EFN412 Lecture 11 - EFN412 Advanced Click to edit Master...

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Click to edit Master subtitle style 9/15/10 EFN412 Advanced Part B Topic 11 (11) Risk Management 3 Risk Management Required Reading: PBEHP 10th ed. Ch.17 & 18 Alternative Reading: PBEHP 9th ed. Ch. 18 &19 Background Reading: RTCWJ, 4th ed., Ch.20 11
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9/15/10 Readings Lecture slides. Tutorial Exercises and Reading. Spreadsheets Peirson et al textbook Chapter 17 & 18, 10th edition. You should have already read these. Optional: “Options, Futures and Other Derivatives” by John C. Hull, 5th edition, 2003, Prentice - Hall . 22
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9/15/10 Learning Objectives Understand how to use options to hedge price risk. Understand how options and futures/physical positions can be used to construct synthetic exposures. Understand how options can be used to create a speculative position which is based on the future expectation of market movements. Understand how put-call parity can be used when constructing a synthetic position. Understand the connection between convertible
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9/15/10 Overview of Last Week Last lecture introduced call and put options, considered the factors which influence the price of options and the Black-Scholes option pricing model. This week we look at options in the management of risk and exposure to risk: brief look at hedging
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9/15/10 Overview of Today’s Topics Option Payoff Diagrams - Long and Short positions shares futures calls and puts Hedging with options Speculating with options bearish, bullish and neutral strategies Put-Call Parity Brief introduction to Convertibles Brief introduction to Value at Risk (VaR).
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9/15/10 Some Financial Risk Failure to hedge Laker Airlines Swiss Francs Speculation Proctor and Gamble Gestetner Rogue traders and poor control Nick Leeson at Barings and more recently NAB. Not understanding hedging (hedging and
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9/15/10 Long Share If I buy a share now for $9.50 with a view to holding it for three months. Two ways of depicting this transaction at maturity Projected Share Price Payoff (Cash Flow on Sale) Profit Cash Inflow – Cash Outflow 9.00 9.00 -0.50 9.50 9.50 0.00 10.00 10.00 0.50 10.50 10.50 1.00
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9/15/10 Share Payoff Ignores the original cost of the share 9.50 9.5 0 Payoff Share Price Payoff = cash flow at maturity
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9/15/10 Long Net Share Position 0 Profit Share Price Loss ($9.50) $9.50
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9/15/10 Long Share - Comparison 0 Profit Share Price Loss ($9.50 ) $9.50
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9/15/10 Short Share Position 0 Profit Share Price Loss $950
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9/15/10 Long Futures Position (bought at 0 Profi t Futures Price Loss (1680 ) 1680
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9/15/10 Short Futures Position (sold at 0 Profit Futures Price Loss 1680 1680
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EFN412 Lecture 11 - EFN412 Advanced Click to edit Master...

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