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Dynamic Risk Management And Firm Value

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Question:

Discuss about the Dynamic Risk Management and Firm Value.
 
 

Answer:

Introduction:

The overall returns provided by LVR 40% is relatively higher than all the other LVR investment scope. This mainly indicates that with the help of LVR use investors are able to generate higher returns from investment. In addition, the use of long-term portfolio equity with the LVR could eventually help in generating a return of more than actual return of no LVR. This mainly indicates that use LVR method could eventually help the investor in generating higher return by increasing the overall investment value.

There is cost of being exposed to the possibility of forced liquidation when using margin loan, as it due to decline in retune the overall LVR increase the threshold level, which directly initiates the sale of shares. Therefore, there is a possibility of the return provided by the stock continues to decline then the LVR would eventually cross the thresh hold level and initiate share selling (Bodie, 2013). Hence forced liquidation is a possibility if the portfolio value crosses the threshold margin call level. The evaluation of LVR mainly help in identifying the irrelevant increment in returns that could be generated by an investor. However, there can be forced liquidation, due to the violation of Margin Call. Any kind of standing instructions regarding the marginal call is directly conducted when maximum LVR limit has touched. The relevant standing instructions directly influence the margin call and force the investor to liquidate if adequate funds are not presented for the margin call. For example if the overall limit is set for 50% and it is touched during the transactions of the equity then all the shares need to be sold for reducing the LVR below the margin call percentage. If the margin call limit is not violated then there is no first liquidation conducted for the investor. However, this Margin Call limit is directly set up by the loan provider as it helps in controlling the excessive risk that could be taken by an individual. Hull & Basu (2016) stated that us of LVR system has mainly allowed the investor with adequate boost in return generation capacity. On the other hand, Zelenko (2017) criticizes that LVR system if not adequately invested could increase losses of the investor exponentially.

The evaluation of overall system mainly help in identifying the profits that could be obtained by the Investor by taking more capital for investment. Therefore it could be understood that the overall IVR system forces the investors to liquidate all it stocks if Margin Call is initiated. However if the funds are available to support the margin calls then the force liquidation is not conducted while the support is conducted for the investment then the stocks needs to be liquidated to support the margin calls and rising expenses. The forced liquidation could only occur if the overall maximum LVR rate is violated from the declining value in shares and constant debt accumulation.

 

Reference and Bibliography:

Bodie, Z. (2013). Investments. McGraw-Hill.

Chance, D. M., & Brooks, R. (2015). Introduction to derivatives and risk management. Cengage Learning.

Guo, Z. Y. (2017). Models with short-term variations and long-term dynamics in risk management of commodity derivatives.

Hopkin, P. (2017). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Hull, J. C., & Basu, S. (2016). Options, futures, and other derivatives. Pearson Education India.

Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.

McNeil, A. J., Frey, R., & Embrechts, P. (2015). Quantitative risk management: Concepts, techniques and tools. Princeton university press.

Pérez?González, F., & Yun, H. (2013). Risk management and firm value: Evidence from weather derivatives. The Journal of Finance, 68(5), 2143-2176.

Rampini, A. A., Sufi, A., & Viswanathan, S. (2014). Dynamic risk management. Journal of Financial Economics, 111(2), 271-296.

Zelenko, I. (2017). Credit Risk Management for Derivatives: Post-Crisis Metrics for End-Users. Springer.

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