Risk Management

by Frenkel, Michael; Hommel, Ulrich; Rudolf, Markus; Dufey, Gunter

• ISBN13: 9783540226826
• ISBN10: 3540226826
• Edition: 2nd
• Format: Hardcover
• Copyright: 2005-03-30
• Publisher: Springer Nature

Summary

Dealing with all aspects of risk management that have undergone significant innovation in recent years, this book aims at being a reference work in its field. Different to other books on the topic, it addresses the challenges and opportunities facing the different risk management types in banks, insurance companies, and the corporate sector. Due to the rising volatility in the financial markets as well as political and operational risks affecting the business sector in general, capital adequacy rules are equally important for non-financial companies. For the banking sector, the book emphasizes the modifications implied by the Basel II proposal. The volume has been written for academics as well as practitioners, in particular finance specialists. It is unique in bringing together such a wide array of experts and correspondingly offers a complete coverage of recent developments in risk management.

Table of Contents

A Word of Greeting	v
Preface	vii
Part 1: Bank Risk Management
Basel II and the Effects on the Banking Sector	3	(22)
Thomas Hartmann-Wendels
Peter Grundke
Wolfgang Spork
Overview on the New Basel Capital Accord	3	(3)
Why Do We Need a More Sophisticated Banking Supervision?	5	(1)
The Standardized Approach	6	(3)
The Internal Ratings-Based Approach	9	(10)
The IRB Approach for the Corporate Asset Class	9	(1)
Basic Structure of the IRB Approach for the Corporate Asset Class	9	(1)
The Risk Components	10	(3)
The Risk Weight Function	13	(4)
The IRB Approach for the Retail Asset Class	17	(2)
Consequences of Basel II	19	(6)
Consequences on the Lending Margins	19	(3)
Consequences for the Banking Industry	22	(3)
Conflicts of Interest and Market Discipline in Financial Services Firms	25	(28)
Ingo Walter
A Conflict of Interest Taxonomy	27	(9)
Conflicts of Interest in Wholesale Financial Markets	28	(3)
Conflicts of Interest in Retail Financial Services	31	(2)
Wholesale-Retail Conflicts	33	(3)
Conflicts of Interest and Strategic Profiles of Financial Firms	36	(4)
Potential Conflicts of Interest in Multifunctional Client Relationships	37	(3)
Constraining Exploitation of Conflicts of Interest	40	(7)
Regulation-Based Constraints	40	(3)
Market-Discipline Constraints	43	(2)
Intersection of Regulation and Market-Based Constraints	45	(2)
Conclusion	47	(6)
Risk Management and Value Creation in Banks	53	(26)
Gerhard Schrock
Manfred Steiner
Introduction	54	(1)
Necessity for a Framework on Risk Management in Banks at the Corporate Level	54	(6)
RAROC as Capital Budgeting Rule in Banks	60	(5)
Evolution of Capital Budgeting Rules in Banks	60	(1)
Definition of RAROC	61	(3)
Assumptions and Deficiencies of RAROC	64	(1)
Overview of New Approaches	65	(2)
Implications of the New Approaches on Risk Management and Value Creation in Banks	67	(5)
Implications for Risk Management Decisions	68	(3)
Implications on Capital Budgeting Decisions	71	(1)
Implications on Capital Structure Decisions	71	(1)
Foundations for a Normative Theory for Risk Management in Banks	72	(2)
Conclusion	74	(5)
The New Basel Capital Accord	79	(20)
Claudia Holtorf
Matthias Muck
Markus Rudolf
Introduction	79	(2)
VaR Calculation	81	(8)
Regulatory Reporting, VaR, and Capital Requirement	89	(2)
Internal vs. Standard Model	91	(3)
Credit Risk	94	(3)
Operational Risk	97	(1)
Summary and Outlook	97	(2)
Value at Risk: Regulatory and Other Applications, Methods, and Criticism	99	(26)
Alois Paul Knobloch
The Concept of Value at Risk and its Role in Contemporary Risk Management	99	(4)
Value at Risk: Definition and Risks of Concern	100	(1)
Applications and Regulatory Background	101	(2)
Calculating Value at Risk: Methods and Inherent Sources of Inaccuracy	103	(6)
Delta-normal and Delta-gamma Approach	104	(3)
Simulation Methods: Historical and Monte Carlo Simulation	107	(2)
Risk Reduction and Capital Allocation Within a Value at Risk Framework	109	(5)
Minimizing Value at Risk	110	(2)
Allocating VaR to Business Units	112	(2)
Shortcomings of Value at Risk as a Measure of Risk	114	(7)
Conclusion	121	(4)
Parsimonious Value at Risk for Fixed Income Portfolios	125	(18)
John F. O. Bilson
Introduction	125	(18)
A Simple Example	126	(4)
The Key Rate Duration Model	130	(3)
The Level, Slope, and Curvature (LSC) Model	133	(4)
LSC Risk Analysis	137	(3)
Conclusion	140	(3)
Risk Budgeting with Value at Risk Limits	143	(16)
Robert Hartl
Lutz Johanning
Introduction	144	(1)
Definition of Value at Risk Limits	145	(2)
The Structure of the Simulation Models	147	(1)
Adjusting Risk Limits for Time Horizons and Profits and Losses	148	(2)
Incorporating Asset Correlations Into Risk Budgets	150	(3)
Conclusion and Practical Implications	153	(6)
Value at Risk, Bank Equity and Credit Risk	159	(10)
Jack E. Wahl
Udo Broll
Introduction	159	(1)
A Banking Firm	160	(3)
The Economic Setting	161	(1)
The Stochastic Setting	162	(1)
Value at Risk and the Bank's Profit	163	(1)
Optimal Capital Requirement	163	(1)
Value Maximization and Bank Equity	164	(2)
Conclusion	166	(3)
Parametric and Nonparametric Estimation of Conditional Return Expectations	169	(28)
Wolfgang Drobetz
Daniel Hoechle
Introduction	170	(2)
Parametric versus Nonparametric Regression -- A Simple Derivation	172	(11)
Conditional Mean, Econometric Loss, and Weighted Least Squares	172	(2)
The Parametric Approach: An Unusual Representation of OLS	174	(2)
Nonparametric Regression Analysis	176	(5)
The Multivariate Case	181	(1)
Bandwidth Selection for Nonparametric Regression Estimators	182	(1)
Data Description	183	(2)
Empirical Results	185	(8)
In-sample Results	185	(4)
Out-of-sample Results	189	(4)
Conclusion	193	(1)
Acknowledgement	193	(4)
Credit Risk Portfolio Modeling: An Overview	197	(22)
Ludger Overbeck
Purpose of Credit Risk Modeling	197	(4)
Enterprise Risk Management	197	(1)
Economic Capital	198	(1)
Capital Allocation	199	(1)
Integration of Risk Types	199	(1)
Loss Distribution	200	(1)
Risk Measure	200	(1)
Portfolio Transactions	201	(1)
Basic Components of Credit Risk Modeling	201	(3)
Inputs	201	(1)
Exposure at Default	201	(1)
Loss Given Default	202	(1)
Default Probability	202	(1)
Dependency Concept	202	(1)
Event Versus Time Series Correlation	203	(1)
Output	204	(3)
Economic Capital	204	(1)
Value-at-Risk	204	(1)
Expected Shortfall	205	(1)
Coherent Risk Measures	206	(1)
Capital Allocation	206	(1)
Contribution to Volatility and Contribution to VaR, Capital Multiplier	206	(1)
Contribution to Expected Shortfall	207	(1)
Portfolio Models	207	(9)
Actuarial Approach	208	(1)
Specification of Severity and Frequency Distributions	208	(1)
Dependence	209	(1)
Extensions	209	(1)
Structural Approach	210	(1)
Default Event	210	(1)
Dependencies	211	(2)
Loss Distribution	213	(2)
Extensions	215	(1)
Summary	216	(3)
Evaluating Credit Risk Models	219	(20)
Hergen Frerichs
Mark Wahrenburg
Introduction	219	(2)
Backtests Based on the Frequency of Tail Losses	221	(4)
Backtests Based on Loss Density Forecasts	225	(6)
Forecast Evaluation Approaches to Backtesting	231	(5)
Conclusion	236	(3)
Estimation of Default Probabilities and Default Correlations	239	(20)
Stefan Huschens
Konstantin Vogl
Robert Wania
Introduction	239	(1)
Estimation of Default Probabilities	240	(9)
Single-Period Case	240	(6)
Multi-Period Case	246	(1)
Multi-Group Case	247	(2)
Estimation of Default Correlation	249	(6)
Concepts of Dependent Defaults	249	(1)
Estimation in a General Bernoulli Mixture Model	250	(3)
Estimation in a Single-Factor Model	253	(2)
Simultaneous Estimation	255	(2)
General Bernoulli Mixture Model	255	(1)
Single-Factor Model	256	(1)
Conclusion	257	(2)
Managing Investment Risks of Institutional Private Equity Investors -- The Challenge of Illiquidity	259	(20)
Christoph Kaserer
Niklas Wagner
Ann-Kristin Achleitner
Introduction	260	(1)
Measuring Private Equity Returns and Risk	261	(9)
Asset Value Based Returns	263	(1)
Smoothed Proxy Observations	264	(2)
Noisy Smoothed Proxy Observations	266	(1)
Cash Flow Based Returns	267	(3)
Risk Management and Asset Allocation	270	(4)
Specific Issues in Risk Management	271	(2)
Specific Issues in Asset Allocation	273	(1)
Conclusion	274	(5)
Assessment of Operational Risk Capital	279	(4)
Carol Alexander
The Operational Risk Capital Model	281	(8)
Frequency, Severity and the Loss Distribution	283	(3)
Operational Risk Capital Calculation	286	(3)
Dealing with Operational Risk Data	289	(5)
Choosing the Functional Form of the Loss Model	289	(1)
Data Filtering and Scaling	290	(3)
Risk Self-Assessment	293	(1)
Data-Oriented AMA	294	(1)
Aggregation of Operational Risks	294	(5)
Identification of Dependencies	295	(1)
The Effect of Dependencies on the Aggregate ORC	296	(2)
Aggregating Operational Risks with Other Risks	298	(1)
Summary and Conclusions	299
Operational Risk: The Management Perspective	283	(38)
Wilhelm Kross
Introduction	304	(17)
Commonly Practiced Approaches to OpRisk	305	(1)
Pitfalls on the Road to AMA Compliance	306	(4)
Inefficiencies in AMA Compliance Management	310	(1)
Desirable Side-Effects in OpRisk Management	311	(2)
Priorities and Maximized Value in OpRisk Management	313	(2)
Generic Roadmap towards Effective OpRisk Management	315	(1)
Conclusions and Recommendations	316	(5)
Part 2: Insurance Risk Management
Catastrophic Events as Threats to Society: Private and Public Risk Management Strategies	321	(20)
Martin Nell
Andreas Richter
Introduction	322	(2)
Insurance-linked Securities	324	(7)
State Guarantees for Catastrophic Risk?	331	(4)
Problems with Catastrophe Insurance Demand	335	(1)
Conclusion	336	(5)
New Approaches to Managing Catastrophic Insurance Risk	341	(28)
Ulrich Hommel
Mischa Ritter
Introduction	341	(4)
CAT-Linked Securities -- A New Asset Class	345	(2)
Traditional and ART-Based CAT Reinsurance	347	(3)
Optimizing the Issuer's Risk Portfolio	350	(2)
Risk Management Strategies Using CAT-Linked Securities	352	(7)
Ex-Post Capital Provision and Funding Cost Reduction with CAT-linked Bonds	353	(6)
Valuation Issues	359	(2)
Concluding Remarks	361	(8)
Alternative Risk Transfer	369	(22)
Christopher L. Culp
Introduction	369	(1)
Self-Insurance, Captives, and the Emergence of ART	370	(5)
Single-Parent Captives	371	(2)
Other Captive-Like Structures	373	(1)
Mutualized Structures	373	(1)
Rent-A-Captives and Protected Cell Companies	374	(1)
Finite Risk	375	(4)
Typical Finite Risk Structures	375	(2)
Potential Benefits to Corporates	377	(1)
The AIG/Brightpoint SEC Settlement	378	(1)
Multi-Line Programs and Risk Bundling	379	(4)
Overcoming Silo-by-Silo Inefficiency	380	(2)
A Mixed Record	382	(1)
Multi-Trigger Programs	383	(1)
Structured Finance Solutions	384	(4)
Asset Securitization	384	(1)
Risk Securitization	385	(2)
Future Flow Securitization	387	(1)
Structured Liabilities	387	(1)
Contingent Capital	388	(1)
Conclusion	389	(2)
The Challenge of Managing Longevity Risk	391	(16)
Petra Riemer-Hommel
Thomas Trauth
Introduction	391	(1)
Establishing the Relevance of Longevity Risk to the Insurance Industry	392	(4)
Economic Reasons for the (Re)Insurance Gap	396	(5)
Difficulties in Forecasting Longevity Trends	397	(1)
Adverse Selection	398	(1)
Moral Hazard	399	(1)
Absence of Diversification and Hedging Opportunities	400	(1)
Possible Solutions for Longevity Risk (Re)Insurance	401	(3)
Pricing to Risk	401	(1)
Finite Reinsurance Solutions	402	(1)
Capital Market Solutions	403	(1)
Conclusion	404	(3)
Asset/Liability Management of German Life Insurance Companies: A Value-at-Risk Approach in the Presence of Interest Rate Guarantees	407	(16)
Peter Albrecht
Carsten Weber
Introduction	408	(2)
The Model and its Calibration	410	(1)
The Case of German Life Insurance Companies	411	(1)
Pure Market Values of Assets	412	(1)
Book Values of Assets	413	(1)
The Riskless Asset	414	(3)
Summary	417	(1)
Appendix A: Probable Minimum Return	418	(1)
Appendix B: Worst Case-Average Return	418	(1)
Appendix C: Conversion of Market Values into Book Values	419	(4)
Part 3: Corporate Risk Management
Risk Management, Corporate Governance and the Public Corporation	423	(14)
Fred R. Kaen
Introduction	423	(1)
``Scientific'' Theoretical Perspective on Risk Management	424	(2)
From Theory to Practice: Why Firms Should Manage Risk	426	(6)
Using Risk Management to Lower Taxes	426	(1)
Reducing Financial Distress and Bankruptcy Costs	427	(1)
Using Risk Management to Encourage and Protect Firm Specific Investments	428	(2)
Using Risk Management to Monitor and Control Managers	430	(1)
Using Risk Management to Improve Decision Making and Capital Budgeting	431	(1)
Risk Management and Dividends	431	(1)
Back to Berle and Means	432	(2)
Summary and Conclusions	434	(3)
Integrating Corporate Risk Management	437	(18)
Christian Laux
Introduction	437	(2)
How Does Risk Management Add Value?	439	(2)
Measuring the Value of Risk Management	441	(2)
Identifying a Firm's Collective Risks	443	(1)
Interactions Between Risk Management, Financial Structure, and Operating Decisions	444	(2)
Integrated Products	446	(3)
Risk Management and Managerial Incentive Problems	449	(6)
Value-Based Motives for Corporate Risk Management	455	(24)
Ulrich Hommel
Introduction	455	(1)
The Irrelevance Theorem of Modigliani-Miller (MM)	456	(2)
Value Based Motives for Corporate Risk Management	458	(16)
Raising the Efficiency of Financial Contracting	459	(1)
Shareholders vs. Management	460	(2)
Creditors vs. Shareholders	462	(4)
Reducing the Corporate Tax Burden	466	(2)
Reducing Transaction Costs	468	(1)
Transaction Cost of Financial Distress	468	(1)
Transaction Cost of Hedging	469	(1)
Selecting the Optimal Risk Portfolio	470	(1)
Coordinating Financial and Investment Policies	471	(3)
Conclusion	474	(5)
Value-based Corporate Risk Management	479	(16)
Werner Gleißner
Introduction	479	(3)
Tasks and Elements of Corporate Risk Management -- Overview	482	(5)
From Risk Management to Value-Based Management and Strategic Management	482	(2)
Analyzing Risks	484	(1)
Aggregating Risks: Definition of Total Risk Volume	484	(2)
Coping with Risks	486	(1)
Designing Risk Management Systems and Monitoring	486	(1)
Risk, Cost of Capital and Shareholder Value	487	(5)
Introducing Considerations, the Shareholder Value	487	(1)
Enterprise Value and Capital Costs in Efficient Markets	488	(1)
Model Criticism	489	(1)
Deriving Realistic Cost of Capital Rates	490	(1)
Further Consequences of Inefficient Capital Markets	491	(1)
Conclusion	492	(3)
Statutory Regulation of the Risk Management Function in Germany: Implementation Issues for the Non-Financial Sector	495	(18)
Jurgen Weber
Arnim Liekweg
Introduction: Statutory Regulations as Cause of a New German Discussion on Risk--Management	495	(2)
Entrepreneurial Risk and Risk Management: A Holistic Approach	497	(11)
Chance, Risk and their Definitions	497	(1)
Chance, Risk and their Dimensions	498	(1)
The Process of Entrepreneurial Chance and Risk Management	499	(1)
The Chance/Risk--Strategy	500	(1)
Chance/Risk-Identification	501	(1)
The Chance/Risk--Analysis	502	(1)
The Chance/Risk-Reporting	503	(3)
Chance/Risk--Management	506	(1)
Chance/Risk--Monitoring	507	(1)
The Process-External Monitoring and Revision Function	508	(1)
Summary: The Critical Factors for the Implementation of the Risk Management Function	508	(5)
A Comprehensive Approach to the Measurement of Macroeconomic Exposure	513	(24)
Lars Oxelheim
Clas Wihlborg
Introduction	513	(2)
Exposure Coefficients	515	(2)
The Choice of Dependent Variable	517	(2)
The Choice of Independent Variables and Time Horizon	519	(1)
Volvo Cars	520	(4)
Results, Interpretations and the Use of Coefficients	524	(6)
Explanatory Factors	524	(2)
Exposure to Macroeconomic Shocks	526	(1)
Exposure Under Pegged Versus Flexible Exchange Rates	527	(1)
What Has Financial Exposure Management Achieved?	528	(1)
Financial Structure as a Hedge Against Macroeconomic Exposure	529	(1)
Using Estimated Coefficients for Future Periods	530	(3)
Concluding Remarks and the Use of MUST Analysis in External Reporting	533	(4)
Foreign-Exchange-Risk Management in German Non-Financial Corporations: An Empirical Analysis	537	(20)
Martin Glaum
Introduction	537	(2)
Theoretical Framework: Measurement and Management of Foreign-Exchange Risk	539	(2)
Methodology of the Empirical Study	541	(2)
Results of the Empirical Study	543	(10)
Exposure Concepts	543	(2)
Exchange-Risk-Management Strategies	545	(4)
The Use of Foreign-Exchange-Rate Forecasts	549	(1)
Organization of Exchange-Rate Management	550	(1)
Further Arguments and Hypotheses on Exchange-Risk Management	551	(2)
Conclusion	553	(4)
Estimating the Exchange Rate Exposure of US Multinational Firms: Evidence from an Event Study Methodology	557	(14)
Kathryn L. Dewenter
Robert C. Higgins
Timothy T. Simin
Introduction	557	(3)
Sample Selection and Event Study Methodology	560	(2)
Event Study Measures of Exchange Rate Exposure	562	(2)
Determinants of Exchange Rate Exposure	564	(4)
Conclusion	568	(3)
International Corporate Risk Management: A Comparison of Three Major Airlines	571	(20)
Matthias Muck
Markus Rudolf
Introduction	572	(2)
The Current Situation of the Airlines	574	(4)
Lufthansa AG Background Information	574	(3)
United Airlines Background Information	577	(1)
Qantas Background Information	578	(1)
CorporateMetricsTM -- Explaining the Model	578	(2)
Income Statements	580	(2)
Corporate Risk Drivers	582	(3)
Hedging Strategies	585	(2)
Simulation Results	587	(2)
Conclusion	589	(2)
Corporate Risk Management: Real Options and Financial Hedging	591	(18)
Alexander J. Triantis
Identification and Classification of Risks	592	(2)
Rationales for Managing Risk	594	(3)
Using Derivatives and Other Contracts to Manage Risk	597	(2)
Using Real Options to Hedge and Exploit Risk	599	(2)
Using Real versus Financial Options for Hedging	601	(2)
Creating an Integrated Risk Management Strategy	603	(2)
Conquering Risk	605	(4)
The Real Option Value of Operational and Managerial Flexibility in Global Supply Chain Networks	609	(22)
Arnd Huchzermeier
Introduction	610	(1)
The Benefit of Operational Flexibility	611	(6)
The Original Problem	611	(1)
Supply Chain Network Cost Optimization	612	(1)
The Two-stage Supply Chain Network Model Formulation	612	(1)
The International Two-stage Supply Chain Network Model	613	(1)
Profit Maximization	614	(1)
Shareholder Value Maximization	614	(1)
Transfer Pricing	615	(1)
Knowledge Management	616	(1)
Real Exchange Rate Risk	616	(1)
The Option Value of Managerial Flexibility	617	(9)
Demand Risk	618	(1)
Stochastic or Scenario Programming Formulation with Recourse	618	(1)
The Option Value of Managerial Flexibility under Demand Risk	619	(1)
Monte-Carlo Simulation Study	620	(1)
Exchange Rate Uncertainty	620	(1)
Local Pricing	620	(3)
World Pricing	623	(1)
Home-Country or US$-Pricing	623	(1)
The Option Value of Managerial Flexibility under Demand Risk and Price/Exchange Rate Uncertainty	623	(1)
Monte-Carlo Simulation Study	624	(2)
Summary	626	(5)
Managing Acquisition-Related Currency Risk Exposures: The E.ON-Powergen Case	631	(20)
Stefan Hloch
Ulrich Hommel
Karoline Jung-Senssfelder
E.ON's Acquisition of Powergen	631	(2)
Currency Risk Exposures in Cross-Border Acquisitions	633	(4)
Currency Exposure Defined	634	(1)
Contingent Exposure	635	(1)
Translation Exposure	636	(1)
Introducing an Acquisition-Related Approach to Managing Currency Risk Exposures	637	(5)
Exposure Identification	638	(1)
Policy Formulation	639	(1)
Exposure Measurement	640	(1)
Exposure Monitoring and Reporting	641	(1)
Exposure Control	642	(6)
Foreign Debt	643	(1)
Currency Options	644	(2)
Currency Forwards, Futures and Cross-Currency Swaps	646	(1)
``Acquisition Companies''	647	(1)
Concluding Remarks	648	(3)
Introducing New Risk Classes to Organized Exchanges: The Case of Electricity Derivatives	651	(20)
Christian Geyer
Werner G. Seifert
Introduction	651	(1)
Building on New Paradigms	652	(7)
The Integration of the Markets is Accelerating	653	(1)
Consolidation of European Market Infrastructures	654	(3)
A New Understanding of Roles, New Technologies, and New Abilities Need a Different Form of Capitalization	657	(2)
New Risk Classes in Electricity	659	(5)
Challenges and Opportunities in the Emerging Power Market	659	(1)
Competition in the Electricity Industry	660	(1)
Opportunities Offered by an Electricity Exchange	661	(1)
Why Power is Different	661	(1)
Determinants of Power Prices and Related Risks	662	(1)
Limitations of Black/Scholes With Respect to Electricity	663	(1)
Price Discovery: Reshaping the Power Industry	664	(4)
The Role of the Forward Curve	664	(2)
Price Discovery in Bilateral and Exchange Markets	666	(1)
Reshaping of the Energy Industry has Begun	667	(1)
The Creation of the European Energy Exchange	667	(1)
Transfer to Other Risk Classes	668	(3)
The Future of Deutsche Borse: Developer and Operator of Markets for Tradable Products	668	(3)
Was Enron's Business Model Fundamentally Flawed?	671	(8)
Ehud I. Ronn
Overview	671	(1)
Causes for Market-Value Losses Known Prior to Oct. 16, 2001	671	(1)
Corporate Governance and the Slide towards Bankruptcy: Business Practices Brought to Light Subsequent to Oct. 16, 2001	672	(2)
The Aftermath of Enron for Merchant Energy	674	(1)
The Economic Role of Markets: Price Discovery, Risk Management and Price-Signaling	674	(2)
Was Enron's Business Model Fundamentally Flawed?	676	(3)
``Real'' Risk Management: Opportunities and Limits of Consumption-Based Strategies	679	(20)
Wolfgang Breuer
Olaf Stotz
Onassis and the Numeraire Problem	679	(1)
Consumption-Oriented Utility Functions	680	(2)
Onassis' Decision Problem Reconsidered	682	(2)
Consumption Oriented Utility and International Invitations for Tenders	684	(13)
The General Setting	684	(2)
Capital Market Data	686	(1)
Entrepreneurial Data	687	(3)
Risk Management Situations	690	(1)
Active Risk Management Only at t = 1	690	(2)
Active Risk Management Only at t = 0	692	(5)
Conclusion	697	(2)
Capacity Options: Convergence of Supply Chain Management and Financial Asset Management	699	(22)
Stefan Spinler
Arnd Huchzermeier
Introduction	699	(1)
Supply Contracting: Emergence of Forward Buying, Contractual Flexibility and Risk Hedging	700	(9)
Pricing Issues	700	(1)
Long-Term Investment vs. Short-Term Flexibility	701	(4)
Contractual Flexibility	705	(2)
Management of Demand Uncertainty	707	(2)
Capacity Options and Risk Management	709	(6)
A Model for Capacity Options	710	(1)
Risk Hedging via Flexibility Contracts	711	(2)
Trading Opportunities for Flexibility Contracts	713	(1)
Contract Portfolios	714	(1)
Summary	715	(6)
Part 4: Systemic Issues of Risk Management
The Key to Risk Management: Management	721	(20)
Adrian E. Tschoegl
Introduction	721	(2)
Some Examples of Financial Debacles	723	(6)
Barings Brothers	723	(2)
Daiwa Bank	725	(2)
Sumitomo Corporation	727	(2)
Conceptualizing Debacles and their Prevention	729	(5)
Conclusion	734	(7)
Postscript: Allied Irish Bank	735	(6)
Economic Risks of EMU	741	(24)
Michael Frenkel
Paul McCracken
Introduction	742	(1)
Risks Stemming from Excessive Government Borrowing	743	(7)
Risks of High Adjustment Costs Stemming from European Labor Markets	750	(8)
Risks Associated with EMU Enlargement	758	(1)
Risks in EMU Financial Markets	759	(2)
Conclusion	761	(4)
Does Risk Management Make Financial Markets Riskier?	765	(20)
Ian R. Harper
Joachim G. Keller
Christian M. Pfeil
Introduction	766	(1)
Increased Risk through Risk Management?	766	(1)
Market Risk as a Regulatory Concern	767	(1)
The Measurement of Market Risk	768	(4)
Some Comments on Different Approaches to VaR	768	(2)
VaR as an Amplifier of Volatility?	770	(2)
Some Empirical Results on Volatility in Major Stock Markets	772	(9)
Model Set-up, Data and Hypotheses	772	(8)
Estimation Results	780	(1)
Conclusion	781	(4)
Risk Management, Rational Herding and Institutional Investors: A Macro View	785	(16)
Torben Lutje
Lukas Menkhoff
Introduction	786	(1)
Incentives towards Rational Herding of Institutional Investors	787	(1)
Evidence on Herding of Fund Managers	788	(2)
Survey Findings on Herd Behavior	790	(6)
Evidence of Herding Among Institutional Investors	790	(2)
Relation between the Perception of Herding and the Institutional Investors' Characteristics	792	(2)
Perception of Herding and the Sources of Information	794	(2)
Consequences for the Management of Macro Risks	796	(5)
Revitalization of Japanese Banks -- Japan's Big Bang Reform	801	(20)
Mitsuru Misawa
Current Status	801	(2)
Demise of the High Growth Period and Birth of the Bubble Economy	803	(2)
The Japanese Big Bang (Financial Overhaul)	805	(1)
Reforming the Financial System	806	(4)
Shift toward the ``Business-Category Subsidiary'' System	807	(1)
Legalization of Financial Holding Companies	808	(2)
Revitalization through Coordination and Consolidation	810	(5)
Risk Management by Deferred Tax Accounting	815	(2)
A Case of Major Bank's Default -- Risk Avoiding by Nationalization	817	(2)
Future of Japan's Big Bang Financial Reform	819	(2)
Authors	821