Summary Risk management for Midterm

Risk Management

31/08


2 examenes:
Midterm en Octubre
Final en diciembre

,VIDEO 1: Introduccion (read slides)

VIDEO 2: To hedge or not to hedge (Part 1)




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Pt= Price at the and of the month
Pt-1= price at the beginning of the month
Ct= capital shield (example a dividend)




The return is how much money you earn by investing in this asset

,Short selling:
- It means to sell (rather than buy) an asset you do not own
- You sell it a price of Pt-1, and on a later date t, you buy a the asset
8at the Price t) and return it to the broker
- This transaction makes sense if you think the asset's price is going to
decrease

Difference in return:




Shorting is costly:
- Pay a fee the broker to borrow the asset
- Your maximum potential loss is unlimited
- Is definitely more risky

Example of short selling:




You need to compensate the lender for the money of the dividend as well

, Variance is a measure of risk:




You divide by T-1 because you lose 1 degree of freedom by estimating
already, that is why you divide by T-1.


Example: Firm ABC




Variance of Multi period returns:
- IID (identical and independently distributed)
- NOT identical: time-varying expected returns and volatility
- NOT independent_ some autocorrelation at high frequencies