Summary: Risk Management

Read the summary and the most important questions on Risk Management

• College 1

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• Benefits of RM for shareholder and companies

  • It may reduce tax costs, by reducing the variability of cash flow
    
  • It increases the credit scoring and the value of a company, by making bankruptcy less likely
    
  • It reduces the costs of external financing, since it helps in achieving optimal investment
    

• Benefits of RM for society

  - It helps lowering systemic risk
  - It aims at dispersing risks, so that economic shocks are more easily absorbed and do not cause cascading failures
  - It increases the general stability of the system

• A measure of risk is said coherent if it is...?

  - Monotonicity
  - Sub-additivity
  - Positive homogeneity
  - Translation invariant

• College 2

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• DeltaSuppose that a change in 0,10 euro in the price of 1 ounce of gold decreases the value of our portfolio by 80 euro.What is the delta of our portfolio?How can we delta-hedge our portfolio?

  Delta = dP/dS
  So: -80/0,10=-800
  
  Delta-hedge by buying 800 ounces of gold. 

• Two interesting properties of linear products (value at any given time instant is linearly dependent on the underlying market variable)

  • Delta-hedging protects against both small and large changes in the value of the underlying asset (Gamma is indeed 0)
  • The show the so-called "hedge and forget" property, for which once the Delta-hedge has been set up, there is no need to update it (Delta is constant)

• Properties of non-linear products

  • Gamma is different from 0
    
  • Our portfolio will be sensitive to large shocks in the underlying asset
    

• What does a small/large value of gamma mean?

  • Small: Delta changes slowly and adjustments for Delta-neutrality are relatively infrequent
    
  • Large: Delta is highly sensitive to even small changes in the underlying asset
    

• The first row exists of

  • Delta
  • Gamma
  • Vega
  • Theta
  • Rho

• College 3

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• If you are a risk manager in a commercial bank, one of the main activities is the management of net interest income. What is net interest income? And net interest margin (NIM)?

  Net interest income is the excess of interest received (from loans) over interest paid (on deposits).
  NIM is the ratio between net interest income and income producing assets.

• When does an asset/liability mismatch typically appear?

  A mismatch occurs when assets that earn interest do not balance with liabilities upon which interest must be paid. 
  For example, an asset that is funded by a liability with a different maturity creates a mismatch. 
  
  For example, a bank may borrow for the short term and make long-term loans. Therefore they will fund 30 year mortgages with short term deposits, anticipating that the deposits will be rolled over.