Beruflich Dokumente
Kultur Dokumente
RISK MANAGEMENT
1
BASIC RISK MANAGEMENT
Output Input
Commodity
Produc Buye
er r
2
THE PRODUCERS
PERSPECTIVE
A producer selling a risky commodity has an inherent long position in
this commodity
When the price of the commodity decreases, the firms profit decreases
(assuming costs are fixed)
3
PRODUCER: HEDGING WITH FORWARD
CONTRACT
A short forward contract allows a producer to lock in a price
for his output
Example: a gold-
mining firm enters
into a short forward
contract, agreeing
to sell gold at a price
of $420/oz. in 1 year
4
PRODUCER HEDGING WITH PUT OPTION
5
PRODUCER: INSURING BY SELLING A CALL
A written call reduces losses through a premium, but limits
possible profits by providing a cap on the price
Example: a gold-
mining firm sells
a 420-strike call
and receives an
$8.77 premium
6
ADJUSTING THE AMOUNT OF INSURANCE
7
THE BUYERS PERSPECTIVE
8
BUYER: HEDGING WITH FORWARD
CONTRACT
A long forward contract allows a buyer to lock in a price
for his input
Example: a firm,
which uses gold as
an input, purchases
a forward contract,
agreeing to buy gold
at a price of $420/oz.
in 1 year
9
BUYER: HEDGING WITH A CALL OPTION
10
NON-FINANCIAL RISK MANAGEMENT
11
REASONS NOT TO HEDGE
12
Collar
13
Put vs. Collar
14
Zero-cost Collar
15
SELECTING THE HEDGE RATIO: Cross
Hedging
Suppose we can produce 1 widget with oz. of gold. If we produce of widgets at a price of :
Profit = - ,
Suppose we hedge long H gold future contracts with each contract covering q oz. Of
gold. If F is the forward price:
Hedged profit = - - F)
Variance:
16
SELECTING THE HEDGE RATIO: Quantity
Uncertain
Variance:
17
TUTORIAL
18