Kurum-İçi Eğitim Programları
A04. Financial Risk Management. (5 days)
All corporate business decisions involve risks. Interest rates fluctuate, exchange rates shift, and commodity prices move up and down on a daily basis. These fluctuations in prices can wreak havoc with the best business plans unless they are carefully accommodated. Fortunately, to help deal with these risks, a global derivative markets have grown to enormous proportions. A recent report from Bank for International Settlements (BIS) states that the notional value of over-the-counter contracts for G10 countries stands at $111 trillion at the end of 2001 and growing at more than 10% per year. This amount is more than 10-times bigger than the GNP of United States.
Overall objective of this program is to introduce the program participants to the concept of risk management, familiarize them with the markets and enormous array of derivative instruments available to manage risk, such as call and put options on stocks, indices, commodities, interest rates, as well as forwards and futures contracts on commodities, currencies, indices, and interest rates; swaps and forward rate agreements. The payoffs, pricing, and the use of each of these instruments including the Binomial Model and Black-Scholes model in risk management will be covered. This program will enable the participants to be thoroughly familiar with the the practice of risk management and understand the benefits and potential risks in risk management. Various exercises involving case studies will reinforce the concepts covered in the program. There is no technical background requirement to participate in the program.
Details of topics covered:
Day 1, Early Morning: Introduction to Risk management:
Topics covered: Why practice risk management? What are the key benefits and costs of risk management. What is the structure of the risk management industry. What do we learn from survey evidence on current risk management practices. What are important organizational, accounting and regulatory issues in risk management. We also introduce basic finance notions and terminology, such as, T-Bill, bonds and notes, LIBOR, LIBID, repo, reverse-repo, and short selling.
Day 1, Late Morning: Introduction to options:
Definitions of call and put options and their payoffs. Profits from buying a call, profits from selling a call, profits from buying a put, profits from selling a put. The role of leverage in options. Organization of the options markets, mechanics of trading, and the role and regulation of options markets.
Day 1, Early Afternoon: Basic Trading Strategies:
This session covers the basics of option trading strategies; portfolio insurance, covered call writing, straddles, strangles, strips, straps, bull and bear spreads, butterfly spreads, calendar spreads, zero-cost collars, leverage and creation of synthetic portfolios.
Day 1, Late Afternoon: Institutional Charateristics of options:
Types of options, styles of options (American, European, Bermudan, and Asian), determination of expiration dates, exercise prices, dividends and stock-splits, marking to market, ways of closing a position, newspaper reporting of options.
Day 2, Early Morning: Non-parametric pricing of call and put options:
This session continues with explores no-arbitrage conditions in pricing options: Upper and lower bounds on the prices of American and European calls and puts, convexity conditions, put-call parity relation, and constructing synthetic positions from put-call parity.
Day 2, Late morning: Option trading and risk management strategies:
This session introduces the state-of-the-art option pricing model, namely the Binomial Model (Cox, Ross, Rubinstein approach). We start with one-period binomial model, risk-neutral valuation, and no-arbitrage approaches.
Day 2, Early afternoon: Option trading and risk management strategies:
We continue with the Binomial Model, extending the model to two-period binomial model, multi-period binomial model and operationalizing the binomial model. Various pricing applications are done.
Day 2, Late Afternoon: Black-Scholes Option Pricing Model:
Discussion of the Normal distribution, and introduction to the Black-Scholes Option Pricing Model. Estimation of the Black-Scholes Model and implied volatility and historical volatility. Black-Scholes delta in managing risk. Modifications to the Black-Scholes Model when the underlying asset pays dividends.
Day 3, Early morning: Option trading and risk management strategies:
Use of advanced option trading strategies in managing risk. How do we manage commodity price risk using option strategies? How do we manage interest rate risk using option strategies? How do we manage currency risk using option strategies?
Day 3, Late morning: Option trading and risk management strategies:
Introduction to exotic options, chooser options, path dependent options, and barrier options and and applications to employee stock options, repricing feature, reload features. Applications to mergers and acquisitions, evaluation of non-linear payoffs in mergers.
Day 3, Afternoon: Introduction to strategic options and risk management through investment decisions:
Use of advanced option trading strategies in managing risk. Option to wait, option to expand, option to contract, option to go to next stage, option to abandon, option to substitute.
Day 4, Morning: Option trading and risk management strategies:
Structure of the forward and futures markets, mechanics of futures trading, types of forward and futures: grains, livestock, food, metals, foreign currency, Treasury Bills and Eurodollars, Treasury Notes and Bonds, and stock indices. Introduction to swaps and forward rate agreements.
Day 4, Early afternoon: Pricing of forwards and futures:
Concept of value, price, risk premium, cost of carry. The theoretical fair value of the futures contracts. Comparison of futures vrsus forward prices. Long hedge versus short hedge. Minimum variance hedge ratio, tailing the hedge.
Day 4, Late afternoon: Managing interest rate risk and stock market risk:
Treasury Bill cash and carry, implied repo rate versus actual repo rate. Eurodollar arbitrage, Treasury bond futures, Treasury Bond spread, implied repo rate. Introduction to stock index futures. Index arbitrage. Risk management using index options futures. How can you protect the value of your stock portfolio against market fluctuations by using stock index futures. Management of beta risk using stock index futures.
Day 5, Morning: Managing currency risk:
Introduction to currency futures with and without transactions costs. Covered and uncovered interest rate parity theorem. Quasi-arbitrage. Can corporate financial officers lower their borrowing costs by borrowing in other currencies?
Day 5 Early afternoon: Futures on stock indices:
Pricing of futures on stock indices, equitization, portfolio risk-management using index futures.
Day 5 Late afternoon: Advanced risk management strategies:
Interest rate calls and puts. Equity forwards and swaps and equity-linked debt. Advanced risk management strategies .
Customization:
Customization should involve using South African institutional characteristics for derivatives, applications using South African derivative exchanges and over-the-counter markets and actual uses and cases from the bank. Details to come from the bank after consultations.
