isks (Lutgen and Helmers; Berck). However sidering price, production, and financial risks the financial risk arising from margins have is presented. Production and marketing strat- not been explicitly considered. In his review egies for corn and soybeans in Georgia and of past studies, Kenyon noted a need for more Illinois are analyzed to determine the optimal evaluation of marketing strategies involving amount of futures contracting which may be simultaneous consideration of production, a hedge or a speculative position. A partial price, and financial risks. hedge is optimal for most situations for risk Some of the studies mentioned suggest that averse producers when the amount hedged hedging can significantly reduce exposure to is variable. With fixed quantity transactions, risk. Although surveys of farmers have found speculative and cash positions, but not hedg- limited use of futures markets to manage ing, tend to be E-V efficient. price risk (Paul et al.), a new pricing environment may provide new opportunities
12 citations
TL;DR: Garcia et al. as discussed by the authors analyzed basis fluctuations forward contracting but lower income and for selected livestock markets and deterrisk than cash sales and concluded that the use of futures differently in their choice of marketing strat- markets offers a viable tool to reduce price egies according to their risk attitudes.
Abstract: The literature is replete with theoretical Cumulative probability distributions of in- and empirical issues involved in the use of come for management scenarios involving strategies to reduce income variability four pre-harvest marketing strategies are sub- through minimizing production, price, and jected to stochastic dominance analysis to financial risks. Falatoonzadeh et al. recently determine risk-efficient sets of strategies for demonstrated the use of five common mandifferent groups of farmers in North Florida. agement tools to reduce price and production Results indicate that farmers should behave risks. They concluded that the use of futures differently in their choice of marketing strat- markets offers a viable tool to reduce price egies according to their risk attitudes. Highly risk using hedging. risk-averse farmers should prefer some for- A key factor influencing beneficial usage ward contracting while low risk-averse and of futures markets is the variation in the basis. risk-loving farmers should prefer cash sales The basis is the difference between the fuat harvest. Use of the futures markets leads tures price and the local cash price at a give to both higher income and greater risk than time. Garcia et al. analyzed basis fluctuations forward contracting but lower income and for selected livestock markets and deterrisk than cash sales. mined that long-term price levels and un
9 citations
TL;DR: In this paper, the authors examined the economic risks associated with nuclear accidents as a result of various regulatory response options that might be imposed after a serious accident, including partial or complete nuclear moratoria, and found that such risks may be two to three times greater than the plant-specific financial risk estimates that have previously been calculated by others.
8 citations
5 citations
TL;DR: In this article, risk programming and simulation methods are used to analyze the opportunity to reduce whole-farm risk in a diversified cash crop farm through reduced leverage and/or adjustments in rental arrangements.
Abstract: Risk programming and simulation methods are used to analyze the opportunity to reduce whole-farm risk in a diversified cash crop farm through reduced leverage and/ or adjustments in rental arrangements. These two financial strategies are shown to extend the ability of the farm operator to manage downside risk beyond the singular effects of a diversified farm plan. The analysis indicates that a trade-off occurs between these strategies, but that the reduction of debt has a greater impact on the distributions of net cash flow (before taxes) and outstanding term debt.
5 citations
3 citations
TL;DR: In this paper, the economic results of the various rotational and fallow systems were evaluated for a period of 24 years (1960 to 1983) for a hypothetical farming unit of 600 ha.
Abstract: The Free State Midlands is a high-risk area where summer and winter crops are cultivated under various rotational and fallow systems. Six such systems in general use were identified and with the aid of crop growth simulation models and weather input data long-term yield data were generated. The economic results of the various systems were evaluated for a period of 24 years (1960 to 1983) for a hypothetical farming unit of 600 ha. The various systems were evaluated in respect of gross farm production value, margin above variable costs, net farm income and farm profit, based on the average yields for the period at 1983 prices. The annual farm profit figures, purchasing power and financial risk were also evaluated. It appears that the protracted wheat fallow system is the most economic of the six. It is also clear that the financing risk can be reduced for both the farmer and the financial institution by coupling the granting of loans to the physio-biological aspects of a fanning unit. Furthermore, ...
Journal Article•
TL;DR: Simulations based on a distribution used to evaluate a sophisticated method of estimation indicate that the NP-2 approximation is accurate as well as simple.
Abstract: Financial regret is said to occur when losses on self-insured perils exceed the premiums that would have been paid to insure those perils. Previous work has emphasized the relevance of the probability of regret to the self-insuring corporation and has provided sophisticated techniques for evaluating this quantity. This paper views the problem from the point of view of the risk manager whose performance may be evaluated, in part, on the basis of how often "financial regret" has occurred. The analogy between "financial regret" for a self-insuring entity and insolvency for an insurer is exploited to develop approximations to this probability and its sensitivity to the limits of coverage. Using these approximations requires a calculator and basic statistical tables. Simulations based on a distribution used to evaluate a sophisticated method of estimation indicate that the NP-2 approximation is accurate as well as simple.
Posted Content•
TL;DR: In this paper, the authors conducted a study to find out the policy and practice of Indian companies regarding various phases of the capital expenditure planning and control, and to ascertain corporate executives' opinion on the linkage between the capital budgeting and the corporate strategy.
Abstract: The purpose of the study was to find out the policy and practice of Indian companies regarding various phases of the capital expenditure planning and control, and to ascertain corporate executives’ opinion on the linkage between the capital budgeting and the corporate strategy. Detailed questionnaires were sent to fourteen companies which had agreed to participate in the study. The study reveals the following: (i) The definition and classification of capital expenditures is guided a lot by accounting convention and tax regulations. (ii) A very large number of project ideas are generated at the plant level. Thus the investment idea generation is a bottom-up process. (iii) The authority to progress and approve investment proposals and to spend money for approved expenditures is rigidly concentrated in the hands of a few top management officials. (iv) A large number of business executives lack conceptual clarity in estimating cash flows. (v) Almost all companies use payback as the evaluation criterion. About three-fourth companies use NPV or IRR; but none of the companies uses any of the sophisticated criteria without payback. (vi) Selling price, product demand, technological changes and government policies contribute investment risk. Sensitivity analysis is the most popular method of handling investment risk. (vii) Companies hardly face capital shortage. No company uses mathematical model to select project under capital rationing. (viii) It is a common practice in India to reappraise approved projects. The power to review reappraisals is concentrated at the top. (iv) In practice, strategic considerations (as well as a number of qualitative factors) are considered to be very important in the investment planning. On the basis of the findings of the study and experiences of other countries, a descriptive model for the capital expenditure planning and control is developed.
01 Jan 1986
TL;DR: Data suggests that hospitals and third party payers have subsidized clinical research in the past by supporting research related patient case costs including extended patient stays, payment of ancillary diagnostic and therapeutic services and supporting acquisition and operation of expensive technical equipment.
Abstract: Prospective reimbursement places hospitals at increased financial risk. Relatively fixed payment rates provide a strong incentive for hospitals to reduce the cost of each inpatient stay. Cost control strategies of hospitals are numerous and varied. Cost of clinical research not paid by project sponsors is currently undergoing scrutiny. Preliminary data suggests that hospitals and third party payers have subsidized clinical research in the past by supporting research related patient case costs including extended patient stays, payment of ancillary diagnostic and therapeutic services and supporting acquisition and operation of expensive technical equipment. Hospitals cannot thrive if they lose money in the name of research. New patterns of fair and equitable cost-sharing between hospitals and clinical research sponsors must occur if hospital-based clinical research and medical progress is to be maximized.
01 Sep 1986
TL;DR: In this paper, the authors argue that the highly managed financial systems in most developing countries have, in one way or another, restricted effective growth patterns and processes in these economies, and argue that financial reform is a key element in expanding the productive capacity of developing countries.
Abstract: Over the past two decades, the financial services industry in most advanced industrial countries has been subject to dramatic and Multultiple transfomations. These revolutionary changes, which resulted in a more competitive financial environment, have produced substantial public benefits. Unfortwtately, the highly managed financial systems in most developing countries have, in one way or another, restricted effective growth patterns and processes in these economies. There are, however, several ways in which underdeveloped countries cart improve the contribution of their financial sectors to economic development to income distribution. This article discusses some of these methods, and ends by arguing that financial reform is a key element in expanding the productive capacity of developing countries.
Posted Content•
TL;DR: In this article, a simple model for adjusting the deposit insurance premium cost to credit a risk-based dividend toward an institution's current insurance premium is presented. But no legislation is required.
Abstract: The assessments and the role for Federal and State deposit insurance funds have been public policy concerns since the banking holiday of 1932 and the Federal Deposit Insurance Act of 1933. … This study provides for adjusting the deposit insurance premium cost to credit a risk-based dividend toward an institution's current insurance premium. Thus, the net or effective insurance premium for each association becomes a risk-based premium. For each S&L, a financial risk index is developed and employed to determine its appropriate dividend. A simple model is developed utilizing only the readily available, and no legislation is required. A dynamic system is also developed for distributing dividends after a risk based system is accepted.