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This study was conducted to establish whether risk management strategies could be developed to enable stock market investment portfolio managers to reduce the risk involved in stock market trading. The awareness of stock market risk elevates the requirement for risk management strategies as discussed in Chapter 1. The research scope is identified, and an overview of the study gives further guidance as to what lies ahead. The theory behind macroeconomic forces and how they influence share prices is discussed in Chapter 2. It is established that market sectors and companies within those sectors react differently to macroeconomic forces. Technical analysis is discussed as a mechanism to identify buying and selling signals. In Chapter 3, risk management strategies are developed from the literature. The hypothesis of the study as described in Chapter 4 is that these risk management strategies are able to reduce the risk associated with trading in the stock market. The market simulation in Chapter 5 offers the opportunity to observe the risk management strategies at work in a simulated stock market investment portfolio. In Chapter 6, the outcome of the market simulation is compared to the criteria set in Chapter 4, and the conclusion that the risk management strategies were able to reduce the risk involved in stock market trading is drawn.

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In this dissertation we study models for the valuation of portfolios of credit risky securities and collateralised debt obligations. We start with models for single security of the reduced form type and investigate means of extending these to the portfolio level concentrating on default dependence between obligors. The Gaussian copula model has become a market standard and we study how the model deals with dependence between portfolio constituents. We implement the model and confirm analytical formulae for certain risk measures. Simplifying assumptions made eases implementation of this model but causes inconsistencies with observed market prices. Evidence of this is the observed correlation smile, highlighted by the recent global credit crises. This has caused researchers to look to extensions of the model to better fit current market pricing. We study a number of these extensions and compare the credit losses for various tranches to those under the standard model. A number of these extensions are able to replicate observed prices by accounting for some observed feature overlooked by the standard model. Of these the most promising appear to be those having default and recovery rates negatively correlated. Various empirical studies have found this to hold true. Another promising advancement is in the area of stochastic correlation. The main problems with such extensions is that no single one has been adopted as standard while all require more sophisticated numerical implementation than the convenient recursive algorithm available for the standard model. Even if such problems are overcome questions still remain. No current usable model is able to provide simultaneously both a term structure of credit spreads for the portfolio and individual constituents. This prevents the valuation of the next generation of credit products. An answer may well be beyond capabilities of the now familiar copula framework which has served the market for the last decade. / Dissertation (MSc)--University of Pretoria, 2010. / Mathematics and Applied Mathematics / unrestricted

The Canadian money market dates back to 1935 when Government of Canada treasury bills were first sold and the main impetus to its present status came with the introduction of day-to-day loans in 1954. Until 1954, the money market was used principally by the chartered banks and the Federal Government, and the main functions were to provide the former with liquid assets and the latter with a relatively inexpensive method of financing its activities. In the last decade many other institutions have started to participate in the market. On the borrowing side, provincial and municipal governments, and financial institutions including trust companies, finance companies, investment dealers and commercial banks have joined the Federal Government, and finally in 1958 non-financial corporations began to issue substantial sums of short-term notes. On the lending side are financial institutions wishing to keep a certain portion of their funds liquid and non-financial corporations with temporary excess cash. The last of these borrowers and lenders mentioned, the non-financial corporation, is the concern of this thesis which examines potentiality and use of securities with maturity from one day to three years. To appreciate the potentiality of the money market, the bond market, of which it is part, is first described and pertinent characteristics of bonds in general are discussed. The specific instruments pertaining to the money market are the following: Government of Canada treasury bills and short term bonds; short term provincial and municipal issues; finance company paper; chartered bank deposit receipts, U.S. swaps and acceptances; trust company guaranteed investment certificates; investment dealer loans and buy backs; and international instruments including letters of credit and Euro-dollars. The potentiality of the money market for the non-financial corporation is further enhanced when such activity is integrated with the cash flow of the company. The cash flow itself is affected by peculiarities of the industry such as seasonal peaks and troughs, and by factors related to individual firms, such as capital structure. From published statistical data and 298 responses to the questionnaires circulated by the author, the most pertinent findings were the predominance of Federal Government, bank, and trust company paper, the small difference in yields between different qualities of paper, and that rather than formalized rules for money market activity, corporate dealings were influenced mainly by intangible factors including attitudes of the treasurer regarding safety and yields of the instruments, bargaining between buyers and sellers, limitations imposed by boards of directors and banker relationships. While the factors mentioned above must continue to affect money market decisions a formalized approach is recommended and discussed. This approach can be geared to the limitations established by the intangible factors and industry and firm peculiarities, and it objectively examines the remaining alternatives. / Business, Sauder School of / Graduate

In this thesis we provide insights into the behavior of financial managers of utility companies by studying their decisions to redeem callable preferred shares. In particular, we investigate whether or not an option pricing based model of the call decision, with managers who maximize shareholder value, does a better job of explaining callable preferred share prices and call decisions than do other models of the decision. In order to perform these tests, we extend an empirical technique introduced by Rust (1987) to include the use of information from preferred share prices in addition to the call decisions. The model we develop to value the option embedded in a callable preferred share differs from standard models in two ways. First, as suggested in Kraus (1983), we explicitly account for transaction costs associated with a redemption. Second, we account for state variables that are observed by the decision makers but not by the preferred shareholders. We interpret these unobservable state variables as the benefits and costs associated with a change in capital structure that can accompany a call decision. When we add this variable, our empirical model changes from one which predicts exactly when a share should be called to one which predicts the probability of a call as the function of the observable state. These two modifications of the standard model result in predictions of calls, and therefore of callable preferred share prices, that are consistent with several previously unexplained features of the data; we show that the predictive power of the model is improved in a statistical sense by adding these features to the model. The pricing and call probability functions from our model do a good job of describing call decisions and preferred share prices for several utilities. Using data from shares of the Pacific Gas and Electric Co. (PGE) we obtain reasonable estimates for the transaction costs associated with a call. Using a formal empirical test, we are able to conclude that the managers of the Pacific Gas and Electric Company clearly take into account the value of the option to delay the call when making their call decisions. Overall, the model seems to be robust to tests of its specification and does a better job of describing the data than do simpler models of the decision making process. Limitations in the data do not allow us to perform the same tests in a larger cross-section of utility companies. However, we are able to estimate transaction cost parameters for many firms and these do not seem to vary significantly from those of PGE. This evidence does not cause us to reject our hypothesis that managerial behavior is consistent with a model in which managers maximize shareholder value. / Business, Sauder School of / Graduate

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