Abstract: The liberalization of capital accounts and the integration of financial markets in recent years have helped to spur growth in many emerging markets and have allowed global investors to diversify risks internationally. Furthermore, increased capita! mobility has helped to tame governments in their fiscal and monetary policies. Nevertheless, the Asian currency and financial crisis and its aftermath have revealed structural problems on the national as well as on the international level and have imposed significant costs on emerging markets as well as on the world economy. • Triggered by these developments, a broad international consensus has emerged to support reforms to strengthen the international financial system. The aim of these reforms will be to create an international financial system that captures the benefits of open and integrated financial markets, and at the same time minimizes the risk of financial crises to emerge and spread to other countries. While the former refers to the need for greater transparency, accountability and prudential regulation, the latter is concerned with the improvement of existing and the creation of new mechanisms for the prevention and resolution of financial crises. International institutions such as the IMF can contribute to the stability of the international financial system. A prominent proposal initially raised by the Clinton administration in fall 1998 designs the creation of a new crisis facility of the IMF to prevent contagion in financial markets. On its recent meeting of April 23, the IMF's Executive Board agreed to provide Contingent Credit Lines for its member countries. The goal of such a facility is to provide preventive credit lines to countries whose economies are fundamentally sound, but which are threatened by financial market contagion and which may lose access to capital markets. In the absence of contagion, these countries should therefore be able to rely on a sustained flow of capital from abroad. The new facility gives rise to a number of questions. First, the distinction between countries in need of ex ante policy adjustments and countries that follow sound economic policies, i.e., the eligibility for the new facility, must be resolved in advance. Second, projections about the likely financial requirements of such a facility and the consequences for the Fund's liquidity position are needed. Another issue relates to the question whether and how private and bilateral creditors should be involved in this new facility. Finally, there is a need for clear guidelines about the terms and conditions that would apply to this new facility. However, as shown in the paper, it will prove difficult to fulfill these criteria and to avoid additional problems related to a precautionary credit line. Based on this skeptical judgment, the paper explores a number of alternative means to foster the stability of the international financial system through a better involvement of private sector creditors. This could be achieved through the introduction of option-type mechanisms that would allow debtors to trigger liquidity support in the case of a crisis. A more radical approach would involve limits to creditors in cases when they would like to reduce their short-term exposure. Another avenue would comprise a reorganization of private claims, either by modifying bond contracts or by adapting bankruptcy procedures. The main task for policy makers, however, remains to increase transparency and improve supervision in financial markets and to pursue sound economic policies.

Abstract: This paper reviews the application of OR to financial markets. After considering reasons for the attractiveness of general finance problems to OR researchers, the main types of financial market problem amenable to OR are identified, and some of the many problems solved using OR are documented

Abstract: SUBJECT AREAS: project finance, emerging markets, valuation analysis, petrochemicals, Middle East, Islamic Finance, religion and business CASE SETTING: December 1995, Kuwait, petrochemicals, $2.0 billion investment, $700 million revenue, 900 employees Equate Petrochemical Company (Equate) is a joint venture between Union Carbide Corporation and Petrochemical Industries Company (PIC) for the construction of a $2 billion petrochemical plant in Kuwait. The sponsors began construction in August 1994 using a bridge loan and are in search of permanent, non-recourse finance. As part of the permanent financing, the sponsors want to use a tranche of Islamic finance-funds that are invested in accordance with Islamic religious principles known as Sharia. According to Sharia, financing cannot be interest-based (i.e. debt), it must be profit-based where the lender accepts the risks and rewards of asset ownership. The sponsors hired Kuwait Finance House (KFH is a Kuwaiti Islamic bank) which, in turn, approached The International Investor (TII is a Kuwaiti investment bank) to assist in structuring and underwriting the Islamic tranche. The case is set in early December 1995, as members of The Institutional Investor's Structured Finance Group are deciding which Islamic structure to use, how to resolve various conflicts between the Islamic and conventional tranches, and how large a commitment to make on behalf of their investors. This case provides an introduction to Islamic finance in general and Islamic project finance in particular. It describes the primary instruments used by Islamic investors and challenges students to develop a financing plan that is consistent with Sharia's prohibition against the payment of interest (riba) while at the same time appropriate for a large, long-term greenfield project. The case also explores the complications of integrating Islamic and conventional Western financial instruments in a single transaction as well as some of the possible solutions. With more than a billion Muslims living primarily in regions with enormous infrastructure needs (the Middle East, Asia, and Africa), there is a growing need to understand Islamic culture, traditions, and financial systems. There is also a note on Islamic Finance (An Introduction to Islamic Finance) that provides some background information on Islamic religious principles as they relate to banking and finance; a section on Islamic financial instruments and institutions; and an overview of recent developments in the Islamic capital markets.

Abstract: The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the term structure of interest rates. This article evaluates five models Ho‐Lee (HL); Black‐Derman‐Toy (BDT); Vasicek; Cox‐Ingersoll‐Ross (CIR); and Heath‐Jarrow‐Morton (HJM) (see Exhibit 1) that are currently used by structured finance practitioners. We suggest which models are most appropriate for assets with different time horizons, interest rate sensitivities and cashflow properties. The authors link model selection to structured financial instruments with the singular focus on the trade‐off between model precision/complexity and calculation costs.

Abstract: The objective of this article is to examine the scope of financial innovation and engineering within an Islamic financial system. The article concludes that, contrary to common belief, Islamic finance provides the basic building blocks that can be used to construct more complex instruments that will enhance liquidity and offer risk management tools. With the introduction of asset securitization and swap transactions conforming to Islamic principles, the issues of secondary markets and risk management can be addressed. The first section discusses the significance of innovation in Islamic financial markets. The second section discusses the process of introducing new products in the market and their scope. The third section illustrates an Islamic form of asset securitization as an example of financial engineering. The fourth section evaluates the structure of a commodity swap transaction to determine its validity. And finally, the fifth section concludes the discussion. © 1999 John Wiley & Sons, Inc.