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YELLOWINTRODUCTION
MATTEO FERRONATO
STOCK LAURA BROGIATO
DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI
MODELLING RISK IN STOCK AND DERIVATIVES MARKETS
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
UNCERTAINTY VOLATILITY
PROBABILITY OF LOSSCHANGEABILITY
YELLOWRISK
QUALITY vs. QUANTITY RELATIVE vs. ABSOLUTE
INTRODUCTION
IN GENERAL … RISKS IN MARKETS:
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
REGULATION – CONTROL vs. OVER-THE-COUNTER
DEGREE OF: DEVELOPMENT – SPREADING – COMPLETION – INNOVATION – KNOWLEDGE
A ≡ B+CPay-off
SpotX = Frwd
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
IN PARTICULAR … RISKS IN MARKETS:
STOCK• CORPORATE Risk
(ISSUER FUNDAMENTALS, DEFAULT, AGENCY)
• ECONOMIC Risk(PRICE, DIVIDENDS,
COMMISSIONS/TRANSACTION COSTS)
• MARKET Risk(LIQUIDITY, EXCHANGE CURRENCY RATE,
INTEREST RATE, JURISDICTIONS)
DERIVATIVES• STOCK MARKETS’ Risks
(RELATION UNDERLYING-DERIVATIVE)
• LEVERAGE Risk(ORDERS/ STRATEGIES TO REDUCE/AMPLIFY
RISK EXPOSURE)
• SETTLEMENT, BUYING, SELLING Risk
• LEGAL Risk(CONTRACT TERMS AND CONDITIONS)
[DEVELOPMENT OF SECONDARY MKTs and STANDARDIZATION]
Before moving on … Don’t forget:
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
RISK EVALUATION: RETURN vs. RISKSPECIFIC/DIVERSIFIABLE Risk + SYSTEMATIC/NOT ELIMINABLE Risk
(evidence of contagion risk)
systematic risk
nr. of securities
specific risk
σp
RISK EVALUATION: TIME HORIZON INVESTMENT
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
RISK EVALUATION: INFORMATION RISK + EXPECTATIONS OVERSHOOTING AVERSION/TOLERANCE
RISK EVALUATION: DIMENSION OF THE MARKETSDERIVATIVES 21x STOCK MKTs
$790 trillion
$40 trillion
STOCK MARKET
traded in Stock Exchange and in OTC market
Purchasing shares of stock, individuals and firms are entitled to
receive dividends from the issuer corporation
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
OTC market is more risky!
RISK IN STOCK MARKETS?
Stocks price is influenced byo Timeo Informationo Expectations/Irrational Behaviors
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
CAPITAL INVESTMENT
UPSIDE RISK AND
DOWNSIDE RISK
EXPOSURE
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
Strictly linked to the economic trend of the corporation and/or of its economic sector. (turnover, operating income, profit, information policies…)
Can be reduced with the DIVERSIFICATION of the investment portfolio
SPECIFIC Risk
SYSTEMATIC RiskStrictly linked to the market trend (interest rate, inflation, GDP, imports and exports, political environment…)
✗Cannot be reduced
CORPORATE Risk
OPERATIONAL risk
DEFAULT/CREDIT Risk
AGENCY Risk
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
MARKET Risk
EXCHANGE RATE Risk
LIQUIDITY Risk
INTEREST RATE Risk
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
ECONOMIC Risk
PRICE Risk
DIVIDENDS Risk
COMMISSIONS/TRANSACTION COSTS Risk
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
Derivatives are products whose values are derived from one or more basic variables called bases
(i.e. Forex or Equity)
DERIVATIVES MARKETS
HEDGERSSPECULATORS
ARBITRAGEURS
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
DIFFERENT TYPES OF DERIVATIVES
Exchange OTC
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
DERIVATIVES RISK
OptionFutureExample
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
DERIVATIVES RISK
LEVERAGE
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
WHAT IS THE LEVERAGE?
Give me a lever long enoughand a place to stand and I will move the entire earth-Archimede (287-212 B.C.)-
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
DIVING INTO THE REAL WORLD
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
From 2001 to 2008525 Italian local authorities
AN EXPOSED POSITION – FT.COM March 9th 2010
Entered 1,000 swap contracts
to swap a fixed interest rate lending for a variable interest rate.
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
Once interest rates began to increase…
OUTCOMES
€35bn
?
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
?
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
RISK IN DERIVATIVES MARKETS: CONCLUSION
YELLOWINTRODUCTION
MATTEO FERRONATO
STOCKS LAURA BROGIATO
DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI
CA' FOSCARI-HARVARD SUMMER SCHOOL 2010 - CORPORATE RISK MANAGEMENT
