Globalization, Gating, and Risk Finance
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Motivation xviii
About the Authors xxv
1 Globalization: Economies in Collision 1
Motivation 1
1.1 Introduction 1
1.2 Trend and Challenges in Global Finance 5
1.3 Global Finance and Trade in the Media and News 12
1.4 Global Risks 15
1.5 Global Finance and Swaps and Financial Products 18
1.6 Currencies and Liquidity 20
1.7 Foreign Exchange Regime and Markets, Global Payment, and Reserve Currency 23
1.8 Trade Incentives and Repressions 33
1.9 Historical Evolution 36
1.10 Archaic and Modern Globalization: A Time Path 40
1.11 Discussions on Global Issues 44
References 46
2 Data, Measurements, and Global Finance 51
Motivation 51
2.1 Data and Models 51
2.2 Global Finance, Data Reduction, and Statistical Measurements 61
2.3 Volatility and Implied Models Estimates 76
2.4 Stochastic Models 86
2.5 Multivariate Probability Models 91
2.6 Statistical Data Reduction 100
2.7 Complexity: The Global Risk Finance Scourge 102
2.8 Discussion 103
References 104
3 Global Finance: Utility, Financial Consumption, and Asset Pricing 110
Motivation 110
3.1 Introduction: Financial Models and Pricing 110
3.2 Review: Elements of Utility and Risk 116
3.3 The Utility of Consumption and its Price 119
3.4 The Capital Assets Pricing Model 123
3.5 Review of Elements of Arrow-Debreu and Q Pricing 131
3.6 The Multiperiod Consumption-Based Capital Asset Pricing Model 142
3.7 Thought Experiments 154
References 155
4 Macroeconomics, Foreign Exchange, and Global Finance 157
Motivation 157
4.1 Introduction 157
4.2 Fundamental Macroeconomic Models 158
4.3 Balance of Payments Accounts 165
4.4 The Mundell and Fleming Model: IS-LM-BOP Model 171
4.5 Macroeconomic Factors Reshaping Global Outlook 178
4.6 Conclusion 190
References 191
5 Foreign Exchange Models and Prices 195
Motivation 195
5.1 Introduction 195
5.2 Macroeconomic Models of Foreign Exchange Rates 196
5.3 Exchange Rates and Purchasing Power Parity 198
5.4 Foreign Exchange Rates and Interest Rates: The Assets Approach 204
5.5 Demand and Supply of Money and Exchange Rates: Monetary Approach 207
5.6 Extensions of the Models 212
5.7 Conclusions 221
Appendix 5.A: Suggested Empirical Work for Econometric and Statistical Analysis 222
References 223
6 Asia: Financial Environment and Risks 226
Motivation 226
6.1 Introduction 226
6.2 Driving Engines of Economic Growth in Asia 228
6.3 Financial Sector Development in Asia 235
6.4 Risks of Investing in Asia 245
6.5 Financial Development in China 251
6.6 Finance in Japan 260
6.7 Conclusion 265
References 266
7 Financial Currency Pricing, Swaps, Derivatives, and Complete Markets 269
Motivation 269
7.1 Introduction 269
7.2 Pricing Consumption Price Index and Foreign Exchange in Complete Financial Markets 272
7.3 A Generalized Consumption Price Index Foreign Exchange Pricing Model 276
7.4 Relative and Foreign Exchange Basket Price Tracking 278
7.5 Options Pricing: Applications and Examples 292
7.6 Spread and Two-Factor Options 296
7.7 Optional Trading Strategies 300
7.8 The Greeks and Financial Risk Management 303
8 Credit Risk and International Debt 315
Motivation 315
8.1 Introduction 315
8.2 Growth of Debt and Debt Dependency 317
8.3 Foreign Exchange is a Credit Bestowed to a Sovereign Entity 321
8.4 Credit and Global Risks 323
8.5 Credit Risk, Credit Derivatives, and Credit Default Swaps 330
8.6 Swaps 332
8.7 Credit Default Swaps and Securitized Volatility 338
8.8 Pricing Credit Risk 340
8.9 Debt, The Merton Model, and Default 347
References 355
9 Globalization and Trade: A Changing World 358
Motivation 358
9.1 Introduction 358
9.2 Tracking Trade and Globalization 368
9.3 Strategic Trade and Gating 375
9.4 A Multicountry Financial Consumption Utility 378
9.5 The Demand Sector and its Supply 388
9.6 Conclusions 390
References 391
10 Compliance and Financial Regulation 395
Motivation 395
10.1 Introduction 395
10.2 Regulation Risks 403
10.3 Regulation, Technology, and Compliance 405
10.4 Statistical and Compliance Risks 407
10.5 A Multivariate Bernoulli Compliance and Audits 415
10.6 Regulation and Compliance Games 418
10.7 Satisficing Games and Regulation-Compliance 421
10.8 Conclusion 423
Appendix 10.A: Games, Risk and Uncertainty 423
Appendix 10.B: Concepts of Games and Risk 424
References 428
Index 000
