Department of Accounting and Finance

Financial risk management

Professor Carol Alexander’s research on financial risk management has been used by the Intercontinental Exchange to develop a new breed of models for determining margins on derivatives trades. The Intercontinental Exchange, Inc. (ICE) is a global network of exchanges and clearing houses for financial and commodity markets.

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Transactions on financial derivatives are leveraged, meaning that the purchases do not need to pay the whole notional amount up front, only a small fraction of this amount, which is called the margin. Financial markets today are driven by changes in regulations, much more than before the banking crisis. For instance, new regulations require all derivatives trades to be cleared by a central counterparty; and related to this are some other new regulations on minimum margins that are receiving considerable attention from academics, regulators and the exchanges that host the clearing houses.

European Regulations (EMIR) are driving exchanges to move away from the Standard Portfolio Analysis Tool (SPAN) that they have used to use to determine margins for more than 20 years. With about $500 trillion notional outstanding, the margining on interest rate swaps is a particularly important problem for banks, especially since these transactions must now cleared through a central counterparty.

Professor Carol Alexander continued this line of research with Professor Andreas Kaeck with a grant from the Global Risk Institute to develop new margining models. Professor Alexander is managing editor of one of the largest finance journals, the Journal of Banking and Finance and author of a 4-volume textbook series Market Risk Analysis (Wiley) which provides the basics to the most advanced level of understanding of market risk analysis, a self-study program, and spreadsheets for developing software for financial services.  Her forthcoming book on Corruption and Fraud in Financial Markets, co-edited with professor Douglas Cumming of Florida Atlantic University, is due for publication (also by Wiley) in 2019