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ch1 - Introduction to Financial Risk Management Xiaodong...

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Introduction to Financial Risk Management Xiaodong Zhu January 4, 2010
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Risk: everywhere, all the time Disease War Weather changes Natural disasters Political instability
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Traditional Risk Management: Insurance Sharing, diversifying risk Informal: help within family and among neighbors gift giving Formal: insurance policy issued by companies
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Limits to Traditional Insurance Risk sharing within a restricted group Only works for low correlation risk Relatively small capacity in risk covering Estimated losses of 9/11: 50 billion US$ Capital of US property insurance industry: 100 billion
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Modern Risk Management Using financial market to diversify and manage risk Capital of US property insurance industry: 100 billion Capitalization of NYSE: 4500 billion Using financial derivatives as the main tools Futures, forwards, options, swaps, … Market value of financial derivatives outstanding: 3800 billion
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Exchange Rate (Japanese Yen/US$) 0 50 100 150 200 250 300 350 400
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