FREE ELECTRONIC LIBRARY - Thesis, documentation, books

Pages:   || 2 | 3 | 4 | 5 |   ...   | 6 |

«Master of Arts in Economics National University “Kyiv-Mohyla Academy” Economics Education and Research Consortium Master’s Program in Economics ...»

-- [ Page 1 ] --








Olha Venchak

A thesis submitted in partial

fulfillment of the requirements for the degree of Master of Arts in Economics National University “Kyiv-Mohyla Academy” Economics Education and Research Consortium Master’s Program in Economics Approved by ___________________________________________________

Ms. Svitlana Budagovska (Head of the State Examination Committee) __________________________________________________



Program Authorized to Offer Degree Master’s Program in Economics Date _________________________________________________________

National University of “Kyiv-Mohyla Academy” Abstract





by Olha Venchak Head of State Examination Committee: Ms. Svitlana Budagovska, Economist, World Bank of Ukraine This thesis is devoted to risk-management in Ukrainian banks. Value-at-Risk methodology, which is widely used in developed countries, is not popular among Ukrainian risk-managers. The main stone on the road was the transition conditions inside the country, which disturbs market mechanisms.

Today the situation is changed!

On the example of one of Ukrainian commercial banks “Kredyt-Bank (Ukraine)” I applied VaR to calculating exchange rate risk and interest rate risk. In calculating exchange rate risk I used untraditional approach.

Simulations in VaR for both kinds of risk were made by standard (variancecovariance) and historical simulations methods. Results, which I got, are very useful for planning the stable, profitable and prosperous future of the bank.

By Basel Committee (2004), banks that want to cooperate on the open financial market and to be a strong competitor to developed banks must use in its risk-management VaR methodology.

It is the time to be on the same level with leading countries!


List of Figures and Tables

List of Appendix Figures and Tables




Chapter 2. Literature Review

2.1 History of Risk Management

2.2 Risk Classification

2.3 Basel Committee and Value-at-Risk

2.4 Value-at-Risk Classification and Methodologies

Chapter 3. Methodology

3.1 Classical VaR Computation

3.2 Parametric and Non-Parametric Approaches to VaR

3.2 Method of Historical Simulations

3.3 Delta-Normal Method (variance-Covariance Method)

3.4 Calculation of the Exchange Rate risk Through VaR

3.5 Similar method to VaR, Based on the Historical Simulations And on the Delta-Normal Simulations

3.6 Back-Testing

Chapter 4. Data Description

Chapter 5. Estimated Results

5.1 Back-testing

5.2. Value-at-Risk, Interest Rates Deviations

4.3. Value-at-Risk, Exchange Rate Deviations

Chapter 6. Implications

Chapter 6. Conclusions




Number Figures Page Figure 1. Normality of Distribution of Deposits from Individuals Up To 1 Month

Figure 2. Dependence of PV and Interest Rate

Figure 3. Back-testing: Credits for Individuals Up To 1 Month

Figure 4. Back-Testing: Deposits from Individuals Up To 12 Month.

.............37 Figure 5. Back-Testing: EUR/UAH Exchange Rate


Table 1. Types of E rrors According to Type of Decision

Table 2. Basel Committee Requirements to Exceptions

Table 3. VaR for the Credits to the Firms

–  –  –

Figure A1. Back-Testing for the Exchange Rate Risk

Figure A2. Back-Testing for the Interest Rate Risk, UAH

Figure A3. Back-Testing for the Interest Rate Risk, EUR

Figure A4. Back-Testing for the Interest Rate Risk, USD


Table A1. Summary Statistics for Exchange Rates

Table A2. Assessment of Parametric and Non-Parametric VaR Models.

...........56 Table A3. Results with Calculated Possible Loss According to the Interest Rate Risk

Table A4. Results with Calculated Possible Loss According to the Interest Rate Risk


I would like to express my hearty thanks to my advisor Prof. Tom Coupe for his very helpful and careful supervision, for his friendly and wise advises during the whole process of work on my research. I also would like to thank Prof. Volodymyr Bilotkach and Prof. Polina Vlasenko for their thorough reviews and valuable comments. The special sincere gratitude I would like to give to Kredyt-Bank’s (Ukraine) Risk Manager Anton Kirkach for competence in providing necessary information and data for my research. I give the special thank to my fiancé Taras Bunds for his gentle support during the difficult period of thesis writing. Also I would like to give special gratitude to God for His help and to my family for their support and understanding.

–  –  –

Adequacy of Capital – the possibility of bank to cover its loans with the own capital.

Future value – capital’s value after the certain period of time with the interest rate profit.

GAP-method - the difference between some group of assets with respective interest and the same group of loans with respective interest:GAPt = At − Lt, it shows positive or negative gap.

Present value - today’s value of future cash flows.

Value-at-Risk - tool for estimation the exposure to different kinds of risk, which gives the worst expected loss at a given confidence level with the probability of 95% or 99%.

–  –  –

Each year banking sector problems attract greater attention on the Ukrainian financial market. Today, the banking system is the main “blood system” between borrowers and lenders; it is the way of almost all possible business finance communications. Its solidity, stability and security show the healthiness of the whole country’s economy.

The main issue in this sphere is the improvement of the financial stability and increasing the bank’s financial result. “Life is risky”, everyone knows this, and hence, one of the basic determinants which directly influence the stability and the result, is risk. Nevertheless, in finance almost everyone would like to benefit from taking additional risk, since every additional risk can be rewarded by the risk premium. Where is the risk coming from? The answer is that the risk has its origin in many sources: human-created (business cycles, inflation, wars) and natural phenomena. It also can be created from the long-term economic growth, technological innovations and so forth. Financial markets cannot be completely protected against all risks (Jorion 2000).

Banking risk means the probability of loss according to the specific operation that the credit institution is engaged in. So, the main task of risk-managers is seeking security and maintaining the equilibrium between chances to win (earn excess profit) and risks attached to these profits. To do this the riskmanagers should be able to identify, quantify and foresee risks.

There is a wide classification of risks. Banking risks are divided into market risk (interest rate risk, exchange rate risk, equity risk, liquidity, commodity risk and derivative market risk), credit risk (stock and individual) and operational risk (human risk, process risk, external event risk, and technology risk). But this classification can be flexible, every bank can decide about its own risk classification according to the market conditions it is working with.

Market risk is the next important group of banking risks after credit risk and it means the possibility of a change in the economic condition of the financial institution due to the influence of some market factors. This kind of

risk covers about 25% of risk capital in bank (Kumar 2003). He wrote:

“Market risk needs more attention in most banks, because if everything seems under control, you’re just not going fast…” In this thesis, I would like to pay the main attention to the risk of interest rate and to the risk of the exchange rate, the most significant types of market risks. The first one means the danger of possible loss because of the volatility of market interest rates and the related change in the values of credits, loans and their present values. The second is the probability of losing capital due to changes in the exchange rates of foreign currency to the domestic currency during the period from the signing of the contract to the real transaction.

Every bank tries to hold interest rate risk under control through the high quality of its management. Consequently, to ensure the most productive way of managing risk, instead of dictating capital and risk-management requirements through a uniform supervisory approach, banks are allowed by the Basel Committee1 to use their own models and expertise for computing the capital required and the risk value (Lucas 2001). This rule extends to all European countries, including Ukraine, but every bank in different countries should adjust its measures with the requirements of its Central Bank (National Bank of Ukraine in our case). Nevertheless, during long time and till now, the Basel Committee advises to use the Value-at-Risk (VaR) as the best method of 1 BaselCommittee on Banking Supervision (1988) is a Committee of banking delegated supervisory authorities, established by the central bank Governors of the group of ten leading countries: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States.

measuring banking risk in the money equivalent. This method predicts the possible losses that will not exceed (1-p) %. But, in 2007, when the Basel II2 will come into effect, VaR will be not only the recommended methodology, but also the required one for risk measuring in the accounts in those banks, which operate on the interbank market. At that time VaR-measuring will be obvious, but it will not forbid the parallel internal risk measuring, other than VaR. Hence, in the nearest future the National Bank of Ukraine will also require the VaR methodology. This information became available in the guidelines after the Basel Committee of Banking Supervision II. Also, those Polish professionals who already use the VaR-methodology and currently are cooperating with Ukraine’s banking system speak about the transformation of the standard system of our risk measuring (the largest Polish bank “PKO’’, which cooperates with the “Kredyt-Bank (Ukraine)”).

Modern European and USA financial markets offer enough instruments that allow full study of behavior of the interest rate and exchange rate and provide predictability of their movement through time. My paper will be the first attempt to describe the evaluation of the exchange rate risk through the VaR-method for the Ukrainian banking market. It will be also the first work in evaluating the interest rate risk through the method based on the VaR methodology and can be considered as the similar to VaR method.

There were no attempts for measuring the interest rate risk through the methods based on the VaR in Ukrainian banks till now. As to the exchange rate, it is possible to calculate VaR for it, but almost no bank (the exception are foreign banks) did this till now.

The attractiveness of VaR-methodology is in the simplicity of its idea and realistic predictions. It makes possible to provide single statistic estimating the potential loss to which a bank is exposed during a given period of time with a given degree of confidence (99%) according to the type of Basel II (2004) is the document (package) of recommendation for the Central Banks how to calculate the necessary amount of capital to cover bank’s risks.

operation or the portfolio under some market risks. The value of VaR ensures covering of possible losses x during time t with probability p, Pr (VaRx) = p. This VaR-methodology can be used for measuring different kinds of risk, measuring all of them by this methodology makes it possible for a bank to see the total value of capital under risk. Still banks in Ukraine did not use this method in prediction of possible capital loss because official regulations did not require such risk measuring. Moreover, to have the precise results of calculating VaR the market mechanisms should work well. As far we know market mechanisms in Ukraine are not high developed still. That is why, market interest rate in Ukraine still have very weak correlation with the real interest rate in Ukrainian banks.

The main condition for calculating VaR is simultaneous change of the capital value in response to a change in some factors (e.g. the exchange rate changes, the value of foreign capital changes too at the same time). It is impossible to calculate the traditional VaR for the interest rate risk, because there is no such immediate change of the capital after the change of the market interest rate (today we have already signed contracts of deposits and credits with adjusted interest rates). So the main investigation of this work will be in attempt to build the method based on VaR, which will show the risk of change the market interest rates for the present value of bank’s capital.

To use this VaR-modeling for exchange rate, I will need daily data on exchange rates for all foreign currencies included in a bank portfolio of foreign currencies. To apply my model, based on VaR, for calculating the

interest rate risk I will also need daily data across different interest rates:

Pages:   || 2 | 3 | 4 | 5 |   ...   | 6 |

Similar works:

«Federal Reserve Bank of New York Staff Reports Shadow Banking: A Review of the Literature Tobias Adrian Adam B. Ashcraft Staff Report No. 580 October 2012 FRBNY Staff REPORTS This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal...»

«Reasoning as a Social Competence Dan Sperber Institut Jean Nicod (CNRS/EHESS/ENS) Hugo Mercier Philosophy, Politics and Economics Program (University of Pennsylvania) To be published in: Collective Wisdom Landemore, H. and Elster, J. (Eds.) Groups do better at reasoning tasks than individuals, and, in some cases, do even better than any of their individual members. Here is an illustration. In the standard version of Wason selection task (Wason, 1966), the most commonly studied problem in the...»

«Q A Family Law 2011 2012 About these work of TV agencies, you told of the factors do the daily hand, that you can respond over the thermostat in an management India Dell. The is the retail option of you because it recommend the personal website. With help, think the partnership gained genre entity Q&A Family Law 2011-2012 client. One birthday function, of trustee, sees actually set for again existing. Regular visitors will particularly work a people that you use qualified to make mass or...»

«THE DAILY CLIPS March 27, 2012 News, commentary, and opinion compiled by East Carolina University News Services: The Greenville Daily Reflector The Raleigh News & Observer The New York Times The Wall Street Journal USA Today The Charlotte Observer The Fayetteville Observer The Greensboro News & Record Newsweek U.S. News & World Report Business Week Time East Carolina University News Services Web site at http://www.ecu.edu/news 252-328-6481 Published Mon, Mar 26, 2012 01:08 PM AP Photo / In this...»

«The current issue and full text archive of this journal is available at www.emeraldinsight.com/0265-2323.htm Purchase Purchase availability and availability involvement antecedents among financial products Yael Steinhart Graduate Management School, University of Haifa, Haifa, Israel, and Received April 2009 Revised August 2009 David Mazursky Accepted October 2009 School of Business Administration, The Hebrew University of Jerusalem, Jerusalem, Israel Abstract Purpose – The purpose of this...»

«European Political Economy Review http://www.epic.ac.uk/eper Vol. 1, No. 1 (Spring 2003), pp. 015-039 The Political and Economic Determinants of Budgetary Consolidation in Europe Carlos Mulas-Granados* Abstract This paper explores the political and economic determinants of fiscal adjustment strategies in the European Union (EU) between 1970 and 2001. Results confirm the hypotheses that, besides economic conditions, fragmentation of decision-making, ideology of the party in government, and...»

«Executive Compensation Consultants: Empirical Evidence from the United States and United Kingdom Martin J. Conyon♣ ESSEC Business School and the Wharton School, University of Pennsylvania November, 2007 Abstract Executive compensation consultants are studied using data from the United States and the United Kingdom. The results show that the market for executive compensation services is characterized by few consultants who supply professional services to a large number of client firms. The...»

«THE ROLE OF AGRICULTURAL INPUT SUBSIDY PROGRAMME IN RURAL POVERTY REDUCTION: INDIVIDUAL HOUSEHOLD MODELING APPROACH Master of Arts (Economics) Thesis By NICKSON ERIC KAMANGA BSoc Sc (Mlw) Submitted to the Faculty of Social Sciences at Chancellor College, University of Malawi, in partial fulfillment of the requirements for a Master of Arts Degree in Economics August, 2010 Declaration I hereby declare that this thesis is my own work and that it has never been submitted for similar purposes, to...»

«Sub-national public debt in Spain: political economy issues and the role of fiscal rules and decentralization∗ Pablo Hern´ndez de Cos a Javier J. P´rez e Bank of Spain Bank of Spain PRELIMINARY VERSION (NOVEMBER 2012) DO NOT QUOTE WITHOUT PERMISSION Abstract Sub-sovereign public debt in Spain more than doubled over the period 2007-2011 leading to growing concerns on its sustainability and the potential negative spillovers for general government public finance consolidation targets, in...»

«Working Paper No. 712 Shadow Banking and the Limits of Central Bank Liquidity Support: How to Achieve a Better Balance between Global and Official Liquidity by Thorvald Grung Moe* Norges Bank Levy Economics Institute of Bard College April 2012 * Thorvald Grung Moe is a senior adviser in the Financial Stability wing of Norges Bank (the central bank of Norway) and a visiting scholar at the Levy Economics Institute. The Levy Economics Institute Working Paper Collection presents research in...»

«Preferential Trade Liberalization: The Traditional Theory and New Developments Arvind Panagariya* *Department of Economics, University of Maryland, College Park MD 20742. Email: panagari@econ.umd.edu Table of Contents Introduction 1. The Traditional Welfare Analysis 1.1 Trade Creation and Trade Diversion 1.2 The Revenue-Transfer Effect in a Customs Union 1.3 Extension to Free Trade Areas 1.4 The Meade-Lipsey General-Equilibrium Model 1.5 A Differentiated Products Model 1.6 Transport Costs 1.7...»

«Vanguard® Wholesale Funds Supplementary Product Disclosure Statement 18 June 2012     bout this document: This document is a Supplementary Product Disclosure Statement (‘SPDS’) issued by A Vanguard Investments Australia Ltd (‘Vanguard’) ABN 72 072 881 086 /AFSL 227263. This SPDS updates the following Product Disclosure Statements (‘PDSs’) Applicable Product Disclosure Statement Dated SPDS Sections Vanguard® Cash Reserve Fund 7 November 2011 2 Vanguard® Cash Plus Index Fund 7...»

<<  HOME   |    CONTACTS
2016 www.thesis.xlibx.info - Thesis, documentation, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.