The examination of the topic of market risk management in Islamic finance is a complex endeavour. At a basic level, the subject matter, being multifarious in a manner that mixes religion and economics, requires the conjoining of religious faith with scientific objectivity in order to ascertain the truth contained in the scripture as it pertains to the Mua’amalat (dealings between individuals) matter of entering into financial contracts with others to manage market risk exposures. Moreover, the complexity is compounded due to the need to disentangle the ambiguity that has beset the discourse on the topic due to historically being mostly legal-centric with a focus on debating the contractual elements rather than attempting to comprehensively address the myriad issues that relate to market risk management in contemporary contexts. These issues, for the most part, revolve around the reliance on market risk transfer as a strategy and derivative contracts, with monetary underlying variables, as tools to implement that strategy. Thus, the journey of investigating the rationale, permissibility, and usage of derivative hedging instruments for market risk management in Islamic finance is, essentially, an undertaking that seeks to engage in a wide-ranging and multi-layered examination of the subject matter as well as the exploration of new areas of relative significance. This, in turn, and subsequent to the analysis of data generated from documentary sources and forty-one interviews which were collected from numerous sources within four locations, led to the elaboration of the contention that market risk management through derivative instruments for legitimate hedging purposes should not be prohibited in the Shari’a, albeit with certain conditions that limit unproductive behaviour. The basis for the aforementioned contention is built on the fact that market risk management has undergone a paradigm shift in how exposures are identified and measured as well as in the emergence of innovative tools which can result in a better ability to address the opportunities and challenges facing institutions that provide value to society (i.e., the real sector). Moreover, there is little substantive evidence that proves that the utilization of derivative instruments for hedging purposes leads its users to partaking in transactions that circumvent the prohibition of Riba (usury), Gharar (excessive uncertainty), and Maysir (gambling). In effect, the derivative instruments used for the management of market risks are not only disassociated from usurious debt transactions, they are also transacted in the financial markets in a manner that is transparent to all the parties involved. Along the same lines, the prohibition of Maysir, which is apparently an overarching concern, should be conceptualized with the focus on the proscription of the act of gambling, not necessarily the instruments (e.g., derivatives) and/or any particular framework (e.g., zero-sum arrangements). Ultimately, one should be cognizant of the fact that the true intentions of Islamic jurisprudence in Mua’amalat (as a manifestation of divine guidance) always centre on human well-being. Accordingly, the religious prohibitions are, in essence, within the realm of acts that adversely affect human well-being. This is a constant theme that is present throughout the thesis; and is one that exists at the heart of a wider aspiration of its adoption to a greater extent than is currently present in the Islamic finance discourse.

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Before the global financial crisis around 2008, the priority of the credit margin was comparatively low and was not taken into consideration as much as today. Many actors believed that credit risk could be neglected at various valuations. Due to that a lot of parties went bankrupt because of the low priorities. Today, this is a natural component in the financial market due to the capital regulation CRR and the Capital requirement directives (CRD IV), which are directly related to Basel III. In this thesis the authors have created a Credit valuation adjustment model, or a CVA-model, on behalf of the consulting firm AGL who want to use it in negotiations of interest rate swap with financial institutions. Factors as expected exposure, loss given default and probability of default are estimated in order to estimate a fair value for CVA. As a final product, the authors have created a model in VBA that can price CVA for individual contracts. This model is then evaluated and a sensitivity analysis is performed to see what impact credit rating and maturity have on the result.

Cálculo do VaR de uma Carteira de Renda Fixa composta por LTNs utilizando modelo de fatores. / Market risk monitoring through Value at Risk is a task undertaken by almost all financial institutions in Brasil due to the regulatory environment set by Banco Central. However, VaR calculations of a portfolio of investments can get quite complicated involving the calculation of matrixes. One must bear in mind that the matrix dimensions increases geometricaly as the number of assets of the portfolio increases. This reality is a fertile soil for researchers to find simpler methodologies for VaR calculations. The proposed framework in this work shows a simpler methodology for VaR calculations of fixed income portfolios of government securities.

Of the many analytical methods collectively referred to as Modern Portfolio Theory (MPT), the Capital Asset Pricing Model (CAPM) is the most familiar to today’s generation of students of finance. The popularity of the CAPM arises from its success in expressing a powerful theoretical insight in a simple, usable form. The primary use of the CAPM is to determine minimum required rates of return from investment in risky assets. The variable in the CAPM is called ‘beta’, a statistical measure of risk which has become familiar to all finance professionals. Over the past decade, beta has become the most widely recognised and applied measure of risk in the investment community. The model has been extensively tested in the developed capital markets, mainly in the United States of America. But the model has not been extensively tested in other developed and developing countries, often due to the size of the capital market and the lack of the data in these countries. This study attempts to fill this vacuum and tries to update the earlier tests done on the Stock Exchange of Singapore. On addition, a review of the validity of the CAPM over time, as proxied by the stationarity of the beta, is performed. Also, tests regarding heteroskedasticity and its implications have been undertaken. / Master of Commerce (Hons)

This thesis examines the relationship between stock market returns and systematic risk factors in twelve industrial countries. Using the APT framework, the thesis investigates the notion of international stock market integration versus segmentation in terms of pricing risk, international stock market efficiency in terms of eliminating arbitrage opportunities across domestic markets, and the validity of the international version of the APT according to a model that specifies purely domestic factors. Starting with ordinary least squares estimation the thesis investigates the responses of investors in their national stock markets to systematic shocks. By employing iterative non-linear multivariate seemingly unrelated regression estimation, this work avoids the statistical problems encountered in the second-pass test of the two-stage procedure. This study found that the international stock market was neither integrated nor efficient and that the IAPT was not supported by the results during the period investigated. It was demonstrated that partial and regional integration, regional efficiency, and regional IAPT validity cannot be ruled out. Moreover, the alternative model proved to be practically valid.

Στην παρούσα διπλωματική εργασία παρουσιάζεται μια μαθηματική προσέγγιση της θεωρίας κινδύνου. Η ποσοτικοποίηση των κινδύνων είναι σημαντική τόσο για τους χρηματοοικονομικούς οργανισμούς όσο και για τις ρυθμιστικές αρχές, ώστε να εξασφαλίζεται η επάρκεια των χρηματοοικονομικών ροών και η ασφάλεια των κεφαλαίων. Αρχικά αναφερόμαστε σε δύο σημαντικές μεθόδους μέτρησης κινδύνου, την Αξία-σε-Κίνδυνο (VaR) και το Αναμενώμενο Κατώφλι (Expected Shortfall), καθώς και στην σχέση μεταξύ τους. Στην συνέχεια επικεντρωνόμαστε στον υπολογισμό του κινδύνου αγοράς μέσω των μεθόδων διασποράς-συνδιασποράς, ιστορικής προσομείωσης και Monte Carlo. Ακολουθούν δύο στοιχειώδεις προσεγγίσεις του λειτουργικού κινδύνου: η προσέγγιση με βασικό δείκτη (BI) και η τυποποιημένη προσέγγιση. Ιδιαίτερη μελέτη πραγματοποιήθηκε στα μοντέλα μέτρησης του πιστωτικού κινδύνου που διακρίνονται στα κατασκευαστικά και τα μοντέλα μειωτικού-τύπου. ‘Ενας ακόμα σημαντικός κίνδυνος είναι ο συνιστάμενος, που συμβάλλει στην εύρεση ορίων, καθώς και στη διανομή του κεφαλαίου στους επιμέρους κινδύνους επιτυγχάνοντας την ασφάλεια της επένδυσης. Τέλος, αντικείμενο μελέτης αποτελούν τεχνικές που εφαρμόζουν τις παραπάνω μεθόδους μέτρησης κινδύνων στην οικονομία και πιο συγκεκριμένα στον χώρο των ασφαλίσεων. / -

The paper describes an attempt to gain insight into the relationship between cash and futures markets for US lean hogs and EU live pigs, and the opportunity of arbitrage hedging. In doing so, the authors use newer methods of threshold cointegration analysis for time series from 1999 until 2008. Besides the existence of a long-run equilibrium, asymmetric price adjustments can be demonstrated. This is especially the case for the EU live pigs, where price variations of the basis are higher and exhibit lower standard deviation. The results also perfectly show that cash prices follow the futures market more than the other way round. Furthermore, a grid search has revealed that the residual-based threshold in either market is near zero and therefore coherent with economic interpretation. Thus, at least theoretically, arbitrageurs in those markets are able to exploit the price differences between the two markets and reap no-risk monetary benefit. Hence, the results are in line with the statement that "speculating the basis" generates a better return. (authors' abstract)

Cálculo do VaR de uma Carteira de Renda Fixa composta por LTNs utilizando modelo de fatores. / Market risk monitoring through Value at Risk is a task undertaken by almost all financial institutions in Brasil due to the regulatory environment set by Banco Central. However, VaR calculations of a portfolio of investments can get quite complicated involving the calculation of matrixes. One must bear in mind that the matrix dimensions increases geometricaly as the number of assets of the portfolio increases. This reality is a fertile soil for researchers to find simpler methodologies for VaR calculations. The proposed framework in this work shows a simpler methodology for VaR calculations of fixed income portfolios of government securities.

Bakgrund: Kommuninvest är en medlemsorganisation som finansierar en stor andel av den svenska kommunsektorns upplåning. Detta möjliggörs genom att Kommuninvest emitterar obligationer på finansiella marknader för att sedan låna ut kapital till kommunerna. Finansiella institut som Kommuninvest hanterar en rad olika risker i sin verksamhet och eftersom det saknas tidigare forskning angående Kommuninvests exponering mot och hantering av marknadsrisk är detta intressant att studera för att fylla kunskapsluckan. Det är också intressant eftersom kommunerna är en viktig aktör i det svenska samhället och Kommuninvest spelar en stor roll i den kommunala upplåningen. Syfte: Syftet med denna studie är att analysera Kommuninvests marknadsriskexponering när de lånar upp pengar på den finansiella marknaden för att låna ut dessa till medlemskommunerna, samt att analysera företagets marknadsriskhantering. Syftet är också att analysera hur marknadsriskexponeringen och marknadsriskhanteringen påverkar medlemskommunerna. Genomförande: Studien är designad som en fallstudie. Fallet har definierats som Kommuninvests marknadsriskexponering och -hantering. Det empiriska materialet utgörs av nio semistrukturerade intervjuer och en dokumentstudie. Det empiriska materialet har använts för att kunna dra slutsatser om Kommuninvests marknadsriskexponering och -hantering samt dessas potentiella påverkan på medlemskommunerna. Slutsats: Flera slutsatser kan dras från denna studie. Kommuninvest hedgar främst sin marknadsrisk med derivat och naturlig matchning. Den monetära effekten på låneportföljen konstateras vara relativt liten. Räntemarginalen är så pass låg att de små kommunerna väljer att alltid låna av Kommuninvest och de stora väljer att göra det ibland. Kommunerna i studien har över lag högt förtroende för Kommuninvest och majoritet upplever att de inte påverkas så mycket av bolagets riskexponering eller riskhantering. Denna studie bidrar med ny kunskap om Kommuninvests marknadsriskexponering och -hantering till det företagsekonomiska forskningsfältet såväl som till de svenska kommunerna. / Background: Kommuninvest is a member organisation that finances a large part of the borrowing of Swedish local governments. This is made possible by emitting bonds on the financial markets and then lending capital to the local governments. Financial institutions like Kommuninvest deal with several different risks and since no previous research has been conducted on the subject of the market risk exposure and the market risk management of Kommuninvest, this is a pertinent case to study in order to fill the gap. It is also a pertinent case since the local governments of Sweden are a very important part of the society and since Kommuninvest plays a great role in the borrowing of these local governments. Aim: The aim of this study is to analyse the market risk exposure of Kommuninvest when the company borrows capital on the financial markets to lend to their members, Swedish local governments, as well as to analyse the market risk management of the company. A secondary aim is to analyse how the market risk exposure and the market risk management affect the local governments that are members of Kommuninvest. Completion: The study is designed as a case study. The case has been defined as The market risk exposure and market risk management of Kommuninvest. The empirical data consists of nine semi-structured interviews and one document study. The empirical data is used to draw conclusions about the market risk exposure and the market risk management of Kommuninvest, as well as their potential effects on the Swedish local governments that are members of Kommuninvest. Conclusion: Several conclusions can be drawn from this study. Kommuninvest primarily hedges its market risk with derivates and natural hedges. The monetary effect on the loan portfolio is found to be relatively small. The interest margin is low enough so that the small local governments choose to always borrow from Kommuninvest, and the big local governments choose to sometimes do so. The local governments that participated in the study generally have high confidence in Kommuninvest and most of them experience that they are not very affected by the company’s risk exposure or risk management. This study contributes with new knowledge about the market risk exposure and market risk management of Kommuninvest to the research field as well as to the Swedish local governments.