l1 drm mms 12 - what is risk

7/29/2019 l1 Drm Mms 12 - What is Risk

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Derivatives & Risk

ManagementLecture 1: Introduction

Prof. Maneesh

Gupta


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About this course

Syllabus

Futures and Forwards

FRA, IRFs and Swaps

Mechanics and properties of Options

Option Strategies

Option Pricing Models

Option Greeks Option Volatility Models

Value at Risk

Prof. Maneesh Gupta 2


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Prerequisites

Probability Theory

Basic Statistics

Time Value of Money

Bond Mathematics

Currency Mathematics

Excel proficiency



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Grading

1. Final Exam (written) 60 marks

2. Internals

a. Mid Term exam (written) 15 marks

b.Attendance 10 marksc. Project (Report + Presentation) 05 marks

d.Case let / Assignment / Class Test 10 marks

100 marks



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Groups

Group 1: 01, 04, 09, 16, 25, 36, 49, 58

Group 2: 02, 05, 10, 17, 26, 37, 50

Group 3: 03, 06, 11, 18, 27, 33, 38, 51

Group 4: 07, 12, 19, 28, 39, 52, 57 Group 5: 08, 13, 20, 29, 40, 44, 48, 53

Group 6: 14, 21, 24, 30, 41, 54, 59

Group 7: 15, 22, 31, 34, 42, 46, 55, 60 Group 8: 23, 32, 35, 43, 45, 47,56



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Format for Assignment

Covering page

Bibliography and Websites


Name of Institute

Name of subject

Topic :Assignment no. :

Submitted to : Prof. Maneesh Gupta

Name :

Roll no. :Class :

Date :


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Course Readings

Options, Futures and OtherDerivatives John C. Hull

Option Volatility & Pricing Sheldon

NatenBerg Understanding Options Robert Kolb

Derivatives: The theory and practice of

financial engineering Paul Wilmott



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Few more books (Not to be

readYou wont have so much

time) The complete guide to option pricingformulas Huag

Fooled by Randomness Taleb

The Black Swan Taleb

Derivatives: The wild beast of Finance

Steinherr



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Basic Functions of Finance

Making Payments

Providing Resources

Transferring Resources

Managing Risk

Providing Price Information

Creating Incentives



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Steps towards managing Financial

Risk Diversification & Collateral

Limited Liability, Seniority Rules,

Balance Sheet Structure

Creating tradable instruments & liquidityin organized markets

Derivatives & Financial Engineering



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The Economic Rationale

Globalization

Technological advances

A ripple in one part of the world may

cause an earthquake in the other part Hand in hand with better Risk

Management

Innovations in Derivative instrumentshave been the driving force



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Is Derivatives the Wild

Beast? Nascent Stage

Cost of Untradeable Risks

Derivatives reduce Risk or CAN IT?

Is Risk Management a fundamental

Corporate objective?



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Why you should learn

Derivatives This course within finance

Corporate Finance

Investment Analysis & Portfolio

Management Market Microstructure

Where pieces of the puzzle fit in?

Pricing Microstructure & Investments

Hedging Corporate, Banking &

Investments

All-in-one Cost of Capital CorporateProf. Maneesh Gupta 13


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Markets & Instruments

Types of Market OTC

Exchange Traded

Our Focus Derivatives on Interest rates Money Market

Fixed income capital markets

Equities Currency

Commodities



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What is Risk ?

Risk is the key concept of modernfinance

Absence of Risk i.e. a riskless asset

A risky asset is one with uncertainfuture value

Concept of Market Efficiency

Sticky concept

Insider trading

15Prof. Maneesh Gupta


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What are the types of Risk ?

Market risk

Currency risk

Credit risk

Liquidity risk

Operational risk

Political risk



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Why is Risk Management

important ? For a/an

Individual investor

Entrepreneur What risk they face

Bank How do they managethem

Insurance company

Investment firm

Multinational company

Country

Hand-written assignment to be submitted to C.R. before

next Monday



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Some refresher questions

(part of assignment) Find the mean and s.d. for a normally distributed

variable if values below 25% have average of 44

and values above 90% have average of 10 of the

distribution.

Ram borrows Rs. 20 lacs for 15 years @ 12%annual compounding. What will be the monthly

installment?

What is the price of a bond paying 7.5% coupons

semiannually and a yield of 9% maturing after 7years? If the same bond is trading at par, then what

is the yield?

Calculate three point arbitrage profit for an

exposure of one million USD given that two banksin N Y quoted USD/JPY=110 25/110 10 andProf. Maneesh Gupta 18

l1 drm mms 12 - what is risk

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