bond indenture provisions and the risk of corporate debt abstract this paper examines the effect of alternative bond indenture provisions on the allocation of risk among the firm s claimants the approach taken here differs from that of earlier studies in that risk allocation is examined while the firm s leverage in market value terms is held constant in this context four indenture provisions are examined 1 the time to maturity 2 the promised payment schedule 3 financing restrictions and 4 priority rules it is concluded that risk is transferred from stockholders to bondholders as the time to maturity and promised payment increase appropriately furthermore substitution of longer term debt for an equal amount of shorter term debt also increases the risk to bondholders while decreasing the risk to stockholders the analysis shows that a coupon bond can be represented by a unique discount bond with the same risk and value this permits the characterization of the effective maturity of a risky debt issue a concept analogous to the stochastic duration of a default free coupon bond these results are shown to be independent of the means used to finance the debt issue finally it is concluded that the relative risk associated with different bonds issued by the same firm cannot be determined by the structure of priority rules alone it is also necessary to consider the timing of the promised payments compared to that of the other debt issues in the firm s capital structure

margining in derivatives markets and the stability of the banking sector we investigate the effects of margining a widely used mechanism for attaching collateral to derivatives contracts on derivatives trading volume default risk and on the welfare in the banking sector first we develop a stylized banking sector equilibrium model to develop some basic intuition of the effects of margining we find that a margin requirement can be privately and socially sub optimal subsequently we extend this model into a dynamic simulation model that captures some of the essential characteristics of over the counter derivatives markets contrarily to the common belief that margining always reduces default risk we find that there exist situations in which margining increases default risk reduces aggregate derivatives trading volume and has an ambiguous effect on welfare in the banking sector the negative effects of margining are exacerbated during periods of market stress when margin rates are high and collateral is scarce we also find that central counterparties only lift some of the inefficiencies caused by margining

swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

default risk and the effective duration of bonds default risk creates difficulties for fixed income portfolio managers in measuring a portfolio s exposure to interest rate risk it also heightens the anxiety of traders and arbitragers who are hedging their investments and it compounds financial institutions problem of matching assets and liabilities the consensus among researchers is that credit risk shortens the effective duration of corporate bonds this paper provides estimates of how much shorter durations become because of credit risk these estimates are based on observable data and easily estimated bond pricing parameters because the duration measures are taken with respect to movements in a common reference rate of interest they can be used with greater confidence than can other measures when attempting to compute the duration of a portfolio of bonds subject to varying degrees of credit risk

credit risk measurement developments over the last 20 years abstract this paper traces developments in the credit risk measurement literature over the last 20 years the paper is essentially divided into two parts in the first part the evolution of the literature on the credit risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the journal of banking and finance and other publications in the second part a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented this model is shown to offer some promise in analyzing the risk return structures of portfolios of credit risk exposed debt instruments

assessing credit risk in a financial institution s off balance sheet commitments the first part of this paper presents a general approach to valuing a financial institution s contracts when there is credit risk the approach uses contingent claims pricing theory and is particularly appropriate for an off balance sheet contract such as a swap that can have either a positive or a negative value to the counterparty the second part of the paper extends the analysis by considering the problem faced by bank supervisory authorities of determining capital requirements for off balance sheet contracts

control techniques and upward flow of information in franchising in distant markets conceptualization and preliminary evidence abstract information exchange between franchisees and franchisors is viewed as instrumental for the attainment of both firm specific and systemic goals within franchise systems our study investigates the issue of control and control techniques employed by franchisors to monitor the performance of their franchisees in distant markers with special focus on the role of information exchange a major assumption underlies our work even though in the language of agency theory franchise contracts attempt to align the incentives of the principal i e franchisor and the agent i e franchisee such alignment is not easy to achieve due to basic conflicts in the parties respective goals for instance while franchisees are primarily interested in achieving short term profits franchisors are more concerned about strengthening the brand equity of their systems a perfect upward flow of information i e from franchisees to franchisors therefore is not necessarily guaranteed this paper introduces and empirically evaluates four hypotheses relating franchisees willingness to provide information to their respective franchisors first it is suggested that franchisees willingness to provide information to their franchisors will be positively related to the incidence of repeat purchases since incentives to free ride are expected to be low at such units in repeat customer industries hence franchisees will have little incentive to hide information second it is argued that the greater the age of relationship between the focal franchisee and franchisor the more secure both parties are likely to feel about the projection of this relationship into the future consequently a positive relationship between the age of the franchise relationship and franchisees willingness to provide information to franchisors is proposed next we suggest that the level of competition faced by franchisees is positively related to franchisees willingness to provide information to their franchisors the latter effect is expected for two reasons foremost such franchisees are likely to see the availability of authentic market information as a necessary tool for their franchisors if franchisors are to provide them with accurate localized advice for combating competitive forces second from an agency theory perspective franchisees have an incentive to conceal information about the external environmental factors only if such information serves to explain franchisees business success in terms of forces other than their effort this would not occur in a competitive environment setting finally multi unit franchisees are hypothesized to more willingly provide information to their franchisors than their single unit counterparts given their lower incentives to free ride and the higher level of security felt in their relationships with their franchisors the empirical verification of our contentions was carried out in two stages first we studied in depth the case of lebanon to develop the initial descriptive materials second and based on the first step we surveyed u s based franchisors with franchisees in the middle east and africa to assess our hypotheses results show that while the extent of competition faced by franchisees was found to be an incentive to provide information to franchisors the age of the relationship emerged as a disincentive to sharing information with the franchisors

the valuation of floating rate instruments abstract a framework for valuing floating rate notes is developed to examine the effects of 1 lags in the coupon formula 2 special contractual features and 3 default risk evidence from a sample of floaters indicates they sold at significant discounts while lags in the coupon formulas and other contractual features make these notes more variable they do not account for the magnitude of the discounts we conclude that the fixed default premium in the coupon formula of a typical note is inadequate to compensate for time varying default premiums demanded by investors who treat other corporate short term paper as close substitutes

buyer seller negotiations around the pacific rim differences in fundamental exchange processes the determinants of buyer seller negotiations in four cultures are investigated in a laboratory simulation one hundred thirty eight american 54 chinese 42 japanese and 38 korean business people participated in a two person buyer seller intracultural negotiation simulation in negotiations between americans the use of more problem solving bargaining strategies positively influenced negotiation outcomes in negotiations between chinese more competitive strategies led to better results in japanese and korean negotiations buyers achieved higher economic rewards than sellers in all four cultures bargainers were more satisfied with negotiation outcomes when partners were rated more attractive

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

selling machinery to china chinese perceptions of strategies and relationships chinese perceptions of machinery suppliers from six countries are used to evaluate supplier strategies and the customer relationships formed strategies based on product quality and service had the greatest impact on preferences the relationship formed seemed to reflect mainly the perceived value of the product service package offered friendship in the traditional chinese sense did not seem to be a strong characteristic of these relationships

default risk yield spreads and time to maturity this paper extends the default model of yield spreads for bonds by showing that in gen eral they are a complex function of maturity and in particular are not always monotoni cally increasing contrary to what one traditional view suggests our results may help explain the apparently conflicting empirical results found in the literature

the tax dis advantage of a firm issuing options on its own stock abstract it is common for firms to issue or purchase options on the firm s own stock examples include convertible bonds warrants call options as employee compensation and the sale of put options as part of share repurchase programs this paper shows that option positions with implicit borrowing such as put sales and call purchases are tax disadvantaged relative to the equivalent synthetic option with explicit borrowing conversely option positions with implicit lending such as warrants are tax advantaged i also show that firms are better off from a tax perspective issuing bifurcated convertible bonds bonds plus warrants rather than an otherwise equivalent standard convertible

electricity transmission arrangements in great britain time for change in great britain gb and across europe significant investment in electricity transmission is expected over the coming years as decarbonisation and market integration efforts are intensified however there is also significant uncertainty with the amount location and timing of new generation connection which in turn will drive the transmission investment needs given the absence of efficient market design we identify three key areas of concern with the current transmission investment arrangements i a mis aligned incentives framework for transmission investment and operation ii lack of coordination of investment and operation and iii conflicts of interest we then propose three options for future evolution of transmission regimes which cover the full spectrum of institutional arrangements with respect to transmission planning and delivery i e how and who plans owns builds and operates the transmission system for each option we present key characteristics evolution of the current regimes the ability of the option to address the concerns and key strengths and weaknesses overall we conclude in the case of gb this conclusion could be extended to other european countries that the most appropriate option would be that of an independent system operator iso who would be responsible for planning and operating the transmission system

the default risk of swaps we characterize the exchange of financial claims from risky swaps these transfers are among three groups shareholders debtholders and the swap counterparty from this analysis we derive equilibrium swap rates and relate them to debt market spreads we then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders in a simplified case we obtain closed form solutions for the value of the default risk in the swap for interest rate swaps we obtain numerical solutions for the equilibrium swap rate including default risk we compare these with equilibrium debt market default risk spreads swaps have been one of the most explosive and important innovations in international capital markets in the last 10 years in its simplest form a swap consists of an agreement hetween two entities called counterparties to exchange in the future two streams of cash flows in a currency swap these streams of cash flows consist of a stream of interest and principal payments in one cvtrrency exchanged for a stream of interest and principal payments of the same maturity in another currency in an interest rate swap they consist of streams of interest payments of one type fixed or floating exchanged for streams of interest payments of the other type in the same currency the two types of swap are shown in appendix 1 the economic importance of swap transactions is the fact that they can he comhined with deht issues to change the nature of the liahility for the borrower the sum of a hond issue and a currency swap gives a net liability stream which is equivalent to transforming the bond liability into a different currency a floating rate note combined with an interest rate swap results in a liability equivalent to fixed rate debt two issues have dominated the academic literature on swaps the first concerns the reasons for their use arbitrage of imperfections in capital markets was the original cause of their appearance price and henderson 1984 turnbull 1987 shows that lowering borrowing costs by a synthetic transaction involving a swap is not possible in a complete integrated capital market subsequent authors wall and pringle 1988 arak estrella groodman and silver 1988 smith smithson and wakeman 1987 observe

the use of the control variate technique in option pricing this paper presents a generalized version of the lattice approach to pricing options it shows how the control variate technique can produce significant improvements in the effi ciency ofthe approach the control variate technique is illustrated using american puts on dividend and nondividend paying stocks

the analytic pricing of asymmetric defaultable swaps swaps where both parties are exposed to credit risk still lack convincing pricing mechanisms this article presents a reduced form model where the event of default is related to structural characteristics of each party the cash flows submitted to credit risk are identified before the swap is priced analytical pricing formulas for interest rate and currency swaps are computed using a gaussian model for risky bonds currency swaps exhibit additional correlation risk the benefits from netting depend on the balance between exposures and market conditions in valuation we show that sources of credit risk asymmetries are also likely to impact on credit spreads

the price setting behavior of banks an analysis of open end leverage certificates on the german market abstract this paper presents the first analysis of open end leverage certificates on the german market the major innovations of these certificates are twofold first issuers announce a price setting formula according to which they are willing to buy and sell the certificates over time second the product s lifetime is potentially endless our main findings are that the price setting formula is i designed to strongly favor the issuer and ii is consistent with the main outcome of the life cycle hypothesis for structured financial products stoimenov p a wilkens s 2005 are structured products fairly priced an analysis of the german market for equity linked instruments journal of banking and finance 29 2971 2993 iii this holds for different product features and also in the presence of issuers credit risk and jump risk in the underlying

defaulted bonds demand supply and performance 1987 1992 estimates of the market value of total private and public defaulted and distressed debt are as high as 200 billion in 1990 with a slight decline to about 175 billion in 1992 the supply can be expected to shrink in the nearfuture as defaults and bankruptcies by large us companies appear to have peaked at the same time the demand for such securities is likely to remain fairly constant as long as they can offer competitive returns

the impact of default risk on the prices of options and other derivative securities abstract this paper presents a model for valuing derivative securities when there is default risk the holder of a security is assumed to recover a proportion of its no default value in the event of a default by the counterparty both the probability of default and the size of the proportional recovery are random the paper shows how data on bonds issued by the counterparty can be used to provide information about model parameters

pricing vulnerable european options when the option s payoff can increase the risk of financial distress abstract we extend the results of johnson and stulz johnson h stulz r 1987 journal of finance 42 267 280 and klein klein p c 1996 journal of banking and finance 20 1211 1229 for valuing european options subject to the risk of financial distress on the part of the option writer our model incorporates a default boundary which depends on the potential liability of the written option as in johnson and stulz 1987 and also on the option writer s other liabilities as in klein 1996 as in both of these papers the pay out ratio in the event of financial distress is linked to the assets of the option writer and the correlation between the assets of the option writer and the asset underlying the option is explicitly modeled although no analytical solution is available we illustrate the importance of this approach through examples which are evaluated numerically we also develop an approximate analytical solution which works well in most situations

taxes default risk and yield spreads this paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities the tax loss consequences of default are recognized traditionally tax free municipal bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk while our model supports the linearity assumption it implies that the slope and intercept are both functions of both the break even tax rate and the default probability ies clientele effects among both municipal and taxable bonds are demonstrated finally the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds students of financial markets cannot help but be impressed by the number of new financial instruments that have been introduced successfully in recent years the fixed income market has been particularly innovative as bonds carrying a whole host of specific features have been successfully marketed bonds with small or zero coupons variable coupon rates or detachable warrants are three examples from among an expanding list of such features not surprisingly there has developed a large and expanding literature attempting to explain the rate spreads between different fixed income securities this literature has evolved much as one would expect early empirical work was in general not well founded in theory and was not based on an underlying expected return price model later empirical research has tended to be more careful in its specification of factors affecting yield spreads and as a consequence better founded in valuation

cross cultural interaction the international comparison fallacy international management studies have been based primarily on the comparison of managerial behavior in countries around the world often these studies have implied that business people behave similarly with their domestic colleagues as with their foreign counterparts in questioning that assumption this study tests whether intra cultural behavior accurately predicts cross cultural behavior using a negotiation simulation and a sample of 462 japanese american and canadian businesspeople behaviors in cross cultural negotiations were found to differ in some important ways from those in intra cultural negotiations

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

the pricing of corporate debt a note to develop a theory of the risk structure of interest rates r c merton 2 defines the risk as the possible gains or losses to bond holders as a result of unanticipated changes in the probability of default p 449 he derives the pricing theory of a pure discount bond corporation debt along the line of blackscholes 1 comparative statics are used to develop graphs of the risk structure although his algebraic derivation is correct his graphical presentation is inadvertently wrong

international multilateral negotiations and social networks compared to their bilateral counterparts multilateral negotiations in an international setting present an extremely complex set of negotiation phenomena this paper proposes a model of negotiations that examines how national culture organization specific factors and individual characteristics of the negotiators impact the multilateral negotiation process in a cross national context specifically social network theory and tools are utilized to examine how coalitions form and roles emerge among participants the model also posits the effect of social network activity on negotiation outcomes research propositions are forwarded in hopes of setting an agenda for the research stream implied by the model methods for testing the model and implications for academics and managers are also discussed

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

pricing foreign currency options under stochastic interest rates abstract in this paper we build a general framework to price contingent claims on foreign currencies using the heath et al 1987 model of the term structure closed form solutions are obtained for european options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic as such this paper provides an example of a bond price process for both the domestic and foreign economies consistent with grabbe s 1983 formulation of the same problem

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

renewable energy and geopolitics a review this article reviews the literature on the geopolitics of renewable energy it finds that while the roots of this literature can be traced back to the 1970s and 1980s most of it has been published from 2010 onwards the following aggregate conclusions are extracted from the literature renewable energy has many advantages over fossil fuels for international security and peace however renewable energy is thought to exacerbate security risks and geopolitical tensions related to critical materials and cybersecurity former hydrocarbon exporters will likely be the greatest losers from the energy transition many of the reviewed publications share some weaknesses a failure to define geopolitics an unwarranted assumption that very little has been published in the field previously limited use of established forecasting scenario building or foresight methodologies a lack of recognition of the complexity of the field a lack of theorisation most authors do not distinguish between the geopolitical risks associated with different types of renewable energy and only a few distinguish clearly between the geopolitics of the transitional phase and the geopolitics of a post energy transition world a disproportionately large part of the literature is dedicated to critical materials and cybersecurity while only a small part concerns the decline of former fossil fuel powers among those publications that do discuss the decline of fossil fuels there is also an over focus on oil producers and a lack of attention to the countries that rely heavily on coal for example australia china germany indonesia poland and the united states

the pricing of leverage products an empirical investigation of the german market for long and short stock index certificates abstract this paper describes the first thorough empirical analysis of the pricing of leverage products in the german retail market these mainly exchange traded products with an impressive trading volume are frequently advertised as long and short futures contracts although they are theoretically equivalent to one sided barrier options issuers daily quotes for stock index products are compared to i theoretical values derived from the prices of eurex options and to ii boundaries obtained from semi static superhedging strategies for the vast majority of products bid and ask quotes significantly exceed both theoretical values and upper hedging boundaries thus providing almost risk free profits for the issuers

a two factor hazard rate model for pricing risky debt and the term structure of credit spreads this paper proposes a two factor hazard rate model in closed form to price risky debt the likelihood of default is captured by the firm s non interest sensitive assets and defaultfree interest rates the distinguishing features of the model are threefold first the impact of capital structure changes on credit spreads can be analyzed second the model allows stochastic interest rates to impact current asset values as well as their evolution finally the proposed model is in closed form enabling us to undertake comparative statics analysis compute parameter deltas of the model calibrate empirical credit spreads and determine hedge positions credit spreads generated by our model are consistent with empirical observations

are structured products fairly priced an analysis of the german market for equity linked instruments abstract based on a unique data set this paper examines the pricing of equity linked structured products in the german market the daily closing prices of a large variety of structured products are compared to theoretical values derived from the prices of options traded on the eurex european exchange for the majority of products the study reveals large implicit premiums charged by the issuing banks in the primary market a set of driving factors behind the issuers pricing policies is identified for example underlying and type of implicit derivative s for the secondary market the product life cycle is found to be an important pricing parameter

on measuring credit risks of derivative instruments abstract this paper critically reviews current practices for measuring credit risks of derivative instruments it argues that there are two major problems with the standard measurement approach first it uses models of the stoachstic behavior of finanacial variables while ignoring both their inherent oversimplification and the uncertainty in their parameters second it ignores the correlations among exposures in derivative intruments and the probabilities of countrypartly default this paper deomonstrates that these practices can produce large errors in the estimation of distribution of both future credit exposures and future credit losses

the effects of cultural adaptation on business relationships americans selling to japanese and thais a 2 4 culture of participants degrees of cultural adaptation experimental design with 145 thai and 101 japanese professionals is used to investigate the effect of cultural adaptation on attraction and outcomes when americans adapt to japanese and thais this study extends the research of francis 1991 the curvilinear relationship between adaptation and attraction found in francis is not replicated for thais the relationship appears monotonic positive for japanese it reaches a plateau beyond moderate adaptation

influences on exchange processes buyers preconceptions of a seller s trustworthiness and bargaining toughness exchange theories posit that trust has an important and favorable influence on dyadic interactions this paper examines the notion that trust plays a key role in making a seller s tough bargaining strategy successful in a bargaining experiment we manipulated subjects preconceptions about a seller s trustworthiness and bargaining toughness as hypothesized a seller s expected trustworthiness plus toughness in bargaining led to higher levels of buyer seller cooperation and agreement and a higher level of buyer concessions

an empirical comparison of soviet and american business negotiations fifty six soviet businesspeople and 160 american businesspeople participated in simulated intracultural one on one buyer seller negotiations all participants completed questionnaires after the negotiation sessions and six negotiators from each cultural group were videotaped during the interactions analysis of the questionnaire data indicated that soviet negotiators achieved higher individual profits when using a competitive approach in negotiations this result is in contrast to a more cooperative approach associated with higher profits for the american participants analysis of the videotapes suggests both similarities and differences in observed bargaining behaviors across the two cultural groups

cultural differences in conducting intra and inter cultural negotiations a sino canadian comparison a study on conflict resolution strategies of canadian and chinese peoples republic of china executives was conducted responses to two types of joint project conflicts task related and person related with potential partners from their own culture or from the other culture were examined neither group of executives altered its strategy when negotiating across cultures chinese executives were more likely to avoid conflicts but recommended more negative strategies discontinue negotiation withdraw negotiation when conflict emerged person related conflicts were found to generate more negative responses than task related conflicts especially for chinese executives both canadian and chinese executives preferred to negotiate with canadians than with chinese

a comparison of canadian and japanese cognitive styles implications for management interaction many american and canadian companies seeking to form joint ventures and alliances with japanese companies or to negotiate contracts with them have discovered that the interaction can be difficult and frustrating value differences and preferences for different management practices have been identified that contribute to these interaction problems however little research has investigated potential differences in cognitive style that might also contribute to intercultural conflict this study compares samples of canadian and japanese mba students using the myers briggs type inventory mbti and links the findings to interaction difficulties reported in the literature

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

the implied reserves of the bank insurance fund abstract option models of deposit insurance pricing view assessment rates as put option premiums however such models ignore the risk of guaranty fund default this paper attempts to link risk based premiums with guaranty fund reserves in a partial equilibrium setting by employing a methodology based on options with credit risk the value of full insurance per coverage period is expressed as a standard options premium and is decomposed into two parts the explicit part is due to the available assets reserves of the guaranty fund while the implicit part comes from federal support contingent on the adequacy of reserves at the end of the coverage period implied reserves are derived under an exogenous insurance coverage rate as a policy parameter the method is illustrated on a sample of 40 large bank holding companies and an extension to the case of several insured banks is provided

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

dynamic decision making a cross cultural comparison of u s and peruvian export managers export managers from the u s and peru completed a survey designed to measure cooperative decisions during a sequence of three simulated interactions with business partners during the initial stage of the relationship the decisions of peruvian export managers reflect less trust than do those of their u s counterparts during the second stage peruvian exporters respond differently to weak cheating results generally are consistent with cultural differences in attitudes toward in group v out group members however the influence of cultural differences gradually erodes in favor of personal characteristics and relationship specific history suggesting that cultural differences between business partners decline in importance as they get to know each other

are two better than one bargaining behavior and outcomes in an asymmetrical power relationship many consumer transactions are characterized by bargaining between parties holding unequal power positions the group polarization hypothesis suggests that the effects of group size will differ for high and low power bargainers accordingly power position and size of bargaining unit one two were manipulated in a threat vulnerable 2 2 game factor effects on economic performance communication style and post bargaining attitudes were examined at the unit and system levels supporting the group polarization hypothesis two person groups tend to magnify the power manipulation i e group size interacts with power position on post bargaining attitudes and system performance

security pricing and deviations from the absolute priority rule in bankruptcy proceedings claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 bankruptcy reform act we measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents on average 7 6 of the total awarded to all claimants evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority suggesting that deviations from the rule were expected by the equity markets the absolute priority rule hereafter apr states that a bankrupt firm s value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors and junior creditors are paid in full before common shareholders bankruptcy reorganization proceedings however are leaving shareholders and junior creditors with valuable assets even when senior claimants receive only partial settlements as barrett and sullivan 1988 noted traditionally shareholders have been last in line their claims on a troubled company s assets have had the lowest priority and their impact on the course of bankruptcy code proceedings generally has been next to nil but lately the balance of power has been shifting warner 1977 provided one of the early discussions of the implications of deviations from the apr baldwin and mason 1983 pp 510 511 examined the resolution of claims in the massey ferguson reorganization and provided no support for the hypothesis that the market believes absolute priority rules will be enforced if the firm defaults on its financial obligations franks and torous 1989 analyzed a sample of bankruptcies that occurred during the period 1970 through 1984 and found that 21 of 27 sample cases exhibited departures from the apr more recently weiss 1990 examined 37 firms that filed for bankruptcy between 1980 and 1986 and reported that 27 of the cases involved apr violations

evaluation of counterparty risk for derivatives with early exercise features abstract we introduce an efficient numerical approach to evaluate counterparty risk and we compute the credit valuation adjustment for derivatives having early exercise features the approach is flexible and can account for wrong way risk and various models for the underlying risk factor s dynamics numerical experiments are presented to illustrate the efficiency and versatility of the method

the pricing of options with default risk this paper considers the pricing of options with default risk the comparative statics of such options can differ from those of ordinary options and early exercise of such american call options can be optimal several examples of options with default risk are considered traditionally it has been assumed that options have no default risk such an assumption is reasonable when one studies options traded on an organized exchange in the u s default on such options would require as cox and rubinstein 5 put it a very sudden and strong movement in stock prices one considerably more extreme than any on record p 71 however many options and financial assets containing option like payoffs are sold by firms that have limited assets for such options default is often a possibility that must be taken seriously in this paper we study how options subject to default risk which we hereinafter call vulnerable options are priced it turns out that many of the well established results of the option pricing literature see e g smith 12 and references therein do not hold for vulnerable options in particular the value of a vulnerable european option can fall with time to maturity with the interest rate and with the variance of the underlying asset furthermore it may pay to exercise early a vulnerable american option on a non dividend paying asset

importance sampling for integrated market and credit portfolio models a sophisticated approach for computing the total economic capital needed for various stochastically dependent risk types is the bottom up approach in this approach usually market and credit risks of financial instruments are modeled simultaneously as integrating market risk factors into standard credit portfolio models increases the computational burden of calculating risk measures it is analyzed to which extent importance sampling techniques previously developed either for pure market portfolio models or for pure credit portfolio models can be successfully applied to integrated market and credit portfolio models specific problems which arise in this context are discussed the effectiveness of these techniques is tested by numerical experiments for linear and non linear portfolios

pricing effects when competitors arrive the case of discount certificates in germany this article investigates how overpricing of outstanding certificates also called master certificates changes when competing products that duplicate the features of master certificates are issued i argue that competition effects may be reverted and overpricing may increase rather than decrease after competitors arrive when retail investors fail to detect implications of credit risk differences on certificates values using difference in differences estimations on matched samples i find that overpricing of master certificates decreases after the competing products have been issued but only when the master issuer s credit risk is lower than that of the duplicate issuer while it increases when the credit risk difference is positive these findings are robust to controlling for retail investors demand in various ways thus the study indicates that retail investors failure to detect the value implications of issuers credit risk can undermine product competition

the mismeasurement of risk investors typically measure risk as the probability of a given loss or the amount that can be lost with a given probability at the end of their investment horizons this view of risk considers only the final result but investors perceive or should perceive risk differently they are affected by exposure to loss throughout the investment period not just at its conclusion we introduce two new ways of measuring risk within horizon probability of loss and continuous value at risk that reveal that exposure to loss is substantially greater than investors normally assume

understanding the domain of cross national buyer seller interactions cross national face to face selling has thus far received very little scholarly treatment in marketing literature with few notable exceptions most existing research in this area has been fragmentary and opportunistic these problems are largely because of the lack of a broad generalizable framework within which to conceptualize and execute research studies in offering such a conceptual framework this article looks at buyer seller interactions from a communication perspective

credit swap valuation this review of the pricing of credit swaps a form of derivative security that can be viewed as default insurance on loans or bonds begins with a description of the credit swap contract turns to pricing by reference to spreads over the risk free rate of par floating rate bonds of the same quality and then considers model based pricing the role of asset swap spreads as a reference for pricing credit swaps is also considered

pricing black scholes options with correlated credit risk abstract this paper presents an improved method of pricing vulnerable black scholes options under assumptions which are appropriate in many business situations an analytic pricing formula is derived which allows not only for correlation between the option s underlying asset and the credit risk of the counterparty but also for the option writer to have other liabilities further the proportion of nominal claims paid out in default is endogenous to the model and is based on the terminal value of the assets of the counterparty and the amount of other equally ranking claims numerical examples compare the results of this model with those of other pricing formulas based on alternative assumptions and illustrate how the model can be calibrated using market data

default risk in a market model abstract this paper presents a theoretical model of default risk in the context of the market model approach to interest rate dynamics we propose a model for finite interval interest rates such as libor which explicitly takes into account the possibility of default through the influence of a point process with deterministic intensity we relate the defaultable interest rate to the non defaultable interest rate and to the credit risk characteristics default intensity and recovery rate we find that the spread between defaultable and non defaultable rate depends on the non defaultable rate even when the default intensity is deterministic prices of a cap on the defaultable rate and of a credit spread option are derived we consider swaps with unilateral and bilateral default risk and derive the fair fixed swap rate in both cases under the condition that both counterparties are of the same risk class we show that for a monotonously increasing term structure the swap rate for a defaultable swap will lie below the swap rate for a swap without default risk

integrated north sea grids the costs the benefits and their distribution between countries abstract a large number of offshore wind farms and interconnectors are expected to be constructed in the north sea region over the coming decades creating substantial opportunities for the deployment of integrated network solutions creating interconnected offshore grids that combine cross border links and connections of offshore plants to shore offers multiple economic and environmental advantages for europe s energy system however despite evidence that integrated solutions can be more beneficial than traditional radial connection practices no such projects have been deployed yet in this paper we quantify costs and benefits of integrated projects and investigate to which extent the cost benefit sharing mechanism between participating countries can impede or encourage the development of integrated projects three concrete interconnection case studies in the north sea area are analysed in detail using a national level power system model model outputs are used to compute the net benefit of all involved stakeholders under different allocation schemes given the asymmetric distribution of costs and benefits we recommend to consistently apply the positive net benefit differential mechanism as a starting point for negotiations on the financial closure of investments in integrated offshore infrastructure

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models