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INTRODUCTION MATTEO FERRONATO INTRODUCTION MATTEO FERRONATO STOCK LAURA BROGIATO STOCK LAURA BROGIATO DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI DERIVATIVES.

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Presentation on theme: "INTRODUCTION MATTEO FERRONATO INTRODUCTION MATTEO FERRONATO STOCK LAURA BROGIATO STOCK LAURA BROGIATO DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI DERIVATIVES."— Presentation transcript:

1 INTRODUCTION MATTEO FERRONATO INTRODUCTION MATTEO FERRONATO STOCK LAURA BROGIATO STOCK LAURA BROGIATO DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI MODELLING RISK IN STOCK AND DERIVATIVES MARKETS CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT

2 UNCERTAINTY VOLATILITY PROBABILITY OF LOSS CHANGEABILITY RISK QUALITY vs. QUANTITY RELATIVE vs. ABSOLUTE

3 IN GENERAL … RISKS IN MARKETS: CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT REGULATION – CONTROL vs. OVER-THE-COUNTER DEGREE OF: DEVELOPMENT – SPREADING – COMPLETION – INNOVATION – KNOWLEDGE Pay-off Spot X = Frwd

4 CA' FOSCARI-HARVARD SUMMER SCHOOL 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]

5 Before moving on … Don’t forget: CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT RISK EVALUATION: RETURN vs. RISK SPECIFIC/DIVERSIFIABLE Risk + SYSTEMATIC/NOT ELIMINABLE Risk (evidence of contagion risk ) systematic risk nr. of securities specific risk σpσp RISK EVALUATION: TIME HORIZON INVESTMENT

6 CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT RISK EVALUATION: INFORMATION RISK + EXPECTATIONS OVERSHOOTING AVERSION/TOLERANCE RISK EVALUATION: DIMENSION OF THE MARKETS DERIVATIVES 21x STOCK MKTs $790 trillion $40 trillion

7 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 CORPORATE RISK MANAGEMENT OTC market is more risky!

8 RISK IN STOCK MARKETS? Stocks price is influenced by o Time o Information o Expectations/Irrational Behaviors CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT CAPITAL INVESTMENT UPSIDE RISK AND DOWNSIDE RISK EXPOSURE

9 CA' FOSCARI-HARVARD SUMMER SCHOOL 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 Risk Strictly linked to the market trend (interest rate, inflation, GDP, imports and exports, political environment…) ✗ Cannot be reduced

10 CORPORATE Risk OOPERATIONAL risk DDEFAULT/CREDIT Risk AAGENCY Risk CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT

11 MARKET Risk EEXCHANGE RATE Risk LLIQUIDITY Risk IINTEREST RATE Risk CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT

12 ECONOMIC Risk PPRICE Risk DDIVIDENDS Risk CCOMMISSIONS/TRANSACTION COSTS Risk CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT

13 Derivatives are products whose values are derived from one or more basic variables called bases (i.e. Forex or Equity) DERIVATIVES MARKETS HEDGERS SPECULATORS ARBITRAGEURS

14 CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT DIFFERENT TYPES OF DERIVATIVES FUTURES/FORWARDOPTIONSSWAPS ExchangeOTC

15 CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT DERIVATIVES RISK INVESTMENTRISKUPSIDE RISK DOWNSIDE RISK FUNDING OptionFuture Example 

16 CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT STOCK RISK DERIVATIVES RISK DERIVATIVES RISK LEVERAGE

17 EXPOSURE OUTLAY CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT WHAT IS THE LEVERAGE? Give me a lever long enough and a place to stand and I will move the entire earth -Archimede ( B.C.)-

18 CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT DIVING INTO THE REAL WORLD

19 CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT From 2001 to 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.

20 Interest rate rose Bigger repayment amount Contract’s restructuring CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT Once interest rates began to increase… OUTCOMES €35bn ?

21 Agency issue Complexity of the tool Lack of competence CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT ?

22 CONS: - Superficial knowledge - Leverage risk PROS: - Risk allocation - Leverage possibility RISK IN DERIVATIVES MARKETS: CONCLUSION

23 INTRODUCTION MATTEO FERRONATO INTRODUCTION MATTEO FERRONATO STOCKS LAURA BROGIATO STOCKS LAURA BROGIATO DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI DERIVATIVES STEFANIA PIVA, NICOLAS GUGLIELMI CA' FOSCARI-HARVARD SUMMER SCHOOL CORPORATE RISK MANAGEMENT


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