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This standard was created in response to significant hedging losses involving derivatives years ago and the attempt to control and manage corporate hedging as risk management not earnings management. All derivatives within the scope of FAS133 must be recorded at fair value as an asset or liability. Hedge accounting may be applied if there is ...
John C. Hull is a professor of Derivatives and Risk Management at the Rotman School of Management at the University of Toronto. [3] [4]He is a respected researcher in the academic field of quantitative finance (see for example the Hull-White model) and is the author of two books on financial derivatives that are widely used texts for market practitioners: "Options, Futures, and Other ...
Remember that an estimator for the price of a derivative is a random variable, and in the framework of a risk-management activity, uncertainty on the price of a portfolio of derivatives and/or on its risks can lead to suboptimal risk-management decisions. This state of affairs can be mitigated by variance reduction techniques.
There are two separate branches of finance that require advanced quantitative techniques: derivatives pricing, and risk and portfolio management. One of the main differences is that they use different probabilities such as the risk-neutral probability (or arbitrage-pricing probability), denoted by "Q", and the actual (or actuarial) probability ...
Derivatives can be used either for risk management (i.e. to "hedge" by providing offsetting compensation in case of an undesired event, a kind of "insurance") or for speculation (i.e. making a financial "bet"). This distinction is important because the former is a prudent aspect of operations and financial management for many firms across many ...
For derivative portfolios, and positions, the Greeks are a vital risk management tool: as above, these measure sensitivity to a small change in a given underlying price, rate, or parameter, and the portfolio is then rebalanced accordingly [98] by including additional derivatives with offsetting characteristics, or by purchasing or selling ...
A Credit valuation adjustment (CVA), [a] in financial mathematics, is an "adjustment" to a derivative's price, as charged by a bank to a counterparty to compensate it for taking on the credit risk of that counterparty during the life of the transaction. "CVA" can refer more generally to several related concepts, as delineated aside.
Weather derivatives are financial instruments that can be used by organizations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions. Weather derivatives are index-based instruments that usually use observed weather data at a weather station to create an index on which a ...