金融風險管理

1、金融風險管理Nature of BankingCommercial bankingTaking deposits, making loans.Wholesale vs. retail.Investment bankingRaising debt and equity for companies; advice on mergers and acquisitions, restructurings, etc.2Exle of Simple Bank Balance Sheet: End 2012AssetsCash 5Marketable Securities 10Loans 80Fixed A

2、ssets 5Total 100LiabilitiesDeposits 90Subord L.T. Debt 5Equity Capital 5Total 1003Income Statement: 2012Net Interest Income 3.00Provision for Loan Losses (0.80)Non-Interest Income 0.90Non-Interest Expense (2.50) Pre-Tax Operating Income 0.604Year 2013What happens in year 2013 if it is the same as ye

3、ar 2012 except that provision for loan losses is 4.0 instead of 0.8?Pre-tax net operating loss: 0.6-3.2=2.6After-tax (30%) loss: 2.6*0.7=1.8Equity capital is 5% of assetsAfter-tax loss is 1.8% of assets5What if Balance Sheet Had Been More Aggressive?AssetsCash 5 Marketable Securities 10Loans 80Fixed

4、 Assets 5Total 100LiabilitiesDeposits 94Subord L.T. Debt 5Equity Capital 1Total 1006Year 2013What happens in year 2013 if it is the same as year 2012 except that provision for loan losses is 4.0 instead of 0.8?Pre-tax net operating loss: 0.6-3.2=2.6After-tax (30%) loss: 2.6*0.7=1.8Equity capital is

5、1% of assetsAfter-tax loss is 1.8% of assetsIts a issue of Capital AdequacyRegulationRegulators set minimum levels for the capital a bank is required to keep.Equity is an exle of Tier 1 capital.Subordinated long term debt is an exle of Tier 2 capital.8Deposit InsuranceMost countries have deposit ins

6、urance programs that insure depositors against losses up to a certain level.In the US the FDIC (Federal Deposit Insurance Corporation) has provided protection for depositors since 1933.The amount insured was $2,500 (maximum level) in 1933.It has been increased several times. Following the credit cri

7、sis it was increased from $100,000 to $250,000 in October 2008.Why might deposit insurance encourage a bank to take risks? (moral hazard)9Investment BankingMethods of raising debt or equityPublic offering.Private placement.Best efforts.Firm commitment.10Best Efforts vs. Firm Commitment50 million sha

8、res are to be issued and target price is $30 per share.Best efforts would lead to a fee of 30 cents per share; firm commitment leads to bank buying at $30 per shareBest effortsFirm CommitmentCan sell at $29+$15 million$50 millionCan sell at $32+$15 million+$100 million11Initial Public Offering (IPO)

9、Usually on a best efforts basis.Bank will set offering price sufficiently low that shares are almost certain to be sold.Often price rises immediately after IPO.Banks often offer IPO shares to fund managers and their best customers.12Initial Public Offering (IPO)Dutch Auction IPOIndividuals and compa

10、nies bid by indicating the number of shares they want and the price they are prepared to pay.The price paid is the lowest bid that leads to all the shares being sold.14Exle: How are 1 million shares allocated in this situation? BidderNumber of SharesPriceA100,000$30.00B200,000$28.00C 50,000$33.00D30

11、0,000$29.00E 150,000$30.50F300,000$31.50G400,000$25.00H200,000$30.2512345615Securities TradingWhy do banks trade?To meet the needs of its counterparties. (market making)To reduce its own risks. (hedging)To take a speculative position in the hope of making a profit. (speculation)Securities TradingBan

12、ks often get involved in securities trading, providing brokerage services.Brokerage services:Full service brokersOffer investment research and advice.Discount brokersCharge lower commissions, but provide no advice.Online serviceProvide a platform for customers to trade without a broker.17Potential C

13、onflicts of InterestBank recommends securities that investment bank is trying to sell.Commercial bank passes confidential information on a client to investment bank.Stock recommended as a “buy” to please companys management in order to get investment banking business.Investment bank issue securities

14、 for a company so that commercial bank can get rid of a loan. (商業(yè)銀行部門不想再借錢給某公司)18The Risks Facing BanksCredit riskDefault risk in loan and derivatives transactions.Market riskDecline in value.Operational riskInternal systems fail to work or external events.Chapter 3: Insurance Companiesand Pension P

15、lansSemester 2, 2013-14Wu, Wei-ShaoTypes of Life InsuranceTerm life (定期壽險)Temporary life insurance: Last a predetermined number of years.Whole life (終身壽險)Permanent life insurance: Over the whole life of the policyholder.Variable life (變額壽險)在保險期內(nèi)保險金額隨資金運用的績效而變化的一種人壽保險。21Types of Life InsuranceUnivers

16、al life (萬能壽險)保險公司為投保人建立投資帳戶并讓客戶參與賬戶內(nèi)資金的投資活動，將保單的價值與獨立運作的投保人投資帳戶的業(yè)績聯(lián)系起來。Endowment life (生死合險、養(yǎng)老保險)以被保險人在保險期限內(nèi)死亡或期滿生存為條件，都可獲得保險金的一種保險。Group lifeCost of Whole Life Insurance Compared with Annual PremiumCost per yearAnnual PremiumSurplus23Investment of SurplusSome contracts allow the policyholder to ch

17、oose how the surplus is invested.There are tax deferral advantages compared with a regular investment because no tax is paid until there is a payout on the policy.24Annuity Contracts (年金)Typically a lump sum payment is used to buy a life-time annuity.Converting a lump sum into regular payments.Annui

18、ty can be fixed or variable.Annuity can start immediately or be deferred.Accumulated value can depend in a complicated way on the performance of stock indices.There may be penalty-free withdrawals.25Extract from US Mortality Tables (2007): MaleAgeProb. death within one yearProb. SurvivalLife expecta

19、ncy (yrs)300.0014280.9714747.13310.0014530.9700946.20320.0014870.9686845.27330.0015290.9672444.33The probability of a man dying within next year26Extract from US Mortality Tables (2007): FemaleAgeProb. death within one yearProb. SurvivalLife expectancy (yrs)300.0006420.9846651.50310.0006780.9840350.

20、53320.0007210.9833649.56330.0007710.9826648.60The probability of a female dying within next year27How Tables Are Used In PricingLife InsuranceConsider a female aged 30.Probability of death during first year is 0.000642.Probability of death during second year is: (1-0.000642) 0.000678 Probability of

21、death during third year is:(1-0.000642) (1-0.000678) 0.000721.Minimum premium is such that present value of inflows equals present value of outflows. 28Longevity DerivativesE.g., longevity bonds.A population group is defined and the coupon on the bond at any given time is defined as the proportion o

22、f living people to the population.Attractive to insurance companies (who issue annuity contracts) and pension funds.Attractive to speculators because the bonds have very little systematic risk.Property-Casualty InsuranceProperty insurance (產(chǎn)險) is concerned with loss or damage to property from fire,

23、theft, etc.Casualty insurance (意外險) is concerned legal liability exposures.What are the biggest risks facing property-casualty insurers? Catastrophic risk (巨災風險).30Exle of Ratios for Property-Casualty InsuranceLoss Ratio 75%Expense ratio30%Combined ratio105%Dividends1%Combined ratio after dividends1

24、06%Investment income(9%)Operating ratio97%Lose 6%Earn 3%31Other issuesHealth insurance.Reinsurence.Special risk.32Moral Hazard and Adverse SelectionMoral hazard is the risk that the existence of the insurance policy causes the policyholder to take more risks.Adverse selection is the tendency for an

25、insurance company to attract bad risks when it cannot perfectly distinguish between good and bad risks.33Typical Summary Balance Sheet: Life InsuranceAssetsLiabs and Net worthInvestments90Policy Reserves80Other assets10Sub Long Term Debt10Equity Capital10Total100100(Investments are mostly long-term

26、corporate bonds)34Typical Summary Balance Sheet: Property-Casualty InsuranceAssetsLiabs and Net worthInvestments90Policy Reserves45Other assets10Unearned premiums15Sub Long Term Debt10Equity Capital30Total100100(Investments are mostly liquid shorter maturity bonds)The payouts for a property-casualty

27、 company are much less easy to predict than those for a life insurance company.35The Risks Facing Insurance CompaniesPolicy reserves are not meet the claims of policyholders.The performance of the investments.The investments liquidity risks.Credit risk and operational risk.Pension PlansDefined benef

28、it plan (確定給付制)Contributions are pooled. Benefits are determined by a formula dependent on the final salary of the employee and the number of years of service. Defined contribution plan (確定提撥制)Contributions for each employee are kept separate and invested on behalf of the employee.When the employee

29、retires the accumulated value of the contributions is usually converted to an annuity.37Defined Benefit PlansActuaries estimate liabilities and calculate a surplus or deficit for the plan.The discount rate used for private plans is the AA borrowing rate.Deficits must be funded by the company within

30、a prescribed period.A perfect storm: Declining equity prices coupled with declining interest rates.38Chapter 4: Mutual Funds and Hedge Funds Semester 2, 2013-14Wu, Wei-ShaoMutual FundsPercentage of total net assets, year-end 2012Mutual FundsOpen-End FundsClosed-End FundsExchange-Traded Funds (ETFs)O

31、pen-End FundsMost common type of fund is an open-end fund.The number of shares in the fund goes up as investors buy more shares and down as they redeem shares.All purchases and sales of shares are at the 4 p.m. net asset value (NAV) of the fund.42TypesEquity.Bond.Hybrid.Money Market.Index.43CostsTax

32、Annual feeFront-end load (申購費用)Back-end load (贖回費用)44Closed-End FundsConsists of a fixed number of shares that are traded in the same way as the shares of any other companyThe share price tends to be less than the NAV calculated from the market value of the investments45Exchange-Traded Funds (ETFs)S

33、ince 1993.Often designed to track an index.Started by an institutional investor that deposits a block of securities and obtains shares in the ETF.Shares are traded on an exchange. (closed-end)Large institutional investors can exchange shares in the fund for the underlying assets, and vice versa. (op

34、en-end)This keeps the share price close to the NAV of the funds investments.46Exchange-Traded Funds (ETFs)Performance of Mutual FundsThe classic study is by Jensen (1969). His results have been confirmed in later studies. The average alpha of all funds is slightly negative.Good performance by a mutu

35、al fund manager in the past is not a good guide to future performance.48Jensens Results on the Persistence of Good PerformanceNumber of Consecutive Years of Positive AlphaNumber of ObservationsObservations for which the Next Alpha is Positive (%)157450.4231252.0316153.447955.854146.461735.3The resul

36、ts suggest that managers who obtain positive alphas do so because of luck rather than skill.49Mutual Fund ScandalsLate trading.Market timing.Front running.Directed brokerage.50Hedge FundsMutual Funds are restricted becauseShares must be redeemable at any time;NAV must be calculated daily;Investment

37、policies must be disclosed;Use of leverage is limited.Hedge funds are not subject to these restrictions.51Hedge FundsSince 1949.The term “hedge fund” implies that risks are being hedged.For some hedge funds, the word “hedge” is inappropriate.Hedge Fund FeesThe fees are higher than mutual funds and dependent on performance.A typical fee structure is 2 plus 20%.This means that the fund charges a 2% management fee per year plus an incentive fee equal to 20% of any net (after management fees) profits.The hedge fund manager has an