session15_1 - FINANCIAL AND SYSTEM RISK MANAGEMENT Class...

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Unformatted text preview: FINANCIAL AND SYSTEM RISK MANAGEMENT Class #15 nd A RISKY WORLD AND IT JUST SEEMS TO BE GETTING RISKIER! Whats getting riskier about our world? Evidence of riskiness Catastrophic events in a more crowded world with greater vulnerabilities Current events Financial markets WHY WORRY ABOUT INTEREST RATE RISK? Data per FRED II, St. Louis FRB, for 3-Month T-Bills, Secondary Market Monthly Change in U.S. T-Bill (Annualized) Returns-6-4-2 2 4 Month (Jan 1934 through June 2003) Change in Annualized Return (Percentage Points) WHY WORRY ABOUT INTEREST RATE RISK? (CONT.) Data per FRED II, St. Louis FRB Historical Term Structure U.S. Treasuries 2 4 6 8 10 12 14 16 18 1977 1983 Calendar Month (1977 to 1983) Percentage Rate 3-month 1-year 5-year 10-year MAJOR MARKET CRISIS Black Monday (18 - 20 Oct. 87) Bond crash (18 - 21 Feb. 94) Emerging market crisis (24 - 28 Oct. 97) Financial market crisis (Jul. - Oct. 98) Sep. 11 market crash COMPONENTS OF RISK EVENT (CAUSE/SOURCE OF RISK) The Event is what caused the hurt:- weather event-- disease - political environment- downward slide in general economy -- competitor action against you- surplus production of milk- low quality inputs- innovation by competitors- - and countless more!!! Wall Street Journal, Tuesday April 8, 2008 Exchange-traded options volume in U.S. 32% compound annual growth rate BUY OR SELL: Palm in is a bid to buy Palm out is an offer to sell PRICE: Hand away and in front of body shows price: last digit of the bid is 3 NUMBER OF CONTRACTS: Hand touching or near face shows quantity Holding your hand to your chin conveys single numbers Holding your hand to your forehead indicates tens Five fingers palm out on forehead: sell 50 Touching forehead palm in two fingers sideways means buy 70 contracts Floor Market: Hand Signals last digit of this bid is 7 OPTION BASICS Option contracts govern the purchase or sale of other securities or commodities. Options are derivative instruments; that is, an option derives its value from another asset. Options are either call or put options. The price paid for a Put or a Call is called the option's premium. American options: are options that can be exercised at any time up to expiration date. European options: are options that can only be exercised on the expiration date itself. OPTIONS AND DERIVATIVES INSTRUMENTS Call option : Buyer purchases the right, but not the obligation, to buy the underlying asset for a fixed strike price up to the options expiration date....
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This note was uploaded on 03/23/2010 for the course INSY INSY434 taught by Professor Oh during the Winter '10 term at McGill.

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session15_1 - FINANCIAL AND SYSTEM RISK MANAGEMENT Class...

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