tailieunhanh - Lecture Financial risks management - Topic 3: Equity risk mitigation
Topic 3 - Equity risk mitigation. The main contents of the chapter consist of the following: What do financial risk managers do? Forward contracts, payoff on a forward contract, reading price quotes, call options,. | Topic #3 Using forward and option contracts to hedge equity risks: an end-user perspective L. Gattis A Course in Financial Risk Management McDonald Ch: 2-3 provide a review of forwards and options 1 What Do Financial Risk Managers Do? (IMM) Identify risks that affects the viability of your firm Market Risks: Equity, Interest Rates, Currency, Commodity Credit Risks: Bond and counterparty default Measure exposure to identified risks Positions, VaR/CaR/EaR, Stress Tests Mitigate risks Layoff, Hedge, Accept, Hold Capital Forward contracts Definition: A binding agreement (obligation) to buy/sell an underlying asset in the future, at a price set today Futures contracts are standardized and traded forward A forward contract specifies: The features and quantity of the asset to be delivered The delivery logistics, such as time, date, and place The price the buyer will pay at the time of delivery Generally, there is no exchange of cash until delivery Today Expiration date Payoff on a forward contract Positions (each contract has two parties) Long: “buyer” will pay forward price and take delivery of asset Short: “seller” will deliver asset and receive the forward price Payoff for a contract is its value at expiration Payoffs: Long = Spot price at expiration – Agreed upon forward (futures) price {St-F0}M “as if bought at agreed upon forward price and sold at spot price” M is the contract multiplier or (contract quantity for commodities) Short = Agreed upon forward (futures) price - Spot price at expiration {F0-St}M “as if Bought at spot price and sold at agreed upon forward price” Example : S&P 500 index Today: spot price = $1,000, 6-month forward price = $1,020 In six months at contract expiration: spot price = $1,050, M=1 Long position payoff = $1,050 - $1,020 = $30 Short position payoff = $1,020 - $1,050 = ($30) Reading price quotes Index futures Expiration month “Delivery Month” The open price High of the day Low of the day Closing price of the day Daily change Lifetime | Topic #3 Using forward and option contracts to hedge equity risks: an end-user perspective L. Gattis A Course in Financial Risk Management McDonald Ch: 2-3 provide a review of forwards and options 1 What Do Financial Risk Managers Do? (IMM) Identify risks that affects the viability of your firm Market Risks: Equity, Interest Rates, Currency, Commodity Credit Risks: Bond and counterparty default Measure exposure to identified risks Positions, VaR/CaR/EaR, Stress Tests Mitigate risks Layoff, Hedge, Accept, Hold Capital Forward contracts Definition: A binding agreement (obligation) to buy/sell an underlying asset in the future, at a price set today Futures contracts are standardized and traded forward A forward contract specifies: The features and quantity of the asset to be delivered The delivery logistics, such as time, date, and place The price the buyer will pay at the time of delivery Generally, there is no exchange of cash until delivery Today Expiration date Payoff on a forward .
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