Financial Risk

This paper conducts the first empirical assessment of theories concerning relationships among risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings have important policy implications as they imply that the same regulation will have different effects on bank risk taking depending on the bank's corporate governance structure.

A research framework based on the theory of planned behavior and the diffusion of innovations theory (Rogers 1983) was used to identify the attitudinal, social and perceived behavioral control factors that would influence the adoption of Internet banking. An online questionnaire was designed on the World Wide Web (WWW). Respondents participated through extensive personalized email invitations as well as postings to newsgroups and hyperlinks from selected Web sites.

Subjects in a laboratory experiment completed the Zuckerman Sensation-Seeking Scale (SSS) then chose among five alternative gambles with substantial financial stakes. The gambles differed in expected return and variance. Gambles were presented in one of two different frames in a betweensubjects design. In one, subjects were paid a fixed sum for completing the survey and that sum was then at risk in the subsequent gamble choices. In the other, all payoff amounts for the gambles were nonnegative. Subjects were paid according to their choices and the outcomes of the gambles. We tested for sex differences in this choice task and found women to be consistently more risk averse, on average, than men. We observed no difference across frames. Subjects were then asked to guess the gamble choices of each of the other participants and were rewarded for each correct answer. Subjects of both sexes did substantially better than chance in guessing the particular choices of individuals of both sexes, but both men and women overestimated the risk aversion of others, especially that of women, and most strongly of all with respect to men's predictions of women's choices. Possible realworld implications of biased assumptions about women's risk attitudes are discussed. D 1090-5138/02/$ -see front matter D 2002 Elsevier Science Inc. All rights reserved. PII: S 1 0 9 0 -5 1 3 8 ( 0 2 ) 0 0 0 9 7 -1

Credit scoring and behavioural scoring are the techniques that help organisations decide whether or not to grant credit to consumers who apply to them. This article surveys the techniques used — both statistical and operational research based — to support these decisions. It also discusses the need to incorporate economic conditions into the scoring systems and the way the systems could change from estimating the probability of a consumer defaulting to estimating the profit a consumer will bring to the lending organisation — two of the major developments being attempted in the area. It points out how successful has been this under-researched area of forecasting financial risk.

Given the growing need for managing financial risk, risk prediction plays an increasing role in banking and finance. In this study we compare the out-of-sample performance of existing methods and some new models for predicting value-at-risk (VaR) in a univariate context. Using more than 30 years of the daily return data on the NASDAQ Composite Index, we find that most approaches perform inadequately, although several models are acceptable under current regulatory assessment rules for model adequacy. A hybrid method, combining a heavy-tailed generalized autoregressive conditionally heteroskedastic (GARCH) filter with an extreme value theory-based approach, performs best overall, closely followed by a variant on a filtered historical simulation, and a new model based on heteroskedastic mixture distributions. Conditional autoregressive VaR (CAViaR) models perform inadequately, though an extension to a particular CAViaR model is shown to outperform the others.

This paper provides the most comprehensive empirical study of the effectiveness of macroprudential instruments to date. Using data from 49 countries, the paper evaluates the effectiveness of macroprudential instruments in reducing systemic risk over time and across institutions and markets. The analysis suggests that many of the most frequently used instruments are effective in reducing pro-cyclicality and the effectiveness is sensitive to the type of shock facing the financial sector. Based on these findings, the paper identifies conditions under which macroprudential policy is most likely to be effective, as well as conditions under which it may have little impact.

The paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low-and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession.

The purpose of this research was to extend the investigative line of inquiry, as initiated by , regarding risk taking in everyday money matters by examining demographic, socioeconomic, and attitudinal characteristics that may be used either individually or in combination as determinants of financial risk tolerance. Discriminant analysis results indicated that risk tolerance was associated with being male, older, married, professionally employed with higher incomes, more education, more financial knowledge, and increased economic expectations. Findings suggest that the achievement of financial success can be explained, at least in part, by a combination of someone's personality characteristics and socioeconomic background.

In the 1990s, Latin American banking sectors experienced an accelerated process of concentration and foreign penetration that prompted diverse views regarding its implications for the competitive behavior of banks and the financial stability of the system. In this paper, we examine these issues exploiting a rich bank-level database for eight Latin American countries. We find that, while increased concentration did not weaken banking competition within the region, foreign penetration appears to have led to a less competitive industry. Moreover, we find that bank risk has been negatively associated with competition which, coupled with the previous finding, explains the positive link between banking sector stability and foreign penetration revealed by the data.

The current financial crisis has made it abundantly clear that business cycle modeling can no longer abstract from financial factors. It is also clear that the current standard approach of modeling labor markets without explicit unemployment has its limitations. We extend what is becoming the standard new Keynesian model in three dimensions. First, we incorporate financial frictions in the accumulation and management of capital. Second, we model the labor market using a search and matching framework. Third, we extend the model into a small open economy setting. Finally, we estimate the model using Bayesian techniques with Swedish data. Our main results are as follows: (1) The financial shock to entrepreneurial wealth is pivotal for explaining business cycle fluctuations. It accounts for two-thirds of the variance in investment and a quarter of the variance in GDP. (2) The marginal efficiency of investment shock has very limited importance. The reason for this is that we match financial market data. (3) In contrast to the existing literature on estimated DSGE models, our model does not need any wage markup shocks or similar shocks with low autocorrelation to match the data. Furthermore, the low-frequency labor preference shock that we do allow is not important in explaining GDP. (4) The tightness of the labor market is unimportant for the cost of adjusting the workforce. In other words, there are costs of hiring but no significant costs of vacancy postings per se.

Many human behaviors, from mating to food acquisition and aggressiveness, entail some degree of risk. Testosterone, a steroid hormone, has been implicated in a wide range of such behaviors in men. However, little is known about the specific relationship between testosterone and risk preferences. In this article, we explore the relationship between prenatal and pubertal testosterone exposure, current testosterone, and financial risk preferences in men. Using a sample of 98 men, we find that risk-taking in an investment game with potential for real monetary payoffs correlates positively with salivary testosterone levels and facial masculinity, with the latter being a proxy of pubertal hormone exposure. 2D:4D, which has been proposed as a proxy for prenatal hormone exposure, did not correlate significantly with risk preferences. Although this is a study of association, the results may shed light on biological determinants of risk preferences.

This paper explores conceptual, methodological, and empirical issues related to the development of a financial risk-tolerance assessment instrument. Financial risk tolerance is a significant factor in a number of household financial decisions, yet few recognized, valid, and reliable methods of assessment are available for use by financial service providers and educators. Empirical results from a multistage development of a 13-item risk assessment instrument are discussed. The multidimensional instrument is presented as the foundation for the development of a more widely used and accepted index. Future use by practitioners and researchers is encouraged to further validate the usefulness of the instrument.

For several reasons the conversion of monospecies into mixed-species forests is presently a major concern of forest management and policy in Central Europe. Although it is possible to show a clear trend in favour of mixed-species forests, private forest owners and some forest economists have often not favoured mixed forests, assuming that they are less profitable. The trend towards mixed forests seems mainly for ecological reasons, while sound economic analysis of mixed forests is still rare. Based on this background the objective of the study is to answer the following four questions: (1) Does the yield of mixed-species forests differ from that of pure forests? (2) Does the mixing of tree species influence the ecological stability of forests? (3) Is the economic value of a mixed forest less than that of a monoculture? (4) How do forest economic models integrate the findings on yield and ecological stability of mixed forests? To answer these questions a literature review was conducted on the possible impacts of mixed-species forests. In comparison to pure stands a greater yield is not necessarily given in mixed stands. Yet, mixed-species stands are better able to compensate disturbances than monocultures. Moreover, there is substantial evidence that mixed-species stands are more resistant against biotic and abiotic disturbances. Applying an extended forest economic model, it was possible to demonstrate that mixing large blocks of native broadleaf species into pure conifer forests may lead to a significant reduction of financial risk. From a risk-averse perspective the economic value of a mixed-species forest may thus be greater than that of a mono-species forest. Yet, it became clear that forest economists do not often integrate the research findings on yield and ecological stability of mixed stands in modelling, but rather apply simple bioeconomic modelling. Moreover, in the context of mixed forests economists also largely ignore even classical financial approaches, which consider risk and risk preferences. We concluded that forest economics has to close substantial research gaps. Firstly, the knowledge of how to integrate biophysical properties of mixed forests in bioeconomic modelling is still an open question. Secondly, forest economists have to adopt the modern approaches of financial theory and management science to value mixed forests.

This paper investigates the probability of ruin within finite horizon for a discrete time risk model, in which the reserve of an insurance business is currently invested in a risky asset. Under assumption that the risks are heavy tailed, some precise estimates for the finite time ruin probability are derived, which confirm a folklore that the ruin probability is mainly determined by whichever of insurance risk and financial risk is heavier than the other. In addition, some discussions on the heavy tails of the sum and product of independent random variables are involved, most of which have their own merits.

Women are commonly stereotyped as more risk averse than men in financial decision making. In this paper we examine whether this stereotype reflects gender differences in actual risk-taking behavior by means of a laboratory experiment with monetary incentives. Gender differences in risk taking may be due to differences in valuations of outcomes or in probability weights. The results of our

In this article, the design and retrofit problem of a supply chain (SC) consisting of several production plants, warehouses and markets, and the associated distribution systems, is considered. The first problem formulation modifies and extends other previously presented models, in order to include several essential characteristics for realistically representing the consequences of design decisions on the SC performance. Then, in

Purpose -One of the implications of Islamic investment principles is the availability of Islamic financial instruments in the financial market. The main aim of this research is to observe the differences in terms of performance between Islamic and conventional mutual fund in the context of Malaysian capital market. Design/methodology/approach -To achieve the major objectives of this paper standard methods wereused for evaluating the mutual funds performance, for example, Sharpe index and adjusted Sharpe index, Jensen Alpha, Timing and selectivity ability. The scope of the paper is to measure the relative quantitative performance of funds which was managed based on two different approaches. Findings -The basic finding of the paper is that Islamic funds performed better than the conventional funds during bearish economic trends while, conventional funds showed better performance than Islamic funds during bullish economic conditions. In addition to that finding, both conventional and Islamic funds were unable to achieve at least 50 per cent market diversification levels, though conventional funds are found to have a marginally better diversification level than the Islamic funds. The results also suggest that fund managers are unable to correctly identify good bargain stocks and to forecast the price movements of the general market.

While much of classical statistical analysis is based on Gaussian distributional assumptions, statistical modeling with the Laplace distribution has gained importance in many applied fields. This phenomenon is rooted in the fact that, like the Gaussian, the Laplace distribution has many attractive properties. This paper investigates two methods of combining them and their use in modeling and predicting financial risk.

The clients of public sector works have an obligation to ensure that the large scale investment in public works is effective and can achieve improvement in social and economic performance. However, construction activity is usually subject to more risk than other business activities because of its complexity particularly in coordinating a wide range of disparate and interrelated skills and activities. This complexity is further compounded in implementing public sector projects where multiple project objectives are expected by a wide range of stakeholders who have different interests associated with the projects. With reference to current practice in Hong Kong, this paper examines the major risks in implementing public sector works, and the ways that the application of public private partnership (PPP) can help to manage risks in project delivery. The example of Hong Kong Disneyland (KDLD) demonstrates how various major risks in committing to a PPP project are allocated and shared effectively between public and private partners. In this typical PPP project, it is found that allocation of site acquisition risk and legal and policy risks to the public sector is more effective while private sector could effectively allocate the design and construction risks, operation risks and industrial action risk to the private sector. Also, development risks, market risks, financial risks and force majeure could be shared effectively between the two partners. These results present valuable lessons for both the practitioners and researchers in application of PPPs to manage risks in delivering of public sector projects in other countries and regions.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Individuals exhibit substantial heterogeneity in financial risk aversion. Recent work on twins demonstrated that some variation is influenced by individual heritable differences. Despite this, there has been no study investigating possible genetic loci associated with financial risk taking in healthy individuals. Here, we examined whether there is an association between financial risk preferences, elicited experimentally in a game with real monetary payoffs, and the presence of the 7-repeat allele (7R+) in the dopamine receptor D 4 gene as well as the presence of the A1 allele (A1+) in the dopamine receptor D 2 gene in 94 young men. Although we found no association between the A1 allele and risk preferences, we did find that 7R+ men are significantly more risk loving than 7R− men. This polymorphism accounts for roughly 20% of the heritable variation in financial risk taking. We suggest that selection for the 7R allele may be for a behavioral phenotype associated with risk taking. This is consistent with previous evolutionary explanations suggesting that selection for this allele was for behaviors associated with migration and male competition, both of which entail an element of risk.

With the goal of protecting its rural population from impoverishment by medical expenses, China began rolling out the New Cooperative Medical System (NCMS) in 2003 with significant government investment. The prevailing model of NCMS combines medical savings accounts with high-deductible catastrophic hospital insurance (MSA/Catastrophic). To assess the effectiveness of this approach, we--using household survey data linked to claims records of health expenditures--simulated the effect of MSA/Catastrophic in reducing the share of individuals falling below two different poverty lines (headcounts) and the amount by which household resources fall short of the poverty lines (poverty gaps) due to medical expenses. We compared the effects of MSA/Catastrophic to Rural Mutual Healthcare (RMHC), an alternate model which provides first dollar coverage for primary care, hospital services and drugs without any deductible but with lower ceilings, for a similar premium. Under the internationallyaccepted poverty line of US$1.08 per person per day, the MSA/Catastrophic models would reduce the poverty headcount by 3.5-3.9%, the average poverty gap by 11.8-16.4% and the positive poverty gap by 8.3-13.1%. By comparison, RMHC would reduce the poverty headcount by 6.1-6.8%, the average poverty gap by 15-18.5% and the positive poverty gap by 11.1-13.3%. Similar results were found using the Chinese official poverty line of 663 RMB (US$83). The primary reason for the poorer performance of NCMS is 2 that its design was not evidence-based. It does not address a major cause of medical impoverishment-expensive outpatient services for chronic conditions. Without first examining the disease profile and health expense pattern, the government's investment would be only marginally effective in achieving its goal in preventing medical impoverishment. A lesson from our study is that, in settings where resources are limited, it is not necessarily true that insurance coverage focusing on expensive hospital care is the most effective in providing financial risk protection, when chronic diseases impose a growing share of the burden on the population in developing countries (word count: 317 words)

Purpose-This paper examines why and how M&A activity has been used by UK hotel companies over a 26 year period and provides a preliminary exploration of its relative success, given that the M&A literature suggests high failure rates or M&A transactions which do not achieve their objectives. Design/methodology/approach-This research is based on a combination of a multiple-case study and comparative historical analysis to bring out the different levels of analysis embedded in past M&A literature and to identify changes of motives for undertaking M&A activities based on companies and their external environment. Findings-Value maximizing motives are prevalent whilst non-value maximizing motives are not supported. The acquisition of brand names and rights is a major motive for the UK hotel industry, particularly, in the light of global competition and the brand power that enables companies to expedite growth while at the same time reducing financial risks. Practical implications-This longitudinal study serves to reinforce the type of target companies, particularly those that share similar resources or end products, for acquiring companies to select from in order to expect a higher M&A success rate. 2 Originality/value-This paper provides the first empirical study to integrate the comparative historical analysis approach with strategic management M&A theory to trace and understand how and why UK hotel companies became leading international companies. Through this interdisciplinary approach, the importance of acquiring a brand name is illustrated and identified as an essential motive, specific to the hotel industry.

We discuss a number of quantile-based risk measures (QBRMs) that have recently been developed in the financial risk and actuarial/insurance literatures. The measures considered include the Value-at-Risk (VaR), coherent risk measures, spectral risk measures, and distortion risk measures. We discuss and compare the properties of these different measures, and point out that the VaR is seriously flawed. We then discuss how QBRMs can be estimated, and discuss some of the many ways they might be applied to insurance risk problems. These applications are typically very complex, and this complexity means that the most appropriate estimation method will often be some form of stochastic simulation.

This paper demonstrates that an important role of intermediaries in supply chains is to reduce the ®nancial risk faced by retailers. It is well known that risk averse retailers when faced by the classical single-period inventory (newsvendor) problem will order less than the expected value maximizing (newsboy) quantity. We show that in such situations a risk neutral distributor can oer a menu of mutually bene®cial contracts to the retailers. We show that a menu can be designed to simultaneously: (i) induce every risk averse retailer to select a unique contract from it; (ii) maximize the distributor's expected pro®t; and (iii) raise the order quantity of the retailers to the expected value maximizing quantity. Thus ineciency created due to risk aversion on part of the retailers can be avoided. We also investigate the in¯uence of product/market characteristics on the oered menu of contracts.

The purpose of this study is to explore the extent to which individuals' knowledge of retirement planning, future time perspective, and financial risk tolerance influence retirement saving practices. A total of 270 young working adults participated in the study. Regression analyses reveal that each of the three variables is predictive of saving practices, and they interact with one another as well. From an applied perspective, the findings suggest that counseling and intervention efforts aimed at pro-moting retirement saving should differentially target individuals on the basis of these three psycho-logical dimensions.

Designing for trust in technology-mediated interaction is an increasing concern in CHI. In advertising, images of people have long been used to create positive attitudes to products or trust in brands. However, the evidence as to whether placing photographs of people on e-commerce web sites has the intended effect has been mixed. This paper reports a study that examined the effect of adding such photographs to 12 existing e-commerce sites, whose reputation had been established through customer ratings. In an experiment with 115 participants, trust was measured using methods that induced financial risk, adapted from experimental economics. Averaging across sites, neither the presence of a photo, nor trustworthiness of the person depicted, had a significant effect. However, the presence of photos reduced participants' ability to identify vendors with good and bad reputations -the perceived trustworthiness of poorly performing vendors was increased, whereas that of vendors with good reputation was decreased. This result advocates caution when using photos on e-commerce sites to boost trustworthiness, and demonstrates the need for further research into interpersonal cues and on-line trust.

Risk assessment of financialintermediaries is an area of renewed interest due tothe financial crises of the 1980's and 90's. Anaccurate estimation of risk, and its use in corporateor global financial risk models, could be translatedinto a more efficient use of resources. One importantingredient to accomplish this goal is to find accuratepredictors of individual risk in the credit portfoliosof institutions. In this context we make a comparativeanalysis of different statistical and machine learningmodeling methods of classification on a mortgage loandata set with the motivation to understand theirlimitations and potential. We introduced a specificmodeling methodology based on the study of errorcurves. Using state-of-the-art modeling techniques webuilt more than 9,000 models as part of the study. Theresults show that CART decision-tree models providethe best estimation for default with an average 8.31%error rate for a training sample of 2,000 records. Asa result of the error curve analysis for this model weconclude that if more data were available,approximately 22,000 records, a potential 7.32% errorrate could be achieved. Neural Networks provided thesecond best results with an average error of 11.00%.The K-Nearest Neighbor algorithm had an averageerror rate of 14.95%. These results outperformed thestandard Probit algorithm which attained an averageerror rate of 15.13%. Finally we discuss thepossibilities to use this type of accurate predictivemodel as ingredients of institutional and global riskmodels.

Acute pesticide poisoning is a major public health problem in Sri Lanka. In several agricultural districts, it precedes all other causes of death in government hospitals. Most of the acute poisoning cases are intentional (suicide) and occur among young adults, mainly males. Poisoning due to occupational exposure is also common, but less well documented. In an irrigation area in Sri Lanka a very high incidence of serious pesticide poisoning was observed, with 68% due to intentional ingestion of liquid pesticides. It is argued that the easy availability and widespread use of highly hazardous pesticides is the most important reason for this high number of poisoning cases. The frequent application of higMy hazardous pesticides in high concentrations was often irrational and posed serious health and financial risks to the farmers. Sales promotion activities and credit facilities promoted this excessive pesticide use, which was not counteracted by an agricultural extension service. Hazardous practices when spraying pesticides were due to the impossibility of applying recommended protective measures under the local conditions, rather than to lack of knowledge. Current emphasis on programs that promote the safe use of pesticides through education and training of farmers will be ineffective in Sri Lanka because knowledge is already high and most poisoning cases are intentional. Instead, enforcement of legislation to restrict availability of the most hazardous pesticides would result in an immediate health benefit. Improved agricultural extension services to promote alternative non-chemical methods of pest control is the most important strategy, in the long term, to prevent acute pesticide poisoning.

The authors thank Suzanne Lindamood for contributions related to the Survey of Consumer Finances datasets. This article focuses on the effect of race and ethnicity on financial risk tolerance. Blacks and Hispanics are less likely to be willing to take some financial risk but more likely to be willing to take substantial financial risk than Whites, after controlling for the effects of other variables. Risk attitudes may affect investment behavior, so having an appropriate willingness to take financial risk is important in achieving investment goals. Government agencies and financial educators should target investor education on investments and financial risk to racial and ethnic groups in order to promote better choices for investing for financial goals.

In this paper, we investigate quality investment and price decision of a make-to-order (MTO) supply chain with uncertain demand in international trade. Due to volatility of orders from buyers, the supplier and the manufacturer in the supply chain are subject to financial risk. In contrast to the general assumption that players in a supply chain are risk neutral in quality investment and price decision, we consider the risk-averse behavior of the players in three different supply chain strategies: Vertical Integration (VI), Manufacturer's Stackelberg (MS) and Supplier's Stackelberg (SS). The study shows that both supply chain strategy and risk-averse behavior have significant impacts on quality investment and pricing. Compared to a risk-neutral supply chain, a risk-averse supply chain has lower, same and higher quality of products in VI, MS and SS, respectively. Also, we derive the conditions under which the supply chain strategy is implemented in a decentralized setting. A numerical study is used to illustrate some related issues.

The question of how an individual firm's environmental performance impacts its firm risk has not been examined in any empirical UK research. Does a company that strives to attain good environmental performance decreases its market risk or is environmental performance just a disadvantageous cost that increases such risk levels for these firms? Answers to this question have important implications for the management of companies and the investment decisions of individuals and institutions. The purpose of this paper is to examine the relationship between corporate environmental performance and firm risk in the British context. Using the largest dataset so far assembled, with Community and Environmental Responsibility (CER) rankings for all rated UK companies between 1994 and 2006, we show that a company's environmental performance is inversely related to its systematic financial risk. However, an increase of 1.0 in the CER score is associated with only a 0.02 reduction in firm's risk and cost of capital.

A methodology is presented to include financial risk management in the framework of two-stage stochastic programming for planning under uncertainty. A known probabilistic definition of financial risk is adapted to be used in this framework and its relation to downside risk is analyzed. Using these definitions, new two-stage stochastic programming models that manage financial risk are presented. Computational issues related to these models are also discussed.

In this paper, we aim to identify the political and financial risk components that matter most for the activities of multinational corporations. Our paper is the first paper to comprehensively examine the impact of various components of not only political risk but also financial risk on inward FDI, from both long-run and short-run perspectives. Using a sample of 93 countries (including 60 developing countries) for the period 1985-2007, we find that among the political risk components, government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, religious tensions, democratic accountability, and ethnic tensions have a close association with FDI flows. In particular, socioeconomic conditions, investment profile, and external conflict appear to be the most influential components of political risk in attracting foreign investment. Among the financial risk components, only exchange rate stability yields statistically significant positive coefficients when estimated only for developing countries. In contrast, current account as a percentage of exports of goods and services, foreign debt as a percentage of GDP, net international liquidity as the number of months of import cover, and current account as a percentage of GDP yield negative coefficients in some specifications. Thus, multinationals do not seem to consider seriously the financial risk of the host country.

According to financial theory, corporate hedging can increase shareholder value in the presence of capital market imperfections such as direct and indirect costs of financial distress, costly external financing, and taxes. This paper presents a comprehensive review of the extensive existing empirical literature that has tested these theories, documenting overall mixed empirical support for rationales of hedging with derivatives at the firm level. While various empirical challenges and limitations advise some caution with regard to the interpretation of the existing evidence, the results are, however, consistent with derivatives use being just one part of a broader financial strategy that considers the type and level of financial risks, the availability of risk-management tools, and the operating environment of the firm. In particular, recent evidence suggests that derivatives use is related to debt levels and maturity, dividend policy, holdings of liquid assets, and the degree of operating hedging. Moreover, corporations do not just use financial derivatives, but rely heavily on pass-through, operational hedging, and foreign currency debt to manage financial risk.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This primer aims to provide IMF macroeconomists with the essential information they need to address issues concerning health sector policy, particularly when they have significant macroeconomic implications. Such issues can also affect equity and growth and are fundamental to any strategy of poverty reduction. The primer highlights the appropriate roles for the state and market in health care financing and provision. It also suggests situations in which macroeconomists should engage health sector specialists in policy formulation exercises. Finally, it reviews the different health policy issues that confront countries at alternative stages of economic development and the range of appropriate policy options.