2.6 THEORETICAL LITTERATURE REVIEW
The theoretical aspect of our L.R. stresses the relevant
theories that have been elaborated concerning the risk management in financial
institutions and its relation with risk reduction. This will be done by
highlighting the research of various authors in order to come out with an
objective analyses of the topic understudied.
2.6.1 THE USE OF FINANCIAL INSTRUMENTS IN RISK
REDUCTION
Stijn Claessens and Ronald C. Duncan (1993) highlighted the
starting point to manage commodity risks, including any the uses financial
instruments is by setting clear objectives which do not interfere with
efficient allocation of resources within the country. Financial risks
management instruments always above is one of the condition for successful
price stabilisation.
Hugher-Harlettand and Ramanujan (1990) pointed out that
instrument for managing commodity risks hedge only against price risks
therefore leaving quantity risks and that buffer stock hedge against revenue
risks. Furthermore, CLaessens and Duncan (1993) added that the financial
commodity risks in the absence of a directly available matching counter swap,
manage the price risks on the swap by using short-dated futures and option
markets. By dynamic hedging, through the use of short dated instruments, the
intermediary can duplicate a long term hedge risk arising from changes in the
relation between spot and future prices. That is: Basis risk = 1 -
correlation coefficient (spot and future price coefficient)
2.6.2 THE MANAGEMENT OF PRICE RISKS IN FINANCE
Christopher L. Gilbert (1993) stated that the first 3 measures
aiming at insulating the economy against price shocks are either by stabilizing
international commodity prices( first measure) or by transferring risks to
third parties. The transfer of risks could be accomplished either by hedging
(second measure) or by transferring funds i.e. borrowing or lending (third
measure). The last measure aims at reducing the impact of commodity price
changes on a certain domestic sector by forms or self insurance or domestic
diversification.
One approach that has been stressed up is the use of financial
derivatives instruments (forward, future option) to reduce the revenue
variability. It is suggested the producers could directly via dealer use the
market to offset their exposure to price risks.
Toshiya Masouka (1998) added that for financial institutions
and corporations, assets liability management includes these activities that
attempt to control exposure to financial and other price risks. Institutions
and corporations examine the risk exposure of their assets and liabilities to
future price movements to develop their risk exposure profile because risk
management operations reduces the possibility of unanticipated deviations from
initial projection on economic variables.
2.6.3 THEORIES OF CREDIT RISK
For Millard F. Long (1989) the origin of financial distress
can be traced as far back the 1950s and 1960s when developing countries decided
to take over foreign investors' financial institutions then, mostly commercial
banks provided short-term command trade credits. Yet they were faced with
directed credit programs by the governments these latter were said to borrow
too much from banks risk concentration. Thus they were forced to become
insolvent or actually fell. E.g.: credit agricol bank in Cameroon and other
banks suffer large losses and actually failed. In Cameroon we are faced with
the problem of insolvency and thee most recent case was the liquidation of
BICIC which has been changed into BICEC. The causes of this failure might be
related to risk concentration or connected lending.
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