Fractional Brownian motion in option pricing and dynamic delta hedging: Experimental simulations

Purpose: The purpose of this study was to investigate how financial risk management strategies lead to growth of MFI sector in Kenya.Methodology: The study adopted a correlation survey research design. The population of this study was fifty seven (57) MFIs. The sampling frame was the list of MFIs provided in the AMFI website www.amfikenya.com. A sample of thirteen (17) MFIs was selected using the random sampling approach. A questionnaire and an interview schedule were the main data collection tools. Qualitative data was analyzed using content analysis whereas the quantitative data was analysed using Statistical Package for Social Sciences (SPSS) where descriptive and regression analysis were conducted to determine the relationship between enterprise risk management strategies and growth of MFIs.Findings: The findings indicated that MFIs had effective financial risk management strategies such as effective credit risk management practices, liquidity risk management practices, interest risk management practices and price risk management practices. In particular, MFIs took into consideration the conditions, characters, capacity, collateral and capital of borrowers. Strict debt collection practices were widely adopted by MFIs. In addition, the concept of Know Your Customer (KYC) policy, seem to have been adopted by MFIs. The relationship between financial risk management strategies and growth was positive and significant. It also shown that sources of funds for MFIs include external sources and internal sources and the most frequently used source of funds are bank loans. The use of banks loans may present various risk exposures to MFIs, the most significant being interest rate risk. However, the ability of MFIs to source funds from various sources indicates that MFIs can apply the pecking order by first exploiting internal sources of funds since they present a lower financial risks and then move on to external sources. However, despite the financial risk exposure accompanied by leverage from external sources, MFIs may also benefit as they may experience higher growth driven by the leverage. It was also found that MFIs had put in place a number of good practices that had emerged to promote responsible and inclusive lending. These include loan size limits, standardized (simple) loan terms, zero tolerance on delinquency, group-based lending. This finding implies that MFIs have put in place effective credit risk management policies which are part of an overall financial risk management strategy. The existence of effective financial risk management practices may have influenced the growth of MFIsUnique contribution to theory, practice and policy: The study recommends that the MFIs to continue practicing effective financial management practices as this would improve the growth of MFIs.

Microfinance institutions (MFIs) have evolved in different and complex ways to solve various market frictions, with some of them providing a wide range of financial products and using different lending technologies to reach poor and underserved populations. As a result, some MFIs are more efficient than others, but are efficiency gains aligned with risk management practices? The specific characteristics of the microfinance industry make the answer to this question less obvious than that of commercial banks. This paper tries to shed light on these issues by analysing the efficiency and risk management of MFIs and describing the potential implications of these relationships for the microfinance industry. After considering several measures of financial risk management ratios commonly used in the microfinance literature, our results show that cost efficiency improves asset quality and solvency of MFIs, but also reduces the need for holding idle cash or liquid assets. The results of this paper can help academics, policymakers, and regulators to better understand the impact of cost efficiency on financial risks management practices in the microfinance industry.

This article considers financial risk management practice using a virtue ethics lens, in response to ongoing critiques of risk management from within business ethics. Risk management should be seen as embedded within a complex system of cultures, organizations and regulations that are underpinned by a quantitatively reductive or ‘mechanistic’ economic paradigm, where dominant logics of self-interest, profit maximization and short-termism prevail. Building on recent work applying virtue ethics in finance, an alternative to the values, normative expectations and priorities in financial risk management is presented in the form of a refined ‘taxonomy’ of the virtues that can be applied to individuals and organizations engaged in financial risk management. This article aims to contribute to and extend debate on the ethical aspects of risk management and presents an alternative to more technically based critiques which do not engage with the underlying socially constructed foundations of risk management practice. It thereby provides a basis to critique the mechanistic and narrow approach used in the current regulation of the sector.

The motivation for this research was the desire to disclose the social nature of the financial risks of global companies: the authors attempted a scientific explanation of the influence of corporate social responsibility, which is manifested through the preservation and creation of additional jobs, on the financial risks of global companies. The research aims to establish the interdependence between financial risks and sustainable employment in global companies. This goal is achieved using the SEM (structural equation modeling) method based on corporate statistics from the Fortune “Global 500” rankings for 2021–2023. As a result, the consequences of global companies’ CSR (corporate social responsibility) practices in personnel management and financial risk management are modeled and described through quantitative and qualitative patterns. The established regularities proved that for developed and developing countries, the larger the number of employees, the lower the financial risks of global companies—the risk of a decrease in profitability, the risk of loss of profit, and the risk of depreciation of assets. The main conclusion is that there is a close systemic relationship between the financial risks of global companies and their workforce size, suggesting that CSR is key to highly effective financial risk management. A clear distinction between the practices of financial risk management through CSR in developed and developing countries forms the basis of the theoretical significance of the research results. The authors provide recommendations to improve the current practice of financial risk management in global companies by integrating it more closely with personnel management practices, highlighting their managerial relevance. It is proposed that corporate strategies for global companies in developed countries should focus on reducing the risk of declining profitability, as CSR has the most pronounced and consistent impact on this particular financial risk. In developing countries, corporate strategies are recommended to be structured by diversifying the areas of CSR application, with the most promising in financial risk management being the reduction in asset depreciation risk and the reduction in profitability risk. The findings of this research have practical significance because they enhance the predictability of CSR activities of global companies and open up opportunities for highly accurate forecasting of the financial risk implications of ensuring sustainable employment by global companies, considering the specificities of developed and developing countries.

This is the third in a series of surveys on financial risk management practice and derivatives use by non-financial corporations in the United States undertaken by the Wharton School. This 1998 survey, written in partnership again with CIBC World Markets, extends the previous two surveys by asking new questions about certain aspects of derivative use and risk management practice. This report compares responses across the various surveys and notes changes in responses over time. A tabulation of the responses to all questions is included in the appendix.

This paper analyses the methods and frameworks used by firms in emerging markets when adapting their risk management strategies across the different dimensions of the strategic, financial, institutional, and operational scopes. In addition to the existing literature surrounding enterprise risk management and the emerging economies (Boubaker et al. 2016), this particular study looked to understand the response of firms to increased levels of uncertainty attributed to macroeconomic turbulence, coupled with the regulatory and or institutional voids. With the use of a constructive integrative approach in the comparative and institutional literature, this paper attempts to consolidate analyses surrounding the firm-level adaptations to fragmented markets and governance policy constraints, coupled with an unpredictable policy environment. Empirical evidence suggests that risk management frameworks that are based (modified or otherwise) on global standards issued by the international regulatory bodies are rarely used by the firms in emerging economies. Rather, such firms tend to contextualize their systems by adjusting their frameworks to align with the institutional setting of the emerging economies within which they operate. In particular, firms tend to incorporate informal governance, relational contracting, and political risk-attribute frameworks into their strategic decision-making processes to counter regulatory and enforcement gaps (Henisz and Zelner 2015; Khanna and Palepu 1997). In response to the currency instability, gaps in capital market accessibility, and limited credit, the financial risk management practices and operational risk mitigate flexibility, redundancy, and supply chain risks, and the control mechanisms straddle. This type of operational adaptation signals a responsiveness to the management of risk in environments of continuous uncertainty and fundamental transformation. Integrated and context-sensitive risk management practices in emerging markets consistently outperform the application of standardized global models, which serves as the basis of the postulate of the undertaken research. Furthermore, the research illustrates that the alignment of risk management and local institutional order conditions proves the greatest resilient and high-performing divergence when compared to the application of systemic, contextually blind models (Hoskisson et al. 2000; McNeil et al. 2015). This conclusion elevates the importance of institutional knowledge as a distinctly relevant factor within enterprise risk management.

PurposeThis article examines the relationship between financial risk management and succession planning in family businesses. Motivated by the Theory of Planned Behaviour, we hypothesize that the use of professional risk management practices is associated with an increased likelihood that businesses adopt professionalized approaches to succession planning. We then investigate if succession planning professionalization is, in turn, positively related to the financial performance of family businesses.Design/methodology/approachWe apply binary probit and ordered dependent variable regressions to unique data generated from a survey sample of Australian family businesses. To check the robustness of our results to potential endogeneity concerns we apply difference tests to propensity score matched sub-samples from our original cohort of respondents.FindingsThe results show that, in contrast to verbal or absent succession arrangements, formal written succession plans are both positively associated with the use of financial risk management practices and with superior financial performance in family businesses.Originality/valueOur arguments and findings suggest that active financial risk management provides a platform for planning succession in family businesses, and that this links with improved short-term financial performance. In light of the critical role that succession plays in ensuring long-term business sustainability, our findings provide important and novel insights into the conditions under which family businesses are most likely to use formal professionalized succession planning.

This study investigated the influence of financial management practices on the performance of housing cooperative societies in Kenya, amidst a growing demand for affordable housing and challenges in the sector. The research was conducted among 115 housing cooperatives registered under the National Union for Housing Cooperatives (NACHU) in Nairobi County. A cross-sectional research design was employed, utilizing structured questionnaires to gather primary data from general and financial managers. The study's theoretical framework was anchored in the Resource-Based View, Pecking Order Theory, Cash Management Theory, and Modern Portfolio Theory, to comprehensively assess the impact of financial management practices on organizational performance. Key findings from the study revealed that budgeting management, cash management, financial risk management, and dividend policy management all significantly influence the performance of housing cooperative societies. Budgeting practices, including budgetary control and effective communication, were found to be essential for detecting deviations from plans and ensuring fiscal discipline. Cash management practices, such as maintaining proper records and conducting due diligence before investments, also played a crucial role in influencing the societies' performance. Furthermore, the study highlighted the importance of financial risk management strategies in enhancing resilience during economic downturns and improving resource allocation. Dividend management practices were identified as a key factor in attracting and retaining members, with preferences for stable and immediate dividends influencing financial decisions.The study concluded that effective financial management practices are indispensable for the sustainability and growth of housing cooperative societies. Recommendations included the institutionalization of comprehensive budgeting processes, adoption of robust cash management practices, mainstreaming of financial risk management, and implementation of balanced dividend policies. Further research is suggested to explore additional variables influencing cooperative performance and to examine the role of digital financial tools in enhancing financial management practices

Implementation of the Single Customs Territory (SCT) in Tanzania, particularly at strategic points like the Holili border, continues to face significant challenges due to various risk factors that hinder the efficiency and effectiveness of cross-border trade. Despite the application of the SCT framework, risks related to compliance, security, and financial management remain persistent obstacles to trade facilitation. This study aims to assess the effectiveness of SCT risk management in enhancing cross-border trade by examining the influence of compliance, security, and financial risks. A convergent research design with a mixed approach was employed. The sample size of 200 respondents was selected using a convenience sampling technique. The data was collected through a structured questionnaire. The instrument was ensured through expert review, while reliability was confirmed with a Cronbach’s alpha coefficient of 0.846, indicating a high level of internal consistency suitable for data collection. Multiple linear regression analysis was used for data analysis. Testing the research hypothesis showed that managing the three risk factors (compliance risk, security risk, and financial risk) has a statistically significant and positive influence on cross-border trade, with financial risk management emerging as the most dominant predictor. In particular, effective compliance measures ensuring accurate documentation and adherence to trade regulations facilitate smoother trade processes. Similarly, strengthened security mechanisms, such as cargo scanning and tracking technologies, minimize disruptions and delays. Most notably, robust financial risk management practices significantly reduce fraudulent practices, build trust among trading parties, and improve the overall integrity and efficiency of trade operations. These findings affirm the importance of an integrated risk management approach in improving cross-border trade outcomes. The Tanzania Revenue Authority and relevant regional bodies should prioritize capacity building in financial oversight and deploy advanced monitoring tools to mitigate identified risks and optimize SCT performance. In addition, the results of this research may help improve the risk management system of single customs territories in other countries.

The objective of this article is to evaluate the performance of the option pricing model at the cross-sectional level. For that purpose, the authors propose a statistical framework, in which they in particular account for the uncertainty associated with the reported pricing performance. Instead of a single figure, the authors determine an entire probability distribution function for the loss function that is used to measure the performance of the option pricing model. This method enables them to visualize the effect of parameter uncertainty on the reported pricing performance. Using a data-driven approach, the authors confirm previous evidence that standard volatility models with clustering and leverage effects are sufficient for the option pricing purpose. In addition, they demonstrate that there is short-term persistence but long-term heterogeneity in cross-sectional option pricing information. This finding has two important implications. First, it justifies the practitioner’s routine to refrain from time series approaches and instead estimate option pricing models on a cross section by cross section basis. Second, the long-term heterogeneity in option prices pinpoints the importance of measuring, comparing, and testing the option pricing model for each cross section separately. To the authors’ knowledge no statistical testing framework has previously been applied to a single cross section of option prices. They propose a method that addresses that need. The proposed framework can be applied to a broad set of models and data. In the empirical part of the article, they show by means of example, an application that uses a discrete time volatility model on S&P 500 index options. TOPICS:Options, volatility measures Key Findings • Absolute pricing performance, measured by a loss-function, is an inappropriate criteria to benchmark competing option pricing models at the cross-sectional level. • The long-term heterogeneity in cross-sectional option pricing information and the uncertainty of reported pricing performance calls for the necessity to rely on an entire probability distribution function of the loss function when comparing models performance. • This article proposes a statistical framework, based on a data-driven approach, to compare model performance accounting for model uncertainty applicable to a single cross-section of option prices.

Fractional Brownian Motions, Fractional Noises and Applications

This paper explores the application of blockchain technology in financial risk management. By analyzing foundational blockchain concepts such as public and private chains, smart contracts, and consensus mechanisms, the paper first illustrates how blockchain is transforming financial risk management practices. Additionally, it highlights challenges related to scalability, interoperability, and regulatory/legal barriers. Finally, the paper discusses innovative opportunities that blockchain presents for financial risk management, aiming to provide financial institutions with new strategies and insights to tackle modern financial challenges.

Purpose – This study investigates the role of AI-driven business analytics in strengthening financial risk management within the banking and insurance sectors. It examines the extent of AI adoption, its impact on organizational resilience, the challenges encountered during implementation, and the future prospects of AI integration in risk management practices. Design/methodology/approach – A quantitative research design was employed using a structured questionnaire administered to 350 professionals across banking and insurance organizations. The survey measured four core constructs—AI adoption, impact on risk management, challenges, and future prospects—using a five-point Likert scale. Descriptive statistics, reliability testing, and Pearson’s correlation analysis were conducted to ensure measurement validity and to examine interrelationships among constructs. Findings – Results indicate moderately high adoption of AI (M = 3.72, SD = 0.64) and a strong positive impact on risk management (M = 3.88, SD = 0.59). Respondents acknowledged moderate challenges (M = 3.41, SD = 0.70), including cost, regulatory uncertainty, and lack of skilled professionals. Despite these barriers, future prospects of AI in financial risk management were viewed with high optimism (M = 4.12, SD = 0.55). Correlation analysis confirmed significant positive associations between AI adoption, enhanced risk management, and future outlook, while challenges were negatively correlated with all other constructs. Originality/value – This study contributes to the growing body of knowledge on digital transformation in financial services by providing empirical insights into how AI-enabled analytics are reshaping risk management. The results indicate that the strategic role of AI in banking and insurance is not only significant but also that organizational, regulatory, and ethical issues are urgent in order to achieve the maximum benefit.

Использование таких понятий, как риск-аппетит и толерантность к риску, общепринято в международной практике финансового управления и риск-менеджмента. При этом международные стандарты не формализуют подходы к оценке риск-аппетита, поэтому для многих руководителей данные понятия остаются лишь теоретической конструкцией, которую сложно измерить в цифрах и применить в практической работе. В данной статье предлагается подход к оценке риск-аппетита на основании формализованной оценки финансового состояния компании – внутреннего кредитного рейтинга. Результаты такой оценки в дальнейшем могут быть использованы для построения кривой толерантности риска и для ранжирования рисков на карте рисков. Благодаря применению такого прозрачного подхода к оценке, риск-аппетит может стать практическим инструментом совета директоров, позволяющим определить приоритеты и распределить уровни ответственности за управление рисками компании.

This bibliometric analysis explores recent trends and influential contributions in financial risk management, shedding light on thematic clusters, keyword occurrences, and highly cited works. The analysis encompasses a wide array of literature, ranging from the integration of risk considerations into broader corporate strategies to the impact of technological advancements on risk management practices. Thematic clusters reveal the interconnectedness of business practices, corporate social responsibility, and risk management, while keyword occurrences highlight dominant themes like financial performance and credit risk management. Highly cited works by notable authors provide foundational insights into risk management for financial institutions, emphasizing liquidity risk, corporate governance, and the integration of theoretical frameworks with practical applications. The synthesis of these findings offers a comprehensive understanding of the evolving landscape of financial risk management, guiding researchers, practitioners, and policymakers in navigating the complexities of risk in contemporary financial contexts.