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

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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 (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

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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

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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

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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

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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

• ut 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

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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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