OSA Operations Simulations Analysis Proactive Structural China/Global Commodities, Financial Futures Derivatives Pricing Simulation and Risks Early Warning Dr Warren Huang ( 黃華南博士) OSA Int’l Operations Analysis OSA Global Strategic Management www.osawh.com/www.osaglobalstrategicmanagement.com email@example.com/ firstname.lastname@example.org Fenglan Zhang Zhejiang University email@example.com Financial Engineering and Risk Management Conference June 11-12, 2007, Peking University, Beijing OSA Operations Simulations Analysis Outline A. What is Global Asset Prices OSA? And its accomplishments B. What is wrong with current asset pricing and risk management ? C. Proactive Structural Global Neoclassic Macro-economy-Financial- Industrial-Trade Economics Integration, Operations Simulation Analysis D. Proactive Structural Dynamic Equities, Debt, Housing, Commodities Pricing for Risks, Bubbles, Crisis Early Warning E. Proactive Structural GARCH F. Proactive Structural Housing Prices Bubble, MBS, Synthetic CDO Derivatives Pricing, Risks Early Warning OSA ,Oil, Energy Commodities Derivatives Prices Bubbles and OSA G. Proactive Structural Inflation- Interest Rate Risk OSA Proactive Structural Banking, Finance, reform, IPO, M/A ADR Prices OSA OSA Operations Simulations Analysis A. What is Global Asset Prices OSA? And its accomplishments Dr. Warren Huang has over 30 year develop, implemented structural dynamic simulation,optimization for US Mobil and China/ Taiwan, Asian Oil companies board directors oil, gas upstream/downstream performances ,achieve sustainable profit. Inspired by Prof Nash Game Theory and Milton Friedman Demand Side Monetary Economics , he pioneered Nobel Prize idea. pioneered; two master hands controlling global economy, finance, capital market equities, bond, housing, commodities, financial futures asset prices based on information knowledge base development in 1983 extend to 1972 - 2005 ( daily Wall Street Journals, Business Week, trading data, web market, economic technical analysis. He gave up time series, maximum likelihood, Monte Carlo Simulation and his 1971 PhD Thesis on Nonlinear Adaptive Kalman Filtering and online Stochastic Control of 4 variable differential equations reactors system in the 1970’s failed to track/forecast real time pricing. He Trained thousands Taiwan, Tsinghua, Tunghai, Peking, Tsinghua, Fudan, Zechiang, University students, guidance and control to challenge the unknown future in thousands structural dynamic models development, implementation. 20 years information knowledge base, He patented “ Improve Process by OSA” in US and 82 countries, 1980, published thousands articles 100 million copies on Taiwan and China government, banking, finance, investment daily news papers, and on his patented Proactive structural oil price on US Oil & Gas Journal predicted global oil, gas, currency, interest, stock futures prices since 1980 . He lectured China, Taiwan, US 15 cities ( Beijing, Shanghai, Taipei, San Francisco Silicon Valley) TV, radio , OPEC petroleum ministers, executives China/global strategic investment risk management workshops to 30 million investors, banking finance executives. He predicted years/month ahead of Asian Financial crisis 1997, US asset bubble burst 2000 and current China/US asset bubbles rate hikes on 2003 and 2006 oil price from 55 to 78, gas 9- 16 and record commodities prices on China CEO workshops and his www.osawh.com website (visited by 4 million global central banks, banking, finance, corporate executives, universities. OSA Operations Simulations Analysis B. What is wrong with current macro- economic , asset pricing , risk management decisions Current macroeconomic inflation, GDP, financial econometric monetary policy, interest rate, currency, stock, bond prices forecasts models are based on statistical, probabilistic approach, reacting to past data and speculating to current news, chasing the markets, following the crowd, betting on the wrong side of interest rates, currency, stocks, derivates prices resulted trillion dollar market loss in global currency, financial, asset bubble burst crisis and corporate scandals. These models fail to identify the real causes and consequences, the structural of the problems. Macro and monetary econometrist fail to identify the excessive money supply and consumer demand, housing, wealth prices bubbles resulted inflationary pressure and rate hikes impact on equities, bond, housing, commodities, derivatives prices OSA Operations Simulations Analysis C . Proactive Structural Global Neoclassic Macro-economy- Financial, Industrial-Trade Economics Integration, Operations Simulation Analysis (OSA) Macroeconomic OSA, 40 global inflation, GDP, unemployment, Consumer, business spending Strategic Trade economic OSA investment Financial Economic OSA Import/export trade,contract/ and risk Global money supply growth, daily Spot pricing ,trade balance, early real time financial markets interest commodity futures, price warning Rates ,currency, bond, stock indices ,financial derivatives Industrial economics OSA 20 industrial sectors supply/demand , Price mechanism,cost/profile,stock, Bond and derivatives pricing OSA Operations Simulations Analysis D. Proactive Structural Dynamic Equities, Debt, Housing, Commodities Pricing for Risks, Bubbles, Crisis Early Warning OSA (What –How –Why – Timing ) Huang gave up current statistical, Monte Carlo CAPM approach 30 years ago, pioneered Proactive structural dynamic asset price OSA ( Operations Simulation Analysis) through two master hands controlling global economy and asset prices, patented 1983 in US, predicted months, years ahead last 20 years macro-economic control impact on daily asset prices and associated cost, financial, derivatives accounting, stock prices, tracking, identify month ahead accounting restatements, derivatives, investment banking speculation scandals replacing current reactive statistical CAPM models which fail to predict the dynamic impact on asset prices and bubbles OSA Operations Simulations Analysis Proactive Structural IT Industry Demand, Expansion Prices Bubbles and Scandals Mechanism OSA IT, communication downstream demand bubbles are fueled by low interest credit money supply, stock markets wealth gain which induce greedy corporate merger/acquisition inflate sales, earning speculate stock prices scandals Soaring demand for Excess money supply Excessive consumer IT upstream/downstream demand products and stock price Excessive rate, tax cuts Inflate sale, earn- Behavior Finance Excessive business ing to speculate soaring investor senti- demand stock prices ment pushing stock WCOM, Apple, UMC index new high Equities wealth gain Technical, market Competition OSA Operations Simulations Analysis Proactive Equities Market, Operational Risks OSA: Global/China Stock indices futures, derivatives price bubbles and trading volume , corporate scandal cycles early warning www.osawh.com/prod03.html tracking 40 stock indices derivatives prices making new high due to excessive money supply, lower interest rates, strong currency, hot money inflow, investor sentiments (trading volume) and scandals cycle Shanghai-Shenzhen Index, Dow Jones, Excessive money Nikkei, Hang Seng Taiwan Dax, LFT 40 supply stock indices future prices , trading volume Consumer demand investors sentiment OSA Black-Schole or OSA call/put Excessive rate, option price OSA tax cuts Business demand Corporate scandals cycle follow Strong currency stock indices boom and bust induced FDI Barring brother speculate on Nikkei Dow Jones index option loss, Guanxia on China A investor index, Fannie Mae on Dow peak sentiment China Trust on Taiwan index peak OSA Operations Simulations Analysis E. Proactive Structural GARCH integration OSA GARCH OSA Long Past, historical Proactive Structural Macro , return information financial , industrial, trade data economic system OSA integration Current/today data Current news/ Granger co-integration Squared return Causes and Casualty analysis OSA Operations Simulations Analysis Monetary policy, WTO impact on inflation, GDP growth Increasing money supply, consumer demand, rising commodity, asset prices and depreciate currency push inflation higher Macro-economic inflation export Consumer demand and GDP growth Monetary policy currency Commodity prices Business demand Foreign direct investment OSA Operations Simulations Analysis Proactive Structural Inflation, interest rate, government, corporate bond yield for Interest rate risks simulation Rising asset, commodity prices, excessive money supply led to inflation, credit tightening, rising interest rates and bond yields currency Consumer spending Interest rates, bond yield Inflation rates Money supply growth currency oil, commodity, asset prices OSA Operations Simulations Analysis Proactive Structural Global currency , RMB market forces prices mechanism simulation two master hands controlling global currency WWW.osawh.com/currency.html tracking trade surplus/deficit, interest rate spread impact on last 20 years daily 40 currencies and last 12 years RMB ( 3 to 12) Integrating into Black-Schole for US / basket of country derivatives prices hedging trade deficit/surplus Daily US dollar, RMB global exchange rates futures prices your country trade surplus/deficit Interest rate spread between US, basket country and yours OSA Operations Simulations Analysis Proactive, Structural Banking Securities insurance Regulation , credit risk early warning simulation Proactive equities, housing bubbles tracking, early warning for government regulation, banking, finance credit risks simulation, Value at Risks down to the portfolio price Equities market asset Banking nonperformance credit default Bubble price Consumer, business credit, market risks Resulted market bubble burst risks simulation Housing market asset Prices bubble Industrial sectors Business, consumer demand Asset bubbles Sentiment bubble OSA Operations Simulations Analysis Proactive Structural Energy Prices Bubble, Risks Early Warning OSA , Energy Commodities Derivatives Prices Bubbles OSA Excessive money supply, rate , tax cuts and cold weather stimulate excessive consumer, business demand for oil, gas, fuel demand, future derivatives prices bubbles which induce greedy corporate scandals Excessive money Consumer supply Gasoline demand, Crude oil, gas, price gasoline, heating oil futures, stock prices Business, Factor bubbles Excessive rate Fuel demand Black-Schole call/put option tax cuts price Oil, gas, energy Extreme cold Home heating derivatives trading loss weather and scandals oil demand Enron,China Aviation Oil OSA Operations Simulations Analysis Causes, onset, recovery of financial ,currency energy banking, bubble burst crisis NPL loan, Risks early warning Excessive money supply and hot money inflow resulted inflation, trade deficit currency plunge, rate hike and stocks, properties prices plunge and NPL loan All leading to financial, currency, bubble burst Strong Export growth Crisis, recovery will begin until trade surplus currency rebound, interest rate cuts, stock prices rebound www.osawh.com/riskm.html Excess money supply growth foreign capital Inflow currency appreciation Runaway inflation and interest rate hike Stock prices and consumer demand plunge Export decline and currency plunge NPL Loan OSA Operations Simulations Analysis Proactive Structural China Oil ,petrochemicals demand, A/H,ADR, IPO prices performance simulation China oil upstream/downstream are well positioned, fully integrated follow Dr. Huang1991 speech to SINOPEC, Beijin on globalization, integration strategy, CNOOC, SINOPEC, PetroChina stock prices doubled , but downstream suffered by soaring oil prices) stock price soaring 6 times since Dr. Huang recommendation in Beijing workshops 2001, Taipei, 2002 Oils, heating oil, gasoline , Consumer, business spending petrochemical, plastics prices Profit margin, stocks simulation Currency Stock indices Oil, petrochemical feedstock costs OSA Operations Simulations Analysis Proactive investment banking: Economic, Banking, Finance, Enterprises reform, privatization MBO and IPO, ADR Prices OSA Privatization, board members organization, debt restructuring. Maximize corporate/plant wide cost, financial accounting tracking, operating profit margin through cost reduction and products, market innovation develop, implemented by goal, mission, performance oriented strategic (top management), and executive Operations Simulation Analysis teams maximize China, US oil, gas corporate performances and IPO stock prices in MBO/IPO prices =F (listed market investor sentiment, and corporate profit margin) = F (Shanghai/Shenzhen index, corporate profit margin) China oil/gas ADR shares prices ( SINOPEC, PetroChina, CNOOC IPO , ADR other market prices =F (China market investor sentiment, US market investor sentiment, and corporate profit margin) = F ( Dow Jones index, Shanghai/Shenzhen index, corporate profit margin) OSA Operations Simulations Analysis Proactive Inflation, Interest rate, Derivatives Price Risks, Bond yield simulation, mortgage default scandals cycle early warning Excessive money supply Rate hikes, credit tightening, followed by rate cuts Excess consumer, business demand Excessive rate resulted inflation Black-Schole or OSA tax cuts derivatives calculation Soaring oil, Betting on the wrong Behavior finance Stocks, housing commodity prices direction of interest soaring housing , wealth bubbles rates scandals stock price bubble Fannie, Freddie Mae OSA Operations Simulations Analysis Proactive Structural Housing Prices Bubble, MBA Securitization, Interest Rates Derivatives Mechanism, Scandal Cycles OSA Housing, properties MBS bubbles are fueled by low interest credit money supply, stock markets wealth gain which induce greedy corporate scandals Money supply growth Housing, Land, Stock prices bubbles, wealth gain OSA Low mortgage interest Housing, mortgage Mortgage Securitization default models Credit derivatives Derivatives mis-pricing Stock market wealth corporate scandals US Fannie Mae, stock indices gain scandals OSA Operations Simulations Analysis Strategic Proactive, Structural QFII and QDII investment market risk management early warning Two master hands controlling China and global economy and industrial sectors profitability and stock prices for QFII/QDII asset allocation, wealth management investment strategy, risk control avoid chasing the markets trillion dollars loss Domestic and global market interest rate, Money supply, interest rates currency prices, equities, commodity price risks simulation Currency exchange rates Industrial sectors asset prices Investors sentiments bubble, profit margin simulation OSA Operations Simulations Analysis Daily Dow Jones Index Future Simulation OSA Operations Simulations Analysis Daily Hang Seng index future OSA Hong kong money supply OSA Operations Simulations Analysis OSA Tokyo Nikkei Index Forecast OSA Operations Simulations Analysis Wuhan steel call warrant OSA OSA Operations Simulations Analysis Wuhan steel put warrant OSA OSA Operations Simulations Analysis Crude oil future prices forecast OSA Operations Simulations Analysis Conclutions and Recommendation OSA simulators predicted 6 month ahead the monetary, economic, fiscal policy, WTO impact on macro-economic control, capital market asset prices to achieve sustainable profit growth and prices stability Monetary , economic, fiscal policy, WTO impact on China capital markets asset prices simulation, early warning is the key to sustainable profit growth supporting strategic China banking, finance, enterprises reform. Monetary , economic, fiscal policy, WTO impact on China capital markets asset prices simulation, early warning avoided trillion dollar market loss due to current Chasing the markets, speculation on technical charts, market, business, economic data. It provide QFII, QDII rational, reliable decision investment and risk management decision tools in asset allocation, wealth management Thousand strategic structural dynamic OSA models tracking China and global economic and daily capital market asset prices supporting China and global capital market decision makers through in-house workshops, corporate memberships and full banking, finance, enterprises reform, change management OSA program OSA Operations Simulations Analysis Conclusions and Recommendation Huang’s proactive OSA simulators predicted 6 months ahead in last 20 years global/China monetary, economic, fiscal policy, WTO impact on macro-economic, capital market assets, derivatives prices, financial crisis, credit, market, operational risks and corporate scandals cycles Zhang’s experience in integrating these simulators into new generation CPA/CFA training tracking ahead the corporate scandal will be valuable to banking, finance, enterprise corporate governance internal auditing control and government oversight board, securities, banking, insurance regulation, supervision decision tools, to avoid current reactive statistical asset prices resulted trillion dollar loss and billion dollar share holder interest damages.