Risks & Hedging - Summary Treasury division Risk Mngt Process - - PDF document

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Risks & Hedging - Summary

Treasury division Risk Mngt Process ID & Measure the Risk Risk controls (incl. Hedging) Past Risk Lessons

CD Equity CD Bonds CD MM CD Forex CD Derivatives Front Office D/T D/T D/T D/T D/T Back Office Risk Mngt Division

Treasury Division

ALCO Treasurer

Treasury Division

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Risk Mngt Process

ID Risk Measure risk Control Risk (incl. hedging) Finance Risk

ID & Measure Risk

Risk interconnection a challenge Various Risk Defins But need classification for controls Various risks (see next slide) ID 5 risks that could affect Sasol. Use current

economic & other relevant info

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ID & Measure Risk ID & Measure Risk

Mkt vs. other risks Example 5 – Measure (See revision first) Operational Risk – Trader character ID Risk via due diligence Impact of share repurchase Internal vs. External Financial vs. Non-financial

Comp Risk Mkt Risk

Only when the tide goes out do you discover who's been swimming naked. Warren Buffet

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Price Time D C A B

Revision – Long vs. Short

Writer Holder Option Premium Long Short

Revision – Option

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ID & Measure Risk

Example 5 – Measure Other risk measures Beta Std dev DM Gap Analysis

Report Int rec – Int pd = 41 – 55 = -14 Int Risk?

Product Mkts Client Retail (R Mil) Corporate (R Mil) Deposit Received xxxx xxxx ST Fixed xxxx xxxx ST Floating 55 xxxx LT Fixed xxxx xxxx LT Floating xxxx xxxx Loans Extended xxxx xxxx ST Fixed 41 xxxx ST Floating xxxx xxxx LT Fixed xxxx xxxx LT Floating xxxx xxxx

Duration

= Modified Duration See notes

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Risk Controls

Types – external & internal Start at top – Board of directors (King Report)

Acts Overseeing Bodies In-house Controls

Lack in-house controls Disasters Misconception Derivatives

Future – twin peak model Mkt conduct Regulator Prudential Regulator Regulators cover same fin insts. Procedure/Event

Risk Cat Control

• Resp. Person

Risk controls

Derivative Hedging

Long position R204 bonds Int. risk? Derivative Hedges - Futures & Options Short R204 futures today Long R204 puts today Short R204 call options today

Procedure/Event

Risk Cat Ex 8 FM Controls Control

• Resp. Person

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Past Risk Lesson: Barings

Initially Leeson traded in futures using arbitrage

• pportunities between Singapore & Japan - low

risk, low profits

Mid Jan 95 - long 3000 futures (Nikkei index)

Earthquake struck Japan --> Nikkei down 13% Futures margin calls +puts exercised on Leeson

Later on, traded in futures without arbitrage

• -> made losses (margin calls)
• -> covered up by back office + improved

cash flow by writing options (20 000)

• -> Showed profits £28 mil, hid losses £180 mil

Leeson controlled both back & front offices To recover losses, Leeson held $ 7 bn position

= contracts (17 000 Japan + 40 000 Singapore) + huge positions in Jap gvt bond + Euroyen