The Rise of Credit Default Swaps and Its Implications on Financial Stability

The credit default swap market has experienced an exponential growth in recent decades. Though the fırst credit default swap contract was negotiated in the mid-1990s, the market has enjoyed a surge of popularity beginning in 2003. By the end of June 2013, the outstanding amount reached 24.3 trillion dollars. It is mostly used to transfer or to hedge credit risk. Concurrently with the global credit crisis, several shortcomings in CDS markets have appeared. One of the obvious questions is whether they affect the stability of financial markets. In this context after broader exhibition of credit default swaps market, speculative use of CDS, inception of central counterparty, and transparency of CDS market is handled. As a conclusion, it is true that the CDS market still has some weaknesses, but it is no more prone to be destabilizing than other financial instruments. This is shown in this chapter.

Risk Management in Agriculture

Risk has always been part of the business of agriculture. It's an industry built on the unpredictable forces of nature. What looks like a promising crop or herd can suddenly fall victim to the weather, insects or disease. Farmers are continually developing new ways to manage risk, from the use of hardier and higher yielding crop varieties and animal breeds to the application of new technologies on the farm to innovative marketing strategies. Smart agricultural policy has also evolved toward risk management programming that helps farmers deal with short-term income fluctuations as a result of risks largely outside their control. But the risks in agriculture today are greater and more complicated than ever before. International competition is fierce. Technological improvements are increasing world production and driving down real commodity prices. Public demand for higher food safety standards and better environmental practices requires new investments in the food system. Advances in science and technology are raising moral and ethical questions about the way food can and should be produced. At the same time, Smart agriculture itself has never been more diverse, ranging from specialty crops planted in small plots to grain farms covering thousands of hectares. In between being livestock operations of all sizes, greenhouses, organic farms and a growing number of agricultural businesses catering to unique consumer demands? It's an environment that is demanding new approaches to how business is conducted on the farm and consequently, how governments conduct agricultural policy.

Project Risk Management Process for Professionals

This chapter will provide an instantly applicable integrated project risk analysis method, which tracks the probabilities of the occurrences of harmful events perceived by the owners from the conceptual phase to the end of the project. The chapter follows a threefold structure. First, the paper provides a revised integrated project risk assessment framework that enhances conventional risk category-based methods. Second, the minimum requirements of the owners are clarified to attain the main goal of project risk assessment and to identify the harmful events jeopardizing this goal. Third, the widely known risk assessment procedures are revised, and a methodology for taking and selecting proper risks is provided. Finally, a new valuation approach to the monitoring phase is introduced, which is able to capture the current market value of the project based on the risk management and controlling system's data.

Survival Analysis and ROC Analysis in Analyzing Credit Risks

As the aim of large banks has been changing to select customers of highest benefits, it is important for banks to know not only if but also when a customer will default. Survival analyses have been used to estimate over time risk of default or early payoff, two major risks for banks. The major benefit of this method is that it can easily handle censoring and competing risks. An ROC curve, as a statistical tool, was applied to evaluate credit scoring systems. Traditional ROC analyses allow banks to evaluate if a credit-scoring system can correctly classify customers based on their cross-sectional default status, but will fail when assessing a credit-scoring system at a series of future time points, especially when there are censorings or competing risks. The time-dependent ROC analysis was introduced by Hu and Zhou to evaluate credit-scoring systems in a time-varying fashion and it allows us to assess credit scoring systems for predicting default by any time within study periods.

Measuring Country Risk

The concept of “country risk” has once again come under the spotlight. Globalization, the shock-waves of the subprime crisis, manifested in sovereign and private debt crises, and the fear to a “contagion” of risk between market participants are, among others, the reasons that make topical this form of risk. The aim of this chapter is to offer an overview of the factors that influence country risk, and an analysis of the methods most commonly used to measure it, with a discussion of their pros and cons. The conclusion is that none of those methods have offered satisfactory results. In this regard, the authors propose a change in the way to analyze country risk. Rather than attempting to predict debt crises, it is necessary to identify the sources of risk, and accept uncertainty as a feature of the current environment.

An Assessment on Inflation Risk and Its Effects on Business Operations

The latest economic crisis in the world affected business operations and decision making process at management rank. One of the major components of financial system is business organizations within the financial environment, which injects cash to the system and individuals. Therefore, fluctuations in financial system regarding inflationary trends should be evaluated and risk management functions for banking operations should be facilitated. In this chapter, operating mechanism of financial system, risks, ınflation and the effects of inflation on business operations have been outlined from a theoretical perspective.

Understanding the Financial Derivatives Instruments

Today, core of the individual and institutional decisions are mainly finance and economics related thereby in today's world the most important success and performance indicators are financial results. Concepts which are called as change or innovation found themselves throughs derivative products in financial markets. Basically, the instruments that are known as forwards, futures, options and swaps have left their mark in last 20 years. However, after the 2008 financial crisis, these products have been labeled as toxic, complex or speculative and held solely responsible for the crisis. Whereas, first appearance of the derivative products was directed toward hedging and risk management. Therefore, objective of this study is to academically explain basic operating principles of financial derivative markets from conceptual and functioning point of view, to understand their places in world financial markets and to analyze their pricing examples. In this way, we aim to help students, academicians, and researchers make better assessment of derivative products.

Early Warning System for Financial Crises

To maintain financial stability, prevention of financial crisis is very important. This prevention is especially is especially important for developing countries where we need robust instruments for prediction of financial crises. One such instrument is Early Warning System (EWS). An EWS provided signals that could reflect the likelihood of a financial crisis over a given time horizon. Changing nature of financial risks due to liberalization of economies has increased the importance of an effective EWS. This chapter explores the state of the art of EWS. It is suggested that policy makers should take into account their objectives and related thresholds of various while developing an EWS since there exists a sharp trade-off between correctly calling crises and false alarms.

The Role of Financial Innovation and the Derivatives Market in the World and Turkey in the Context of the Global Crisis of 2008

In Derivatives markets, contracts made concerning an asset or a financial instrument between a buyer and a seller entered into today regarding a transaction to be fulfilled at a future point in time. The derivatives markets incorporate forward, swap, futures and options transactions. Banks, the principle actor in financial markets, finds derivatives favorable in developing countries like Turkey in which there is high interest rates and inflation. It is crucial to express the role of the derivatives markets, whereas the uncertainty concerns are perceived enormously. 2008 mortgage crises, the main cause is stated as to sheer of expectations, which started in US and spread out to all developed and developing countries evoke to encounter against risks intensely. The aim of this paper is to study how efficient is the use of the derivatives market instruments in Turkey, a developing country, by the banks and other financial market actors after the 2008 Global Crises.

Emerging Markets Reward Risk

The relationship between risk and return in Middle East and North Africa (MENA) region stock markets is estimated during 2008 international financial crisis; including Jordan, KSA, Morocco, and Turkey. For comparison purpose, stock markets from Europe are also examined; including, FTSE (UK), CAC40 (France), DAX (Germany), and the Swiss market. The empirical findings show evidence that; contrary to European stock markets; MENA region stock markets generally reward risk during 2008 financial crisis. This result is important for international asset managers and investors to consider investing in emergent markets from MENA region.