Impact of Interest Rate Risk on Supply Chain Network under Bank Credit and Trade Credit Financing

The purpose of this study is to propose a methodology that reflects the impact of interest rate risk on firms in supply chain network under bank financing and trade credit and further describe how trade credit improves the impact of interest rate risk on supply chain network through a financial flow equilibrium. A mean-variance framework and a network equilibrium analysis are integrated to provide a modeling framework. The model allows for the investigation of how bank credit financing (BCF) and trade credit financing (TCF) affect the payment strategy and financial flow of interconnected firms in supply chain networks and how they are affected by interest rate risks. The optimal behavior of manufacturers and retailers is described through variational inequality. We construct a supply chain network equilibrium model and derive qualitative properties of the solution and the function that becomes assimilated to the variational inequality problem. Additionally, variational inequality is solved using the modified projection method. This study extends the research on the impact of interest rate risk on the decision in supply chain network of firms. While other studies focus on the game between banks and firms, only a few authors have made attempts to examine the game between one manufacturer and one retailer in supply chain. An effective trade credit strategy is obtained by balancing cash and credit transactions. Through the case study, we learn how to balance the capital flow effectively to improve the negative impact of interest rate risk on supply chain.

Financial impact of using EUR call options to hedge accounts receivables

International business has grown rapidly in recent years as companies seek to take advantage of expanding supply chain opportunities. As companies enter into contracts to take advantage of engineering, production, and cost reduction capabilities of the global supply chain, they may be creating a foreign currency exchange rate risk. The purpose of this research was to determine the EUR/USD exchange rate risk within a relatively short time frame such as in 60-day accounts receivable and if using currency options to hedge this risk would be financially beneficial on a transactional basis. The quantitative study examined the 60-day EUR/USD exchange rate fluctuation and the use of currency call options to hedge the risk associated with EUR/USD currency fluctuations. The researcher analyzed 13 years of historical EUR/USD currency data and 10 years of actual EUR call options premiums for this research paper. The researcher concluded that the variability of the EUR/USD over 60-days does pose financial risk to a company. The study also found that using currency call options to hedge this 60-day exchange rate risk resulted in an overall transactional financial loss as compared to no hedging. However, research studies have shown that the use of hedging instruments to smooth financial results may result in lower overall financing costs which could offset the hedging transactional costs. This study did not address the benefits of the use of hedging to smooth financial results or obtain other related financial benefits. The researcher recommends that a firm should recognize the exchange rate risks it may be establishing within 60-day EUR or USD payable contracts and develop an appropriate hedging strategy.

Critical Role of Risk Management and its Impact on Bank Performance in Pakistan

Risk management is most important factor to exist and survive for the financial industry. The major bankruptcies which incurred of ERON and Lehman-Brothers this arises the awareness about the appropriate risk management procedure in banking sectors. Our study analyze the various risk which can affect on banking operation in Pakistan and this study also include the effect of risk management on the performance of the large banking sector as well as small banking sectors in Pakistan. This study uses capital adequacy ratio, non performing loans, interest rate risk, liquidity risk and operational risk for the risk management. The data is taken from the published annual report of the commercial banks from 2005 to 2015. Descriptive statistics, correlation matrix and regression analysis use to analyze the data. This study leads to conclusion is that the better risk management system leads to the better performance of the banks. It’s also conclude that capital adequacy ratio, non performing loans, interest rate risk, liquidity risk and operational risk that are key drivers of the profitability for the large banking sector of Pakistan. It’s also tell us that only capital adequacy ratio and non performing loans are the key drivers of small banking sectors in Pakistan.

Dependence Structures Between Sovereign Credit Default Swaps and Global Risk Factors in Brics Countries

This study examined the tail dependency structure of sovereign credit risk and three global risk factors in BRICS countries using copulas approach, which is known for its ability to provide the “true” tail correlation based on the correct marginal distribution. The empirical results show that global market risk sentiment comoves with sovereign CDS spreads across BRICS countries under extreme market events, with Brazil having the highest co-dependency followed by China, Russia, and South Africa. Furthermore, oil price volatility is the second biggest risk factor correlated with sovereign CDS spreads for Brazil and South Africa while exchange rate risk exhibits very small co-dependence with sovereign CDS spreads under extreme market conditions dominated by tail events. On the contrary, exchange rate risk is the second largest risk factor co-moving with China and Russia’s sovereign CDS spreads while oil price volatility exhibits the lowest co-dependence to CDS in these countries. Between oil price and currency risk, evidence of single risk factor dominance is found for Russia where exchange rate risk is largely dominant. These results suggest that BRICS policymakers might consider financial sector regulations that mitigate risks spill-over such as targeted capital controls when markets are distressed.

Key deals ease exchange-rate risk in South-east Asia

Headline SOUTH-EAST ASIA: Key deals ease exchange-rate risk

Exchange Rate Risk Assessment of Cross-border E-commerce Based on BP Neural Network

Objectives: At present, the domestic exchange rate system takes the market supply and demand as a benchmark, and then compares with other currencies to complete the exchange rate setting. This approach allows the RMB exchange rate to be more flexible and elastic. The RMB is controlled through the market mechanism. However, for many cross-border electricity suppliers in China, if the exchange rate of RMB fluctuates widely, they will face the operational risks brought by exchange rate fluctuations. Methods: In recent years, due to the continuous appreciation of the RMB, the cross-border e-commerce companies are under pressure. Results: BP neural network is an ideal processing tool to deal with the risk assessment of cross-border e-commerce caused by exchange rate changes, and it also has a very good future for practical application. Conclusion: In this paper, the exchange rate risk of cross-border e-commerce companies in China was evaluated by BP neural network.

Analysis of Floating Rate Bonds and the Firm Characteristics

We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.