Essays on Systemic Risk

Introduction

The financial crisis of 2007/9 was the worst in the U.S. since the Great Depression of the 1930s. It was the cause of the failure of some of the biggest financial institutions including Washington Mutual which was closed in 2008, and its assets transferred to JP Morgan. In 2008, the crisis reached its peak with loans dropping dramatically to the lowest levels to be witnessed in a half a century. For example, new loans to large borrowers fell by 47 percent in the fourth quarter of 2008 as compared to the previous quarter and by 79 percent relative to ...

Assignment : Essay based on Chapter 5 of “Beggar thy neighbour”.

Assignment number

Assignment –A (1238 words) Essay-1 Question: The economic consequences of lending at compound interest resulted in loss of productive yield of the society. How finance dominated over economics and politics by using this concept of interest (Geisst 193)?

Introduction

The question given above poses a mandatory evaluation of the harmful impact of the compound interest based lending and consequent ease of loans for the people of America. The author, Charles Geisst, used the viewpoint of John Maynard Keynes to explain that the American society was so possessed by the idea of easily availing the loans using compounded ...

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Summary:

- What the Paper is about This study was done by four students from Department of International Business at Schulich School of Business (Bae et al., nd) to test how expropritaion incentives of controlling shareholders impact firm values during a financial crisis and the recovery period. The results of the expropriation model ran for Asian firms for their 1997 crisis and Latin American firms for the 2001 Argentine economic crisis were aligned with the main hypothesis. The hypothesis called “expropriation hypothesis” posits that the value of firms with weaker corporate governance would significantly drop during a ...

The concept of disaster bonds: Overview of catastrophe bonds

Capital markets experience a number of risks that cause investors huge sums of cash. Catastrophe bonds (cat bonds) are a form of principal-at-risk debt securities issued by insurance companies to investors that allow direct transfer of low-frequency, high-sensitivity risk to capital markets. Traditionally, debt securities only allowed insurance companies to repay full principal amount upon maturity of the bond. The introduction of catastrophe bonds solved this situation. Upon the occurrence of one or more catastrophe event, the outstanding principal of the insured reduces. Examples of catastrophe events covered by this bond include natural disasters (earthquakes, hurricane), deaths caused by an outbreak ...

Herding: An Introduction

While psychologist call it as Herd behavior, the financial pundits go with the word ‘’ Herding’’. Herding is a behavior trait found in an individual where his investment decisions are decided by the majority. In other words, it refers to instances when the individuals gravitate towards same or similar investment based solely on the fact that the majority of the investors are doing so. Important to note, since decades, financial pundits has claimed that such action of investors where they enter into herding environment, leads to inefficiency of the financial markets by causing large or unsubstantiated sell-offs which have no fundamental ...

1. Findings CDS market concentrated at counterparty’s levels, and less concentrated at the reference entity levels. This means the top ten active most traders account for 70% of the gross protection and less than 50% of total exposure. Secondly, the gross outstanding notional CDS amount on the EU reference utilities rose by roughly USD 1 trillion since 2010 summer rising to USD 4.6 trillion in 2012. The total net amount of protection equivalently sold on the reference utilities is around USD 500 billion. An aggregate approach is that the major traders sell CDS protection while smaller traders ...

Systemic failure implies the failure of an entire system and occurs due to fragility associated with complex systems. Technological progress creates rapid increases in the number of systems, products as well as policies which pose challenges regarding management, analysis safety and control. (Venkat, 2010). It differs from other risks in terms of effects rather than causes. Systemic risks keep on developing so cannot be predicted. Assessment of systemic risk involves probability of failure, predicting consequences of failure and collapse of pathways. Complex organizations face management, design, system overload and proliferating random failures. Complex systems are intrinsically dangerous systems with ...

Q1. This simplest explanation for this is that when the economy failed, Bear Sterns spiked the mortgage of people’s houses, which gave the company a negative name and thus led to investors ceasing loans to the firm. In more complex terms, Bear Sterns tied itself up in numerous derivatives dealings that involved subprime-based investments. Other banks caught on to the amount of “toxic waste”, i.e. The subprime-based investments that the firm held and they stopped making short term loans that Bear Sterns desperately needed to remain liquid. As a result, Bear Sterns was forced to start selling off ...

Question 1

Analyze the relationship between the marginal cost of capital and foreign investment analysis. Marginal cost of capital is the cost connected to raising an additional unit of capital. The marginal cost of capital depends on the type of capital that will be used and the associated risks. Marginal cost of capital is important in foreign investment analysis because it is used to determine foreign projects that are to be undertaken and those that are to be rejected. A foreign project can only be accepted if its rate of return is greater than the marginal cost of capital. It ...

Question 1: What are the advantages of leads and lags over direct loans?

Leads refers to acceleration of the time of making foreign currency payments while lags on the other hand refer to delaying the time of making foreign currency payment. It is aimed at increasing the working capital or reducing foreign-exchange exposure. Lags and leads are achieved by modification of credit terms extended in one currency to another. Most multi-national companies use leads and lags to reduce the exchange risk and to transfer the financing burden from one unit to another. There are several advantages of leads and lags when compared to direct loans. An official note as a recognition of a ...

Special Topics

Question 1 Change in corporate control refers to transfer of the decision making authority of a company from one group of persons to another group. This power entitles individuals to make decisions concerning operations and strategic planning of the company, allocation of capital, acquisitions, marketing decisions and production decisions. Publicly traded companies are prone to corporate control changes when large investors, especially institutional investors and other companies, strive to seize control from existing shareholders and managers. Change of corporate control can be effected through; tender offers, negotiated offers and proxy fights . Negotiated offers are the process by which ...