Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

The authors propose an approach to analyzing risk management activities when multiple risks are bundled within a firm's assets or liabilities. They classify potentially bundled risks into two types: compensated risk and hedgeable risk. Firms earn rents for bearing compensated risk such as credit risk, and earn zero economic rents for bearing hedgeable risk such as interest rate risk. Because the costs associated with reducing hedgeable risk are lower than those associated with compensated risk, firms rationally eliminate hedgeable risks using either on- or off-balance sheet strategies. Thus, hedging becomes desirable even for risk-neutral or risk-seeking firms as a means of allocating risk. They denote this approach of optimal risk allocation among multiple risks with a firm as Coordinated Risk Management. The authors test the coordinated risk management approach by examining the interaction between interest rate risk (hedgeable risk) and credit risk (compensated risk) management at thrift institutions following conversion form a mutual-to-stock form of ownership. Although the concept of coordinated risk management applies to any firm, they use this sample because of data availability for the sample of converting thrifts and the control groups of non-converting institutions. The time-series findings are consistent with the coordinated management of interest rate risk and credit risk. In particular, immediately at conversion they observe decreased interest rate risk across institutions combined with a more gradual trend toward increasing credit risk. The negative relation between interest rate risk and credit risk is also significant in pooled tests. In addition, institutions use both on-balance sheet strategies and derivative instruments to reduce interest rate risk. This finding of decreasing interest rate risk occurs despite incentives to increase total risk following conversion. In light of the current discussions on the use of derivatives, this finding also indicates that thrifts use derivatives instruments for hedging rather than for speculative purposes. The cross-sectional results support models of optimal hedging. The authors provide evidence that interest rate risk hedging within an institution is positively associated with ex ante growth opportunities. They also provide evidence that managerial security holdings are a significant determinant of hedging activity. Finally, they report a negative association between managerial option holdings and interest rate risk hedging. Managers holding relatively high numbers of options maintain a risky position on-balance sheet with respect to unexpected changes in interest rates.

Feeding Ourselves Thirsty: How the Food Sector is Managing Global Water Risks

The global food sector faces extraordinary risks from the twin challenges of water scarcity and water pollution. Growing competition for water, combined with weak regulations, failing infrastructure, pollution and climate change impacts threaten the sector's water security and contribute to a water availability emergency that was recently ranked the world's "top global risk" by the World Economic Forum.This report examines how water risks affect the profitability and competitive positioning of 37 major food sector companies in four industries: packaged food, beverage, meat and agricultural products. It evaluates and ranks these companies -- the majority of which are U.S. domiciled and publicly-traded -- on how well they are positioned to anticipate and mitigate these risks, as well as contribute to improved water resource management.The report provides recommendations for how analysts and investors can effectively evaluate food sector companies on their water risk exposure and management practices. It also provides recommendations for how food companies can improve water efficiency and water quality across their operations and supply chains to reduce risks and protect water resources

TRIDEnT: Building Decentralized Incentives for Collaborative Security

Sophisticated mass attacks, especially when exploiting zero-day vulnerabilities, have the potential to cause destructive damage to organizations and critical infrastructure. To timely detect and contain such attacks, collaboration among the defenders is critical. By correlating real-time detection information (alerts) from multiple sources (collaborative intrusion detection), defenders can detect attacks and take the appropriate defensive measures in time. However, although the technical tools to facilitate collaboration exist, real-world adoption of such collaborative security mechanisms is still underwhelming. This is largely due to a lack of trust and participation incentives for companies and organizations. This paper proposes TRIDEnT, a novel collaborative platform that aims to enable and incentivize parties to exchange network alert data, thus increasing their overall detection capabilities. TRIDEnT allows parties that may be in a competitive relationship, to selectively advertise, sell and acquire security alerts in the form of (near) real-time peer-to-peer streams. To validate the basic principles behind TRIDEnT, we present an intuitive game-theoretic model of alert sharing, that is of independent interest, and show that collaboration is bound to take place infinitely often. Furthermore, to demonstrate the feasibility of our approach, we instantiate our design in a decentralized manner using Ethereum smart contracts and provide a fully functional prototype.Comment: 28 page

The Relationship Between Risk, Incentive Pay, and Organizational Performance

In this study we extend agency based research by examining the role of risk in the structure of managerial compensation and its relationship to organization performance. Our results suggest that organizations facing higher risk do not place greater emphasis on short term incentives, they place less emphasis on it. Also, higher risk firms which rely on incentive pay exhibited poorer performance than high risk firms which de-emphasize incentive pay

Efficient systems for the securities transaction industry : a framework for the European Union

This paper provides a framework for the securities transaction industry in the EU to understand the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure. Of particular interest are microeconomic incentives of the industry players that can be in contradiction to social welfare. We evaluate the three functions and the strategic parameters - the boundary decision, the communication standard employed and the governance implemented - along the lines of three efficiency concepts. By structuring the main factors that influence these concepts and by describing the underlying trade-offs among them, we provide insight into a highly complex industry. Applying our framework, the paper describes and analyzes three consistent systems for the securities transaction industry. We point out that one of the systems, denoted as 'contestable monopolies', demonstrates a superior overall efficiency while it might be the most sensitive in terms of configuration accuracy and thus difficult to achieve and sustain

Securing The Root: A Proposal For Distributing Signing Authority

Management of the Domain Name System (DNS) root zone file is a uniquely global policy problem. For the Internet to connect everyone, the root must be coordinated and compatible. While authority over the legacy root zone file has been contentious and divisive at times, everyone agrees that the Internet should be made more secure. A newly standardized protocol, DNS Security Extensions (DNSSEC), would make the Internet's infrastructure more secure. In order to fully implement DNSSEC, the procedures for managing the DNS root must be revised. Therein lies an opportunity. In revising the root zone management procedures, we can develop a new solution that diminishes the impact of the legacy monopoly held by the U.S. government and avoids another contentious debate over unilateral U.S. control. In this paper we describe the outlines of a new system for the management of a DNSSEC-enabled root. Our proposal distributes authority over securing the root, unlike another recently suggested method, while avoiding the risks and pitfalls of an intergovernmental power sharing scheme

Scenarios for the development of smart grids in the UK: literature review

Smart grids are expected to play a central role in any transition to a low-carbon energy future, and much research is currently underway on practically every area of smart grids. However, it is evident that even basic aspects such as theoretical and operational definitions, are yet to be agreed upon and be clearly defined. Some aspects (efficient management of supply, including intermittent supply, two-way communication between the producer and user of electricity, use of IT technology to respond to and manage demand, and ensuring safe and secure electricity distribution) are more commonly accepted than others (such as smart meters) in defining what comprises a smart grid. It is clear that smart grid developments enjoy political and financial support both at UK and EU levels, and from the majority of related industries. The reasons for this vary and include the hope that smart grids will facilitate the achievement of carbon reduction targets, create new employment opportunities, and reduce costs relevant to energy generation (fewer power stations) and distribution (fewer losses and better stability). However, smart grid development depends on additional factors, beyond the energy industry. These relate to issues of public acceptability of relevant technologies and associated risks (e.g. data safety, privacy, cyber security), pricing, competition, and regulation; implying the involvement of a wide range of players such as the industry, regulators and consumers. The above constitute a complex set of variables and actors, and interactions between them. In order to best explore ways of possible deployment of smart grids, the use of scenarios is most adequate, as they can incorporate several parameters and variables into a coherent storyline. Scenarios have been previously used in the context of smart grids, but have traditionally focused on factors such as economic growth or policy evolution. Important additional socio-technical aspects of smart grids emerge from the literature review in this report and therefore need to be incorporated in our scenarios. These can be grouped into four (interlinked) main categories: supply side aspects, demand side aspects, policy and regulation, and technical aspects.

Political Economy of International Climate Finance: Navigating Decisions in PPCR and SREP

This working paper explores how countries can build their own 'climate finance readiness' by understanding their internal political economy and use that understanding to steer consensus-based decisions on climate finance investments. For climate finance to be effective, national leaders must build shared commitments. This involves considering the arguments, incentives and power dynamics at play to ensure priorities are more equitable and representative of a broader group of stakeholders. Doing so will also help to reduce the risk of implementation delays. This paper uses case studies from Bangladesh, Ethiopia and Nepal to explore how narratives and incentives within the political economy drive climate investment outcomes under the Pilot Programme for Climate Resilience (PPCR) and the Scaling up Renewable Energy Programme (SREP). It draws from broader analysis of the discourses around these investments, including 80 interviews with government; multilateral development banks (MDBs) and other stakeholders