Description: In this paper, we introduce a political risk variable, d, to measure risk of foreign direct investment FDI. The political risk variable has opposite effects of loss reduction and loss prevention in Ehrlich and Becker 1972. The unique characteristics of political risk insurance make the applications of actuarially-based pricing models infeasible. In this study, by taking into account the effects of self-protection and self-insurance through the variable d and by maximizing utility function, we find the equilibrium for insured and insurer in a competitive market and in a monopoly one. In addition, under the equilibrium status, the boundary for the amount of investment, the insurance coverage, and the minimum required rate of return on the FDI are derived.

Description: Securitization of mortality risks is an alternative risk management tool that may have some advantages over reinsurance. The purpose of this paper is to study mortality-based securities, such as swaps and mortality bonds, and to price the proposed mortality securities. We focus on group life annuity data, although the techniques could be applied to other lines of annuity or life insurance.

Description: In this paper we discuss the link between the price of a contingent claim and its replicating strategies. We compute the replicating strategies for some contingent claims when the price of stocks are modeled using either the Wiener process or the Poisson process. These replicating strategies are essential knowledge if one wishes to implement a dynamic trading strategy.

Description: Much of the push for ERM has come from regulators and rating agencies, but it is being applied in internal company decision-making as well. This paper reviews the progress made and the needs still outstanding in two key areas of application: optimal capital level for an insurer and risk-adjusted profitability of business units. The basic conclusion is that progress has been made in these areas, but more is needed. Building models is not emphasized—it will be assumed that a state-of-the art model is available. The emphasis is on using such models in decision-making.

Description: This note develops the optimality of the put option as a hedging strategy. For an investor who owns a stock, he can buy a put option to hedge against the downside risk of the stock price. In this short note, we ask two questions with the hedge strategy of the put option. First, whether the investor is better off with the hedging strategy? Second, if the investor is better off with the hedging strategy, whether it is the optimal hedging plan? Our result shows that in a risk averse world an investor will maximize his utility with buying the put option as a hedge strategy.

Description: This paper examines the problem of hedging foreign exchange risk across multiple countries using currency options. The profit target requirement is formulated as a stochastic constraint in the context of a binomial lattice. Models are presented for European options. In a numerical example, five currency options are selected, allowing for long or short positions, depending on the target value.

Description: This paper explores Indian futures and options market as a market for hedging by equity holders. The authors have tried to examine optimal hedge ratio and hedge efficiency, and to provide empirical evidence from India.

Description: This paper demonstrates that using a conditional probability approach to analyzing investment data yields investment forecast and stock option pricing models which more closely match actual market data, and it demonstrates the impact that conditional probabilities could have on CAPM beta and risk premia calculations. Reprinted from: Journal of Financial and Economic Practice, Vol. 6 No. 2 Spring 2006.