Risk Management: Analysing exposure to risk and determining how to best handle this exposure

Résumé du document

Risk Management involves analyzing exposure to risk and determining how to best handle this exposure. The DV01 is a measure used to describe how a basis point change in yield can affects the price of a bond. It is also known as the "price value of a basis point"(PVBP). In fact, the DV01 calculation measures how much a bond's price can increase in case a bond's yield to maturity decreases by only one basis point. It tells you how much money you can gain or lose if the yield curve varies by 0.01% and therefore allows you to estimate the risks of your investment.

Extraits

[...] and not in the technological sectors that are too fluctuating due to the quick obsolescence of the products nowadays. Therefore, I would give small consideration to this point. To conclude, we can say that all this factors are to taken into account when doing a VaR simulation such as without information on one of these factors, you can not calculate the risk exposure. Nevertheless some of them are more important than the others in the majority of the cases because they deal with the stability and vital functions of the company III / QUESTION Q3: You have been asked to do a risk management review of a medium sized hedge fund. [...]

[...] question 1 and the Operational Risk risk of loss due to problems in transactions B / Risk measures I should manage As it is written in the front page risk management consist in Analyzing exposure to risk, and determining how to best handle this exposure. Therefore to be efficient in its risk management an investor must pay attention to many monitoring tools and not trust a unique one. Thus, I would use the PVBP and Value at Risk models such as they seem to be the more accurate, complete tools to use. [...]

[...] Generally 7 speaking, for hedge fund the key aspect is to limit risks and losses of course, and improves earnings. And we can say that is today's unstable financial world the need for a set of risk management protocols specifically designed for hedge fund investments has never been more pressing5. When talking about risk management in hedge fund, there are 5 major points to have a look at such as they are what impact most on the risk exposure of the company: The 1st point would be to ameliorate and generalize the use of the Value-atRisk model and other traditional risk management tools that are usually developed for over-the-counter derivatives portfolios, and which are not sufficient for capturing the myriad risk exposures of hedge fund investments. [...]

[...] They are agreements between two parties in which one of them exchange interest payments to get cash flow for example. The aim of the interest rate Swaps is simply to swap the fixed rate loan payments for the payments on an equivalent floating rate. They are very popular as they are highly liquid tools. Nevertheless, it is a risky investment such as unexpected event scan happen and affects the market, liquidity and credit risks are high and changes in interest rates are also decisive factors that can affect the operation in case of trouble. [...]

[...] A big part of the risk we are taking when investing depends on the liquidity we have to cover our risks in case the market fall. III / Diversity of trading products This element impacts a lot on the risk that can be tolerated by the company, and so the monitoring and management that result from this. Thus I would give strong consideration to this point. It is always good to have a diversified portfolio, as it limits the risk. [...]