The value at risk measure attempts to summarize in a single number market value risk of a portfolio of financial assets.The paper focuses on the interaction between the solvency probability of a bank, on one hand, and the diversification potential of its portfolio, on the other hand, when...

To explain the strategic dimension in pricing options, it will be helpful to go back to the heart of the idea behind the concept of an option: options open up the possibility to postpone current decisions to a future point of time. Because of this flexibility additional information and new...

This paper studies a Cournot duopoly in international trade so that the firms are exposed to exchange rate risk. A hedging opportunity is introduced by a forward market where the foreign currency can be traded on. We investigate two settings: First we assume that hedging and output decisions are...

Given that a multinational enterprise can react flexibly upon exchange rate movements, international trade flows may be interpreted as an option. An enterprise will opt to export if the profits obtained from exporting under given exchange rate developments are greater than if foreign subsidiary...

We study the impact of exchange rate risk upon export production within an emerging economy lacking in currency forward markets. However there exists a financial asset whose price is correlated with the relevant foreign currency. We present conditions under which export production is stimulated...

Using a two-moment decision model this paper analyzes corporate hedging behavior in the presence of unified and differential income taxation. We start with the well-known result that risk-taking may increase when income tax rates increase and, therefore, the incentive for hedging reduces. We...

Basel II changes risk management in banks strongly. Internal rating procedures would lead one to expect that banks are changing over to active risk control. But, if risk management is no longer a simple "game against natureʺ, if all agents involved are active players then a shift from a...

This paper considers a model of spatial allocation of investment capital under uncertainty. We demonstrate that the spatial concentration of economic activity depends upon properties of risk preferences deeper than risk aversion. The degree of so-called relative prudence unambiguously decides...

This paper examines the interplay between the real and financial decisions of the competitive firm under output price uncertainty. The firm faces additional sources of uncertainty that are aggregated into a background risk. We show that the firm always chooses its optimal debt-equity ratio to...

The prospect theory is one of the most popular decision-making theories. It is based on the S-shaped utility function, unlike the von Neumann and Morgenstern (NM) theory, which is based on the concave utility function. The S-shape brings in mathematical challenges: simple extensions and...