FINANCIAL ENGINEERING eJOURNAL
"The Impact of the Integrated Financial Risk Management on the Effectiveness of the Decisions of the Financial Leverage: An Empirical Study on the Insurance Companies in Kosovo"
IBISH MAZREKU, University 'Haxhi Zeka'
FISNIK MORINA, University 'Haxhi Zeka'
Among many decisions taken by business organizations, the most critical decision they take which affects the value of the company is that of the financial leverage. The designing of the decisions in a standard level of the financial leverage can be useful and at the same time harmful for the company. This study introduces a new approach called "Integrated financial risk management" which maximizes the effect of the organizational decisions.
The management of the integrated financial risk aims at: improving the financial performance of the company, strengthening the stakeholders' communication and building a greater confidence in the market by providing real time data about the financial risks, decisions and the values of the organization, and finally approving and implementing a common framework about the risk inside the organization.
The process of the integrated financial risk management (IFRM) is designed and established by the company management and is implemented by the staff inside the organization. This is not a linear process; an IFRM may also have an effect on other risks and on control tools which are recognized as effective on the limitation of the risk. In short, this management of the financial risks effects on the efficiency of the financial leverages decisions.
This approach will have an impact on the increase of integration between strategic and operational standards inside and outside the country throughout the managerial hierarchy. In this study we will identify the relationship between the financial leverage and the performance of the insurance companies which are licensed by the Central Bank of Kosova. This is an econometric study for the period from 2010 until 2014.
"A Flexible Generalised Hyperbolic Option Pricing Model and its Special Cases"
CLAUDIA YEAP, University of Sydney Business School
SIMON KWOK, University of Sydney
BORIS CHOY, University of Sydney Business School
We formulate a flexible generalised hyperbolic (GH) option pricing model, which unlike the version proposed by Eberlein and Prause (2002), has all four of its parameters free to be estimated. We also present six three-parameter special cases: a variance gamma (VG), t, hyperbolic, normal inverse Gaussian, reciprocal hyperbolic and normal reciprocal inverse Gaussian option pricing model. Using S&P 500 Index options, we compare the flexible GH, VG, t and Black-Scholes models. The flexible GH model offers the best out-of-sample pricing overall, while the t special case outperforms the VG for both in-sample and out-of-sample pricing. All three models also improve the orthogonality of implied volatility compared to the Black-Scholes model.
"Error Analysis of Finite Difference and Markov Chain Approximations for Option Pricing"
LINGFEI LI, The Chinese University of Hong Kong
GONGQIU ZHANG, The Chinese University of Hong Kong (CUHK)
Mijatovic and Pistorius (Math. Finance, 2013) proposed an efficient Markov chain approximation method for pricing European and barrier options in general one-dimensional Markovian models, however sharp convergence rates of this method for realistic financial payoffs which are non-smooth are rarely available. In this paper, we solve this problem for general one-dimensional diffusion models, which play a fundamental role in financial applications. For such models, the Markov chain approximation method is equivalent to the method of lines using central difference. Our analysis is based on the spectral representation of the exact solution and the approximate solution. By establishing the convergence rate for the eigenvalues and the eigenfunctions, we obtain sharp convergence rates for the transition density and the price of options with non-smooth payoffs. In particular, we have shown that for call/put-type payoffs, convergence is second order, while for digital-type payoffs, convergence is only first order in general. Furthermore, we provide theoretical justification for two well-known smoothing techniques that can restore second order convergence for digital-type payoffs and explain oscillations observed in the convergence for options with non-smooth payoffs. As an extension, we also establish sharp convergence rates for European options in a rich class of Markovian jump models constructed from diffusions via subordination. The theoretical estimates are confirmed by numerical examples.
About this eJournal
This eJournal distributes working and accepted paper abstracts related to development and employment of quantitative techniques to further our understanding of financial markets, instruments, and strategies. The eJournal welcomes research with a focus on advancing the theory or practice of financial engineering in endowments, hedge funds, insurance firms, investment and commercial banks, pension funds, and personal financial and retirement planning. Topics of interest include, but are not limited to, econometric analysis of financial data, enterprise risk management, investment and consumption models, optimal portfolio, pricing and hedging of financial instruments, as well as innovative empirical studies, analytical models, and mathematical algorithms in credit, energy, fixed-income and other markets.
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