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by Lai, Cheuk-wai Charles, Ng, Kwok-kwong Philip. / Thesis (M.B.A.)--Chinese University of Hong Kong, 1990. / Bibliography: leaves 63-65. / TABLE OF CONTENTS / ABSTRACT --- p.i / TABLE OF CONTENTS --- p.ii / LIST OF EXHIBITS --- p.iv / ACKNOWLEDGEMENTS --- p.v / Chapter / Chapter I. --- INTRODUCTION --- p.1 / Chapter II. --- METHODOLOGY --- p.4 / Chapter III. --- INTEREST RATE SWAP --- p.7 / Basic Mechanism of Interest Rate Swap --- p.7 / Interest Rate Swap in Its Simplest Form --- p.8 / Interest Rate Swap with Intermediary --- p.9 / Basis Swap --- p.11 / Arbitrage --- p.12 / Application --- p.16 / New Instruments --- p.21 / Chapter IV. --- CURRENCY SWAP --- p.25 / Swap in Foreign Exchange Market --- p.25 / Swap in Capital Market --- p.26 / Chapter V. --- COMPARISON BETWEEN SWAP AND OTHER INSTRUMENTS --- p.38 / Chapter VI. --- RISKS ATTACHING SWAP CONTRACTS --- p.41 / Interest Rate Risk --- p.43 / Default Risk --- p.45 / Chapter VII. --- SWAPS IN PRACTICAL ENVIRONMENT --- p.57 / New Attitudes of Swap Intermediaries --- p.57 / Situations and Prospect of Swap Market --- p.59 / Empirical Use of Swap in the Market --- p.60 / Chapter VIII. --- CONCLUSION --- p.61 / BIBLIOGRAPHY --- p.63

In this thesis we discuss option pricing and hedging under regime switching models. To the standard model we add jumps of various types. In particular, we consider a jump that is synchronous with a change in the regime state. Thus, for example, we can define a process such that the stock price moves to a high volatility state and simultaneously has a large downward jump in returns. This type of model is consistent with market experience. We derive the compensator for our synchronous jumps and price options on such a price process using Fourier transforms. We also test the model on S&P futures options and show that it performs significantly better than a jump diffusion model. Furthermore, we look at the problem of hedging options under finitely many regime states and with finitely many possible jump sizes. We find risk-free hedge portfolios using the risk-free asset, the underlying asset, and finitely many options. Our risk-free trading strategy is consistent with any equivalent martingale measure, and so does not in itself specify which measure should be used to price options.

This study examines systematic patterns in returns reported by hedge funds for the period from 1989 to 2003. Two patterns are examined: strategic changes in returns variance in the second half of the year and the avoidance of reporting small losses. The hedge fund industry has grown rapidly during the 1990s. Despite this rapid growth, and the large amount of investment in hedge funds, hedge funds are less regulated than other forms of investment. Given the lower level of regulation and the assumed ability of hedge fund managers to influence both investment policy and the estimation of value for illiquid assets included in the calculation of returns, I predict systematic patterns in hedge fund returns. Brown, Goetzmann and Park (2001) show that funds that perform poorly compared to their peers tend to adopt more risk in subsequent periods while funds that perform relatively well tend to adopt less risk. I replicate this result in a larger and more recent database of hedge fund returns. The strategic use of variance is more visible in the latter half of the fifteen year period examined. This result is consistent with increased investor scrutiny and competition between hedge funds in recent years. Burgstahler and Dichev (1997) show that public companies tend to avoid reporting small losses. I show that the well documented discontinuity around zero seen in public company earnings distributions is also found in the distribution of hedge fund returns. This is consistent with hedge fund managers facing similar pressure to public company managers to avoid reporting small losses, and managers having the ability to influence reported returns in a less regulated environment.

Abstract Recently, domestic mutual fund development was rapidly. As widely open door for foreign investment and mutual fund joining stock market, its structure starts slowly changing. Via different kinds of expansion and merger let The properties of companies tend to complex. Investors sometimes hardly make correction decision. Here just focus on mutual funds which are belong to common stock type to observe the existence of herding trade. And then check the relation between performance roll drift and herding trade in mutual funds. Usually known how to select funds is performance roll. And general one likes to choose No. 1 which may be myth. Actually No. 1 fund sometimes put heavy weight on particular stock. So it might temporary catch head. But it does not gain steady return. Then selecting steady head group is more important. Is it true? Investment companies may issue several funds. During inside discuss between funds managers could influence stock holding. Even though information spread speed could have different between crowd and investment com- panies, they are all affected by outside. So call hedging is mean that follows market behavior to cow buy or bear sell. If the choice of funds holding stocks follows other funds, perform- ance roll will random shift. Then using it to judge funds selection would not be reliable. The major are common stock type mutual funds belong to Taiwan mutual fund perform- ance. Draw funds front 20 and rear 20 and define them as winner and loser. Check their stock ownerships correlation, herding coefficient and drift phenomenon in certain period. During time set, find winner and loser have preference to keep some group stocks. In co- mparsion with entire common stocks funds, herding values in winner and loser are not so obviously different with zero. Loser group drift to winner side when values are more different with zero. In certain period, there is high drift ration which change performance roll list. Keyword: hedging¡Bfund performance¡Bwinner¡Bloser

Bank holding companies (BHCs) in the United States (US) have been recently required to report foreign exchange derivatives in two accounts. One account includes the foreign exchange derivatives held for trading while the other account contains the foreign exchange derivatives held for purposes other than trading. The objective of this study is to examine the factors that determine the sizes of these two accounts.<p> We propose that the size of the securities portfolio held for purposes other than trading is an indicator of the magnitude of the hedging operations by a US BHC. In particular, we are interested in the portfolio of foreign exchange derivatives held for purposes other than trading and we refer to this portfolio as the foreign exchange derivatives hedging account. Our proposition is consistent with Adkins, Carter and Simpson (2007) who regard the securities that are held for purposes other than trading as primarily used for hedging purposes. Thus, we use the foreign exchange hedging account to study the foreign exchange hedging behavior of BHCs and determine the factors that influence the magnitudes of the foreign exchange hedging accounts.<p> Hedging activities in general are very important for practitioners, regulators, and academics as evidenced by the extensive publicity and attention that has been given to interest rate risk and the extensive research that has been done to examine the factors that determine the magnitudes of interest rate hedging activities. Yet, little research has been devoted to examine the factors that determine the magnitudes of the foreign exchange hedging activities in US BHCs. One purpose of this study is to fill this gap in the literature.<p> Similarly, we propose that the size of the trading account of a BHC is an indicator of the magnitude of the trading operations. These operations are attracting the attention of academics, regulators, and practitioners as they can generate significant revenues to BHCs but they are sources of significant risks. For example, much of the surprisingly high revenues reported by major US banks in the first and second quarters of 2009 are credited to trading operations while revenues from other activities were significantly low. On the other hand, trading activities are largely blamed for several catastrophic financial events such as the collapse of the Baring Bank PLC and the financial crisis of 2008 which nearly leads to the collapse of the global financial system. One objective of this study is to improve our understanding of the foreign exchange derivatives trading and the factors that influence the magnitudes of the foreign exchange trading accounts at US BHCs. Given the importance of the trading operations it is surprising that little research has been done in this area.<p> The results of this study are derived from empirical data observed over the period from 1995 to 2007 inclusive. This data is obtained from the financial reports and statements of US BHCs. We use regression analysis to show that the notional amounts of the foreign exchange derivatives held in the hedging and trading accounts are related to various firm-specific and environmental factors. In particular, we argue that the net asset exposure, which measures the difference between the assets and liabilities denominated in foreign currency, and the net income exposure, which measures the difference between the interest income and interest expenses denominated in foreign currency, should be significant determinants of the notional amount of derivatives held in the hedging account. We propose that these two factors are indicators of a BHCs exposure to foreign exchange fluctuations and hedging should be designed to offset their influence on the value of assets or level of income. In addition, we propose that a BHCs size and level of capitalization affect the size of the hedging account.<p> Similarly, we propose that the notional amount of foreign exchange derivatives held for trading should be related to the same factors. In particular, we argue that the notional amount of derivatives in the trading account is related to the net asset exposure and the net income exposure as they indicate a BHCs involvement in international operations such as lending, deposit taking, risk management, and correspondent relationships in foreign countries. In our opinion, the larger the involvement in international operations the larger is a BHCs ability to trade foreign exchange derivatives.<p> This study makes several unique contributions. First, it shows that the net asset exposure and the net income exposure have positive and significant effects on both the hedging and the trading accounts. Second, we show that the capital ratio and the magnitude of the hedging and trading accounts are positively and significantly related. In addition, this study confirms that the magnitude of total assets is a positive and significant determinant of BHCs foreign exchange derivative securities held in either the hedging or the trading accounts. This result is consistent with previous studies such as Carter and Sinkey (1998), Brewer, Jackson and Moser (2001), Adkins, Carter and Simpson (2007), and Hassan and Khasawneh (2009).

Geometric Brownian Motion (GBM) and has been widely used in the Black Scholes option-pricing framework to model the return of assets. However, many empirical investigations show that market returns have higher peaks and fatter tails than GBM. Contrary to the Black Scholes model, an option-pricing model which contains jumps reflects the evolution of stock prices more accurately. Therefore, hedging a model under jump diffusion would be desirable. This thesis develops a simplified method for hedging jump diffusions. In order to hedge the jump risk, other instruments besides the underlying asset must be used in the hedging procedure. We start with a the Partial Integro Differential Equation (PIDE) that models contingent claims with jumps and consider a dynamic hedging strategy that uses a hedging portfolio with the underlying asset and liquidly traded options. We introduce a simple hedging method, where, at each rebalance time, we minimize the instantaneous jump risk by finding proper weights for the underlying asset and instruments. We use a simulation method to test our approach using a Truncated SVD method to solve the linear system of equations resulting from our minimization procedure. Our results indicate that the proposed dynamic hedging strategy provides sufficient protection against diffusion and jump risk. The method also provides a firm theoretical basis for a method which is used in practice.

Bank holding companies (BHCs) in the United States (US) have been recently required to report foreign exchange derivatives in two accounts. One account includes the foreign exchange derivatives held for trading while the other account contains the foreign exchange derivatives held for purposes other than trading. The objective of this study is to examine the factors that determine the sizes of these two accounts.<p> We propose that the size of the securities portfolio held for purposes other than trading is an indicator of the magnitude of the hedging operations by a US BHC. In particular, we are interested in the portfolio of foreign exchange derivatives held for purposes other than trading and we refer to this portfolio as the foreign exchange derivatives hedging account. Our proposition is consistent with Adkins, Carter and Simpson (2007) who regard the securities that are held for purposes other than trading as primarily used for hedging purposes. Thus, we use the foreign exchange hedging account to study the foreign exchange hedging behavior of BHCs and determine the factors that influence the magnitudes of the foreign exchange hedging accounts.<p> Hedging activities in general are very important for practitioners, regulators, and academics as evidenced by the extensive publicity and attention that has been given to interest rate risk and the extensive research that has been done to examine the factors that determine the magnitudes of interest rate hedging activities. Yet, little research has been devoted to examine the factors that determine the magnitudes of the foreign exchange hedging activities in US BHCs. One purpose of this study is to fill this gap in the literature.<p> Similarly, we propose that the size of the trading account of a BHC is an indicator of the magnitude of the trading operations. These operations are attracting the attention of academics, regulators, and practitioners as they can generate significant revenues to BHCs but they are sources of significant risks. For example, much of the surprisingly high revenues reported by major US banks in the first and second quarters of 2009 are credited to trading operations while revenues from other activities were significantly low. On the other hand, trading activities are largely blamed for several catastrophic financial events such as the collapse of the Baring Bank PLC and the financial crisis of 2008 which nearly leads to the collapse of the global financial system. One objective of this study is to improve our understanding of the foreign exchange derivatives trading and the factors that influence the magnitudes of the foreign exchange trading accounts at US BHCs. Given the importance of the trading operations it is surprising that little research has been done in this area.<p> The results of this study are derived from empirical data observed over the period from 1995 to 2007 inclusive. This data is obtained from the financial reports and statements of US BHCs. We use regression analysis to show that the notional amounts of the foreign exchange derivatives held in the hedging and trading accounts are related to various firm-specific and environmental factors. In particular, we argue that the net asset exposure, which measures the difference between the assets and liabilities denominated in foreign currency, and the net income exposure, which measures the difference between the interest income and interest expenses denominated in foreign currency, should be significant determinants of the notional amount of derivatives held in the hedging account. We propose that these two factors are indicators of a BHCs exposure to foreign exchange fluctuations and hedging should be designed to offset their influence on the value of assets or level of income. In addition, we propose that a BHCs size and level of capitalization affect the size of the hedging account.<p> Similarly, we propose that the notional amount of foreign exchange derivatives held for trading should be related to the same factors. In particular, we argue that the notional amount of derivatives in the trading account is related to the net asset exposure and the net income exposure as they indicate a BHCs involvement in international operations such as lending, deposit taking, risk management, and correspondent relationships in foreign countries. In our opinion, the larger the involvement in international operations the larger is a BHCs ability to trade foreign exchange derivatives.<p> This study makes several unique contributions. First, it shows that the net asset exposure and the net income exposure have positive and significant effects on both the hedging and the trading accounts. Second, we show that the capital ratio and the magnitude of the hedging and trading accounts are positively and significantly related. In addition, this study confirms that the magnitude of total assets is a positive and significant determinant of BHCs foreign exchange derivative securities held in either the hedging or the trading accounts. This result is consistent with previous studies such as Carter and Sinkey (1998), Brewer, Jackson and Moser (2001), Adkins, Carter and Simpson (2007), and Hassan and Khasawneh (2009).

We use dynamic hedging to replicate the short put positions of common stocks and thelong put positions of equity index. The strategy is developed based on the fact that the volatility of average constituent stocks is greater than that of the index, and the aggregate movement of the constituent stocks becomes the movement of the index. Therefore, we expect the long-short volatility strategy to deliver stable returns. In this study, we first employ Monte Carlo simulation methods to create paths for the underlying securities and the corresponding index. Then, we use Black-Scholes delta-neutral dynamic hedging strategy to create synthetic options for the long-short put positions.Specifically, we conduct the dynamic replication strategy to form long put option of TSEC Taiwan 50 equity index and short options of its constituent stocks. Finally, we pick the TSECTaiwan Mid-Cap 100 Index and replicate the long-short volatility strategy again. This time the target constituents screening criteria are high beta and high historical volatility. The empirical studies show that: (1) The correlation coefficients between stock pairs are reciprocally related to the standard deviations of strategy returns. (2) The main source of losses is performance deviation of the price of small-sized stocks and the index. (3) The return of the strategy for portfolios excluding small cap stocks will be improved. (4) The loss will decline if we apply short strip strategy on those stocks which prices perform worse than the index. (5) The higher the volatility of the stocks we select, the greater the dynamic hedging premium we can get. (6) If we pick the high beta stocks to avoid the trend of stock prices diverging from the index, then the strategy yields higher returns.