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session15_1 - FINANCIALAND SYSTEMRISK MANAGEMENT Class#15...

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FINANCIAL AND  SYSTEM RISK  MANAGEMENT                 Class #15 nd
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A RISKY WORLD AND IT JUST SEEMS TO BE  GETTING RISKIER! What’s getting riskier about our world? Evidence of riskiness Catastrophic events in a more crowded world with  greater vulnerabilities Current events Financial markets
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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 0 2 4 Month (Jan 1934 through June 2003) Change in Annualize Return (Percentage Points)
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WHY WORRY ABOUT INTEREST RATE RISK? (CONT.)  Data per FRED II, St. Louis FRB Historical Term Structure U.S. Treasuries 0 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
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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
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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!!!
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Wall Street Journal, Tuesday April 8, 2008
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Exchange-traded options volume in  U.S. 32% compound annual growth rate
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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
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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.
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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 option’s  expiration  date.
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