Cover
Title Page
Chapters' Outline
1. Acknowledgments
Motivation
1. Our Approach
2. References
About the Authors
1 Globalization
1. Motivation
2. 1.1 Introduction
3. 1.2 Trend and Challenges in Global Finance
4. 1.3 Global Finance and Trade in the Media and News
5. 1.4 Global Risks
6. 1.5 Global Finance, Swaps and Financial Products
7. 1.6 Currencies and Liquidity
8. 1.7 Foreign Exchange Regime and Markets, Global Payment, and Reserve Currency
9. 1.8 Trade Incentives and Repression
10. 1.9 Historical Evolution
11. 1.10 Archaic and Modern Globalization: A Time Path
12. 1.11 Discussions on Global Issues
13. References
2 Data, Measurements, and Global Finance
1. Motivation
2. 2.1 Data and Models
3. 2.2 Global Finance, Data Reduction, and Statistical Measurements
4. 2.3 Volatility and Implied Models Estimates
5. 2.4 Stochastic Models
6. 2.5 Multivariate Probability Models
7. 2.6 Statistical Data Reduction
8. 2.7 Complexity: The Global Risk Finance Scourge
9. 2.8 Discussion
10. References
3 Global Finance
1. Motivation
2. 3.1 Introduction: Financial Models and Pricing
3. 3.2 Review: Elements of Utility and Risk
4. 3.3 The Utility of Consumption and its Price
5. 3.4 The Capital Asset Pricing Model
6. 3.5 Review of Elements of Arrow–Debreu and Q Pricing
7. 3.6 The Multi‐Period Consumption‐Based Capital Asset Pricing Model
8. 3.7 Thought Experiments
9. References
4 Macroeconomics, Foreign Exchange, and Global Finance
1. Motivation
2. 4.1 Introduction
3. 4.2 Fundamental Macroeconomic Models
4. 4.3 Balance of Payments Accounts
5. 4.4 The Mundell and Fleming Model: IS–LM–BOP Model
6. 4.5 Macroeconomic Factors Reshaping Global Outlook
7. 4.6 Conclusion
8. References
5 Foreign Exchange Models and Prices
1. Motivation
2. 5.1 Introduction
3. 5.2 Macroeconomic Models of Foreign Exchange Rates
4. 5.3 Exchange Rates and Purchasing Power Parity
5. 5.4 Foreign Exchange Rates and Interest Rates: The Assets Approach
6. 5.5 Demand and Supply of Money and Exchange Rates: Monetary Approach
7. 5.6 Extensions of the Models
8. 5.7 Conclusions
9. Appendix 5.A: Suggested Empirical Work for Econometric and Statistical Analysis
10. References
6 Asia
1. Motivation
2. 6.1 Introduction
3. 6.2 Driving Engines of Economic Growth in Asia
4. 6.3 Financial Sector Development in Asia
5. 6.4 Risks of Investing in Asia
6. 6.5 Financial Development in China
7. 6.6 Finance in Japan
8. 6.7 Conclusion
9. References
7 Financial Currency Pricing, Swaps, Derivatives, and Complete Markets
1. Motivation
2. 7.1 Introduction
3. 7.2 The Consumption Price Index and Foreign Exchange in Complete Financial Markets
4. 7.3 A Generalized Consumption Price Index Foreign Exchange Pricing Model
5. 7.4 Relative and Foreign Exchange Basket Price Tracking
6. 7.5 Options Pricing: Applications and Examples
7. 7.6 Spread and Two‐Factor Options
8. 7.7 Optional Trading Strategies
9. 7.8 The Greeks and Financial Risk Management
10. Appendix 7.A: Mathematical Review
11. 7.A.2 The Feynman–Kac Formula
12. 7.A.3 Stochastic Integral and Quadratic Variations (Benhamou, 2007)
13. 7.A.4 Pricing, the Radon–Nykodim Derivative and Girsanov Theorem
14. 7.A.5 Reducing a Dependent Vector to be Independent
15. References
8 Credit Risk and International Debt
1. Motivation
2. 8.1 Introduction
3. 8.2 Growth of Debt and Debt Dependency
4. 8.3 Foreign Exchange is a Credit Bestowed to a Sovereign Entity
5. 8.4 Credit and Global Risks
6. 8.5 Credit Risk, Credit Derivatives, and Credit Default Swaps
7. 8.6 Swaps
8. 8.7 Credit Default Swaps and Securitized Volatility
9. 8.8 Pricing Credit Risk
10. 8.9 Debt, The Merton Model, and Default
11. References
9 Globalization and Trade
1. Motivation
2. 9.1 Introduction
3. 9.2 Tracking Trade and Globalization
4. 9.3 Strategic Trade and Gating
5. 9.4 A Multi‐Country Utility of Financial Consumption
6. 9.5 The Demand Sector and its Supply
7. 9.6 Conclusions
8. References
10 Compliance and Financial Regulation
1. Motivation
2. 10.1 Introduction
3. 10.2 Regulation Risks
4. 10.3 Regulation, Technology, and Compliance
5. 10.4 Statistical and Compliance Risks
6. 10.5 A Multivariate Bernoulli Compliance and Audits
7. 10.6 Regulation and Compliance Games
8. 10.7 Satisficing Games and Regulation–Compliance
9. 10.8 Conclusion
10. Appendix 10.A: Games, Risk and Uncertainty
11. Appendix 10.B: Concepts of Games and Risk
12. References
Index
End User License Agreement

List of Tables

Chapter 01
1. Table 1.1 Import tariffs on agricultural products (%).
2. Table 1.2 Classification of exchange rate regimes (as of July, 2016).
3. Table 1.3 The world’s top 10 non‐financial TNCs, ranked by foreign assets, 2015.
4. Table 1.4 The largest 10 banks in the world.
Chapter 02
1. Table 2.1 National accounts and international macroeconomic indicators.
2. Table 2.2 Correlations between exchange rates.
3. Table 2.3 Statistical summary of FX (1995–2016).
4. Table 2.4 Statistical summary of daily return for FX rates (1995–2016).
5. Table 2.5 The LM test used for testing the ARCH effects.
6. Table 2.6 ARCH(1) estimation.
7. Table 2.7 GARCH(1,1) estimation.
8. Table 2.8 T‐GARCH(1,1) estimation.
9. Table 2.9 M‐GARCH(1,1) estimation.
10. Table 2.10 Bivariate Bernoulli in terms of controls and compliance.
11. Table 2.11 Bivariate Bernoulli audit and compliance.
Chapter 04
1. Table 4.1 Structure of the BOP accounts.
2. Table 4.2 China’s BOP with selected sub‐accounts (USD billion).
3. Table 4.3 Cross‐border M&A (top five industries).
4. Table 4.4 Macroeconomic factors shaping global economy and finance (2014–2015).
Chapter 05
1. Table 5.1 Summary statistics for relative PPP.
2. Table 5.2 Regression results of relative PPP.
3. Table 5.3 Example on covered interest arbitrage.
4. Table 5.4 Asset and monetary approaches for the FX determination.
Chapter 06
1. Table 6.1 Asia’s trade within Asia, with the EU, and with the USA; 1990 versus 2015 (billion USD).
2. Table 6.2 FDI and value of cross‐border M&As in Asia (billion USD).
3. Table 6.3 Ranking of Asian banks in the world’s safest banks (2016).
4. Table 6.4 Standard deviation of FX (%, monthly percentage changes).
5. Table 6.5 Correlation of exchange rate of Asian currencies (percentage monthly change), 2011–2015.
6. Table 6.6 Average returns and standard deviations on Asian indexes.
7. Table 6.7 Correlation between Asian indexes (monthly returns denominated in USD, 2000–2015 March).
8. Table 6.8 A summary statistics of portfolio assets denominated in USD.
9. Table 6.9 Correlation.
10. Table 6.10 Portfolio’s expected returns and portfolio volatility.
11. Table 6.11 Indicators at end of fourth quarter of commercial banking institutions in China.
12. Table 6.12 Performance of industrial enterprises in China.
Chapter 07
1. Table 7.1 Asian and US indexes.
2. Table 7.2 Asian country betas (monthly returns in Asian indexes denominated in USD, 2000–2014).
3. Table 7.3 Regression results for the USA and China (dependent variable: log(USDCNY)).
4. Table 7.4 Regression results for different countries.
Chapter 08
1. Table 8.1 Foreign claims of reporting banks on counterparty country (outstanding amount as of end of 2015, in billion USD).
2. Table 8.2 Government consolidated gross debt in the EU and correlation.
3. Table 8.3 Selected sovereign currency defaults.
4. Table 8.4 Sovereign credit ratings (long term) and government bonds.
Chapter 09
1. Table 9.1 Evolution of trade shares of developed, developing, and transition economies.
Chapter 10
1. Table 10.1 Compliance and inspection.
2. Table 10.2 Probabilities for the regulation dependence case.
3. Table 10.3 Type II errors.
4. Table 10.4 The (FF, regulator) payoff matrix.
5. Table 10.5 The (polluter, regulator) risk‐neutral payoff matrix.

List of Illustrations

Chapter 01
1. Figure 1.1 Global finance: geopolitical, economic, and financial.
2. Figure 1.2 Globalization trend (KOF overall globalization index).
3. Figure 1.3 SOE employees as of 2012.
4. Figure 1.4 Interconnected financial–economic–geopolitical system under globalization and gating.
5. Figure 1.5 Global OTC derivatives contracts (semiannual outstanding gross market value).
6. Figure 1.6 The IMF basket of currencies (composition of the special drawing right (SDR) basket by currency weight).
7. Figure 1.7 Global FX market turnover by instruments and by currencies (1998–2016). Note: top traded currencies include the USD, EUR, JPY, GBP, Australian dollar (AUD), and others including the Swiss franc (CHF), the Canadian dollar (CAD), the Mexican peso (MXN), and the CNY. Turnovers are expressed in billions of USD.
8. Figure 1.8 Composition and trends in accumulation of official FX reserves.
9. Figure 1.9 Exchange rate of emerging currencies, per USD (January 2007–January 2017).
10. Figure 1.10 The growth of GDP per capita.
11. Figure 1.11 The evolution of the Chinese yuan spot exchange rate, per USD (1981–January 2017).
Chapter 02
1. Figure 2.1 Statistical versus data analytic approaches.
2. Figure 2.2 The Guttman approach.
3. Figure 2.3 Data set of stock exchanges.
4. Figure 2.4 Volatility of return for JPY/USD and GBP/USD.
5. Figure 2.5 Autocorrelation of squared returns, $/JPY.
6. Figure 2.6 Conditional variance from ARCH and GARCH models for JPY and GBP.
Chapter 04
1. Figure 4.1 Fiscal and monetary policies under IS–LM model: (a) fiscal policy (expansionary); (b) monetary policy (expansionary).
2. Figure 4.2 Money (financial) market: (a) a shift in money demand curve; (b) a shift in money supply curve.
3. Figure 4.3 GDP Composition in the USA.
4. Figure 4.4 Credit and debit entries, and current account and financial accounts.
5. Figure 4.5 Trends in global imbalances (CA, net FA).
6. Figure 4.6 IS–LM–BOP model under fixed FX Rate (different capital K mobility).
7. Figure 4.7 Macroeconomic policies’ effects under floating FX rate (perfect capital mobility): (a) fiscal policy; (b) monetary policy.
8. Figure 4.8 FDI home and host regions.
9. Figure 4.9 Cross border M&A by country (sales and purchases).
10. Figure 4.10 External debt stock‐to‐GDP ratios.
11. Figure 4.11 Yield on 10‐year government bonds.
12. Figure 4.12 Effects of the strong US dollar on the US and world economy.
13. Figure 4.13 USD index and commodity index movements.
14. Figure 4.14 Income inequality (Gini coefficients) and globalization (KOF index).
Chapter 05
1. Figure 5.1 Exchange rate and inflation differentials, annual (1991–2014).
2. Figure 5.2 Macro factors driving FX prices.
3. Figure 5.3 Derivation of the FX rate from the money market.
4. Figure 5.4 Relative productivity, wages, prices, and exchange rates.
5. Figure 5.5 Monetary policy under Dornbusch overshooting model.
Chapter 06
1. Figure 6.1 Exchange rate (local currency per USD, 1995–January 2017).
2. Figure 6.2 Nominal effective and real effective exchange rates in Asia (2007–2016).
3. Figure 6.3 Financial assets in deposit‐taking and non-bank financial corporations (excluding central bank).
4. Figure 6.4 Profitability, capital adequacy, asset quality, and liquidity of deposit taking institutions in Asia.
5. Figure 6.5 Expansion of local currency bond markets in Asia (as percentage of GDP).
6. Figure 6.6 Foreign currency bond markets in Asia.
7. Figure 6.7 Stock market capitalization, 2015.
8. Figure 6.8 Stock market development in Asia (market capitalization, total value of stocks traded as % of GDP, stocks traded turnover ratio).
9. Figure 6.9 Portfolio’s expected return, portfolio volatility, and correlation.
10. Figure 6.10 Credits in China (funds raised, newly increased aggregate financing).
11. Figure 6.11 Growing industrial enterprises in China (gross industrial output and industrial profit).
12. Figure 6.12 Stock market in China (market capitalization and capital raised).
13. Figure 6.13 Stock market performance in China (daily indexes, 2006–January 2017).
14. Figure 6.14 Banking sector in Japan (total assets and liabilities of all banks).
15. Figure 6.15 Corporate retained earnings and dividend yields.
16. Figure 6.16 Return on equity in Japan.
17. Figure 6.17 Japanese financial markets’ performance (government bond yield (10‐year), exchange rate, Nikkei 225, 1990–January 2017).
Chapter 08
1. Figure 8.1 Growth of debt in the EU and globalization (government consolidated gross debt and net external debt).
2. Figure 8.2 Growth of regional external debt as share of GDP.
3. Figure 8.3 Country risk indicators and ranking (2015) by Business Monitor International Ltd (http://www.bmiresearch.com).
4. Figure 8.4 The evolution of FX rates (currency of the country per US dollar; 1995–January 2017).
5. Figure 8.5 Sovereign credit rating factors used by S&P.
6. Figure 8.6 CDSs spreads, 5‐year (bps), January 2008–January 2017.
7. Figure 8.7 CDS spread curves (term structure).
Chapter 09
1. Figure 9.1 Merchandise trade trends.
2. Figure 9.2 The business of trade: many factors, many challenges.
3. Figure 9.3 Economic globalization trends with actual flows and restrictions.
4. Figure 9.4 Indexes on international trade freedom, tariff and regulatory trade barriers, and control on capital and people movements.
5. Figure 9.5 Evolution of world tariff rates.

This edition first published 2018
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Library of Congress Cataloging‐in‐Publication Data

Names: Nyambuu, Unurjargal, 1980- author. | Tapiero, Charles S., author.
Title: Globalization, gating, and risk finance / Dr. Unurjargal Nyambuu, New York City College of Technology, The City University of New York, Dr. Charles S. Tapiero, Tandon School of Engineering, New York University.
Description: Hoboken, NJ : John Wiley & Sons, Inc., 2018. | Includes bibliographical references and index. |
Identifiers: LCCN 2017023321 (print) | LCCN 2017037256 (ebook) | ISBN 9781119252689 (pdf) | ISBN 9781119252702 (epub) | ISBN 9781119252658 (cloth : alk. paper)
Subjects: LCSH: International finance. | Financial risk management. | International trade.
Classification: LCC HG3881 (ebook) | LCC HG3881 .N885 2018 (print) | DDC 332/.042–dc23
LC record available at https://lccn.loc.gov/2017023321

Cover Design: Wiley
Cover Image: © monsitj/Gettyimages

Chapters' Outline

The book is organized as follows.

Chapter 1, Globalization: Economies in Collision, provides a broad overview by introducing a selected number of problems motivating interest in global risk finance. This chapter provides a summary of foreign exchange (FX) markets, exchange rate regimes, and the evolution of reserve currencies from a macroeconomic perspective. We discuss the emergence of the Chinese yuan as a global exchange currency, its usage in global trade, and its inclusion in the International Monetary Fund’s basket of foreign currencies. Further discussion of the yuan is relegated to subsequent chapters. Chapter 1 further outlines the history of globalization and presents a list of special issues for further discussion.

Chapter 2, Data, Measurements, and Global Finance, provides a review of standard statistical measurement approaches commonly used in economics and finance. We discuss national accounts, big data and model‐less finance, technology and financial data, and data management. Particular attention is given to multivariate data and its treatment. For example, an introduction to data reduction and statistical measurement, principle component analysis, data modeling, copulas, implied volatility, autoregressive moving average, and related multivariate probability models are presented as an approach to the modeling and the study of global financial data. Autoregressive conditional heteroscedasticity (ARCH) and its extensions (generalized ARCH (GARCH), threshold GARCH, and GARCH‐in‐mean) are suggested for the measurement of FX volatility. This chapter assumes that the reader is already familiar with basic statistical techniques and seeks only to learn their relevance for practical problems. For the further study of data analytics and statistics, an extensive list of references is given.

Chapter 3, Global Finance: Utility, Financial Consumption, and Asset Pricing, outlines microeconomic and financial approaches to financial and asset pricing models and their extensions to a multi‐country and multi‐currency world. We develop the theoretical underpinnings underlying the Arrow–Debreu theory for complete market as well as the utility theory and its consumption capital asset pricing model (CCAPM). These theories are applied to valuation pricing in competing and a multi‐agent framework. To do so, we introduce an approach based on the financial commitments to consumption. We then apply this framework to both standard and multi‐country financial pricing and investment problems. This is shown to be far more representative of global finance based on competing agents. Examples for pricing foreign bonds, investments in securities, debt management, and currency wars are also outlined. CCAPM, in its multi‐agent form, is shown to be particularly useful in pricing debt, financial leverage, inequality, swaps, and other aspects of global finance. Our tentative analyses are essentially essays which express the complexity of the pricing of financial products across national boundaries. Throughout the chapter, we introduce pricing and valuation models that are consistent with fundamental approaches, yet seek their marginal expansion to problems recurrent in global finance. The chapter’s intent is to provide a relatively simple approach to some theoretical issues that occur in both conventional and multi‐agent applications of global finance models.

Chapter 4, Macroeconomics, Foreign Exchange, and Global Finance. Global finance and international macroeconomics are intimately related to one another, yet they differ by the time scale of their statistics and by their concern with economic and financial global policies. This chapter presents several fundamental macroeconomic FX rate models required to provide a broader appreciation of global finance as well as to better predict sovereign state policies based mostly on macroeconomic statistics and political and geopolitical factors. We refer to the closed economy model introduced by Keynes and study its extension to an open economy by the Mundell–Fleming model. In this context, the implications of monetary and fiscal policies under the IS–LM–balance of payments model are discussed, describing the relationship between the goods and money markets and the balance of payments. Also, an equilibrium exchange rate determined by the demand and supply of currency is described, with further discussion on major factors affecting the exchange rate. Interactions between expenditures by the private sector, government, and transactions with foreign economies are highlighted. Their evolution underlies the relationships between cross‐border trade, capital, and job flows. We discuss the importance of balance of payments in global finance and its implications. The sustainability of external debt, trends in foreign direct investment, and capital flows are highlighted. This chapter discusses recent trends in macroeconomic policies and exchange rate movements that shape global finance. At the same time, it highlights practical policy concerns and predictable scenarios concordant with macroeconomic finance. In addition, we analyze a correlation between globalization and income inequality and present the existing literature.

Chapter 5, Foreign Exchange Models and Prices, assesses FX rate pricing based on different models for FX. Purchasing power parity is explained using an application of the law of one price (concurrent to the no‐arbitrage principle in finance) and empirical findings for its validity. Furthermore, FX rates and interest rates are studied based on covered interest arbitrage and uncovered interest parity (UIP). Monetary and asset‐based approaches to FX rate determinations are presented along with the UIP model. We cover the Balassa–Samuelson model, the Dornbusch overshooting model, and the present‐value models, all of which are outlined as extensions together with empirical evidence. A list of works for econometric and statistical analysis is suggested.

Chapter 6, Asia: Financial Environment and Risks, provides an overview of Asia’s financial and economic development, emphasizing engines of growth and implications for the global economy and finance. Included is discussion of Asia’s increasing international trade and its regional interdependence, FX rate issues, and foreign investment. We analyze the financial environment in Asia with an emphasis on the banking sector, bond market, and stock market development, and use different approaches to assess the financial and investment risks that Asia’s financial industry is facing. Based on currency data, we discuss FX risks. We also consider regional systematic risk based on local stock exchange data. In addition to the study of Eastern and South‐Eastern Asia, a detailed discussion on China and Japan is presented. In the case of China, while stressing the importance and achievements of the banking sector, we analyze the problem of shadow banking and look at challenges in equity markets, and corporate debt in particular. Econometric and statistical analyses for selected problems are provided.

Chapter 7, Financial Currency Pricing, Swaps, Derivatives, and Complete Markets, provides analysis of pricing the consumer price index and the FX‐based securities in complete financial markets using modeling as well as empirical approaches. We present both relative and martingale‐based FX models with an emphasis on risks and approaches found in US currency indices, global index reversion, the Ricatti FX model, and basket‐based price reversion. We introduce a partial generalization by considering multivariate stochastic models and outline mean‐reverting volatility‐based models. Given the extensive use of options in finance, we assess their use only through some simple examples pertaining to FX options, cross‐national boundary investments, and so on. The currency option pricing models and their applications are presented with further examples using spreads and other options (with references directing the reader to the extremely rich family of optional models). Furthermore, we look at option‐based trading strategies, emphasizing protective puts, foreign trading, the covered call, and others. Finally, this chapter presents the, so‐called, Greek analysis, which measures the sensitivity of option prices to parameters defining the price (e.g., interest rates, volatility). Although, in a global and heterogeneous economic world, “assumed complete markets” may in fact be incomplete, we note that the complete market framework may also be used to price specific and tailor‐made financial products adapted to the needs of international financial transactions. To this purpose, we have also introduced swaps and some of their applications. More detailed developments and applications of swaps, accounting for a substantial part of foreign transactions, are introduced in Chapter 8, where loan‐debt contracts are also defined as swaps.

Chapter 8, Credit Risk and International Debt, presents the growth of debt and debt dependency, highlighting both credit and global risks. This chapter analyzes country‐specific risks, FX risks, credit trading, sovereign bond risks, as well as credit derivatives. In this context, different swaps (e.g., currency swaps, swaptions, credit default swaps, and securitized volatility) are defined and explained. This is important because, under assumptions of complete markets, option‐based products (e.g., swaptions) are used extensively in global financial exchanges. We present credit and default risk pricing based on reduced‐form models. Under this framework, bond prices are defined by the financial market in which they are traded. Then, we consider foreign bonds issued in a foreign currency as a pointer to the risk of bonds compounded by FX risk and extend this idea through the use of martingales. The utility approach is used to price and manage international credit risk and its option‐based derivatives. Finally, this chapter describes the Merton debt model and its relationship to FX markets; it provides an example of the market pricing of both debt and credit risk and outlines Merton’s continuous‐time model for debt and options.

Chapter 9, Globalization and Trade: A Changing World, provides an overview of the evolution of trade based on conventional approaches, as well as its financial and gating aspects. We highlight the importance of trade in globalization and discuss its contributions to the changing world by analyzing its risks and other related issues; for example, inversion, outsourcing, risk externalities, strategic trade and gating, and trade barriers. This chapter reviews trade models based on Ricardo’s theory and the implications of trade models for FX rates in a Cournot game. We introduce a strategic global and financial pricing approach to heterogeneous (and competing) agents (financial agents or countries) based on dependent utilities as well as competing suppliers. Therefore, our multi‐country financial consumption approach is presented starting with a one‐period utility consumption demand model integrated with a supply problem including imports and exports between two parties. Extensions to a Cournot multi‐period financial consumption model accounting for both current and future consumption are, for brevity, considered in research papers we refer to. Owing to their complexity, the problems defined are relatively simple, providing a guideline for the development of a far more complex trade model that can be analyzed using simulation techniques. In this context, this chapter outlines our belief that essential issues underlying globalization (for the “rich” Western world, in particular) are their relationships between local consumption prices and strategic (game) problems fueled by cheap imports, the creation/loss of jobs, foreign dependence and the pursuit of short‐ and long‐term political and geopolitical agendas.

Chapter 10, Compliance and Financial Regulation. Given the complex, growing, multi‐headed, and multi‐country financial and economic regulatory environment, this chapter is focused on compliance risks. A current trend, initiated by the USA, to regulate and tax globally will most likely lead to retaliatory actions by other countries. These retaliatory actions assume many forms; for example, creating competing markets where US laws cannot be enforced, a move away from the US dollar as the main exchange currency, stealthy finance seeking to elude controls, and so on. These and other new elements in global finance are having an impact which may be difficult to ascertain. Justice Stephen Breyer, in his book The Court of the World: American Law and the New Global Realities, raised some fundamental issues confronting the US legal framework and the future of democracy. One specific question he raised is, “Does foreign law have a place in interpreting the American Constitution?” Such a question is most relevant to almost all aspects of sovereign states’ exchanges and relationships and, as a result, the world of global business and finance. On the one hand, legal isolationism would entail a USA divorced from the world; on the other hand, globalization renders foreign laws and international affairs simply unavoidable. From a practical viewpoint, regulated finance, both domestic and global, is confronted with an application of laws and asks “How do we comply?” and “Can we comply in a multi‐polar world, with sovereign states and regulators pursuing multiple agendas?” These are complex questions that this chapter avoids. Instead, we introduce some of the issues and problems; we provide a partial view that emphasizes compliance in light of regulatory risks and their controls. We also point to the increased complexity of regulatory risks and compliance in a global, gated, and strategic finance. A number of quantitative and statistical compliance models are introduced based both on statistical and (random payoff) game constructs, raising a greater awareness of regulation and compliance risks and the consequences of these risks.

Although this book spans a wide breadth of problems, it is far from being exhaustive. The number of books and research papers that relate to the themes of study and featured in important international economics and financial journals, as well as those found in mathematical and quantitative finance and engineering books, is much larger. Our contribution seeks to create a greater awareness to the transformation of finance in an era confronting globalization and its gating and introduce their effects to financial pricing, trade, and compliance. In addition, we hope to provide the reader rational guidelines to economic and financial modeling in a global environment.

Acknowledgments

This book has profited from contributions from both authors' previous publications in academic journals and in books published by John Wiley & Sons, Springer, Elsevier, and others. In addition, we have referred, wherever we could, to our and others' many academic and professional publications that have addressed global finance from multiple perspectives. We apologize to those we missed and did not refer to. Throughout our research, we have benefitted from discussions with a number of students, academic researchers and practitioners. There may be too many to list, but among the many we thank Alain Bensoussan, Lucas Bernard, Dan Goroff, Ben Golub, Laurent Jacque, Konstantin Kogan, Peter Lewis, George Papanicolaou, Lorne Switzer, Pierre Vallois and three additional Tapieros: Daniel, Dafna and Oren, who are all immersed in real and global finance. Finally, Prof. Tapiero’s involvement was supported by the endowment of the Topfer Chair and by the Sloan Foundation (for its support for the Regulation Chapter 10). To all we acknowledge our gratitude.