**Revised 6 - Risk Management Flashcards
What does Standard Deviation measure?
It measures the volatility of an investment.
What does Beta measure?
Beta measures how volatile the investment is relative to the rest of the market.
In other words- how quickly (and in what amount) does the value of the stock change when the market sways?
What is a Derivative?
An asset whose value is DERIVED from the value of another asset.
Derivatives are measured at Fair Value.
How is an Option used?
Gives the buyer the option to buy or sell a financial derivative at a certain price
Traders use them to speculate where they think the price will be at a certain point and make a profit
Hedgers use them to offset risk
What is a Future?
A Forward Contract with a future value.
They are sold and traded on the futures market.
What is an Interest Rate Swap?
Forward Contract to swap payment agreements
They are highly liquid and often valued using the Zero-Coupon method.
Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR
What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing.
Changes in value are reported in earnings.
What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing.
Changes in value are reported in OCI.
What is a Foreign Currency Hedge?
A hedge that protects against the value of a foreign currency changing.
For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.
