486 Proceedigs of the 8th Iteratioal Coferece o Iovatio & Maagemet Research o the Ris Maagemet Model of Developmet Fiace i Chia Zou Huixia, Jiag Ligwei Ecoomics ad Maagemet School, Wuha Uiversity, Wuha, P. R. Chia, 430072 (E-mail: hxzou@126.com, giraffejiag@qq.com) Abstract: Ris maagemet i developmet fiace is a importat issue, but the liear operatio model of developmet fiace i Chia is ot coducive to ris maagemet. The spiral operatio model provides a method of prevetive ris maagemet. This model maes liear operatio model ito three-stage spiral cycle process which icludes the Govermet chose the project import, developmet fiace icubator ad to achieve the maret export. Ad ris assessmet should be carried out before the start of each stage, accordig to the results to decide whether to cotiue to ivest. The operatio process ad ris characteristics of this model have the characteristics of compoud real optios; therefore it ca be used to improve decisio-maig flexibility, reduce ivestmet ris by variable volatility of compoud real optios. Key words: Developmet fiace; Spiral operatio model; Ris maagemet; Real optio 1 Itroductio Developmet fiace is a fiacial form, which is a fiacial istitutio (usually ba) established by sigle or states with the atioal credit, to provide log-term credit for the specific eeds, at the same time to accelerate ecoomic developmet ad achieve log-term ecoomic growth ad the other govermet targets by buildig marets ad improvig system [1]. I the existig research results, Li (2005) propose a basic framewor for developmet fiacial operatios, which icludes Credit iput mechaism, the project loa maagemet ad repaymet mechaism [2]. Wu (2009) believes that govermet cooperatio is the foudatio, loas assistace istitutios ad platform costructig are meas, ris-sharig ad compesatio is security, these costitute the developmet fiace operatio mechaism which support the developmet of couty ad rural SMEs, ad he evaluates the effect of the operatio of the mechaism [3]. Ouyag (2009) build a developmet fiacial istitutio compliace ris maagemet system which icludes compliace ris idetificatio, compliace ris assessmet, compliace ris cotrol, compliace ris moitorig ad compliace ris reportig, based o the compliace ris maagemet model, ad maes recommedatios o the costructio of mechaisms [4]. Xie (2010) taes Beibu Gulf Ecoomic Zoe as a example, desigs a operatio mechaism of veture capital fud maret developmet supported by developmet fiace, which icludes veture capital ivestmet mechaism, the project evaluatio ad decisio-maig mechaism, ris maagemet mechaism, veture capital exit mechaism ad implemetig process protectio mechaism [5]. The special historical missio ad operatioal characteristics of developmet fiace determie the specific riss it face, so ris maagemet has become the focus should be cosidered i the course of its operatio. However, there is o research result of developmet fiace operatio model i Chia from the perspective of ris maagemet. The existig researches ca t meet the practical eeds, so this article studies developmet fiace operatio model from the perspective of ris maagemet, ad real optios approach solves the developmet fiace ris maagemet related issues by itroducig. 2 The Operatio Model of Developmet Fiace i Chia ad Its Defects The operatio model of developmet fiace i Chia ca be summarized as the Govermet chose the project import - developmet fiace icubator - to achieve the maret export, show i Figure 1. The Govermet chose the project import meas local govermet i accordace with the atioal idustrial policy ad strategic plaig i the regio eed to itegrate iteral resources, select ad idetify projects recommeded applyig developmet fiace loas. Developmet fiace istitutios based o regioal ecoomic developmet level, fiacial reveue ad expediture levels, compliace ad credit situatio to determie the total loa. Developmet fiace icubator meas to promote the project ad marets costructio, to improve the buildig of goverace, legal, cash flow This paper is supported by the Fudametal Research Fuds for the Cetral Uiversities
Proceedigs of the 8th Iteratioal Coferece o Iovatio & Maagemet 487 ad credit (four-buildig) uder the coordiatio of the govermet ad by fiace. To achieve the maret export meas based o the progress of the four-buildig, developmet fiace istitutio desigs pay mechaisms accordig with the loa ature, purpose ad use, such as geeral credit repaymet, paret repo ad issuace of shares or bods i the capital maret. Figure 1 The Operatio Model of Developmet Fiace i Chia Figure 1 ca be clearly see, the existig operatio model is a straight operatig mode which the capital flow from govermet to maret, the three stages divisio of model also implies that oly whe the ed of the previous stage, the ext stage ca begi. This model exists the followig questios i ris maagemet: (1) All stages of the model idepedet of each other, ad did t form a uified whole. Differet stages by differet mai resposible for, each stage separately ad did ot form a good commuicatio ad coordiatio mechaism. This leads to high coordiatio costs ad low coordiatio efficiecy, while icreasig the riss. (2) The existig model did ot cosider ris maagemet issues. Various stages of developmet fiace are at ris. If a stage does ot hadle the ris, the ris of damagig although ot ecessarily show i the curret period, but there may be show i the ext eve ext two stages. Oce the ris impact the project, the impact is ofte devastatig. The existig operatio model has this defect i ris maagemet. (3) The assumptios of developmet fiace operatio are ot realistic. Curret operatig model is a sigle-period, liear model, but i the actual wor is ot so. For example, previous successful experieces ad models may affect the evaluatio of similar ivestmets this stage, the chage of participats capabilities may affect the project success rate at differet stage. 3 The Spiral Operatio Model of Developmet Fiace Through the above aalysis we ca see, due to iheret defects i the existig operatio mechaism, ivestmet with this model results are ofte ot satisfactory, especially i ris maagemet. I order to solve the problems of liear order model, cosiderig the actual operatio process of developmet fiace ad its ris, the spiral operatio model ca be used to explai the operatig model of developmet fiace ad to explore how its ris maagemet. The spiral operatio model divides the process of developmet fiace ito several stages, as show i Figure 2. Import Ⅲ Ris maagemet Ris maagemet Start Icubator Ris maagemet Export Figure 2 The Spiral Operatio Model of Developmet Fiace i Chia Show i Figure 2, the spiral operatio model begis with project start, ru couterclocwise, by the govermet chose the project import, developmet fiace icubator ad to achieve the maret export stage three tass, the retur to the import. Sice the the parameters of developmet fiace master more iformatio marets ad has accumulated experiece ad capital i the previous stage, therefore, each participat has a higher capacity i this stage. The spiral operatio model etre ito import, icubator ad export, a higher level of recyclig process, ad will
488 Proceedigs of the 8th Iteratioal Coferece o Iovatio & Maagemet cotiue the cycle cotiues util the project is termiated. It should be oted that this model is geerally; i the operatio process of developmet fiace will be special case. For example, over time, developmet fiace istitutios mastered more ad more rich iformatio o ivestmet projects, ad projects ris assessmet results more accurately, developmet fiace istitutios may decide to re-evaluatio of ivestmet projects or eve to stop the ivestmet because ivestmet ris is greater tha previously estimated. At this poit, ivestmet projects may retur to the govermet chose the project import, ad caot eter ito the maret export ". Therefore, i practical applicatio, Stage of the model should be adjusted accordig to actual situatio. The spiral operatio model actually provides a method of prevetive ris maagemet. It ca be see from Figure 2, there is a zoe betwee each stage, ad ris maagemet will be coducted i this zoe. This ris maagemet method emphasizes that ris aalysis should be carried out i each stage of the spiral operatio model, reducig the probability of ris occurrece ad the losses caused by ris rather tha taig remedial measures after the ris occurred. 4 The Aalysis o the Spiral Operatio Model Based o Real Optio Real optio theory suggests that maagers should wait uder coditios of ucertaity, mae decisios or implemet projects at various stages util the situatio clarified or coditios became more mature. I this way, maagers ca decide whether to cotiue or abado the project i the follow-up stage, ad avoid excessive riss which cause by a oe-time ivestmet [6]. Compared with the traditioal operatio model, the spiral operatio model has a clearer real optio meas. Real optio theory provides a powerful laguage tool to explai its meaig ad essece. The start ad ed time is a basic problem of the spiral operatio model. I this regard, based o the operatio mechaism of developmet fiace, the basic assumptios made that if the developmet fiace operatios ca promote the realizatio of the iteded target, start the ivestmet process; if it ca t, termiatio of spiral process (cacel ivestmet). For example, whe great chages i iteratioal eviromet led to project difficulties, the project should be caceled. The spiral operatio model requires testig this hypothesis at the begiig of each iteratio cycle i order to decide whether to cotiue ivestmet. Therefore, the spiral model of developmet fiace is a set sequece of decisio-maig, the equivalet of a multi-stage compoud optio. From Figure 2 we ca see, due to the developmet fiace operatio is usually divided ito a series of differet stages, each level of ris is differet ad variable volatility of compoud optios ca describe the ris characteristics of developmet fiace spiral operatio process better, therefore itroduced variable volatility of compoud real optios model of the spiral operatio model aalysis [7]. Assumig a developmet fiace project iteratios, t (=0, 1,, ) meas the decisio time of cycle. I ay decisio poit, whe the basic assumptio fouded (the optio value is higher tha the cost of time ivestmet) start the ext iteratio cycle, otherwise abado the project. Repeat this process util the operatio eded. I meas Ivestmet cost of each cycle, V (+1) (t)(=0,, -1) meas the value of the uderlyig assets i the stage, time t(t [t,t +1 ]), Suppose V ( +1) (t) subject to the followig process: dv ( + 1) / V ( + 1) = α ( + 1) dt + σ ( + 1) dz (1) Where, α (+1) ad σ (+1) deote the istataeous expected retur ad expected volatility of the istataeous, dz meas Stadard Wieer Process ad var(d z,d z )=0(, =0,1,,-1; ). Assumig that α ( + 1) ad σ ( + 1) may chage with, use this to describe the value of the uderlyig asset has differet ris-retur characteristics i differet stage. Ay stage real optio value (F ) is derived by cotiget claims aalysis (CCA) method, F (V (+1),t)(=0,,-1;t [t,t +1 ]) should satisfy the equatio: 2 F 1 2 2 F F ( ) (2) + σ V + r δ V rf = 0,( = 0,, 1) t 2 ( + 1) ( + 1) 2 ( + 1) ( + 1) V V ( + 1) ( + 1) I volatility of compoud real optios, there is compoud relatioship betwee previous optios ad the late, the termial coditios ad boudary coditios are differet from each other. First, cosider the fial stage, F -1 ca be see as a Europea call optio o the subject project, so the termial coditio is: F 1, T ) = max I 0, ) (3) Whe the value of uderlyig asset is 0, the value of the optio is 0 too. So its lower boudary coditio is:
Proceedigs of the 8th Iteratioal Coferece o Iovatio & Maagemet 489 F 1 ( 0, t ) = 0 (4) Whe the uderlyig asset value is large eough, the optios ca be cosidered almost certai to be executed, so the differece betwee the value of the optio ad the value of uderlyig asset is the discouted of the fial paymet cost. So its upper boudary coditio is: F, t ) (5) 1 ( 1) r ( T t ) V ( 1) I e 1, V ( 1) Now go bac to cosider the termial ad boudary coditios of F (=-2, -3,...,1,0). F ca be see as a Europea cotiget claims o V (+1), the latter optio F +1 effect of F, all reflected i its termial coditio: F + 1, T + 1 ) = max ( F + 1 + 1 ) I + 1,0 ) (6) The value of compoud optio icreases mootoically with the value of uderlyig assets, so the implemetatio threshold ) of the optio (F +1 ) eed to meet the equatio: F, 0 ) = I, = 0 1,,, 1 (7) Similarly, we ca mae the upper ad lower boudary coditios of F +1. Its lower boudary coditio is: F ( 0, t ) = 0 (8) Its upper boudary coditio is: F ( + 1), t ) (9) ( ) 1, V + r T + ( 1) 1 t F 0, ) I e + 1 ( + 1) + 1 The solutio area of this model is ruled half bads area(t,v (+1) ) {[t,t +1 ],[0,+ ]}, meawhile boudary coditios ad termial coditios are the first boudary coditio. Therefore, fiite differece method ca be used to solve the problem of simple ad effective 1. 5 A Example A developmet fiacial istitutio will provide a umber of $25 millio i loas for supportig the developmet of the Emergig Idustries of Strategic Importace. Accordig to the agreemet of loa, loa term for 3 years, servicig $30 millio at the ed of the third year. 5.1 The traditioal value aalysis Accordig to the traditioal operatio model of developmet fiace, $25 millio loas all ledig at the begiig of the first year (t 0 ), servicig $30 millio at the ed of the third year (t 3 ), set the ris-free rate i 0 is 5%, usig NPV computig project value: t 3 NPV = ( CI CO ) t ( 1 + i 0 ) = 250000 + 300000 ( 1 + 5% ) = 9151. 3 t = 0 5.2 The spiral operatio model value aalysis To simplify the calculatios, the spiral operatio model is divided ito three cycles i this case, each cycle lasted 1 year. As projects require start-up capital, $1 millio loa to start project firstly. Before accessig to formal credit cycle, the project should be evaluated. If the projects meet the requiremets, access to formal credit cycle. Ris Assessmet will be doe at the ed of each cycle, i order to decide whether to start the ext cycle. If cotiue, each cycle will produce $8 millio i loas. This operatio ca be see as a three-stage compoud optio. Therefore, the compoud real optio model ca be used to evaluate this project. Assumig the ris volatility of each stage is 0.5, 0.4, 0.3. The model parameters are show i Table 1. Table 1 Parameters Parameters Value The fial value of the project 300000 The ris-free rate (r=i 0 ) 5% Volatility σ (=1,2,3) [0.5,0.4,0.3] The loa amout of preparatio period 10000 The loa amout of the first cycle 80000 The loa amout of the secod cycle 80000 The loa amout of the third cycle 80000 Total cycles 3 1 The specific solutio process ca be foud i the referece 7, this paper ot to repeat them.
490 Proceedigs of the 8th Iteratioal Coferece o Iovatio & Maagemet Use these parameters ad set I =50, J=300, V ( + 1) = 0. 01, V ( + 1) = 10000 (=0,1, -1), calculate by fiite differece method, we ca get the value of the compoud optio. It s $99150. This value is far greater tha the value calculated by NPV. This differece ca be iterpreted as the optio value which cotaied i the spiral model. The spiral model suggests that decide whether to cotiue the ext cycle should cosider the results of ris aalysis, ad the threshold is oe importat idex of these results. If the estimated value of project exceeds the threshold, cotiue ivestig; if ot, cacel. The thresholds of each stage i this case are show i Table 2. For example, the threshold the first stage is $222624, if the estimated value of project is greater tha $222624, the secod cycle of the ivestmet will be doe; if ot, this project will be cacel i order to avoid greater losses. Table 2 The Thresholds of Each Stage Stage Threshold The ed of preparatory 142820 The ed of the first cycle 222624 The ed of the secod cycle 156005 It is show through the example that the spiral model gives developmet fiace istitutio greater flexibility i decisio-maig. Ris aalysis will be carried out i each stage ad whether to start the ext stage will be re-established. The spiral model reduces capital ris i the ucertai eviromet by flexible decisio-maig. 6 Coclusio (1) The existig operatio model of developmet fiace i Chia is a straight operatig model which the capital flow from govermet to maret. This model exists some questios i ris maagemet cause by all stages of the model did t form a uified whole, the existig model did ot cosider ris maagemet issues ad the assumptios of developmet fiace operatio are ot realistic. (2) The spiral operatio model of developmet fiace provides a method of prevetive ris maagemet. This model maes straight operatio model of developmet fiace ito three-stage spiral cycle process which icludes the Govermet chose the project import, developmet fiace icubator ad to achieve the maret export. Ad ris assessmet should be carried out before the start of each stage, accordig to the results to decide whether to cotiue to ivest. This improves the ability to resist riss of developmet fiace. (3) The operatio process ad ris characteristics of the spiral operatio model have the characteristics of compoud real optios, therefore variable volatility of compoud real optios ca be itroduced ito ivestmet decisio, value evaluatio ad ris maagemet of developmet fiace. Refereces [1] Joit Tas Force of Chia Developmet Ba ad Remi Uiversity of Chia. Developmet Fiace i Chia[M]. Beijig: Chia Remi Uiversity Press, 2006:75 (I Chiese) [2] Li Zhezhog. Improvig Govermetal Credit ad the CUDA of Developmet Fiacig[J]. The Agricultural Developmet ad Fiace, 2005, (8):30-33 (I Chiese) [3] Wu Zhog. The Operatio Mechaism ad Effect of Rural Costructio Supported by Developmet Fiacig[J]. 2009, (6):68-69 (I Chiese) [4] OuYag Hegfeg. Research o the Compliace Ris Maagemet Mechaism of Developmet Fiacial Istitutio[J]. Joural of Cotemporary Ecoomics, 2009, (10):130-132 (I Chiese) [5] Xie Peisha, Liu Jili. The Operatio Mechaism Desig of Veture Capital Ivestmet Fud Supported by Developmet Fiace: Taig Guagxi Beibu Gulf Ecoomic Zoe as a Example[J]. Joural of Forum o Sciece ad Techology i Chia, 2010, (3):11-15 (I Chiese) [6] Shi Jie, Zhao Rui. The Review of Real Optio[J]. Joural of Beijig Techology ad Busiess Uiversity (Social Sciece), 2008, 23(1):92-96 (I Chiese) [7] Gog Pu, He Zhiwei. Time-Depedet Volatilities Multi-Stage Compoud Real Optio Model ad Applicatio[J]. Joural of Idustrial Egieerig ad Egieerig Maagemet, 2006, 20(2):46-53 (I Chiese)