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This case examines the decision by the Swiss pharmaceutical Roche Holding AG (Roche) to offer a record $42 billion bond in February 2009. In light of a pending acquisition of U.S. biotechnology leader, Genentech, Roche management planned to sell $32 billion in bonds at various maturities from 1 year to 30 years and in three different currencies (U.S. dollar, euro, and British pound). In a context of substantial uncertainty in both world financial markets and the value of the Genentech deal, students are introduced to the pricing of corporate bonds by being invited to price Roche's bold global offering.

LONG before man learnt to make fire by the friction of wood, he experienced the burden of friction in dragging home his kill. Perhaps it is not too fanciful to suppose that the torn sides of his beast gave the first solid lubricant. Blood and mutton fat were seriously recommended as lubricants for church bell trunnions as recently as the 17th century. Indoed we still reckon fatty acids the best of all boundary lubricants. The range of man's activities has increased enormously in the present century, and particularly in the last few decades. Men have circled the earth in space; a space ship is on its way to examine another planet; terrestrial man is boring to the bottom of the earth's crust; others have descended to the depths of the ocean, and oven established a home on the floor of the Mediterranean, Speeds have increased by factors of thousands, temperatures range from near absolute zero to thousands of degrees; and a new environment of high‐intensity nuclear radiation has been created. Still, objects must move over and along each other in these exotic conditions; and to a large extent solid lubricants can provide the answer to the frictional problems.

The purpose of this paper is to derive an easy‐to‐implement and highly accurate formula to approximate the change in the bond price resulting from a change in interest rates.

The bond price is raised to an infinitesimal power and the Taylor series expansion is applied. Then, using the well‐known modified duration and convexity, the new formula is obtained as a limiting case.

It is proved mathematically and illustrated by numerical examples that the new formula generates better results than both the traditional duration‐convexity and the exponential duration approximation formulas.

The new formula derived in this paper will be used by risk managers to perform stress‐testing on bond portfolios.

Catastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.

This research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.

The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.

This research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.

The purpose of this paper is to outline a pricing formula for the valuation of catastrophic (CAT) bonds as applied to multiple trigger drought risks in Kenya.

The valuation model is designed around the multiple triggers of the Mexican Catastrophe bonds, but the valuation model is based on Jarrow’s (2010) closed form CAT Bond Pricing model. The authors outline the model structure, the multiple tranches with rainfall triggers, and simulate the model using Monte Carlo methods. Data input was synthesized from historical rainfall data in Kenya’s Moyale region as well as prevailing LIBOR and rates and conventional coupons.

The authors compute the valuation model using Monte Carlo techniques. The authors found the pricing method to be robust and consistent under various parameter settings including trigger levels, time after launch, recovery rates, coupon spreads, and zero coupon curves. For example the higher the trigger rates, the lower will be the bond price at issue. With 50 percent recovery the CAT bond at issue would be around $702 with a high triggers and 976 with low triggers, but the valuation changes with parameters.

As far as the authors know the use of multiple trigger CAT bonds has been very limited in practice. The valuation formula and methods outlined in this paper show how CAT bonds can be effectively designed to address CAT covariate risks in developing agricultural economies.

This paper examines CAT bonds to investigate multi-trigger rainfall risks in Kenya. The paper shows how CAT bonds can be designed to meet specific and CAT risks. Using Jarrow’s (2010) closed form solution this paper is one of the first to apply it to the macro-management of agricultural risks.

The purpose of this paper is to determine whether the amount of profits gained from musharakah mutanaqisah model using coupon rate of 4.5 per cent, price at par and tenure of five years was greater than using ijarah principle where the price is at a discount. Also to compute and compare the profits obtained from sukuk investment in ijarah and musharakah mutanaqisah for 3.5 per cent coupon rate and price at par for a sukuk with tenure of 12.5, 15, 17.5 and 19 years.

In total, two models were used to calculate profit. These models are based on ijarah and musharakah mutanaqisah principles. Formulas are derived from ijarah and musharakah and mutanaqisah principles used in sukuk.

Sukuk investment using ijarah principle is found to be a better investment alternative than musharakah mutanaqisah principle, regardless of the number of years of the sukuk, as long as it is a long‐term tenure. However, for short‐term tenure, the latter is preferred based on the amount of profits generated.

The formulas and results shown in this research are just one of the mathematical approaches that can be used for decision making in sukuk investment. There are other approaches which may deemed to be more effective in decision making. This research was applied only to ijarah and musharakah mutanaqisah types of investment.

The results in the research will assist in making a quick decision on what type of sukuk investment for the investors and issuers and which will be suitable given the amount of financial resources and duration of the investment period.

Many researchers have attempted to study the implications of using mathematical formulas to guide decision making on the choice of sukuk investment and this research has, to a certain extent, concurred with and complemented the works of past researchers. Additionally it will create awareness and provide more information to potential investors on better sukuk investment alternative principles from a mathematical point of view.

Most of the credit spread literature deals with the determinants of credit spread changes for individual bonds. The purpose of this paper is to investigate the explanatory power of credit spread changes and their determinants for portfolios.

Using ordinary least squares (OLS) regressions and monthly data from 1990 to 1997, this paper tests several new potential determinants (e.g. portfolio diversification) and expectations (and realizations) for some previously identified determinants (e.g. gross domestic product (GDP)) of credit spread changes for portfolios of financials as derived from spot curves.

Strong empirical support is reported that default risk and undiversified risk are priced in credit spreads. The paper finds that forecasts for GDP and inflation are better determinants of credit spread changes than the realized values previously used in the literature, which is consistent with the notion that term structures convey expectations about future interest rates.

Interesting issues for future research include the sensitivity of the results to the use of other procedures for deriving zero‐coupon spot rates, and whether forecasts of macrovariables (such as GDP) are better determinants of credit spreads for other industrial categories, such as utilities and industrials.

The findings provide guidance for the management of risk for fixed income portfolios, for the pricing of fixed income securities differentiated by the difficulties encountered in achieving well‐diversified portfolios, and for assessing the performance of credit spread portfolios managed by financial institutions.

The empirical model, which achieves substantial explanatory power while being parsimonious, is the first to support the usage of forecasts instead of realized values in determining credit spreads, and to show that undiversifiable risk is an important component of the credit spreads of portfolios.

The purpose of this paper is to provide a detailed analysis of industry loss warranties (ILWs), an alternative risk transfer instrument which has become increasingly popular throughout the last few years.

The authors first point out key characteristics of ILWs important to investor and cedent, including transaction costs, moral hazard, basis risk, counterparty risk, industry loss index, and regulation. Next, the authors present and discuss the adequacy of actuarial and financial approaches for pricing ILWs, as well as the aspects of basis risk. Finally, drivers of demand and associated models frameworks from the purchaser's viewpoint are studied.

Financial pricing approaches for ILWs are highly sensitive to input parameters, which is important given the high volatility of the underlying loss index. In addition, the underlying assumption of replicability of the claims is not without problems. Due to their simple and standardized structure and the dependence on a transparent industry loss index, ILWs are low‐barrier products, which can also be offered by hedge funds. In principle, traditional reinsurance contracts are still preferred as a measure of risk transfer, especially since these are widely accepted for solvency capital reduction. However, the main important impact factor for the demand of ILWs from the perspective of market participants, i.e. large diversified reinsurers and hedge funds, is the lower price due to rather low transaction costs and less documentation effort. Hence, ILWs are attractive despite the introduction of basis risk and the still somewhat opaque regulatory environment.

An important issue for future research is how reinsureds deal with the basis risk inherent in ILWs. Another central point is the development of a European industry loss index and the creation of an exchange platform to enable an even higher degree of standardization and a faster processing of transactions.

ILWs feature an industry loss index to be triggered, and, in some cases, a double‐trigger design that includes a company indemnity trigger. ILW contracts belong to the class of alternative risk transfer instruments that have become increasingly popular, especially in the retrocession reinsurance market. There has been no comprehensive analysis of these instruments in academic literature to date. Consequently, the authors believe that this paper provides a high degree of originality.

The purpose of this paper is to discuss the compliance with the regulatory-driven changes to collateral management and OIS discounting indicating operational and technological challenges faced by global investment banks. As it transpires, collateral management strategies need to be revised to find optimal solutions for the regulatory-driven landscape. Furthermore, set against the regulatory background, this report tests the reliability of OIS discounting and current trends in interbank lending, as well as emergent issues with CSAs.

This paper is based on an exploratory, qualitative approach to investigate the regulatory-driven collateral management landscape.

The new regulatory framework was viewed by the surveyed banks as a factor influencing strategic planning and operations within collateral management. All surveyed banks pointed to the increased regulatory reporting. The interviewed banks highlighted inconsistencies in implementing the new regulatory framework across different countries. With reference to the positive factors influencing collateral management, the responses were mixed and depended on bank-specific opportunities spotted in the new collateral management landscape. According to the surveyed banks, complying with the new regulations has no pronounced impact on the liquidity. The financial scandals undermined the credibility of the LIBOR rate-setting processes and prompted changes to the regulatory framework in the banking sector. Against this backdrop, the interviewed banks considered various alternatives to LIBOR, often beyond the OIS rates. The departure from LIBOR entails operational challenges faced by the participating banks. Surprisingly, the factors that pushed the interviewed banks to OIS discounting were not linked to the regulatory change or reliability of OIS rates but general market trends that emerged in the aftermath of the global financial crisis.

The paper contributes to the widespread, albeit complex, discussion on how banks adapt to the rapidly changing environment in collateral management and risk operations.