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INDUSTRIAL AUTOMATION & ROBOTICS
Introduction to hotel system management
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A food policy is designed to influence the operation of the food system network of farms, distributors, restaurants, retailers, and consumers . It impacts on how food is produced, processed, distributed, marketed, consumed, and disposed. Implementing
The graphics processing unit GPU is a computer chip that performs rapid mathematical calculations. GPU is a ubiquitous device which appears in every computing systems such PC, laptop, desktop, and workstation. It is a many core multithreaded multipro
Service may be regarded as the application of competences for the benefit of others. Service science focuses on service as a system of interacting parts that include people, technology, and business. It is the study of services, service systems and v
CHAPTER 1
DERIV DERI VATI TIVE VES S – AN INTRODUCTION Derivatives and Risk Management By Rajiv Srivastava
Risk 2
Risk can be defined as deviations of the actual results from expected. Risk can be classified two ways – 1) risk of small losses with frequent occurrence and 2) risk of large losses with infrequent occurrence. The impact or magnitude of risk is normally estimated from following two factors 1. The probability of an adverse event happening, and 2. In case the event occurs the magnitude of the loss it can cause.
Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Managing Risk 3
The ways to manage risk include attempt to control potential damage, diffuse, diversify and transfer risk to those willing to accept it. One can manage the risk by transferring it to another party who is willing to assume risk. Insurance company does not do anything to contain the risk per se but assumes risk on your behalf. Management of risk through derivatives is commonly referred as hedging which enable offsetting of risk emanating from one situation.
Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Types of Risks 4
Business risks are characterised by small losses but with high probability The risk of large losses with small probability is normally referred as event risk. Event risk is normally managed by insurance. companies and Business risk is concerned about Changes in prices, Changes exchange rates, and Changes in interest rates.
Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Derivatives 5
Three kinds of business risk of price, exchange rate and interest rate can be managed through products that are classified as derivatives. Derivatives are products that derive their value from some other asset called underlying asset but in other aspects they may remain distinctly different from and independent of the underlying asset.
Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Derivative Products 6
Variety of derivatives are available both standard product as well as tailor-made, to suit various applications. Four broad types of instruments are:
Forwards
Futures
Options, and
Swaps,
Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Classification of Derivatives 7
Based on the underlying asset
The underlying asset can be
Commodities
Currencies
Shares/Indices
Interest Rates
Credit
Weather
Derivatives and Risk Management By Rajiv Srivastava
Based on how traded
Derivatives can be traded either on the exchange or OTC
Over-the-counter (OTC)
Exchange Traded
Derivative
Chapter 1 An Introductio
Participants in Derivative Markets 8
Hedgers: are those who use derivatives for hedging i.e.
reduce or eliminate risk. Speculators: are those take positions in derivatives to
increase returns by assuming increased risk. They provide much needed liquidity to markets. Arbitrageurs: are those who exploit mispricing in
different markets; They assume riskless and profitable positions. All 3 participants are essential for efficient functioning. Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Functions of Derivatives 9
3 major functions of derivatives are:
Enable price discovery
Facilitate Transfer of Risk
Provide Leverage
Derivatives and Risk Management By Rajiv Srivastava
Derivative
Chapter 1 An Introductio
Misuses & Criticism of Derivatives 10
Increased volatility: Though used for efficient price
discovery, derivatives when used as a speculative product can make increase volatility in prices.
Increased bankruptcies: Derivatives being leveraged
products have caused disproportionate positions leading to several disasters and bankruptcies.
Increased burden of regulations: Most derivatives
hide more than they reveal. For financial discipline and better disclosures new rules have to be devised. Derivatives and Risk Management By Rajiv Srivastava
