introduction matteo ferronato introduction matteo ferronato stock laura brogiato stock laura...

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