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A Supply Chain Financial Management Insurance Model for the Protection of Corporations Against the Bankruptcy of Suppliers by Using the Black-Scholes-Merton Model


A Supply Chain Financial Management Insurance Model for the Protection of Corporations Against the Bankruptcy of Suppliers by Using the Black-Scholes-Merton Model

Valverde, Raul (2014) A Supply Chain Financial Management Insurance Model for the Protection of Corporations Against the Bankruptcy of Suppliers by Using the Black-Scholes-Merton Model. Masters thesis, University of the West of England.

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Many banks provide supply-chain finance solutions that might include insurance services that further mitigate trade risk such as the default of suppliers. This study proposes the development of an insurance model that uses the Black-Scholes-Merton Model (BSM) (1973) for default prediction and risk pooling management techniques as a way to reduce the risk due to supplier bankruptcy and estimate an insurance premium that banks can use to charge this service to their customers. In order to demonstrate the use of the proposed insurance model, a sample of companies is selected from the New York Stock exchange and data for historical stock prices from the CRSP database (Center for Research in Security Prices) is collected in order to calculate the probability of bankruptcy of a sample of suppliers from different industries by using the BSM model. Twelve pools of companies of different sizes are created and a VBA program for Excel is developed in order to calculate probability of bankruptcy tables of companies belonging to the different pools. A Monte Carlo simulation to simulate the impact on risk and expected losses on the number of insurance policies sold is implemented with the use of simulation software. The results show that the simulation is useful to estimate the number of sold policies required in order to reduce the risk to a minimum level and predict with a high level of certainty the losses due to bankruptcy of suppliers. The expected losses for a risk pool can be used by a financial institution in order to price an insurance contract that hedges a company against the risk of default of suppliers.

Item Type:Thesis (Masters)
Authors:Valverde, Raul
Institution:University of the West of England
Degree Name:M. Sc.
Program:Accounting and Financial Management (Supply Chain Management specialization)
Date:9 September 2014
Thesis Supervisor(s):Vendrame, Vasco
ID Code:980228
Deposited By: Raul Valverde
Deposited On:23 Jun 2021 15:43
Last Modified:28 Jun 2021 22:50


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