June '2020
The IUP Journal of Financial Risk Management
Focus
In the first paper, "Bond Valuation: Modeling Downgrade Risk and Default Risk Based on Rating Migration Variation as Uncertainty Over the Investment Horizon Through Optimization", the author, Brian Barnard, by measuring the variation in the rating migration matrix, suggests that rating migration uncertainty and variation, as a component of default risk and downgrade risk, may very well be a significant factor of bond value. The author concludes that the uncertainty in bond prices owing to rating migration uncertainty and variation may not necessarily be diversified away, even in a portfolio context.
Risk is an uncertain consequence of a future event. It could have positive or negative effects. While positive risks are opportunities, as they have positive impact on the objectives, negative risks are threats and should be managed and minimized. Management of risk involves identification of risk, assessment of risk and prioritization of risk. The above three stages help the firm to minimize, monitor and control the impact of an unfortunate event or negative risk and utilize the resources to foster the realization of opportunities, that is positive risk. Enterprise Risk Management (ERM) or Corporate Risk Management (CRM) is a helpful tool for it. In the second paper, "An Analysis of Factors Affecting Corporate Risk Management with Special Reference to Power Finance Corporation", the author, Ritu Wadhwa, determines the effectiveness of CRM in the context of Power Finance Corporation, that identifies top 21 risks in its external and internal environment, of which 8 are quantifiable and 13 are
non-quantifiable.
Lastly, in the research note, "ELG Proposition in South Asian Countries - Panel Data Analysis", the authors, Amit Kundu and Anil Kumar Goyal, estimate the relation between export and economic growth in five South Asian countries, i.e., India, Sri Lanka, Bangladesh, Nepal and Pakistan, for the period 1999-2017 using panel data. The panel data analysis reveals that relationship between export and growth is not established in the selected countries, hence rejecting the export-led growth hypothesis in the studied context.
Consulting Editor
| Article | Price (₹) | ||
| Bond Valuation: Modeling Downgrade Risk and Default Risk Based on Rating Migration Variation as Uncertainty Over the Investment Horizon Through Optimization |
100
|
||
| An Analysis of Factors Affecting Corporate Risk Management with Special Reference to Power Finance Corporation |
100
|
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| ELG Proposition in South Asian Countries - Panel Data Analysis |
100
|
||
Bond Valuation: Modeling Downgrade Risk and Default Risk Based on Rating Migration Variation as Uncertainty Over the Investment Horizon Through Optimization
Rating migration variation or volatility, as rating migration uncertainty, is a real-life phenomenon that can be measured empirically. The study extends reduced form bond valuation models based on rating migration (matrices) by allowing variation in the rating migration matrix, as opposed to variation of the rating migration matrix. This is seen as a more accurate and practical modeling of downgrade risk and default risk, as including rating migration uncertainty. Rather than stating a number of possible rating migration matrices, commonly representing certain scenarios, each entry of the rating migration matrix is allowed to vary by a certain extent. The resultant price probability distribution is delineated by searching the minimum and maximum possible price through optimization. The study models bond value of individual issues as well as portfolios. The cost of downgrade or default is delineated by calculating possible future bond or portfolio prices at a certain point in time, and comparing the output price probability distributions with conventional bond valuation model prices. Because variation in the rating migration matrix is permitted, the model is better able to account for and discount the cost of downgrade or default. The outcome of the study suggests that rating migration uncertainty and variation, as a component of default risk and downgrade risk, may very well be a significant factor of bond value. Prices calculated in this way may deviate from conventional prices. Furthermore, portfolios do not necessarily diversify price uncertainty and variation due to rating migration uncertainty and variation.
An Analysis of Factors Affecting Corporate Risk Management with Special Reference to Power Finance Corporation
Enterprise Risk Management (ERM) or Corporate Risk Management (CRM) is a concept which has been recently introduced. The approach has already been gregariously adapted by companies, banks, and financial and non-financial institutions to create a risk cover against the turbulences of tomorrow. The ability to manage risks across geographies, products, asset classes, customer segments and functional departments is of prime importance. Any failure to keep a check on these risks can lead to a serious damage to the continuity of the business. Power Finance Corporation (PFC) has identified the top 21 risks in its external and internal environment. Out of these 21 risks, 8 are quantifiable and 13 are non-quantifiable risks. The company has in place a vigilant committee consisting of professional and experienced people to consistently monitor the risk policies and make sure that the policies are revised to match the changing face of the power sector. The present study focuses on the effectiveness of ERM policies in the context of PFC. The various risks associated with PFC are credit risk, liquidity risk, market risk, operational risk, exchange rate risk on external borrowings, legal risk, risks due to change in prevailing statutes and interest rate risk associated with floating rate of interest.
ELG Proposition in South Asian Countries - Panel Data Analysis