¶ … Swap in Risk Reduction
Derivative markets have evolved for the last few years and they currently offer contracts on any financial security. They offer contracts to hedge any investment risk. Swap is one such derivative that is used to hedge investment risk. Its use has gained popularity because it is one of the most efficient ways to hedge common and specific financial risks which characterize many portfolios (National Association of Pension Funds, 2005).
The term swap encompasses an extremely wide-ranging variety of instruments namely: interest rate swaps, inflation rate swaps, and portfolio swaps. Perhaps before we delve deep into the different types of swaps it is imperative that we ventilate what swaps really are. Swaps are contractual agreements between two parties to exchange future cash-flows on pre-determined dates over a specified period. Interest rate swaps is the most basic swap contract where party to the contract pays a fixed rate of interest while the other party pays a floating...
Utility and Benefits of Derivative Instruments A European asset manager believes there is an elevated risk of extreme volatility in the markets during the next 3 months and wish to fully hedge their portfolio against all risks. However, they are mandated to remain fully invested at all times so selling securities is not an option. Their portfolio currently comprises the following positions. Notional/Amount Security Term €1,000,000 Schatz 2-year on-the-run [Futures contract 2-year
Risk Management Financial derivatives are an innovation in the field of finance that enable us to understand, measure and manage our financial risks. The definition of financial derivative according to the textbooks is of a financial instrument, and the value of any financial derivative is based on the value or values of the underlying securities or groups of securities that constitute the derivative. It can be said that there have been
Critical Evaluation Chincarini's analysis of the Amaranth collapse contains five key lessons for portfolio managers and regulators with respect to managing market risk. Of the ones applicable to firms, the first is that liquidity risk must be accounted for. Liquidity risk in Amaranth's case compounded an already-bad situation. The second recommendation is that liquidity risk measures should be developed that are common -- the way that VaR is common -- so
Risk Management in Hedge Funds A research of how dissimilar hedge fund managers identify and achieve risk The most vital lesson in expressions of Hedge Fund Management comes from the inadequate name of this kind of alternative investment that is an alternative: The notion that all methodical risks are differentiated away is not really applicable here, with the Hedge Fund returns, in realism, representing a mixture of superior administration of market
CEMEX:Strategic Risk Management CEMEX: Strategic Risk Management CEMEX is a leading producer of cement products. Headquartered in Monterrey, Mexico, CEMEX serves customers around the globe. Before the 1970s, CEMEX was a sleepy company, limited in scope to the domestic market, engaged in cement, mining, tourism and petrochemicals. Rising through the ranks of the company his grandfather founded in 1906, CEO Lorenzo Zambrano focused the company on the world market for cement after
The article that was written by Conley (2011) discusses the impact that collateralized debt obligations (CDO's) would have upon the subprime loans. These were created in 1987, by the Wall Street firm Drexel Burnham. In this product, the investment bankers would take a number of different articles and combine them together as one investment. The various assets that were used included: junk bonds, mortgages and other high yielding investments from
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