Risk Management for Bonds with Embedded Options

This paper examines the behavior of the interest rate risk management measures for bonds with embedded options and studies factors it depends on. The contingent option exercise implies that both the pricing and the risk management of bonds requires modelling future interest rates. We use the Ho and Lee (HL) and Black, Derman, and Toy (BDT) consistent interest rate models. In addition, specific interest rate measures that consider the contingent cash-flow structure of these coupon-bearing bonds must be computed. In our empirical analysis, we obtained evidence that effective duration and effective convexity depend primarily on the level of the forward interest rate and volatility. In addition, the higher the interest rate change and the lower the volatility, the greater the differences in pricing of these bonds when using the HL or BDT models.

Impact of the Monetary Policy Rules on the Inflation Targeting

The standard version of the Taylor rule includes the inflation gap and the GDP gap in the right-hand side. I describe a modified version of it, where the exchange rate growth also determines the interest rate change. I estimate this version for a number of IT and non-IT countries in the periods before and after the financial crisis of 2008. First, countries of both groups are leading the similar politics post 2008. Second, if a central bank pays more attention to the inflation gap and GDP growth, it has a higher probability of an inflation target achievement.

Understanding the risks in China's PPP projects: ranking of their probability and consequence

PurposeBased on the Chinese government's increased public‐private partnership (PPP) experience in the last decade, they have made a lot of efforts to improve the investment environment. This paper hence aims to conduct a more up‐to‐date evaluation of the potential risks in China's PPP projects.Design/methodology/approachAs part of a comprehensive research looking at implementing PPP, a two‐round Delphi survey was conducted with experienced practitioners to identify the key risks that could be encountered in China's PPP projects. The probability of occurrence and severity of the consequence for the selected risks were derived from the surveys and used to calculate their relative risk significance index score.FindingsThe results showed that the top ten risks identified according to their risk significance index score are: government's intervention; poor political decision making; financial risk; government's reliability; market demand change; corruption; subjective evaluation; interest rate change; immature juristic system; and inflation. Further analysis was conducted on these risks so that the possible consequence, the most impacted parties, and the preferred allocation are discussed. Recommendations on commercial principles or contract terms between the Chinese government and private consortium are also provided.Originality/valueThese up‐to‐date findings concerning the probability and consequence of key risks would provide a valuable reference for private investors who are planning to invest in infrastructure projects in China.

ANALYSIS OF STOCHASTIC INFLATION IN THE INTERACTION OF SUPPLY AND DEMAND REGARDING THE ASPECT OF DINAMIC CAUSALITY

Systematic analysis of the development of understanding the causes of inflation, taking supply and demand conditions as the central axis, offers a deeper insight into the inflation process and its essence. It is obvious that the long-term inflation impacting human, productive and financial resources can in no way be justified by extremely short-term benefits to a country’s budget or to monopolistic structures. Analysis of the literature clarifies and confirms the fact that in order for inflation to occur and significantly accelerate, the growth of demand factors must exceed that of supply factors during several years. The research shows that the policy of encouraging the demand, and thus a significant and long-lived inflation, is possible only in non-competitive oligopolistic economies marked by corruption and provoking emigration. On the other hand, adjustment of demand instruments to changes in supply is rather a result of fair competition. Interest rate change as an independent factor is shown to be important for the inflation process, especially for deflation, and therefore for the economy. Moreover, it is not completely clear whether delayed is the cause of inflation or its result, but it is obvious that the negative impact of delayed demand, as delayed human and social well-being, results in weaker supply and thereby also in higher poverty and inflation, all of them encouraging a more thorough examination of this problem. Analysis of the phenomenon of inflation over a historic period provides a realistic picture of this problem and shows the ways how to solve it.