Key Points
- AI fits many use cases in finance today
- analytics, sales & cash flow forecasting, underwriting, credit decisions, product risk, AML, fraud, cyber risks, market segment trends, policy recommendations ( SLI v OKRs)
References
| Reference_description_with_linked_URLs_____________________ | NOtes___________________________________________________________ |
|---|---|
| https://www.scottaaronson.com/blog/ | Scott Aaronson - Quantum blog |
| https://medium.com/@vipinsun/quantum-supremacy-the-blockchain-2b035ecc87f9 | Vipin - Quantum computing impacts on encryption |
| Quantitative Analysis Definitions - investopedia | |
Key Concepts
Key Standards and Communities are the foundation for Digital Finance
- Always good to see growth of digital asset solutions. There are many DeFi platforms today to review.
- My focus has been on open communities engineering solutions built on open standards, trust, regulatory compliance and governance first.
- I'm continuing to track the progress on trust models, digital assets, transactions, settlements in finance ( RLN, RSN, ISO-20022 ), supply chain ( GS1 ), digital identity ( ISO 5009 ) and security & privacy ( ISO-27001, 27018, 27019 ).
- While a lot of the existing architectures need to evolve, these directions offer promising results.
- DeFi provided DAO as an organizing concept initially.
- Evolving to a flexible community model, VCC - Value Chain Communities has been helpful modeling effective, counter-party community relationships as a context for digital solutions.
Digital Finance
Citi Institutional Interoperability Report. link
Citi Institutional Interoperability Report. url
Generative AI: Unlocking its potential in finance - webinar
- Gen AI creates new solutions, results based on the LLM models and the custom problem
- works when there are common patterns in the data
- Internet content crawlers pull in specific data to specific LLM models for training / calibration
- effective when using broader data sets vs specific enterprise data sets for predictions
- PTP with Genesys IVR did custom CustomerCare voice recognition
- output = text, images, code
- Gen AI processes whole sentences and can understand context from trained models with added inputs
- Transformers were able to process sentences effective 2017
- Gen AI in healthcare can improve the quality of data collected and suggest possible strategies for a patient ( Nuance )
- Microsoft works with Tier 1 Bank solutions focusing first on apps that help their staff ( smart assistants LIKE DMX STM - Smart Trade Mgr for auto pricing )
- Fin firms will buy and build custom solutions to their software
- AI projects often meet delivery dates
- AI app areas: personal productivity on IT staff on their tasks ( before direct customer interfaces ), sales & customer service on moderately complex products ( mortgages, loans, trade finance value chain ( or some components / steps ), insurance, wealth ), software development tools ( quality and productivity )
- Governance strategies for AI
- Responsible use of AI
- Strategy add governance on top of existing governance for a solution
- How AI is regulated now
- EU AI act focus - current version ? on Gen AI - transparency on data,models,rules, registration of AI solutions, IP rules
- M365 copilot EAP - personal assistant in MSFT products
- can summarize an email details
- ask to create a response given concerns in the email etc
- start a Word doc given some other content added
- ask it to coach / improve the style of response
- Working Swift on M365 EAP
- Customer survey – 70% more productive, better work quality, saved 1/3 of time
- Advice on Gen AI rollouts
- ai tech team skills
- reuse strategies for AI component services
- focus on specific business use cases for teams
- staff first use cases before customer use cases
- internal productivity - fast time to value - ttv, low risk, 3B sourcing,
- rethink business models, processes in the VCE for automation, AI, DLT, trust impacts
- Tips
- when to use Gen AI vs custom AI
- rarely need to create custom Gen AI LLM model vs reuse and inject new data, parms
- Impact on Financial services of Gen AI - better value product w bigger audience, more personalization, compliance growth
BCS - Better Compliance Services - business partnerships - custom solutions w common services like OTI
Quantum Computing Updates
https://www.eetimes.com/document.asp?doc_id=1335027
Mitigate Credit Risk in Trade Finance_ Tools, Techniques, and Best Practices _ by Andrea Frosinini _ Aug, 2024
Mitigate Credit Risk in Trade Finance_ Tools, Techniques, and Best Practices _ by Andrea Frosinini link
credit investigations of a borrower
credit insurance
Still another essential strategy for controlling credit risk is credit insurance. This kind of insurance compensates the insured party in case of default, therefore shielding companies against non-payment. Transferring the risk to an insurance provider helps businesses protect their receivables and keep cash flow even in the case of a trade partner failing payment responsibilities. Although credit insurance costs extra, the security it provides might often exceed the cost, particularly in erratic markets or when working with new or high-risk partners.
advance payments from buyer to seller
In cases when an advance payment is not possible, partial payments or progress payments connected to particular benchmarks might provide a compromise between risk and competitiveness.
bank letter of credit lowers default risks
letter of credit — a financial instrument used by banks — guarantees payment to the seller upon goods delivery. Acting as a middleman, the bank provides a degree of security for both sides.
Using trade finance tools such as factoring and forfaiting helps control credit risk
reduces credit risk but also enhances liquidity,
A proactive way to control credit risk is to routinely evaluate credit policies, update risk assessments, and guarantee legal and regulatory compliance.
crucial are good communication and well defined contracts. Clearly stated payment terms, delivery conditions, and dispute resolution procedures help to avoid misunderstandings and offer legal action should non-payment occur.
Effective Credit Management Control
credit management program. These rules specify the conditions of credit, the standards for creditworthiness, and the steps for payment collection and monitoring.
Good credit management helps businesses to strike a balance between the necessity to control risk and safeguard their financial interests and the need to provide credit to propel development and sales.
Credit policies can define credit options to customers based on their credit classifications from internal and 3rd party services
companies should carefully evaluate the important elements of adopting portfolio risk monitoring, routinely monitoring performance measures, and embracing digitalization to simplify credit operations before using credit risk mitigating solutions
Automation helps credit teams react quickly to any changes in risk profiles by streamlining the process, lowering manual mistakes, and offering constant monitoring.
In poorly run companies, a sales team can override the finance team on finance issues
Predictive analysis can help id future credit problems - Before the order is issued, artificial intelligence may forecast forthcoming blocked orders and assist in client partial payment recovery.
Client onboarding - manual vs TYS
The simplified client onboarding procedure is also another important factor. Forming initial impressions and guaranteeing a good client experience depend on the onboarding period. Still, in many companies — especially mid-sized companies — this procedure is typically labor-intensive and laborious.
Effective credit risk reduction also depends on competent credit data aggregation.
Digitizing their credit risk management systems can help companies enjoy several advantages w event-driven policy systems
Real-time credit risk monitoring keeps companies informed about all possible hazards and possibilities, therefore helping them to spot and reduce credit risks before they become major issues. By helping to lower bad debt incidence, this proactive strategy promotes greater cash flow and financial stability
improvement of the customer experience is also another major advantage of digitization. Effective and quick client onboarding, along with transparent and simplified credit decision communication, enhances important points of contact.
Compliance - digital solutions can also help companies be more compliant with legal criteria
Managing Business, Political, Economic Risk by Country
D&B business risk themes - 2023
https://www.dnb.co.uk/perspectives/finance-credit-risk/quarterly-global-business-risk-report.html
Allianz-Trade.com
https://www.allianz-trade.com/en_US/resources/country-reports.html
Supply chain resilience by country - FM Global
Country Risk
https://www.investopedia.com/terms/c/countryrisk.asp
Potential Value Opportunities
Quantitative Analysis Definitions - investopedia
Understanding Quantitative Analysis
Quantitative analysis (QA) in finance refers to the use of mathematical and statistical techniques to analyze financial & economic data and make trading, investing, and risk management decisions.
QA starts with data collection, where quants gather a vast amount of financial data that might affect the market. This data can include anything from stock prices and company earnings to economic indicators like inflation or unemployment rates. They then use various mathematical models and statistical techniques to analyze this data, looking for trends, patterns, and potential investment opportunities. The outcome of this analysis can help investors decide where to allocate their resources to maximize returns or minimize risks.
Some key aspects of quantitative analysis in finance include:1
- Statistical analysis - this aspect of quantitative analysis involves examining data to identify trends and relationships, build predictive models, and make forecasts. Techniques used can include regression analysis, which helps in understanding relationships between variables; time series analysis, which looks at data points collected or recorded at a specific time; and Monte Carlo simulations, a mathematical technique that allows you to account for uncertainty in your analyses and forecasts. Through statistical analysis, quants can uncover insights that may not be immediately apparent, helping investors and financial analysts make more informed decisions.
- Algorithmic trading - this entails using computer algorithms to automate the trading process. Algorithms can be programmed to carry out trades based on a variety of factors such as timing, price movements, liquidity changes, and other market signals. High-frequency trading (HFT), a type of algorithmic trading, involves making a large number of trades within fractions of a second to capitalize on small price movements. This automated approach to trading can lead to more efficient and often profitable trading strategies.
- Risk modeling - risk is an inherent part of financial markets. Risk modeling involves creating mathematical models to measure and quantify various risk exposures within a portfolio. Methods used in risk modeling include Value-at-Risk (VaR) models, scenario analysis, and stress testing.3 These tools help in understanding the potential downside and uncertainties associated with different investment scenarios, aiding in better risk management and mitigation strategies.
- Derivatives pricing - derivatives are financial contracts whose value is derived from other underlying assets like stocks or bonds. Derivatives pricing involves creating mathematical models to evaluate these contracts and determine their fair prices and risk profiles. A well-known model used in this domain is the Black-Scholes model, which helps in pricing options contracts.4 Accurate derivatives pricing is crucial for investors and traders to make sound financial decisions regarding buying, selling, or hedging with derivatives.
- Portfolio optimization - This is about constructing a portfolio in such a way that it yields the highest possible expected return for a given level of risk. Techniques like Modern Portfolio Theory (MPT) are employed to find the optimal allocation of assets within a portfolio.5 By analyzing various asset classes and their expected returns, risks, and correlations, quants can suggest the best mix of investments to achieve specific financial goals while minimizing risk.
The overall goal is to use data, math, statistics, and software to make more informed financial decisions, automate processes, and ultimately generate greater risk-adjusted returns.
Quantitative analysis is widely used in central banking, algorithmic trading, hedge fund management, and investment banking activities. Quantitative analysts, employ advanced skills in programming, statistics, calculus, linear algebra etc. to execute quantitative analysis.
Quantitative Analysis vs. Qualitative Analysis
Quantitative analysis relies heavily on numerical data and mathematical models to make decisions regarding investments and financial strategies. It focuses on the measurable, objective data that can be gathered about a company or a financial instrument.
But analysts also evaluate information that is not easily quantifiable or reduced to numeric values to get a better picture of a company's performance. This important qualitative data can include reputation, regulatory insights, or employee morale. Qualitative analysis thus focuses more on understanding the underlying qualities of a company or a financial instrument, which may not be immediately quantifiable.
Quantitative isn't the opposite of qualitative analysis. They're different and often complementary philosophies. They each provide useful information for informed decisions. When used together. better decisions can be made than using either one in isolation.
Some common uses of qualitative analysis include:6
- Management Evaluation: Qualitative analysis is often better at evaluating a company's management team, their experience, and their ability to lead the company toward growth. While quantifiable metrics are useful, they often cannot capture the full picture of management's ability and potential. For example, the leadership skills, vision, and corporate culture instilled by management are intangible factors that can significantly impact a company's success, yet are difficult to measure with numbers alone.
- Industry Analysis: It also includes an analysis of the industry in which the company operates, the competition, and market conditions. For instance, it can explore how changes in technology or societal behaviors could impact the industry. Qualitative approaches can also better identify barriers to entry or exit, which can affect the level of competition and profitability within the industry.
- Brand Value and Company Reputation: The reputation of a company, its brand value, and customer loyalty are also significant factors considered in qualitative analysis. Understanding how consumers perceive the brand, their level of trust, and satisfaction can provide insights into customer loyalty and the potential for sustained revenue. This can be done through focus groups, surveys, or interviews.
- Regulatory Environment: The regulatory environment, potential legal issues, and other external factors that could impact a company are also analyzed qualitatively. Evaluating a company's compliance with relevant laws, regulations, and industry standards to ascertain its legal standing and the potential risk of legal issues. In addition, understanding a company's ethical practices and social responsibility initiatives, that can influence its relationship with stakeholders and the community at large.
Sustainable Finance Concepts
EU Sustainable Finance
https://finance.ec.europa.eu/sustainable-finance/overview-sustainable-finance_en
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Environmental considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in people and their skills and communities, as well as human rights issues. The governance of public and private institutions – including management structures, employee relations and executive remuneration – plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.
In the EU's policy context, sustainable finance is understood as finance to support economic growth while reducing pressures on the environment to help reach the climate- and environmental objectives of the European Green Deal, taking into account social and governance aspects. Sustainable finance also encompasses transparency when it comes to risks related to ESG factors that may have an impact on the financial system, and the mitigation of such risks through the appropriate governance of financial and corporate actors.
See more on EU Green Deal here
Climate, Carbon Management & more#theEuropeanGreenDeal
Potential Challenges
Candidate Solutions
Step-by-step guide for Example
sample code block