A Study of the EUR/USD Exchange Rate and EUR Call Options

International business has grown rapidly in recent years as companies seek to take advantage of expanding market and 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 quantitative study was to endeavor to develop a multiple linear regression EUR/USD forecasting methodology for companies to use when determining when to use currency call options for managing currency risk in accounts payable. The study examined the 60-day EUR/USD exchange rate fluctuation with the conclusion that the variability of the EUR/USD over 60-days does pose financial risk to a company. Multiple linear regression models were created using historical exchange rate data, interest rate data, and Brent crude oil price data. The multiple linear regression models using historical data were not statistically significant in predicting the directional movement of the EUR/USD. This finding aligns with the weak form of the efficient market hypothesis. The study also found that using currency call options to hedge this 60-day exchange rate risk resulted in an overall financial loss as compared to no hedging. The findings suggest that historical data alone cannot be used to predict future EUR/USD directional movements and that purchasing call options to hedge the risk results in a net financial loss. The study did not address the financial benefits of the use of hedging to smooth financial results

The role of investment banking for the German economy: Final report for Deutsche Bank AG, Frankfurt/Main

The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking. The study focuses on investment banks as this part of banking is particularly relevant for financing companies as well as the development and use of specific products to support the needs of private and professional clients. The assessment of benefits and costs of investment banking has been conducted from a European perspective. Nevertheless there is a focus on the German economy to allow a more detailed analysis of certain aspects as for example the use of derivatives by German companies, the success of M&As in Germany or the effect of securitization on loan supply and GDP in Germany. For comparison purposes other European countries and also the U.S. have been taken into account. The last financial crisis has shown the negative impacts of banks on the financial system and the whole economy. In a study on the contribution of investment banks to systemic risk we quantify the negative side of the investment banking business. In the last part of the study we assess how the effects of regulatory changes on investment banking. All important changes in banking and capital market regulation are taken into account such as Basel III, additional capital requirements for systemically important financial institutions, regulation of OTC derivatives and specific taxes. --

Reframing Financial Regulation

Financial regulation today is largely framed by traditional business categories. The financial markets, however, have begun to bypass those categories, principally over the last thirty years. Chief among the changes has been convergence in the products and services offered by traditional intermediaries and new market entrants, as well as a shift in capital-raising and risk-bearing from traditional intermediation to the capital markets. The result has been the reintroduction of old problems addressed by (but now beyond the reach of) current regulation, and the rise of new problems that reflect change in how capital and financial risk can now be managed and transferred. In this Article, I begin to assess the current U.S. approach to financial regulation, in light of recent changes in the financial system, and offer a tentative way forward to address gaps in proposals for regulatory reform. Regulators must focus on the principal problems that financial regulation is intended to address – relating to financial stability and risk-taking – without regard to fixed categories, intermediaries, business models, or functions. Doing so, however, requires a prospective assessment of the markets, a different approach from the reactive process that characterizes much of financial regulation today

Reframing Financial Regulation

Financial regulation today is largely framed by traditional business categories. The financial markets, however, have begun to bypass those categories, principally over the last thirty years. Chief among the changes has been convergence in the products and services offered by traditional intermediaries and new market entrants, as well as a shift in capital-raising and risk-bearing from traditional intermediation to the capital markets. The result has been the reintroduction of old problems addressed by (but now beyond the reach of) current regulation, and the rise of new problems that reflect change in how capital and financial risk can now be managed and transferred. In this Article, I begin to assess the current U.S. approach to financial regulation, in light of recent changes in the financial system, and offer a tentative way forward to address gaps in proposals for regulatory reform. Regulators must focus on the principal problems that financial regulation is intended to address – relating to financial stability and risk-taking – without regard to fixed categories, intermediaries, business models, or functions. Doing so, however, requires a prospective assessment of the markets, a different approach from the reactive process that characterizes much of financial regulation today

The future of securitization

Securitization is a financial innovation that experiences a boom-bust cycle, as many other innovations before. This paper analyzes possible reasons for the breakdown of primary and secondary securitization markets, and argues that misaligned incentives along the value chain are the primary cause of the problems. The illiquidity of asset and interbank markets, in this view, is a market failure derived from ill-designed mechanisms of coordinating financial intermediaries and investors. Thus, illiquidity is closely related to the design of the financial chains. Our policy conclusions emphasize crisis prevention rather than crisis management, and the objective is to restore a “comprehensive incentive alignment”. The toe-hold for strengthening regulation is surprisingly small. First, we emphasize the importance of equity piece retention for the long-term quality of the underlying asset pool. As a consequence, equity piece allocation needs to be publicly known, alleviating market pricing. Second, on a micro level, accountability of managers can be improved by compensation packages aiming at long term incentives, and penalizing policies with destabilizing effects on financial markets. Third, on a macro level, increased transparency relating to effective risk transfer, risk-related management compensation, and credible measurement of rating performance stabilizes the valuation of financial assets and, hence, improves the solvency of financial intermediaries. Fourth, financial intermediaries, whose risk is opaque, may be subjected to higher capital requirements

Four Futures for Finance; A scenario study

This document presents four scenarios for the future of finance. The goal of our study is to imagine the future of finance and to identify challenges faced by policymakers in fighting systemic risk. It builds upon a tradition within the CPB to develop scenarios for policy analysis. We develop four scenarios for the future of finance. Our scenarios differ in two dimensions. First, to what extent soft information lies at the core of banks’ business. Second, to what extent scope economies exist between different banking activities. By combining these two dimensions, we obtain four scenarios: Isolated Islands, Big Banks, Competing Conglomerates, and Flat Finance. Market structure, market failures, and government failures vary between scenarios. These differences then translate into differences in the complexity of balance sheets, the ability to coordinate policy internationally, the information gap faced by regulators, the size of banks’ balance sheets, the tradability of banks’ assets, the level of interconnectedness, the potential for market discipline, and the threat of regulatory capture. As a result, each scenario calls for a different set of policies to combat systemic risk.

The role of investment banking for the German economy

The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking

Risk-based supervision of pension funds in Australia

This paper examines the development of risk-based supervision of pension funds in Australia. The large number of pension funds has meant that since the inception of pension fund supervision in the early 1990's the regulator has sought to identify high risk funds and focus its attention on these funds. However, the regulator developed a more sophisticated risk-rating model, known as PAIRS/SOARS, in 1992 in order to apply a more disciplined and consistent ratings methodology. Four reasons are given for the move towards more sophisticated risk-based supervision: 1) creation of an integrated supervisor which allowed the use of techniques used in banking and insurance to be adopted for pension fund; 2) the need to better use available supervisory resources; 3) several pension fund failures; and 4) concerns about industry weaknesses. Supervisory techniques used particularly in the banking industry, such as universal licensing,'fit and proper'assessment, and risk management requirements were adopted for the pension sector between 2004 and 2006. The paper provides an outline of the PAIRS/SOARS risk-rating model which was also adopted. It observes that the approach provides an analytical discipline to risk assessment, strengthens the link between risk assessment and supervisory response, and allows better targeting of supervisory resources.Debt Markets,,Non Bank Financial Institutions,Labor Policies,Emerging Markets

Social construction of IS evaluation: a case study of IT investment appraisal

This study explores the phenomenon of the social construction of IS investment evaluation in the financial services industry. The extensive literature on information systems (IS) evaluation stretches back more than thirty years and it is widely agreed that IS evaluation is an important and complex issue. Constructivist evaluation, which serves to develop the interpretivist strand of the literature, concentrates on the notion that evaluations are the outcomes of an interaction and argumentation process between various interested parties. The purpose of this research is to shed further light on the IS investment evaluation area. Explaining the practice of IS evaluation within the dynamic and technologically sophisticated financial services industry would benefit academics and financial services firms alike. This context is relatively neglected in the existing literature. The chosen case study reflects the demands in the financial services industry to upgrade their infrastructure in order to manage an ever increasing number of transactions, as well as increased regulation. The fieldwork produced extensive data concerning traditional trading, brokerage, high frequency algorithmic trading and transaction clearing. The rapid rise of derivative transactions during the last few years caused problems in terms of clearing and managing the transactions. At the same time, hedge funds‘ growing demand for low latency execution services and changes in regulations increased, pressuring firms in the industry to invest heavily. Actor-network theory (ANT) is used in order to describe and explain the formation of networks between human and non-human actors. The theory‘s specific vocabulary allows IS evaluation to be seen in a new light and the study uses ANT analysis to produce insight into the longstanding problem of IS evaluation, human and non-human interactions and roles within the context if IT investment appraisal. Building on ANT, this thesis is an in-depth case study of the employment process of an IT evaluation method at a global financial services company