THE ACADEMY OF FINANCIAL MARKETS WELCOME TO THE PRESENTATION! - - PDF document

2012/11/02 1

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)

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Risk Management and hedging

Risk in a Financial services business:

The ALCO and treasury

BUT, risk must be managed Risk Management process:

Identify Evaluate Control Finance

Risk Management and hedging

Identifying the risk:

Define Classify

Classification of risks:

Many different classifications of risk:

Market (Systematic) vs. Company specific

(unsystematic) risk

Financial 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

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Risk Management and hedging

Ethics

Example 3, 4

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

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)

Gap analyses and report

VaR Controlling the risk:

Internal and external control

Externally: Laws, bodies, etc. Internally: Process, people, controls

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Risk Management and hedging

External Controls:

Acts such as:

FICA (Money Laundering)

Internal Controls:

Controls through a risk minimizing system Model Code and Trading principles

Risk management system and Corporate

Governance

Organisational structures Sound investment strategies Corporate Governance Best Practice; structure, GARP and EWRM

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

Internal control examples 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 Hedging instruments:

Futures and forwards Call and put options Other derivatives

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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

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

Example 5, 9

Risk Management and hedging

Controlling financial market risk through

hedging of positions:

Which hedging instrument do you choose

• ut of the myriad of available instruments?

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Risk Management and hedging

What are hedge funds? Lessons in risk management from past

disasters:

Enron Barings bank Lehman Brothers

Risk, hedging & application

Terminology and application:

Stop-loss limit Bull & Bears PA trades Single stock futures Futures naming convention e.g. Dec12

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