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By RAJIV SRIVASTAVA
RISK DEFINED
Risk, in traditional terms, is viewed as a negative. Websters dictionary,
"The ups and downs in life are equally important to keep us going,
because a straight line, even in an E.C.G. means we are not alive."!
from expected.
Risk can be classified two ways 1) risk of small
losses with frequent occurrences, and 2) risk of large
losses with infrequent occurrences.
The impact or magnitude of risk is normally
estimated from following two factors
1. The probability of an adverse event happening, and
2. In case the event occurs the magnitude of the loss it
can cause.
CLASSIFICATION OF RISK
PROJECT RISK
FINANCIAL RISK
Operational
Price Risk
Currency Risk
Regulatory
Quantity Risk
Political
Liquidity
Human Resource
Credit/Default Risk
Portfolio Risk
CLASSIFICATION OF RISK
SYSTEMATIC/MARKET RISK
UNSYSTEMATIC RISK
asset.
Can be managed by
diversification to a desirable
extent but cannot vanish
altogether.
Some element of risk remains
after diversification.
CLASSIFICATION OF RISK
EVENT RISK
BUSINESS RISK
probability such as
earthquake, tsunami, riots,
terrorism etc.
May affect large number of
firms/individuals.
Can be managed by insurance
if such policies are available.
MANAGING RISK
The ways to manage risk include attempt to control
DERIVATIVES
Derivatives are products that derive their value from
Spot/Physical Market
Derivatives
Market
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TYPES OF DERIVATIVES
Variety of derivatives are available both as standard
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TYPES OF DERIVATIVES
Based on the underlying asset
The underlying asset can be
Commodities
Financial
Currencies
Shares/Indices
Interest Rates
Credit
Others
Weather
Energy
Derivatives and Risk Management
Rajiv Srivastava
12
PARTICIPANTS IN
DERIVATIVE MARKETS
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FUNCTIONS OF
DERIVATIVES
3 major functions of derivatives are:
Enable price discovery because two independent
markets are available for the same asset. It increases
participation making markets deep. If derivatives are
exchange traded then transparent prices are available
worldwide.
Facilitate transfer of risk from those trying to avoid to
those prepared to assume risk.
Provide leverage to attract speculators to participate and
increase market depth enabling fair price.
Derivatives and Risk Management
Rajiv Srivastava
14
CRITICISM OF
DERIVATIVES
Increased volatility: Though used for efficient price discovery,
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Rajiv Srivastava
rajiv1234@hotmail.com
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