FINANCIAL RISK MANAGEMENT FREQUENTLY ASKED QUESTIONS Module 1 – Introduction to financial risk management 1. What are the major categories of risk? Please provide examples. (Topic heading: Main categories of risk controls SG 1.32) Seven categories of risk are outlined. These are summarised in the table below: Type of risk Definition Example Liquidity The risk of not being able to pay back what you owe due to the inability to convert assets into cash quickly‚ without materially
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Hedging Corporate Revenues with Weather Derivatives: A Case Study Master of Science in Banking and Finance - MBF Master’s Thesis Antoni Ferrer Garcia Franz Sturzenegger Universit´ de Lausanne e Ecole des Hautes Etudes Commerciales HEC - 2001 Abstract This paper searches for the implications in the use of a new generation of financial derivatives known as Weather Derivatives as a form of hedging future corporate revenues. According to the US Department of Commerce about 22 per cent of
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cedis/$ 1.95 Expected spot exchange rate in 6 months‚ cedis/$ 2.00 Options on Ghanaian cedis: Call Option Put Option Strike price‚ cedis/$ 2.00 2.00 Option premium (percent) 2.00% 3.00% United States Ghana Six-month interest rate for borrowing (per annum) 4.00% 8.00% Six-month interest rate for investing (per annum) 2.00% 6.00% (a) If the company wants to offset their exposure‚ what options they have? And which one is the best? Why? Q2. From base price levels
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instruments are the following: * Recommendation from Yahoo‚ TD Ameritrade and other websites. * Price pattern * High or moderate P/E ratio * Seasons (spring‚ summer‚ fall and winter) for the commodities * Class lessons on option for option strategies I used the seasons to buy 2000 of iPath S&P GSCI Crude Oil Total Return Index ETN and 10 April futures on gaz. I used the thought that as we were still in winter when the project began that people would use more
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On Constructing a Market Consistent Economic Scenario Generator Ebba K. Baldvinsdóttir & Lina Palmborg March 4‚ 2011 Abstract Recently the insurance industry has started to realise the importance of properly managing options and guarantees embedded in insurance contracts. Interest rates have been low in the last few years‚ which means that minimum interest rate guarantees have moved from being far out-of-the money to expiring inthe-money. As a result‚ many insurance companies have experienced
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Week 9: The Black-Scholes Solution And The “Greeks” (see also Wilmott‚ Chapter 6‚7) Lecture VIII.1 Plain Vanilla The goal of the next two lectures is to obtain the Black-Scholes solutions for European options‚ which belong to the type of basic contingent claims called ‘vanilla options’. These lectures may seem a bit too technical. However‚ I think‚ it is important to have at least some idea about how the BS equation is solved for various financial instruments. I will try my best to keep things
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prices. Volatility can be characterized as historical or implied. Historical volatility measure stock price changes by using historical stock price data‚ while implied volatility is a stock’s current volatility‚ which is measured by using the stock’s option price. According to Fischer‚ volatility creates inconsistency in price trends; this results in a situation at which formulas for volatility can be changed according to the predictability of volatility. Fischer identified four factors that affect
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HEC Paris Financial Markets Spring 2012 Final Exam “Cheat Sheet” 0. Basic Statistics (a) Consider an n-outcome probability space with probabilities p1 ‚ p2 ‚ . . . ‚ pn . Consider two discrete random variables X and Y with outcomes (X1 ‚ X2 ‚ . . . ‚ Xn ) and (Y1 ‚ Y2 ‚ . . . ‚ Yn ). 2 The we have the following formulas for means (µX ‚ µY )‚ variance (σX )‚ standard deviation (σX )‚ covariance (σX‚Y )‚ and correlation (ρX‚Y ) µX = EX = E(X) = p1 X1 + p2 X2 + · · · + pn Xn µY = EY = E(Y ) =
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References: Batchvarov‚ Alexander and Nicolas Gakwaya (2006)‚ “Principles and Structures of Islamic Finance‚” Merrill Lynch‚ European Structured Finance –ABS (8 September)‚ London. Black‚ Fischer and Myron Scholes (1973)‚ “The Pricing of Options and Corporate Liabilities‚” Journal of Political Economy‚ Vol. 81‚ No. 3‚ 637-54. El-Qorchi‚ Mohammed (2005)‚ “Islamic Finance Gears Up‚” Finance and Development‚ International Monetary Fund (IMF)‚ Vol. 42‚ No. 4 (December)‚ 46-9. Iqbal‚ Zamir and
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Problem go to solution Business‚ Finance - Year 2 What is the bond ’s conversion ratio? What is the bond ’s conversion value? What is the bond ’s straight-debt value? The following data apply to Saunders Corporation ’s convertible bonds: Maturity 10 Stock Price $30.00 Par Value $1‚000 Conversion Price $35.00 Annual Coupon 5% Straight-Debt Yield 8% 1) What is the bond ’s conversion ratio? A. 27.14 B. 28.57 C. 30.00 D. 31.50 E. 33.08 2) What is the bond ’s conversion value? A. $698.15 B. $734
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