Real Time simulation of Financial Markets prices performances , Crisis, Risks Management
With Applications to Asian, Russia Financial Crisis impact on European Financial Markets
Author Address: #Warren Huang OSA Int'l Operations Analysis,    San Francisco,, Fax: 1-510-524-4484
)corresponding author, presenter  )e-mail Add. Whuang@osawh.com / wh3928@yahoo.com  website : www.osawh.com
Xiao. Min . Ji , Graduate School of Economics. Email maryxmj@hotmail.com   Hua-Zhong University of Technology and Science, Wuhan, China

                                                Abstract

This banking , financial markets knowledge based Global financial Markets OSA (Operations Simulations Analysis) and Risk Management expert Systems, has been tracking, simulating of last 20 years real time US Asian, Russia, 11 Euro countries central bankers monetary policy and it's impact on inflation, GNP, money markets interest rates, currency markets, stocks, bond, commodities, futures, financial derivatives prices movements with average error below 1.5 %, correlation constant greater than 0.95 It has been used for training 20 million global CEO, CFO, fund managers, traders and 1000 economics, chemical engineering, MBA seniors and can easily be adapted to tracking, simulation of post ECU central bank monetary policy , super bankers, global players (bulls, bears) markets forces, it's impact on EURO Currency, 11 countries stock markets

Introduction: Global Financial Markets Behavior OSA and Crisis Management Systems,

The panic buying and selling in the global financial markets have caused trillions dollars loses in financial and properties investments and in investment opportunities and risks in the current Asian , Russia, South American Financial Crisis, despite the global central bankers and government policy and markets support efforts.

Huang started the global financial simulation system development in 1972 , have applied these experts systems to the university and research and teaching for 1000 senior, graduate economics, global strategic management, chemical engineering and biochemical students and on the job training for 20 millions US, China, Taiwan, ASEAN, Japan, Korean, European CEO, CFO, fund managers, traders, financial analysis, senior management and technical staff for tracking and minimize the global central banks policy risks, equity markets, hedging risks , credit risks and corporate profit margin risks and emerging markets risks simulation and management since 1980, invited to speak to 28 countries 60 int'l economics, strategic information management, artificial intelligence conferences

These stock index, stock prices, interest rate, currency call/put options and warrants prices simulation

models integrated into the warrants, and call/put option prices simulation, which is much simpler and more reliable than the Nobel winning Black-Schole formula. Thousands of expert systems based simulation models have been developed, implemented for real time tracking, simulation of global central bankers monetary policy impact on interest rate, currency, corporate profit margins, stock prices and integrate into the financial derivatives options, warrant calculation( striking price, date to expiration, and the simulation of current prices). To avoid betting on the wrong side. These formula do not require calculation of volatility data, (it is calculated by the internal learning model)

The tracking results have been demonstrated on OSAWH.COM. which accurately predicted the global currency and stock markets overheat on July 20. Dr. Huang warned that the Dow Jones Index at 9340 and global stock index at their peak , Dollar at 147 are over priced, ready for 10 to 20 % correction(The author recommended to short or buy put). Greenspan remarks on July 21 about the stocks and economy overheat took the Dow, global stock index and dollar plunge 20 %. The put investments in global stock index, currency almost tripled. The combination of IBM stock price simulation and IBM put/call option simulation accurately predicted on the website on June 5 that IBM will be traded between 103 and 136, reflect Asian Crisis impact on the weak Yen at 147 resulted currency loss, recommended to buy IBM Aug. 110 put, and Aug. Call 130 . investment soared 20 times on both the put and call, Compaq stock call/put and W. Tex crude oil call/ put option in summer as the author accurately predicted the oil price soared from 11 to 16 in June and plunge from 16 to 12 in Nov. investment. And many more...

Presented to EC2 Econometric Forecasting conference, Dec. 18, 1998, Stockholm , Sweden
Banking/Finance Conference on Post EURO strategy, Nov. 27, 1998, Rome, Italy
European FInancial Management Conference, Barcelona, Spain, June 2, 1999
Royal Society of Statistics Global Risk conference July 15, 1999,  London, UK

A: Identify, monitor, simulation of the causes of global financial crisis and risks elements:

1. Global central bankers monetary policy resulted inflation, deflation Risks

2. Global Financial Markets Crisis Risks: Caused by central bankers monetary risk lead to interest rates, currency bond , commodities, energy, financial futures speculation, betting on the wrong side by global players resulted prices swings risks in financial markets prices risks( Long Term Capital

3. Credit risks: caused by 1 and 2 (bad bank loan to hedging, stock funds, emerging markets,

4. Management Risks: Combination of 1,2,3 impact on corporate operating environment : soaring raw materials prices, slumping products pricing, merger/acquisition, resulted operating loss and mounting debt, bankruptcy and stock prices

B. Risks Hedging Management :Financial derivatives prices simulation :OSA improved Black-Schole options calculation

2 Options, Hedging Strategy and LTC Hedging Fund Operations Simulation and Improvement

Global central bankers applying monetary policy and various interest rates instruments to control the inflation rate due to the domestic inflation, meeting the GNP growth rate set by the economic plan.. While the commodity, oil prices and the dollar exchange rates also influence the inflation rate, through the imported inflation, While the GNP are related to money supply growth, interest rate are used to accelerate ( rate cut) or slowdown (rate increase)the GNP and export growth,)

Inflation rate = F (Money supply growth rate %, Commodity index, Dollar exchange rate)

These formula explains US and most of the EURO countries inflation drop below 2 % (which is the medium goal set by EURO central bank) due to falling commodity prices and strong currency, The author have applied it to trained 1000 economics and global strategic management students to tracking 1000 IMF countries Macro economics with average error below 1.5 %, The excessive money supply in the emerging markets countries led to higher double digits GNP resulted higher inflation, which lead to spiraling stocks, properties prices and salary costs and export prices, trade and current account deficit.

Global Interest Rates and Risk Simulations

The global central bankers(including the EURO pre and post union ) use the commodity prices and inflation rate as the leading indicators for setting the monetary policy and interest rates

These formulas explain reduced demand due to Asian turmoil have pulling down the global commodities prices and inflation, and the strong dollar allow the global and EURO central bankers applying expansionary monetary policy, which lead to falling interest rates( initially converge to 4 %, Spain and Italy's inflation over 2 % resulted 4 % interest rate, while the rest inflation below 1 % took interest rate below 3.3 %, next year with the falling inflation in Spain, Italy, interest will converge to 3 % e for German interbank interest rate simulation) and the US bond yield. While the troubled Asian countries and Russia, Brazil central bankers have to tight the money supply, raising interest rates to fight inflation which caused by excessive money supply and currency depreciation . which minimize risks due to central bankers monetary policy risks, credit risks in developing countries, and betting errors

Global Currency Exchange Rates Risks Simulation.

The US dollar exchange rates are related to US and the other countries trade deficit (or surplus) and the two countries interest rates spread (which control the capital flow)
exchange rate = F (US trade deficit, the other country's trade surplus (deficit), interest rate spread)

EURO Currency exchange rate simulation: EUROS expanded global markets share and improved trade surplus at lower inflation. can adopt expansionary monetary policy, cutting interest rates spread with US still maintain stable currency (most Euros countries like franc, lira, mark).

Global Currency crisis simulation: The troubled Asian, Russia, Brazil countries suffered from Asian Financial crisis with increasing trade and current account deficit. It's central bankers have to tight the money supply, raising interest rates to fight inflation and maintain interest spread with US to stabilize their currency(like WON, Baht, Rupiah and the recent Russia Ruble). This formula shown US Fed two interest rate cut in Oct due to Asian and LTC turmoil resulted global credit crunch, reduce interest rate spread, took the dollar tumbled to 115 Yen and 1.62Mark, and the euros expanded trade and current account surplus supported stable , strong euro ecu ( rebound from 1.06 to 1.26), mark, and lira , Kronor currency, at falling interest rates.

Over 100 IMF countries dollar exchange rates simulations have been used for 1000 economics and chemical engineering seniors assignment by the author . The tracking results have been published in the weekly trade journal for 100,000 Taiwan's Taipei importer/exporters members. trading decisions

The risks in uncertainties in corporate profits due to global deflation resulted product demand and prices slump in global commodities, industrial raw material and consumers products contract and spot and futures prices can be simulated to it's current and future raw material cost, downstream demand, and the dollar exchange rates in the trading countries or spot, futures markets. Thousands of such proprietary prices simulation forecasts models have been developed, implemented for 20 millions US, EUROS, Taiwan and China's corporate procurement, marketing, sales managers and 100,000 importer/exporter members weekly global currency tracking and import/export pricing strategy and metals, feedgrains, oils, petrochemical, fibers, plastics, paper and computers companies daily global corporate procurement, marketing strategic decisions during the last 14 years These relationships explain the recent gold and IC, oils prices slump to new low of 270 is due to Asian slowdown, the strong US dollar, lower inflation and the oil prices(production cost) and recent weakness in dollar (dropped from 145 to 111 take the crude oil price to 16 and gold rebound to 308 .and the most recent oil price slump to 12 took the gold prices below 290 again. The current economic slowdown in Asia, caused by credit tightening due to Asian Financial Market Crisis lead to falling oil, petrochemicals raw material and products, IC, computers prices will continue till next spring . weakness in West Texas crude oil price is due to poor demand in fuel oil( inventory builtup, dropped to 38 c/gal and falling gasoline prices(will drop to 42 and lower in winter as summer demand peak is over), which indicate the oil price will rebound in winter with the fuel to 16, but drop to 12 in next January as , winter is over. . The slump in IC DRAM and PC prices are due to strong US dollar VS Korean Won, Japanese Yen and the technical innovation (short product life) the falling trend will stop as recent dollar plunge.. The impact of global economic demand and production cost and dollar exchange rate impact on the these commodity and consumers products prices in the global import and export market are simulated reliably for daily corporate financial and marketing decisions with average error below 1.5%,

Global Financial Economics and Financial Markets Risks Simulations

The Global Commodities and Financial Futures and Derivatives Call/Put options prices Risks OSA:

Trillions dollars current and future global central bankers monetary policy risks impact on global financial interest rate and exchanges rate futures risks to avoid betting on the wrong side

While EUROS stock index will be closely related to Dax index after the Union:

Stock Index/Bond = F (M2 money supply growth, interest rate, Dax Stock index)

This relationship simulated last 15 years daily international stock market stock indices, including normal and major crisis with average error below 1.5 %. It predicted 1987 crash:

US Dow Jones, S&P Index risk simulation:, The high US inflation rate (6.5% ) complicated by the Iranian war in early Oct., pushed the oil price to 25, lead US Fed credit tightening, reduce the money

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supply growth from 9 % to 7 %,, raised the Fed fund rate from 9 % to 9.75%, the Dollar Yen exchange rate drop from 150 to 136, caused the Dow crashed from 2250 to 1520 in 1987 crash. It also indicate the Dow making new highs in July 1998, due to high money supply growth of 7.3 % and low Fund rate at 5 %, while the strong dollar will hurt the export and corporate earning, providing the negative impact of the Asian turmoil. The author warned on the website on July 20 that Dow at 9330 and EUROS stocks made new high was overheated and dollar at 147 was overpriced, is ready for 20 %. Greenspan warned the market overheat next day took the US and global stocks plunge 20 % in Aug.

EUROS stock markets risks simulation : This formula also predicted 1992 European currency crisis caused stock market plunge and 1998 July German, DAX, Italy, CAC, Stockholm, London Financial Times stock markets rally to new highs due to union central bank announcement of the post union interest will converge to 4 %, and expansionary money supply . UK, German, France financial stock are badly hurt by bad loans to emerging markets and LTC, The Russia crisis and LTC hedging fund loses resulted banking and financial industry credit crunch have caused EUROS billions dollars loses ( German and Swiss, Sweden ) recent Euros stock markets setback will provide good investment opportunities for the post union stock markets rally.

The ASEAN Currency crash has spilled over to Japan, Korean, due to mounting trading and current deficit, the credit tightening in support the currency (especially Hong Kong raise the interest rate to stick to the dollar) caused their stock index plunged more than 50 %,

China's Stock index= F( China m2 money supply growth , HK Henseng Index, China Inflation rate)

the index is off 30 % from it's peak to 1000, due to m2 money supply growth is down 50 % to 14 % and Henseng index plunged 50 %, the index is supported at 1000 by the low inflation rate of 2 %, lead recent interest rate cut). tracked last four years daily stocks movement with average error below 1.5 %, speak to Beijing's Central Radio station, Shanghai, and 10 major cities nationwide 20 million audiences and television viewers and used it for nationwide corporate finance, government officials, institution managers, traders, investors investment strategy and risk management training program.

Global Stocks, Bond Options Hedging Risks Simulation: While Japan is badly hurt due to heavily invested in Asia, The Tokyo Nikkei index Plunged to 12800 as Yen dropped to 147 and the declining money supply growth(domestic demand slumped )..These simulations forecasted on the website , HK Henseng Index plunged more than 50 % to 6100 due to interbank rate pushed up to 25 %(to support HK dollar) and while China Shanghai Stock Index down 30 % from it's top, and US DOW JONES retreated to 7100, While Korea's Seoul Index crashed 50 % due to Won exchange rate plunged from 800 to 2000, interest rate hike to 30 % and Russia's interest rate tripled to 200 % to stabilized Ruble from 20 to 10 (LTC betting on the wrong side of interest rate took the Russia stock index tumbled from 340 to 130,

We can easily tracking, simulate global central banks monetary supply policy, it's impact on global macro, financial, trade, and industrial raw, material, products prices, and therefore the corporate capital expenditures, merger/acquisition and the profit margin, stock prices. These systems have been applied successfully to thousand of US, Euros,Asian corporate profit margin, stock prices simulation since the 1987 stock crash.

Corporate Profit Margin = F(operating costs(raw material, energy, manpower, financial), sales)

IBM suffered huge loss and stock prices hit 40 as the US money supply growth dip below 0.5 % , Fed fund hit 10 %, during the last recession, caused IBM's huge loss, IBM stock price pushed to 160 and profit margin soaring as US money supply growth soared to 8.8 % recently

IBM is having trouble maintain double digit growth in the months ahead to fight the global deflation. While the IBM put/call options, warrant have been simulated accurately as follows

The above commodities, interest rate, exchange rate and stock index simulations have been extended easily to the futures simulation and forecast by replacing the current independent variables value by the future value. while their call/put options have been used extensively by the financial industry for hedging in risk management have been simulated

IBM put/call/warrant prices= F(Striking prices, days to expiration, IBM current/future stock prices),

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This formula is simpler than the Nobel wining Black-Schol formula, it integrating future commodities interest rate, exchange rate and stock index simulation , forecasts into the option prices calculation and does not require volatility data. Avoided betting on the wrong side of interest rate, currency, stock prices resulted LTC loses provided by Black and Scholes formula. It has been developed, implemented successfully since 1987 stock market crash and in June 1998, Recommend IBM July put 110, IBM Aug 130 call, IBM Oct 130 call soared 20 times based on IBM price simulation traded in 103 and 135 during 1998 summer, see figure for IBM 135 Call option and stock price simulation shown (tracking results shown on osawh.com weeks before

1. OSAWH.COM daily tracking Simulation of Asian, Russia, South America Financial crisis impact on global deflation, credit crunch impact on Global Financial Markets, Import/Export, risks simulation and investment strategy
2. Huang, W. ,   Ji, X.M“ European Financial Markets Simulation and Risks Management”, to be presented to Rome’s finance and banking conference on post Euros finance, banking strategy, Nov. 25-27, 1998, Rome
3. Huang, W. “Asian Financial Crisis Impact on Financial Derivatives Prices Simulation”, Accepted by QFM98, Computational Methods in Financial Derivatives Conference, Dec. 16, 1998, Sydney, Australia,
4. Huang, W. Ji, X. M.” Asian, Russia financial crisis impact on global Financial Markets prices performance ”,to be presented to EC2, Econometrics Forecasting Conference Dec. 18-19, 1998, Stockholm, Sweden,
References : Dr. Warren Huang speech to 18 int'l banking, finance, business, government, academice conferences in 1999