week1 - Derivatives and Risk Week 1a: The Derivatives...

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Derivatives and Risk Week 1a: The Derivatives Market Fundamentals
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Learning Outcomes By the end of this week’s teaching, you should be able to: explain the role of derivatives in risk management explain what a derivative instrument is and identify the main types Understand the basics of derivatives markets explain the terms: hedger; arbitrageur and speculator
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Risk It is only by risking our persons from one hour to another that we live at all William James The Will to Believe 1897 We view risk as an asset. Noel Donohoe, Goldman Sachs Risk, July 2004
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Risk Business Risks Uncertainty of future sales or the costs of input Financial risks Uncertainty associated with the volatile interest rates, exchange rates, stock prices, and commodity prices.
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Spot market VS Derivative market Spot markets Cash markets Purchases and sales require hat the underlying asset be delivered immediately Derivative markets Pre-determine price now. Delivery in the future Few derivative traders hold their position for real delivery, but for cash settlement.
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Derivatives for gamblers? Speculators in the derivatives market One party’s gains are another’s losses No additional risk into the economy Risk is passed from one investor to another Allow the risk of transacting in real goods to be transferred from those not wanting it to those willing to accept it The distinction between derivative markets and gambling Gambling benefits only the participants The benefits of derivatives help financial markets become more efficient and provide better opportunities for managing risk, benefiting the whole society.
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Increased Volatility… Oil prices: 1947–2006 DM/$ rate: 1947–2006 Monthly percentage change in the producer price index for oil, 1947–2006. Monthly percentage
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This note was uploaded on 04/21/2011 for the course BUSINESS AAF001-1 taught by Professor Dr.tony during the Spring '11 term at University of Bedfordshire.

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week1 - Derivatives and Risk Week 1a: The Derivatives...

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