Search results for: option pricing theory

Authors: Dchieche Amina, Aboulaich Rajae

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In this work, we will modelize Waad Bil Mourabaha contract. This islamic contract provides the right to buy goods at a future date with a Mourabaha. Waad is a promise of sale or purchase of goods, declared in a unilateral way. In spite of the divergence between some schools of Islamic law about the Waad, this contract will allow us to study sophisticated and interesting contract: Waad Bil Mourabaha that can be used for hedging. In order to price Waad Bil Mourabaha contract, we will use an adapted Black and Scholes model using the Shariah compliant assumptions.

Keywords: Islamic finance, Black-Scholes model, call option, risks, hedging

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Authors: Rong-Tsorng Wang

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In this paper, we derive a pricing formula for catastrophe equity put options (or CatEPut) with non-homogeneous loss and approximated compound distributions. We assume that the loss claims arrival process is a nonhomogeneous Poisson process (NHPP) representing the clustering occurrences of loss claims, the size of loss claims is a sequence of independent and identically distributed random variables, and the accumulated loss distribution forms a compound distribution and is approximated by a heavy-tailed distribution. A numerical example is given to calibrate parameters, and we discuss how the value of CatEPut is affected by the changes of parameters in the pricing model we provided.

Keywords: catastrophe equity put options, compound distributions, nonhomogeneous Poisson process, pricing model

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Authors: H. C. Chinwenyi, H. D. Ibrahim, F. A. Ahmed

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In modern financial mathematics, valuing derivatives such as options is often a tedious task. This is simply because their fair and correct prices in the future are often probabilistic. This paper examines three different Stochastic Differential Equation (SDE) models in finance; the Constant Elasticity of Variance (CEV) model, the Balck-Karasinski model, and the Heston model. The various Martingales option price valuation formulas for these three models were obtained using the replicating portfolio method. Also, the numerical solution of the derived Martingales options price valuation equations for the SDEs models was carried out using the Monte Carlo method which was implemented using MATLAB. Furthermore, results from the numerical examples using published data from the Nigeria Stock Exchange (NSE), all share index data show the effect of increase in the underlying asset value (stock price) on the value of the European Put Option for these models. From the results obtained, we see that an increase in the stock price yields a decrease in the value of the European put option price. Hence, this guides the option holder in making a quality decision by not exercising his right on the option.

Keywords: equivalent martingale measure, European put option, girsanov theorem, martingales, monte carlo method, option price valuation formula

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Authors: Isha Sharawat, R. P. Dahiya, T. R. Sreekrishnan

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One of the environmental challenges in India is urban wastewater management as regulations and infrastructural development has not kept pace with the urbanization and growing population. The quality of life of people is also improving with the rapid growth of the gross domestic product. This has contributed to the enhancement in the per capita water requirement and consumption. More domestic water consumption generates more wastewater. The scarcity of potable water is making the situation quite serious, and water supply has to be regulated in most parts of the country during summer. This requires elaborate and concerted efforts to efficiently manage the water resources and supply systems. In this article, a system dynamics modelling approach is used for estimating the water demand and wastewater generation in a district headquarter city of North India. Projections are made till the year 2035. System dynamics is a software tool used for formulation of policies. On the basis of the estimates, policy scenarios are developed for sustainable development of water resources in conformity with the growing population. Mitigation option curtailing the water demand and wastewater generation include population stabilization, water reuse and recycle and water pricing. The model is validated quantitatively, and sensitivity analysis tests are carried out to examine the robustness of the model.

Keywords: system dynamics, wastewater, water pricing, water recycle

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Authors: Kamran Yazdanbakhsh, Somayeh Mahmoudi

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Three reasons make good use of the decision theory in medicine: 1. Increased medical knowledge and their complexity makes it difficult treatment information effectively without resorting to sophisticated analytical methods, especially when it comes to detecting errors and identify opportunities for treatment from databases of large size. 2. There is a wide geographic variability of medical practice. In a context where medical costs are, at least in part, by the patient, these changes raise doubts about the relevance of the choices made by physicians. These differences are generally attributed to differences in estimates of probabilities of success of treatment involved, and differing assessments of the results on success or failure. Without explicit criteria for decision, it is difficult to identify precisely the sources of these variations in treatment. 3. Beyond the principle of informed consent, patients need to be involved in decision-making. For this, the decision process should be explained and broken down. A decision problem is to select the best option among a set of choices. The problem is what is meant by "best option ", or know what criteria guide the choice. The purpose of decision theory is to answer this question. The systematic use of decision models allows us to better understand the differences in medical practices, and facilitates the search for consensus. About this, there are three types of situations: situations certain, risky situations, and uncertain situations: 1. In certain situations, the consequence of each decision are certain. 2. In risky situations, every decision can have several consequences, the probability of each of these consequences is known. 3. In uncertain situations, each decision can have several consequences, the probability is not known. Our aim in this article is to show how decision theory can usefully be mobilized to meet the needs of physicians. The decision theory can make decisions more transparent: first, by clarifying the data systematically considered the problem and secondly by asking a few basic principles should guide the choice. Once the problem and clarified the decision theory provides operational tools to represent the available information and determine patient preferences, and thus assist the patient and doctor in their choices.

Keywords: decision making, medicine, treatment strategies, patient

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Authors: Miroslav Čulík, Petr Gurný

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This paper is aimed at the financial assessment of the hard coal mining in a given region by real option methodology application. Hard coal mining in this mine makes net loss for the owner during the last years due to the long-term unfavourable mining conditions and significant drop in the coal prices during the last years. Management is going to shut down the operation and abandon the project to reduce the loss of the company. The goal is to assess whether the shutting down the operation is the only and correct solution of the problem. Due to the uncertainty in the future hard coal price evolution, the production might be again restarted if the price raises enough to cover the cost of the production. For the assessment, real option methodology is applied, which captures two important aspect of the financial decision-making: risk and flexibility. The paper is structured as follows: first, current state is described and problem is analysed. Next, methodology of real options is described. At last, project is evaluated by applying real option methodology. The results are commented and recommendations are provided.

Keywords: real option, investment, option to abandon, option to shut down and restart, risk, flexibility

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Authors: Clarinda V. Nhangumbe, Ercília Sousa

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Weather Derivatives are financial instruments used to cover non-catastrophic weather events and can be expressed in the form of standard or plain vanilla products, structured or exotics products. The underlying asset, in this case, is the weather index, such as temperature, rainfall, humidity, wind, and snowfall. The complexity of the Weather Derivatives structure shows the weakness of the Black Scholes framework. Therefore, under the risk-neutral probability measure, the option price of a weather contract can be given as a unique solution of a two-dimensional partial differential equation (parabolic in one direction and hyperbolic in other directions), with an initial condition and subjected to adequate boundary conditions. To calculate the price of the option, one can use numerical methods such as the Monte Carlo simulations and implicit finite difference schemes conjugated with Semi-Lagrangian methods. This paper is proposed two explicit methods, namely, first-order upwind in the hyperbolic direction combined with Lax-Wendroff in the parabolic direction and first-order upwind in the hyperbolic direction combined with second-order upwind in the parabolic direction. One of the advantages of these methods is the fact that they take into consideration the boundary conditions obtained from the financial interpretation and deal efficiently with the different choices of the convection coefficients.

Keywords: incomplete markets, numerical methods, partial differential equations, stochastic process, weather derivatives

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Authors: Arnab Adhikari, Arnab Bisi

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Since the inception, the fashion apparel supply chain is facing the problem of high demand uncertainty. Often the demand volatility compels the corresponding supply chain member to incur substantial holding cost and opportunity cost in case of the overproduction and the underproduction scenario, respectively. It leads to an uncoordinated fashion apparel supply chain. There exist several scholarly works to achieve coordination in the fashion apparel supply chain by employing the different contracts such as the buyback contract, the revenue sharing contract, the option contract, and so on. Specially, the application of option contract in the apparel industry becomes prevalent with the changing global scenario. Exploration of existing literature related to the option contract reveals that most of the research works concentrate on the one direction demand adjustment i.e. either to match the demand upwards or downwards. Here, we present a holistic approach to coordinate a dyadic fashion apparel supply chain comprising one manufacturer and one retailer with the help of bidirectional option contract. We show a combination of wholesale price contract and bidirectional option contract can coordinate the under expanded supply chain. We also propose a framework that captures the variation of the apparel retailer’s order quantity and the apparel manufacturer’s production quantity with the changing exercise price for the different ranges of the option price. We analytically explore that corresponding cost parameters of the supply chain members along with the nature of demand distribution play an instrumental role in the coordination as well as the retailer’s ordering decision.

Keywords: fashion apparel supply chain, supply chain coordination, wholesale price contract, bidirectional option contract

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Authors: Ben Main Piotr Ozieranski

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State government spending on pharmaceuticals stands at 1 trillion USD globally, promoting criticism of the pharmaceutical industry's monetization of drug efficacy, product cost overvaluation, and health injustice. This paper elucidates the mechanisms behind a state-institutional response to this problem through the sociological lens of the strategic relational approach to state power. To do so, 30 expert interviews, legal and policy documents are drawn on to explain how state elites in New Zealand have successfully contested a 30-year “pharmaceutical spending containment policy”. Proceeding from Jessop's notion of strategic “selectivity”, encompassing analyses of the enabling features of state actors' ability to harness state structures, a theoretical explanation is advanced. First, a strategic context is described that consists of dynamics around pharmaceutical dealmaking between the state bureaucracy, pharmaceutical pricing strategies (and their effects), and the industry. Centrally, the pricing strategy of "bundling" -deals for packages of drugs that combine older and newer patented products- reflect how state managers have instigated an “incentivization game” that is played by state and industry actors, including HTA professionals, over pharmaceutical products (both current and in development). Second, a protective context is described that is comprised of successive legislative-judicial responses to the strategic context and characterized by the regulation and the societalisation of commercial law. Third, within the policy, the achievement of increased pharmaceutical coverage (pharmaceutical “mix”) alongside contained spending is conceptualized as a state defence of a "social profit". As such, in contrast to scholarly expectations that political and economic cultures of neo-liberalism drive pharmaceutical policy-making processes, New Zealand's state elites' approach is shown to be antipathetic to neo-liberals within an overall capitalist economy. The paper contributes an analysis of state pricing strategies and how they are embedded in state regulatory structures. Additionally, through an analysis of the interconnections of state power and pharmaceutical value Abrahams's neo-liberal corporate bias model for pharmaceutical policy analysis is problematised.

Keywords: pharmaceutical governance, pharmaceutical bureaucracy, pricing strategies, state power, value theory

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Authors: Saurabh Agarwal

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This paper attempts to formalise the effect of demographic variables like marital status, gender, occupation and age on the source of investment advice which, in turn, affect the herd behaviour of investors and probability of investment in near future. Further, postulations have been made for most preferred investment option and purpose of saving and source of investment. Impact of theoretical analysis on choice among investment alternatives has also been investigated. The analysis contributes to understanding the different investment choices made by households in India. The insights offered in the paper indirectly contribute in uncovering the various unexplained asset pricing puzzles.

Keywords: portfolio choice, investment decisions, investor’s behaviour, Indian securities market

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Authors: Madia Safdar, G. Amjad Hussain, Mashhood Ahmad

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One of the major challenges of today’s era is peak demand which causes stress on the transmission lines and also raises the cost of energy generation and ultimately higher electricity bills to the end users, and it was used to be managed by the supply side management. However, nowadays this has been withdrawn because of existence of potential in the demand side management (DSM) having its economic and- environmental advantages. DSM in domestic load can play a vital role in reducing the peak load demand on the network provides a significant cost saving. In this paper the potential of demand response (DR) in reducing the peak load demands and electricity bills to the electric users is elaborated. For this purpose the domestic appliances are modeled in MATLAB Simulink and controlled by a module called energy management controller. The devices are categorized into controllable and uncontrollable loads and are operated according to real-time tariff pricing pattern instead of fixed time pricing or variable pricing. Energy management controller decides the switching instants of the controllable appliances based on the results from optimization algorithms. In GAMS software, the MILP (mixed integer linear programming) algorithm is used for optimization. In different cases, different constraints are used for optimization, considering the comforts, needs and priorities of the end users. Results are compared and the savings in electricity bills are discussed in this paper considering real time pricing and fixed tariff pricing, which exhibits the existence of potential to reduce electricity bills and peak loads in demand side management. It is seen that using real time pricing tariff instead of fixed tariff pricing helps to save in the electricity bills. Moreover the simulation results of the proposed energy management system show that the gained power savings lie in high range. It is anticipated that the result of this research will prove to be highly effective to the utility companies as well as in the improvement of domestic DR.

Keywords: controllable and uncontrollable domestic loads, demand response, demand side management, optimization, MILP (mixed integer linear programming)

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Authors: Pratap Chandra Pati, Prabina Rajib, Parama Barai

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The traditional finance theory neglects the role of sentiment factor in asset pricing. However, the behavioral approach to asset-pricing based on noise trader model and limit to arbitrage includes investor sentiment as a priced risk factor in the assist pricing model. Investor sentiment affects stock more that are vulnerable to speculation, hard to value and risky to arbitrage. It includes small stocks, high volatility stocks, growth stocks, distressed stocks, young stocks and non-dividend-paying stocks. Since the introduction of Chicago Board Options Exchange (CBOE) volatility index (VIX) in 1993, it is used as a measure of future volatility in the stock market and also as a measure of investor sentiment. CBOE VIX index, in particular, is often referred to as the ‘investors’ fear gauge’ by public media and prior literature. The upward spikes in the volatility index are associated with bouts of market turmoil and uncertainty. High levels of the volatility index indicate fear, anxiety and pessimistic expectations of investors about the stock market. On the contrary, low levels of the volatility index reflect confident and optimistic attitude of investors. Based on the above discussions, we investigate whether market-wide fear levels measured volatility index is priced factor in the standard asset pricing model for the Indian stock market. First, we investigate the performance and validity of Fama and French three-factor model and Carhart four-factor model in the Indian stock market. Second, we explore whether India volatility index as a proxy for fearful market-based sentiment indicators affect the cross section of stock returns after controlling for well-established risk factors such as market excess return, size, book-to-market, and momentum. Asset pricing tests are performed using monthly data on CNX 500 index constituent stocks listed on the National stock exchange of India Limited (NSE) over the sample period that extends from January 2008 to March 2017. To examine whether India volatility index, as an indicator of fear sentiment, is a priced risk factor, changes in India VIX is included as an explanatory variable in the Fama-French three-factor model as well as Carhart four-factor model. For the empirical testing, we use three different sets of test portfolios used as the dependent variable in the in asset pricing regressions. The first portfolio set is the 4x4 sorts on the size and B/M ratio. The second portfolio set is the 4x4 sort on the size and sensitivity beta of change in IVIX. The third portfolio set is the 2x3x2 independent triple-sorting on size, B/M and sensitivity beta of change in IVIX. We find evidence that size, value and momentum factors continue to exist in Indian stock market. However, VIX index does not constitute a priced risk factor in the cross-section of returns. The inseparability of volatility and jump risk in the VIX is a possible explanation of the current findings in the study.

Keywords: India VIX, Fama-French model, Carhart four-factor model, asset pricing

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Authors: Amol Parikh

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The goal of this study is to understand the most preferred ways to spend time at an airport while waiting for a flight to board. Survey was done on 1639 people of the United States of America. In the overall data, it was found that majority people always preferred spending time doing something in their mobile phone. Second most preferred option was reading something, followed by wanting a companion to talk to or to eat/drink. Least preferred option was to eat/drink alone. Overall data was then filtered based on age, gender, income and urban density groups. Percentage of people wanting to use a mobile phone was highest in the age group of 18-24. People aged 45 and above chose reading as the most preferred option. In any of the ranges of income, gender or urban density using mobile phone was the most preferred option. Conclusion of this study is that introducing a mobile app to search for a companion at an airport to do like minded activity would get noticed by majority travelers and would be a business idea worth trying as wanting a companion to talk or eat/drink with is not the least preferred option.

Keywords: waiting for a flight, airport, mobile phone, companion

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Authors: Ririh Rahma Ratinghayu, Jayu Pramudya, Nur Aini Masruroh, Shi-Woei Lin

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This research studies pricing strategy in cooperative setting of hotel duopoly selling perishable product under fixed capacity constraint by using the perspective of managers. In hotel revenue management, competitor’s average room rate and occupancy rate should be taken into manager’s consideration in determining pricing strategy to generate optimum revenue. This information is not provided by business intelligence or available in competitor’s website. Thus, Information Sharing (IS) among players might result in improved performance of pricing strategy. IS is widely adopted in the logistics industry, but IS within hospitality industry has not been well-studied. This research put IS as one of cooperative game schemes, besides Mutual Price Setting (MPS) scheme. In off-peak season, hotel manager arranges pricing strategy to offer promotion package and various kinds of discounts up to 60% of full-price to attract customers. Competitor selling homogenous product will react the same, then triggers a price war. Price war which generates lower revenue may be avoided by creating collaboration in pricing strategy to optimize payoff for both players. In MPS cooperative game, players collaborate to set a room rate applied for both players. Cooperative game may avoid unfavorable players’ payoff caused by price war. Researches on horizontal cooperative game in logistics show better performance and payoff for the players, however, horizontal cooperative game in hotel revenue management has not been demonstrated. This paper aims to develop hotel revenue management models under duopoly cooperative schemes (IS & MPS), which are compared to models under non-cooperative scheme too. Each scheme has five models, Capacity Allocation Model; Demand Model; Revenue Model; Optimal Price Model; and Equilibrium Price Model. Capacity Allocation Model and Demand Model employs self-hotel and competitor’s full and discount price as predictors under non-linear relation. Optimal price is obtained by assuming revenue maximization motive. Equilibrium price is observed by interacting self-hotel’s and competitor’s optimal price under reaction equation. Equilibrium is analyzed using game theory approach. The sequence applies for three schemes. MPS Scheme differently aims to optimize total players’ payoff. The case study in which theoretical models are applied observes two hotels offering homogenous product in Indonesia during a year. The Capacity Allocation, Demand, and Revenue Models are built using multiple regression and statistically tested for validation. Case study data confirms that price behaves within demand model in a non-linear manner. IS Models can represent the actual demand and revenue data better than Non-IS Models. Furthermore, IS enables hotels to earn significantly higher revenue. Thus, duopoly hotel players in general, might have reasonable incentives to share information horizontally. During off-peak season, MPS Models are able to predict the optimal equal price for both hotels. However, Nash equilibrium may not always exist depending on actual payoff of adhering or betraying mutual agreement. To optimize performance, horizontal cooperative game may be chosen over non-cooperative game. Mathematical models can be used to detect collusion among business players. Empirical testing can be used as policy input for market regulator in preventing unethical business practices potentially harming society welfare.

Keywords: horizontal cooperative game theory, hotel revenue management, information sharing, mutual price setting

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Authors: Dai-Ling Li, Jung-Fa Cheng, Min-Lang Huang, Yun-Yao Chi

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The hedonic pricing model has been popularly applied to describe the economic value of environmental amenities in urban housing, but the results for cultural heritage variables remain relatively ambiguous. In this paper, integrated variables extending by GIS-based data and an existing typology of communities used to examine how cultural heritage and environmental amenities and disamenities affect housing prices across urban communities in Tainan, Taiwan. The developed models suggest that, although a sophisticated variable for central services is selected, the centrality of location is not fully controlled in the price models and thus picked up by correlated peripheral and central amenities such as cultural heritage, open space or parks. Analysis of these correlations permits us to qualify results and present a revised set of relatively reliable estimates. Positive effects on housing prices are identified for views, various types of recreational infrastructure and vicinity of nationally cultural sites and significant landscapes. Negative effects are found for several disamenities including wasteyards, refuse incinerators, petrol stations and industries. The results suggest that systematic hypothesis testing and reporting of correlations may contribute to consistent explanatory patterns in hedonic pricing estimates for cultural heritage and landscape amenities in urban.

Keywords: hedonic pricing model, cultural heritage, landscape amenities, housing

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Authors: Wee Tong Liaw, Elaine Wong Yee Sing

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Since 2001, many companies in Singapore have voluntarily participated in the bi-annual Singapore HEALTH Award initiated by the Health Promotion Board of Singapore (HPB). The Singapore HEALTH Award (SHA), is an industry wide award and assessment process. SHA assesses and recognizes employers in Singapore for implementing a comprehensive and sustainable health promotion programme at their workplaces. The rationale for implementing a sustained health promoting workplace and participating in SHA is obvious when company management is convinced that healthier employees, business productivity, and profitability are positively correlated. However, performing research or empirical studies on the impact of a sustained health promoting workplace on stock returns are not likely to yield any interests in the absence of a systematic and independent assessment on the comprehensiveness and sustainability of a health promoting workplace in most developed economies. The principles of diversification and mean-variance efficient portfolio in Modern Portfolio Theory developed by Markowitz (1952) laid the foundation for the works of many financial economists and researchers, and among others, the development of the Capital Asset Pricing Model from the work of Sharpe (1964), Lintner (1965) and Mossin (1966), and the Fama-French Three-Factor Model of Fama and French (1992). This research seeks to support the rationale by studying whether there is a significant relationship or impact of a sustained health promoting workplace on the performance of companies listed on the SGX. The research shall form and test hypotheses pertaining to the impact of a sustained health promoting workplace on company’s performances, including stock returns, of companies that participated in the SHA and companies that did not participate in the SHA. In doing so, the research would be able to determine whether corporate and fund manager should consider the significance of a sustained health promoting workplace as a risk factor to explain the stock returns of companies listed on the SGX. With respect to Singapore’s stock market, this research will test the significance and relevance of a health promoting workplace using the Singapore Health Award as a proxy for non-diversifiable risk factor to explain stock returns. This study will examine the significance of a health promoting workplace on a company’s performance and study its impact on stock price performance and beta and examine if it has higher explanatory power than the traditional single factor asset pricing model CAPM (Capital Asset Pricing Model). To study the significance there are three key questions pertinent to the research study. I) Given a choice, would an investor be better off investing in a listed company with a sustained health promoting workplace i.e. a Singapore Health Award’s recipient? II) The Singapore Health Award has four levels of award starting from Bronze, Silver, Gold to Platinum. Would an investor be indifferent to the level of award when investing in a listed company who is a Singapore Health Award’s recipient? III) Would an asset pricing model combining FAMA-French Three Factor Model and ‘Singapore Health Award’ factor be more accurate than single factor Capital Asset Pricing Model and the Three Factor Model itself?

Keywords: asset pricing model, company's performance, stock prices, sustained health promoting workplace

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Authors: Daniel Nkrumah

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The Magic Bullet theory was a popular media effect theory that defined the power of the mass media in altering beliefs and perceptions of its audiences. However, following the People's Choice study, the theory was said to have been disproved and was supplanted by the Two-Step Flow Theory. This paper examines the relevance of the Magic Bullet theory in Africa and establishes whether it is still relevant in Africa's media spaces and societies. Using selected cases on the continent, it adopts a grounded theory approach and explores a new theoretical model that attempts to enforce an argument that the Two-Step Flow theory though important and valid, was ill-conceived as a direct replacement to the Magic Bullet theory.

Keywords: magic bullet theory, two-step flow theory, media effects, african media

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Authors: Arlan Zandro Brucal, John Lynham

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With the accelerated sea-level rise (SLR) increasingly becoming a concern, demand for coastal management and protection is expected to grow. Among the coastal management and protection methods, building seawalls are among the most controversial due to the negative externalities they impose on beachgoers and neighboring properties. This paper provides estimates of the external cost associated with building seawalls on the island of Oahu in Hawaii. Using hedonic pricing approach on real properties sold between 1980-2010 and aerial photographs of seawalls in 1995, the paper finds that (1) while seawalls do increase the value of protected properties, the share of armored properties appear to be negatively correlated with property sale prices, suggesting that the positive effect of seawalls tend to decline as more and more rely on this coastal management method; and (2) the value of beachfront properties tend to decline as they get approach seawalls. Results suggest that policymakers should devise a policy that would internalize the externalities associated with private-sector adaptation to climate change.

Keywords: private sector climate change adaptation, externalities, sea-level rise, hedonic pricing

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Authors: Mohan Bikram Thapa

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Despite the successful implementation of community forestry program, a number of pros and cons have been raised on Terai community forestry in the case of lowland locally called Terai region of Nepal, which climatically belongs to tropical humid and possessed high-quality forests in terms of ecology and economy. The study aims to investigate the local pricing strategy of forest products and its impacts on equitable forest benefits sharing, the collection of community fund and carrying out livelihood improvement activities. The study was carried out on six community forests revealed that local people have substantially benefited from the community forests. However, being the region is heterogeneous by socio-economic conditions and forest resources have higher economic potential, the decision of low pricing strategy made by the local people have created inequality problems while sharing the forest benefits, and poorly contributed to community fund collection and consequently carrying out limited activities of livelihood improvement. The paper argued that the decision of low pricing strategy of forest products is counterproductive to promote the equitable benefit-sharing in the areas of heterogeneous socio-economic conditions with high-value forests. The low pricing strategy has been increasing accessibility of better off households at a higher rate than poor, as such households always have the higher affording capacity. It is also defective to increase the community fund and carry out activities of livelihood improvement effectively. The study concluded that unilateral decentralized forest policy and decision-making autonomy to the local people seems questionable unless their decision-making capacities are enriched sufficiently. Therefore, it is recommended that empowerments of decision-making capacity of local people and their respective institutions together with policy and program formulation are prerequisite for efficient and equitable community forest management and its long-term sustainability.

Keywords: benefit sharing, community forest, livelihood, pricing mechanism, Nepal

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Authors: Yoke-Mui Lim, Yahaya Ahmad

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Conservation works in Malaysia that is procured by public organisation usually follow the traditional approach where the works are tendered based on Bills of Quantities (BQ). One of the purposes of tendering is to enable the selection of a competent contractor that offers a competitive price. While competency of the contractors are assessed by their technical knowledge, experience and track records, the assessment of pricing will be dependent on the tender amount. However, the issue currently faced by the conservation works sector is the difficulty in assessing the competitiveness and reasonableness of the tender amount due to the high variance between the tenders amount. Thus, this paper discusses the factors that cause difficulty to the tenderers in pricing competitively in a bidding exercise for conservation tenders. Data on tendering is collected from interviews with conservation works contractors to gain in-depth understanding of the barriers faced in pricing tenders of conservation works. Findings from the study lent support to the contention that the variance of tender amount is very high amongst tenderers. The factors identified in the survey are the format of BQ, hidden works, experience and labour and material costs.

Keywords: building conservation, Malaysia, bill of quantities, tender

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Authors: Bangkit Adhi Nugraha, Bambang Suripto

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On September 2016 Bank Indonesia (BI) release regulation no.18/18/PBI/2016 that permit bank clients for using the FX option call spread USD/IDR. Basically, this product is a combination between clients buy FX call option (pay premium) and sell FX call option (receive premium) to protect against currency depreciation while also capping the potential upside with cheap premium cost. BI classifies this product as a structured product. The structured product is combination at least two financial instruments, either derivative or non-derivative instruments. The call spread is the first structured product against IDR permitted by BI since 2009 as response the demand increase from Indonesia firms on FX hedging through derivative for protecting market risk their foreign currency asset or liability. The composition of hedging products on Indonesian FX market increase from 35% on 2015 to 40% on 2016, the majority on swap product (FX forward, FX swap, cross currency swap). Swap is formulated by interest rate difference of the two currency pairs. The cost of swap product is 7% for USD/IDR with one year USD/IDR volatility 13%. That cost level makes swap products seem expensive for hedging buyers. Because call spread cost (around 1.5-3%) cheaper than swap, the most Indonesian firms are using NDF FX call spread USD/IDR on offshore with outstanding amount around 10 billion USD. The cheaper cost of call spread is the main advantage for hedging buyers. The problem arises because BI regulation requires the call spread buyer doing the dynamic hedging. That means, if call spread buyer choose strike price 1 and strike price 2 and volatility USD/IDR exchange rate surpass strike price 2, then the call spread buyer must buy another call spread with strike price 1’ (strike price 1’ = strike price 2) and strike price 2’ (strike price 2’ > strike price 1‘). It could make the premium cost of call spread doubled or even more and dismiss the purpose of hedging buyer to find the cheapest hedging cost. It is very crucial for the buyer to choose best optimum strike price before entering into the transaction. To help hedging buyer find the optimum strike price and avoid expensive multiple premium cost, we observe ten years 2005-2015 historical data of USD/IDR volatility to be compared with the price movement of the call spread USD/IDR using Garman–Kohlhagen Model (as a common formula on FX option pricing). We use statistical tools to analysis data correlation, understand nature of call spread price movement over ten years, and determine factors affecting price movement. We select some range of strike price and tenor and calculate the probability of dynamic hedging to occur and how much it’s cost. We found USD/IDR currency pairs is too uncertain and make dynamic hedging riskier and more expensive. We validated this result using one year data and shown small RMS. The study result could be used to understand nature of FX call spread and determine optimum strike price for hedging plan.

Keywords: FX call spread USD/IDR, USD/IDR volatility statistical analysis, Garman–Kohlhagen Model on FX Option USD/IDR, Bank Indonesia Regulation no.18/18/PBI/2016

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Authors: Arne Fagerstrom, Gary Cunningham, Fredrik Hartwig

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In this paper, a theory of sustainable enterprises, sustainable enterprise theory (SET), is developed. The sustainable enterprise theory can only be a valid theory if knowledge about life and nature is complete. Knowledge limitations should not stop enterprises from doing business with a goal of better long-term life on earth. Life demands stewardship of the resources used during one’s lifetime. This paper develops a model influenced by (the classical) enterprise theory and resource theory that includes more than money in the business activities of an enterprise. The sustainable enterprise theory is then used in an analysis of accountability and in discussions about sustainable businesses.

Keywords: sustainable business, sustainability reporting, sustainable values, theory of the firm

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Authors: Saleh Alzahrani, Halim Boussabaine

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Many of Public Private Partnership (PPP) are developed based on a public project is to be awarded to a private party within a one contractual framework. PPP project risks typically include the development and construction of a new asset as well as its operation. Certainly the most severe consequences of risks through the construction period are price and time overruns. These events are among the most generally used situation in value for money analysis risks. The sources of risk change during the time in PPP project. In traditional procurement, the public sector usually has to cover all prices suffering from these risks. At least there is plenty to suggest that price suffering is a norm in some of the projects that are delivered under traditional procurement. This paper will find the impact of exogenous risk factors into actual construction price into PPP projects. The paper will present a brief literature review on PPP risk pricing strategies and then using system dynamics (SD) to analyses of the risks associated with the estimated project price. Based on the finding from these analyses a risk pricing association model is presented and discussed. The paper concludes with thoughts for future research.

Keywords: public private partnership (PPP), risk, risk pricing, system dynamics (SD)

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Authors: Gaosheng Ju

Abstract:

Our empirical evidence supports a model of consumption planning behaviors with the following two characteristics. First, households formulate a rational consumption target based on their desired target, displaying a diminishing sensitivity to the discrepancy between them. Second, the established target is a reference point for their planned consumption. The diminishing sensitivity leads to opposite reactions in higher and lower quantiles of both consumption targets and consumption growth to changes in economic conditions. This phenomenon accounts for the perplexingly low correlation between consumption and other macroeconomic variables. Furthermore, the opposing movements of consumption targets offer new insights into consumption-based asset pricing.

Keywords: consumption planning, reference point, diminishing sensitivity, quantile regression, asset pricing puzzles

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Authors: Lidia Sanchis-Marco, Antonio Rubia, Pedro Serrano

Abstract:

This paper studies the informational content of pricing errors in the term structure of sovereign CDS spreads. The residuals from a non-arbitrage model are employed to construct a Price discrepancy estimate, or noise measure. The noise estimate is understood as an indicator of market distress and reflects frictions such as illiquidity. Empirically, the noise measure is computed for an extensive panel of CDS spreads. Our results reveal an important fraction of systematic risk is not priced in default swap contracts. When projecting the noise measure onto a set of financial variables, the panel-data estimates show that greater price discrepancies are systematically related to a higher level of offsetting transactions of CDS contracts. This evidence suggests that arbitrage capital flows exit the marketplace during time of distress, and this consistent with a market segmentation among investors and arbitrageurs where professional arbitrageurs are particularly ineffective at bringing prices to their fundamental values during turbulent periods. Our empirical findings are robust for the most common CDS pricing models employed in the industry.

Keywords: credit default swaps, noise measure, illiquidity, capital arbitrage

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Authors: Chenhong Peng

Abstract:

Beijing, the capital city of China, is running out of water. The water resource per capita in Beijing is only 106 cubic meter, accounts for 5% of the country’s average level and less than 2% of the world average level. The tension between water supply and demand is extremely serious. For one hand, the surface and ground water have been over-exploited during the last decades; for the other hand, water demand keep increasing as the result of population and economic growth. There is a massive gap between water supply and demand. This paper will focus on addressing the water shortage in Beijing city by increasing water use efficiency in domestic sector. First, we will emphasize on the changing structure of water supply and demand in Beijing under the economic development and restructure during the last decade. Second, by analyzing the water use efficiency in agriculture, industry and domestic sectors in Beijing, we identify that the key determinant for addressing the water crisis is to increase the water use efficiency in domestic sector. Third, this article will explore the two primary causes for the water use inefficiency in Beijing: The ineffective water pricing policy and the poor water education and communication policy. Finally, policy recommendation will offered to improve the water use efficiency in domestic sector by making and implementing an effective water pricing policy and people-engaged water education and communication policy.

Keywords: Beijing, water use efficiency, domestic sector, water pricing policy, water education policy

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Authors: Saleh Alzahrani, Halim Boussabaine

Abstract:

The majority of Public Private Partnership (PPP) are developed based on the rationale that the design, construction, operation, and financing of a public project is to be awarded to a private party within a single contractual framework. PPP project risks normally include the development and construction of a new asset as well as its operation for decades. Undoubtedly the most serious consequences of risks during the construction period are price and time overruns. These events are amongst the most broadly used scenarios in value for money analysis risks. The sources of risk change over the life cycle of a PPP project. In traditional procurement, the public sector normally has to cover all price distress from these risks. At least there is plenty evidence to suggest that price distress is a norm in some of the projects that are delivered under traditional procurement. This paper will find the impact of construction risk factors into actual construction price into PPP projects. The paper will present a brief literature review on PPP risk pricing strategies, and then using system dynamics (SD) to analyses of the risks associated with the estimated project price. Based on the finding from these analyses a risk pricing association model is presented and discussed. The paper concludes with thoughts for future research.

Keywords: Public Private Partnership (PPP), Risk, Risk Pricing, System Dynamics (SD), construction price

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Authors: Taher Abofol, Eldad Yechiam, Thorsten Pachur

Abstract:

In four studies, we examined whether seller and buyers differ not only in subjective price levels for objects (i.e., the endowment effect) but also in their relative accuracy given objects varying in expected value. If, as has been proposed, sellers stand to accrue a more substantial loss than buyers do, then their pricing decisions should be more sensitive to expected-value differences between objects. This is implied by loss aversion due to the steeper slope of prospect theory’s value function for losses than for gains, as well as by loss attention account, which posits that losses increase the attention invested in a task. Both accounts suggest that losses increased sensitivity to relative values of different objects, which should result in better alignment of pricing decisions to the objective value of objects on the part of sellers. Under loss attention, this characteristic should only emerge under certain boundary conditions. In Study 1 a published dataset was reanalyzed, in which 152 participants indicated buying or selling prices for monetary lotteries with different expected values. Relative EV sensitivity was calculated for participants as the Spearman rank correlation between their pricing decisions for each of the lotteries and the lotteries' expected values. An ANOVA revealed a main effect of perspective (sellers versus buyers), F(1,150) = 85.3, p < .0001 with greater EV sensitivity for sellers. Study 2 examined the prediction (implied by loss attention) that the positive effect of losses on performance emerges particularly under conditions of time constraints. A published dataset was reanalyzed, where 84 participants were asked to provide selling and buying prices for monetary lotteries in three deliberations time conditions (5, 10, 15 seconds). As in Study 1, an ANOVA revealed greater EV sensitivity for sellers than for buyers, F(1,82) = 9.34, p = .003. Importantly, there was also an interaction of perspective by deliberation time. Post-hoc tests revealed that there were main effects of perspective both in the condition with 5s deliberation time, and in the condition with 10s deliberation time, but not in the 15s condition. Thus, sellers’ EV-sensitivity advantage disappeared with extended deliberation. Study 3 replicated the design of study 1 but administered the task three times to test if the effect decays with repeated presentation. The results showed that the difference between buyers and sellers’ EV sensitivity was replicated in repeated task presentations. Study 4 examined the loss attention prediction that EV-sensitivity differences can be eliminated by manipulations that reduce the differential attention investment of sellers and buyers. This was carried out by randomly mixing selling and buying trials for each participant. The results revealed no differences in EV sensitivity between selling and buying trials. The pattern of results is consistent with an attentional resource-based account of the differences between sellers and buyers. Thus, asking people to price, an object from a seller's perspective rather than the buyer's improves the relative accuracy of pricing decisions; subtle changes in the framing of one’s perspective in a trading negotiation may improve price accuracy.

Keywords: decision making, endowment effect, pricing, loss aversion, loss attention

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Authors: Brent McKenzie, Victoria Taylor

Abstract:

The use of QR (Quick Response Codes) codes for customer scanning with mobile phones is a rapidly growing trend. The QR code can provide the consumer with product information, user guides, product use, competitive pricing, etc. One sector for QR use has been in retail, through the use of Electronic Shelf Labeling (henceforth, ESL). In Europe, the use of ESL for pricing has been in practice for a number of years but continues to lag in acceptance in North America. Stated concerns include costs as a key constraint, but there is also evidence that consumer acceptance represents a limitation as well. The purpose of this study is to present the findings of a consumer based study to gage the impact on their use in the retail food sector.

Keywords: electronic price labels, consumer behaviour, grocery shopping, mixed methods research

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Authors: Mingming Leng

Abstract:

Wal-Mart has allocated considerable human resources for its quality assurance program, in which the largest retailer serves its supply chains as a quality gatekeeper. Asda Stores Ltd., the second largest supermarket chain in Britain, is now investing £27m in significantly increasing the frequency of quality control checks in its supply chains and thus enhancing quality across its fresh food business. Moreover, Tesco, the largest British supermarket chain, already constructed a quality assessment center to carry out its gatekeeping responsibility. Motivated by the above practices, we consider a supply chain in which a retailer plays the gatekeeping role in quality assurance by identifying defects among a manufacturer's products prior to selling them to consumers. The impact of a retailer's gatekeeping activity on pricing and quality assurance in a supply chain has not been investigated in the operations management area. We draw a number of managerial insights that are expected to help practitioners judiciously consider the quality gatekeeping effort at the retail level. As in practice, when the retailer identifies a defective product, she immediately returns it to the manufacturer, who then replaces the defect with a good quality product and pays a penalty to the retailer. If the retailer does not recognize a defect but sells it to a consumer, then the consumer will identify the defect and return it to the retailer, who then passes the returned 'unidentified' defect to the manufacturer. The manufacturer also incurs a penalty cost. Accordingly, we analyze a two-stage pricing and quality decision problem, in which the manufacturer and the retailer bargain over the manufacturer's average defective rate and wholesale price at the first stage, and the retailer decides on her optimal retail price and gatekeeping intensity at the second stage. We also compare the results when the retailer performs quality gatekeeping with those when the retailer does not. Our supply chain analysis exposes some important managerial insights. For example, the retailer's quality gatekeeping can effectively reduce the channel-wide defective rate, if her penalty charge for each identified de-fect is larger than or equal to the market penalty for each unidentified defect. When the retailer imple-ments quality gatekeeping, the change in the negotiated wholesale price only depends on the manufac-turer's 'individual' benefit, and the change in the retailer's optimal retail price is only related to the channel-wide benefit. The retailer is willing to take on the quality gatekeeping responsibility, when the impact of quality relative to retail price on demand is high and/or the retailer has a strong bargaining power. We conclude that the retailer's quality gatekeeping can help reduce the defective rate for consumers, which becomes more significant when the retailer's bargaining position in her supply chain is stronger. Retailers with stronger bargaining powers can benefit more from their quality gatekeeping in supply chains.

Keywords: bargaining, game theory, pricing, quality, supply chain

Procedia PDF Downloads 250