simulation_6 - Risk Management and Financial Hedging Long...

This preview shows page 1 - 6 out of 21 pages.

Risk Management and Financial HedgingLong Gao
2Risk Management and Financial HedgingWhat is risk? (adverse outcomes and their probabilities)undesirable consequences of uncertaintyVariance (variability)Probability of an unfavorable outcome, e.g., Pr(downside risk)Other measurements: expected downside loss, VaR, semivariancesTwo types of risk:Financial riskis about the undesirable variability of realized profit flows Operational riskis the risk of a mismatch between supply and demand, which reduces expected profit flowsHedgingmeans mitigating these risks:Financial hedgingare constructions with financial instruments to reduce the varianceof profitsOperational hedging are constructions in the processing network to reduce operational risks that may increase expected profits as well as reduce its variance
3DerivativesAn instrument whose value depends on the values of other more basic underlying variables, e.g., stocks, commodities, etc.Futures ContractsForward ContractsOptionsSwaps
4Ways Derivatives are UsedTo hedge risksTo speculate(take a view on the future direction of the market)To lock in anarbitrageprofitTo change the nature of a liabilityTo change the nature of an investment without incurring the costs of selling one portfolio and buying another
5

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture