PRICING AND HEDGING OF DERIVATIVES BASED ON NONTRADABLE UNDERLYINGS

This paper is concerned with the study of insurance related derivatives on financial markets that are based on nontradable underlyings, but are correlated with tradable assets. We calculate exponential utility‐based indifference prices, and corresponding derivative hedges. We use the fact that they can be represented in terms of solutions of forward‐backward stochastic differential equations (FBSDE) with quadratic growth generators. We derive the Markov property of such FBSDE and generalize results on the differentiability relative to the initial value of their forward components. In this case the optimal hedge can be represented by the price gradient multiplied with the correlation coefficient. This way we obtain a generalization of the classical “delta hedge” in complete markets.     

Subsidization of S&Ls under the flat-rate deposit insurance system: Some empirical estimates

This study provides some estimates of the magnitude of the subsidies extracted by S&L holding companies under the present flat-rate deposit insurance system. The results suggest that the flat-rate deposit insurance system induces substantially uneven and inequitable distribution of subsidies among thrift institutions. The analysis of the thrift institutions' asset volatilities over the 1966–1988 period does not support the claim that deregulation of the industry has led to a systematic increase in risk-taking in the industry. On the other hand, we find that a large fraction of the asset volatilities are attributable to firm-specific investment policies and that the risk of the institutions' assets change considerably over time. Taken as a whole, the results suggest that switching to a risk-based deposit insurance system would be economically more efficient than the present scheme. We provide some recommendations for policy changes that can increase the efficacy of risk-based insurance by increasing the level of monitoring by depositors and the financial markets.     

Foreign affiliates of the world largest financial groups: Locations and governance

This paper has two objectives. The first is the documentation of the relative importance of the largest financial groups in the world. The list of top 50 financial groups ranked by total assets in 2003 is compared to a similar list available for 1986. The second objective is to examine where financial firms are expanding their operations and to document some of the factors that may explain the most-favoured locations of these financial groups.The results of this study have two important implications. First, they indicate that location-specific advantages such as size, human capital and cultural distance, do provide an explication of the internationalization of financial firms. Second, they show that good governance has a strong impact on the choice of countries by firms.     

Modeling the Impacts of Corporate Commitment on Climate Change

The aim of this paper is to propose an integrative framework for understanding the determinants of business strategies to reduce greenhouse gas emissions and the impact of these determinants on performance. The proposed structural equation model is based on a survey of 319 Canadian manufacturing firms. The study calls into question the traditionally positive relationship between a firm's environmental commitment and its economic motivations. However, the results also show a win–win relationship between the commitment to reduce greenhouse gas emissions and financial performance. This study contributes to the understanding of the motivations underlying the efforts manufacturers make to tackle climate change and their economic benefits. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.     

Cournot equilibrium without apology: Existence and the Cournot inverse demand function

In a multi-commodity framework with absence of wealth effects, we prove the existence of equilibrium for Cournot oligopoly, and that the concept is completely non-ambiguous. We also obtain a uniquely defined endogenous inverse demand function, depending only on the competitive sector.     

Fair Trade Managerial Practices: Strategy,Organisation and Engagement

The number of distributors selling Fair Trade products is constantly increasing. What are their motivations to distribute Fair Trade products? How do they organise this distribution? Do they apply and communicate the Fair Trade values? This research, based on five case studies in Switzerland, aims at understanding and structuring the strategies and the managerial practices related to Fair Trade product distribution, as well as analysing if they denote an engagement with Fair Trade principles. The results show a high heterogeneity of strategies and engagement. In general, strategies implemented by mainstream actors contribute to increase Fair Trade global sales but do not convey the transformative message of Fair Trade through their engagement. The latter is rather communicated through alternative channels. Problems and potential solutions to this issue are discussed.     

Why Did Argentina's Currency Board Collapse?

This paper sheds light on the risks associated with currency board arrangements, referring to the severe liquidity crisis that emerged in Argentina in November 2000. The inability of the Argentinean economy to grow because of an overvalued peso and the massive borrowing needs of the government in the context of rapidly rising borrowing costs seriously undermined the credibility of the fixed‐exchange rate regime. Given the widespread dollarisation of the financial sector on the liability side, Argentina had arguably little choice but to stick to the currency board. A series of measures aimed at reviving growth were implemented but with no signs of upturn in demand, increasingly distrustful international investors and growing social unrest, the country was forced into default in December 2001, putting an abrupt end to its decade long experiment with hard money. This study shows that with rigid labour markets, a lack of fiscal discipline and the absence of a natural anchor currency, Argentina was never a strong candidate for a hard peg.