2013/04/24 THE ACADEMY OF FINANCIAL MARKETS WELCOME TO THE PRESENTATION! Thought for the day When the OUTLOOK is not good; try looking UP. Risk Management and hedging � What is risk and what do you do with risk in a business? � Transfer (Insure) � Avoid (Do not get involved) � Reduce (Hedge, etc.) � Accept (Take the risk) 1
2013/04/24 Risk Management and hedging � Risk in a Financial services business: � The ALCO and treasury (including investment and liability management) � BUT, risk must be managed � Risk Management process: � Identify � Evaluate � Control � Finance Risk Management and hedging � Identifying & define the risk: � Classification of risks: Many different classifications of risk: � Financial vs. Non-financial risk � Market vs. business risk � Example 1, 2 Risk Management and hedging � The business risk: Aspects affecting it � Specific risks: � Financial: � Market or price � Interest rate � Currency � Other: � Finance � Non-financial 2
2013/04/24 Risk Management and hedging � Non-financial: � Operational: � Ethics � Example 3, 4 � Resource risk � Compliance risk � Reputation risk � Legal risk � Example 5 Risk Management and hedging � Risk and control detection: � Due diligence � Example 6 � System reviews � Profile and instrument risks Risk Management and hedging � Evaluating the risk: � Risk measurement via calculation and scenario’s � Instrument specific measurement criteria � Equities – Volatility & standard deviation (CV); Beta Coefficient � Forex – Nett open position 3
2013/04/24 Risk, hedging & application � Interest rate risk (Bonds) � Duration and modified duration (The percentage change in the bond price, with a 1% change in interest rates) � Example: The current date is 1 Jan 2013. A bond which matures on 30 June 2014 has a coupon rate of 11% and trades at a market rate of 8.5%: � What is the price of the bond? � What is the duration of the bond? � What is the modified duration of the bond? � What will the new price of the bond be if the market rate decreases to 8%? Risk, hedging & application � Interest rate risk (Bonds) � Bond listing and details � Excel examples � Gap analyses and report � VaR � Controlling the risk: � Internal and external control � Externally: Laws, bodies, etc. � Internally: Process, people, controls Risk Management and hedging � External Controls: � Acts such as: � FICA (Money Laundering) � Current SA situation � Internal Controls: � Controls through a risk minimizing system � Model Code and Trading principles 4
2013/04/24 Risk Management and hedging � Risk management system and Corporate Governance � Organisational structure - GARP � Risk Management process � Regulations, Acts & in-house controls � Money laundering � Example 7 � Risk element and category � Example 8 Risk, hedging & application � Financial Market hedging: � Long vs. short positions � Open vs. hedged positions � Risk that can be hedged � Principle of hedging: Hedge must make money when physical position looses money Risk Management and hedging � Controlling financial market risk through hedging of positions: � Futures and hedging � Working � Long vs. short � Call options and hedging � Working � Long (holder) vs short (writer) � Maximum profits & losses � Use in hedging 5
2013/04/24 Risk Management and hedging � Controlling financial market risk through hedging of positions: � Put options and hedging � Working � Long (holder) vs short (writer) � Maximum profits & losses � Use in hedging � Examples 5, 9 Risk Management and hedging � Controlling financial market risk through hedging of positions: � Which hedging instrument do you choose out of the myriad of available instruments? Risk Management and hedging � What are hedge funds? � Lessons in risk management from past disasters: � Enron � Barings bank � Lehman Brothers � Credit crunch 6
2013/04/24 Risk, hedging & application � Terminology and application: � Stop-loss limit � Bull & Bears � PA trades � Single stock futures � Futures naming convention e.g. Dec12 ANGQ 7
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