Notes_Hull

Notes_Hull - Author: John C. Hull

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Study Notes: Risk Management and Financial Institutions By Zhipeng Yan Risk Management and Financial Institutions By John C. Hull Chapter 3 How Traders manage Their Exposures . ....................................................................... 2 Chapter 4 Interest Rate Risk. ........................................................................................................ 3 Chapter 5 Volatility. ...................................................................................................................... 5 Chapter 6 Correlations and Copulas. ............................................................................................ 7 Chapter 7 Bank Regulation and Basel II . ..................................................................................... 9 Chapter 8 The VaR Measure. ...................................................................................................... 11 Chapter 9 Market Risk VaR: Historical Simulation Approach . .................................................. 14 Chapter 10 Market Risk VaR: Model-Building Approach. ........................................................ 16 Chapter 11 Credit Risk: Estimating Default Probabilities. ........................................................ 17 Chapter 12 Credit Risk Losses and Credit VaR. ........................................................................ 20 Chapter 13 Credit Derivatives . .................................................................................................. 22 Chapter 14 Operational Risk. ..................................................................................................... 24 Chapter 15 Model Risk and Liquidity Risk. .............................................................................. 25 Chapter 17 Weather, Energy, and Insurance Derivatives. .......................................................... 27 Chapter 18 Big Losses and What We Can Learn From Them. .................................................. 28 T1 Bootstrap. ............................................................................................................................ 30 T2 Principal Component Analysis. ........................................................................................... 30 T3 Monte Carlo Simulation Methods. ...................................................................................... 31 - 1 -
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Study Notes: Risk Management and Financial Institutions By Zhipeng Yan Chapter 3 How Traders manage Their Exposures 1. Linear products : a product whose value is linearly dependent on the value of the underlying asset price. Forward, futures, and swaps are linear products; options are not. E.g. Goldman Sachs have entered into a forward with a gold mining firm. Goldman Sachs borrows gold from a central bank and sell it at the current market price. At the end of the life of the forward, Goldman Sachs buys gold from the gold mining firm and uses it to repay the central bank. 2. Delta neutrality is more feasible for a large portfolio of derivatives dependent on a single asset. Only one trade in the underlying asset is necessary to zero out delta for the whole portfolio. 3. Gamma : if it is small, delta changes slowly and adjustments to keep a portfolio delta neutral only need to be made relatively infrequently. Gamma = 2 2 S ∂Π - Gamma is positive for a long position in an option (call or put) . - A linear product has zero Gamma and cannot be used to change the gamma of a portfolio. 4. Vega - Spot positions, forwards, and swaps do not depend on the volatility of the underlying market variable, but options and most exotics do. - ν σ ∂Π = - Vega is positive for long call and put ; - The volatilities of short-dated options tend to be more variable than the volatilities of long-dated options. 5. Theta: time decay of the portfolio . - Theta is usually negative for an option . An exception could be an in-the-money European put option on a non-dividend-paying stock or an in-the-money European call option on a currency with a very high interest rate. - It makes sense to hedge against changes in the price of the underlying asset, but it does not make sense to hedge against the effect of the passage of time on an option portfolio. In spite of this, many traders regard theta as a useful statistic. In a delta neutral portfolio, when theta is large and positive, gamma tends to be large and negative, and vice versa.
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This note was uploaded on 01/19/2011 for the course FIN 3117 taught by Professor Nanli during the Spring '10 term at Duke.

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Notes_Hull - Author: John C. Hull

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