Risk management with derivatives

6 important questions on Risk management with derivatives

What is the difference between event risk and ongoing risk?

Event risk is the risk of an unexpected situation that can decrease the value of a company (e.g. scandal) while ongoing risk is continuous risk caused by the company's changing environment (e.g. change in currency)

What are the forms of business risk?

1. Macro risk (economical, political and social)
2. Strategic risk (competitive, technological and other risks)
3. Operational risk (risks related to business processes, tax rules, human capital or trade credit)

What are the forms of financial risk?

1. Financial leverage risk - company depends on its results (EBIT)
2. Financing cost risk - insecure future interest rates
3. Refinancing risk - uncertainty whether a company can retake a loan with same terms of agreement
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How do you calculate the market value at risk?

(depreciation if risk occurs) * (probability that risk occurs)

What are the differences between a future and a forward?

1. A future is traded on the stock exchange and bay only be traded by professional stockbrokers, while a forward is often traded outside the stock exchange in over the counter markets
2. The daily difference between the price of a future and the agreed upon price needs to be matched by the buyer of the future, this is not the case with a forward3. With a future, the seller may decide to deliver the underlying asset on a day of choice in the agreed delivery month, while with a forward it may only be on the decided upon date

What are the 2 types of hedging strategies?

1. Short hedge - sell a futures contract to cover a risk
2. Long hedge - buy a futures contract to cover a risk

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