3381 Words14 Pages

DERIVATIVES & RISK MANAGEMENT ASSIGNMENT – II

By: ATTIKA RAJ, ROLL NO: MS10A009, MBA- 2012 BATCH, DOMS, IITM

2/21/2012

I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1

II.

Case Analysis: Commodity Market Derivatives

Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one*…show more content…*

Exercise (assignment) will result in the delivery (payment) of cash on the business day following expiration.

b. Eligible for market offset against conventional options on the same underlying index if some conditions are met. c. Eligible for portfolio margin accounts. d. Offers unique price discovery mechanism through competitive auction process which is not obligatory on the participants. e. Offers price transparency f. All FLEX options are quoted publicly daily. Quotations are easily accessible via standard quote systems like Bloomberg or Reuters g. Lower liquidity risk as there is a secondary market h. Low counterparty risk i. FLEX option offer, like over-the-counter options, the benefit of fine-tuning option strategies according to some target trading objectives. Example to create zero-cost collars, synthetic positions with lower market impacts. 3

Risks associated in terms of trading FLEX options are: a. Highly volatile: As it expires on almost any day, therefore, the volatility brought by the scramble can happen anytime to avoid loss or to solidify gains. Thus prices move at any time. b. Unpredictable ramifications: when market is bullish participants gain and hence do not complain but if market is bearish, losses made by the players could be huge leading to breakdown in the system. c. Not fungible with standard listed index d. The expiration date cannot be the 3rd Friday of the month or two-business days date

By: ATTIKA RAJ, ROLL NO: MS10A009, MBA- 2012 BATCH, DOMS, IITM

2/21/2012

I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1

II.

Case Analysis: Commodity Market Derivatives

Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one

Exercise (assignment) will result in the delivery (payment) of cash on the business day following expiration.

b. Eligible for market offset against conventional options on the same underlying index if some conditions are met. c. Eligible for portfolio margin accounts. d. Offers unique price discovery mechanism through competitive auction process which is not obligatory on the participants. e. Offers price transparency f. All FLEX options are quoted publicly daily. Quotations are easily accessible via standard quote systems like Bloomberg or Reuters g. Lower liquidity risk as there is a secondary market h. Low counterparty risk i. FLEX option offer, like over-the-counter options, the benefit of fine-tuning option strategies according to some target trading objectives. Example to create zero-cost collars, synthetic positions with lower market impacts. 3

Risks associated in terms of trading FLEX options are: a. Highly volatile: As it expires on almost any day, therefore, the volatility brought by the scramble can happen anytime to avoid loss or to solidify gains. Thus prices move at any time. b. Unpredictable ramifications: when market is bullish participants gain and hence do not complain but if market is bearish, losses made by the players could be huge leading to breakdown in the system. c. Not fungible with standard listed index d. The expiration date cannot be the 3rd Friday of the month or two-business days date

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