Fixed Income Securities
Prof. Lei Lian
Teaching Notes # 13
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Fixed Income Securities
Autumn 2012
1 / 34
Risk management starts with the pricing of assets.
I
I
I
Regular, fixed-coupon bonds are the si
Portfolio Construction:
The Capital Asset Pricing Model
Prof. Lei Lian
Teaching Notes # 9 and 10
Financial Risk Management
Autumn 2012
1/1
Example: Comparing multiple assets
(in the same time period)
Equities
Long-term bonds
Average
Return
11.2%
5.6%
Vola
Statistics 2
Prof. Lei Lian
Teaching Notes # 4 & 5
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Statistics 2
Autumn 2012
1 / 27
Skewness: the third moment
I
describes departures from symmetry, defined as
Z
[x E (X )]3 f (x )dx /3
=
F
F
Negat
Return and Risk
Prof. Lei Lian
Teaching Notes # 2
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Return and Risk
Autumn 2012
1 / 21
Function of Financial Risk Management
functions
I
I
I
To evaluate financial risks using both quantitative tools
Statistics 2
Prof. Lei Lian
Teaching Notes # 4
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Statistics 2
Autumn 2012
1 / 24
Skewness: the third moment
I
describes departures from symmetry, defined as
Z
[x E (X )]3 f (x )dx /3
=
F
F
Negative
Statistics 4
Prof. Lei Lian
Teaching Notes # 7
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Statistics 4
Autumn 2012
1 / 18
Statistical Inference
Previous topics on probability theory assumes the
distributions are known and we study their pro
Statistics 3
Prof. Lei Lian
Teaching Notes # 6
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Statistics 3
Autumn 2012
1 / 24
Important Distribution Functions
Bernoulli Distribution
I
I
I
Let Y be a Bernoulli variable.
Y is an outcome of a tria
Options 4
Prof. Lei Lian
Teaching Notes
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Options 4
Autumn 2012
1/1
Option Greek: Vega
Unlike linear contracts, options are exposed to movements
not only in the direction of the spot price, but also
Forward and Futures
Prof. Lei Lian
Teaching Notes # 15,16
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Forward and Futures
Autumn 2012
1 / 23
Main Points:
What is the futures market?
Comparison to forwards
The pricing of forwards and futures
Options
Prof. Lei Lian
Teaching Notes # 20
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Options
Autumn 2012
1 / 17
Options
Options account for a large part of the derivative markets.
Though the concept of option is not new, option markets
hav
Managing Linear Risk with Futures 3
Prof. Lei Lian
Teaching Notes # 19
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Managing Linear Risk with Futures 3
Autumn 2012
1 / 19
Application of Optimal Hedging:
Duration Hedging
I
applied to the bond
Managing Linear Risk with Futures 2
Prof. Lei Lian
Teaching Notes # 18
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Managing Linear Risk with Futures 2
Autumn 2012
1 / 19
Optimal Hedging
In the last lecture, we learned unitary hedging, where
Risk, Statistics
Prof. Lei Lian
Teaching Notes # 3
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Risk, Statistics
Autumn 2012
1 / 15
Risk
Risk is uncertainty about the future
While stocks do better on average, investors know that in
any one ye
Statistics 5regression analysis
Prof. Lei Lian
Teaching Notes # 8
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Statistics 5regression analysis
Autumn 2012
1 / 15
Regression Analysis
has particular importance for risk management because
I
I
it
Options 2
Prof. Lei Lian
Teaching Notes # 21
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Options 2
Autumn 2012
1 / 15
Black-Scholes Formula
Can make binomial periods as small as you want. This can
approach a continuous time process, which le
Portfolio Construction:
Hedging and CAPM
Prof. Lei Lian
Teaching Notes # 12
Financial Risk Management
Autumn 2012
1 / 14
Marginal Variance:
First, remember that we showed that, under our
assumptions, all investors must hold the market portfolio.
Secondly,
Managing Linear Risk with Futures 1
Prof. Lei Lian
Teaching Notes # 17
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Managing Linear Risk with Futures 1
Autumn 2012
1 / 14
Hedging
An important aspect of managing risk is Hedging, which
consists
Fixed Income Securities 2
Prof. Lei Lian
Teaching Notes # 14
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Fixed Income Securities 2
Autumn 2012
1 / 17
Bond Price Derivatives
For fixed-income instruments, the derivatives are so
important that
Portfolio Construction:
The Capital Asset Pricing Model
Prof. Lei Lian
Teaching Notes # 9 and 10
Financial Risk Management
Autumn 2012
1 / 13
Formula of
=
Cov (ra , rp )
Var (ra )
ra : measures the rate of return of the asset
rp measures the rate of retu
Introduction of Risk Management
Prof. Lei Lian
Teaching Notes # 1
Financial Risk Management
Autumn 2012
Lei Lian (Isenberg)
Introduction of Risk Management
Autumn 2012
1 / 15
What is Financial Risk Management?
the practice of creating economic value in a
Jack DeSantis
Molly Martini
Isenberg Seminar
3/19/17
Networking
1 While participating in the in-class networking activities I felt a little nervous but also
excited. I was nervous because there are many students in our class that I have
never s
Jack DeSantis
Bill Sennott
Isenberg Seminar
10/6/16
Isenberg Clubs
I attended an ICF meeting concerning the trip to South Africa over spring break. I find
community service very rewarding and this trip sounds like a once in a life time experienc
Jack DeSantis
Bill Sennott
Isenberg Transitions Seminar
10/19/16
Event 1 Essay
One event that I attended was the informational meeting held by ICF concerning a
volunteer opportunity. ICF organizes a trip to South Africa and Isenberg students g
Jack DeSantis
Molly Martini
Isenberg Seminar
3/3/17
Internships
After the advice given to me in class I decided to sign up for the job searching websites
Indeed and Monster. I chose these sites because they are relatively popular and there is
Eric Van Gelder
10/30/14
ISOM 200
Exploring Your Major
Choosing my major seemed like the most important thing in my life when I first came to
UMass Amherst last fall. I had been worrying all summer about whether I had wanted to do
business or if I wanted
Eric Van Gelder
12/2/14
ISOM 200
Informational Interviews
Ray Simmons (Senior Accounting Student):
Q: What steps did you take to get to where you are now?
A: To get to a graduating senior this semester entering Grad school here next semester took a lot of
Eric Van Gelder
ISOM 200
9/18/14
Accomplishment Statements
Context of Problem/situation
Going into senior year was a very stressful time. All of the classes, homework, sports and clubs
were a lot of work. Not to mention having to submit my college applica