Research Trends in Derivatives and Risk Management since Black–Scholes

CFA Digest ◽  
1999 ◽  
Vol 29 (4) ◽  
pp. 89-91
Author(s):  
John H. Earl
Keyword(s):  
Risk Management ◽  
Research Trends ◽  
Black Scholes

scholarly journals Application of Credit Risk Management Model in Chinese Banks

2019 ◽  
Vol 11 (1) ◽  
pp. 141
Author(s):  
Haojie Chen ◽  
Ng Sin Huei ◽  
Lew Shian Loong
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Management Practices ◽  
Default Probability ◽  
Management Model ◽  
Credit Risk Management ◽  
Kmv Model ◽  
Black Scholes ◽  
Chinese Banks ◽  
A Company

The main objective of this paper is to perform empirical analysis and research on the KMV and Zeta models, discussing whether banks in China could adopt both models in their credit risk management practices. In order to measure credit risk, the KMV model focuses on “Expected Default Probability” (EDP) that is calculated using Black-Scholes Option Pricing Formula. On the other hand, the Zeta Model focuses on determining the probability of a company going bankrupt two years prior to the event. Previous research on risk management has shown that the primary risk the banks generally face is credit risk as an increasingly greater number of banks suffer losses because of credit issues. This paper therefore aims to add to the existing literature a strong case for the relevance of both the KMV and Zeta models to be considered in the topic of banks’ credit risk management.

scholarly journals Value at Risk (VaR) in uncertainty: Analysis with parametric method and Black & Scholes simulations

2017 ◽  
Vol 11 (22) ◽  
Author(s):  
Humberto Banda-Ortiz ◽  
Felipe Pérez-Sosa ◽  
Denise Gómez-Hernández
Keyword(s):  
Risk Management ◽  
Uncertainty Analysis ◽  
Value At Risk ◽  
Risk Measure ◽  
Parametric Method ◽  
Expected Loss ◽  
Historical Simulation ◽  
Simulation Based ◽  
Black Scholes ◽  
High Uncertainty

Keywords: portfolio, uncertainty analysis, Value at RiskAbstract: VaR is the most accepted risk measure worldwide and the leading reference in any risk management assessment. However, its methodology has important limitations which makes it unreliable in contexts of crisis or high uncertainty. For this reason, the aim of this work is to test the VaR accuracy when is employed in contexts of volatility, for which we compare the VaR outcomes in scenarios of both stability and uncertainty, using the parametric method and a historical simulation based on data generated with the Black & Scholes model. VaR main objective is the prediction of the highest expected loss for any given portfolio, but even when it is considered a useful tool for risk management under conditions of markets stability, we found that it is substantially inaccurate in contexts of crisis or high uncertainty. In addition, we found that the Black & Scholes simulations lead to underestimate the expected losses, in comparison with the parametric method and we also found that those disparities increase substantially in times of crisis. In the first section of this work we present a brief context of risk management in finance. In section II we present the existent literature relative to the VaR concept, its methods and applications. In section III we describe the methodology and assumptions used in this work. Section IV is dedicated to expose the findings. And finally, in Section V we present our conclusions.Palabras clave: análisis de incertidumbre, portafolio, Valor en RiesgoResumen: El VaR es la medida de riesgo más aceptada a nivel mundial y la principal referencia en cualquier valuación de riesgo. Sin embargo, su metodología tiene importantes limitantes que la hace poco fiable en contextos de crisis o de alta incertidumbre. Por esta razón, el objetivo de este trabajo es poner a prueba la precisión del VaR cuando se emplea en contextos de volatilidad, por lo que se comparan los resultados del VaR en los escenarios de estabilidad e incertidumbre, utilizando el método paramétrico y una simulación histórica basada en datos generados con el modelo Black & Scholes. El objetivo principal del VaR es la predicción de la pérdida esperada más alta para cualquier cartera determinada, pero incluso cuando se considera una herramienta útil para la gestión de riesgos en condiciones de mercados estables, encontramos que es sustancialmente inexacta en contextos de crisis o de alta incertidumbre. Además, se encontró que las simulaciones de Black & Scholes conducen a subestimar las pérdidas esperadas, en comparación con el método paramétrico y también encontramos que esas disparidades aumentan sustancialmente en tiempos de crisis. En la primera sección de este trabajo se presenta un breve contexto de la gestión de riesgos en las finanzas. En la sección II se presenta la literatura existente en relación con el concepto del VaR, sus métodos y aplicaciones. En la sección III se describe la metodología y los supuestos utilizados en este trabajo. Sección IV está dedicado a exponer los hallazgos. Y, por último, en la Sección V se presentan las conclusiones.

scholarly journals Managing risk using real options in company’s valuation

2014 ◽  
pp. 125-132
Author(s):  
Edina Kulcsár
Keyword(s):  
Risk Management ◽  
Real Options ◽  
Real Option ◽  
Capital Budgeting ◽  
Total Risk ◽  
Strategic Decisions ◽  
The Real ◽  
Black Scholes Model ◽  
Black Scholes

The valuation of company is very important because provides information about the current value/situation of company, and through this, provide the opportunity of choosing the best company’s growth alternatives. The future strategic decisions are characterized by lack of knowledge, information, so all measures of company’s growth are closely linked with uncertainty and risk. The company’s valuation process is also related with uncertainty and risk. The risk may result both from the assessed assets and the technique used. In literature, we could find three approaches for risk management: capital budgeting based method, methods based on portfolio analysis and real options approach of risk management. Among them, the real options based methods is the most revolutionary approach for risk management. The advantages of the method, consists in the fact, that the process of establishing strategic decisions integrates the possibility of reversibility, delay and rejections, which isn’t it possible at two previous methods. The method also takes into account the total risk of company, so both the company-specific and systematic risk. In this study, I have used one of the best-known real option based method, the Black-Scholes model, for determining the option’s value. Determination of option value is based on the data of enterprise, which was tested Monte Carlo simulation. One of the basic assumptions of the Black-Scholes model is that the value of option is influenced by several factors. The sensitivity of option’s value could be carried out with so-called “Greeks”.. In the study the sensitivity analysis, was carried out with indicators Delta (Δ), Gamma (Γ) and Vega (ν). The real options based risk management determinations were performed in the R-statistics software system, and the used modules are 'fPortofio' and 'mc2d'. By using of real options method, I have calculated the average value of company capital equal with 38.79 million. By using simulation was carried out 1000 runs. The results of this show a relatively low standard deviation, small interquartile range and normal distribution. In the calculation of indicator Delta, could be concluded the value of company moves in 0.831 proportion to the price of options, the standard deviations of index is low, so the real option based method could be used with success in company’s value estimation. The Gamma index shows the enterprise value is sensitive just for large changes. The result of Vega reflects the value of option, so the company’s value volatility, which is small in this case, but this means a volatility of value. In summary, we can conclude that the call options pricing model, well suited for the determination of company’s value.

scholarly journals Calculating for managing: The emergence of the idea of risk management

2018 ◽  
pp. 89-102
Author(s):  
Alejandro Morales Henao
Keyword(s):  
Risk Management ◽  
Black Scholes

Este texto argumenta que el surgimiento de la idea del manejo del riesgo puede rastrearse en el uso de las derivadas en el sector financiero a principios de los años 70. A través de una discusión crítica con la propuesta de Michael Power sobre la consolidación del manejo del riesgo como una práctica organizacional común en los años 90, el artículo afirma que el riesgo como asunto administrable se remonta al uso del modelo Black-Scholes-Merton para fijar los precios de las opciones en el Chicago Board Options Exchange (CBOE) desde 1973. La idea de cálculo, medición y manejo del riesgo se pueden situar hasta ese momento. Este es un ejercicio de teorización que busca identificar el papel de las ideas en las prácticas económicas, de tal manera que se permita una historización del conocimiento técnico.

Black-Scholes Risk Management

2015 ◽  
pp. 82-120
Author(s):  
Zareer Dadachanji
Keyword(s):  
Risk Management ◽  
Black Scholes

RISK MANAGEMENT UNDER A FACTOR STOCHASTIC VOLATILITY MODEL

2011 ◽  
Vol 28 (01) ◽  
pp. 65-80 ◽  
Author(s):  
MARCOS ESCOBAR ◽  
PABLO OLIVARES
Keyword(s):  
Risk Management ◽  
Stochastic Volatility ◽  
Value At Risk ◽  
Factor Model ◽  
Risk Measures ◽  
Stochastic Volatility Model ◽  
Dependence Structure ◽  
Black Scholes Model ◽  
Volatility Model ◽  
Black Scholes

In this paper, we study risk measures and portfolio problems based on a Stochastic Volatility Factor Model (SVFM). We analyze the sensitivity of Value at Risk (VaR) and Expected Shortfall (ES) to the changes in the parameters of the model. We compare the positions of a linear portfolio under assets following a SVFM, a Black–Scholes Model and a model with constant dependence structure. We consider an application to a portfolio of three selected Asian funds.

Price risk management by using dynamic hedging based on advanced Black–Scholes model

2020 ◽  
Vol 07 (01) ◽  
pp. 2050011
Author(s):  
Peili Lu ◽  
Jiaqi Shen ◽  
Liheng Zhao ◽  
Haoyang Qin ◽  
Xunzhi Liu ◽  
...  
Keyword(s):  
Risk Management ◽  
Evaluation Method ◽  
Commodity Price ◽  
Price Risk ◽  
Dynamic Hedging ◽  
Hedging Strategy ◽  
Replication Method ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Price Risk Management

Price Risk Management plays an important role in Commodity trading and corporate purchasing or Sales plan. Futures are used to hedge the price risk which is linear, while options are used for the nonlinear one. This paper proposes an evaluation method of dynamic hedging strategy for corporate hedging commodity price risk based on advanced Black–Scholes Model. By using the inverse replication method, we get the dynamic hedging strategy which uses futures to replicate options. Finally, we apply the dynamic hedging strategy for corporate purchases and sales to either lower purchase cost or maintain the sales price.

Influence of financial distress on foreign exchange exposure

2014 ◽  
Vol 29 (3/4) ◽  
pp. 223-236 ◽  
Author(s):  
Aigbe Akhigbe ◽  
Anna D. Martin ◽  
Laurence J. Mauer
Keyword(s):  
Risk Management ◽  
Foreign Exchange ◽  
Conflict Of Interest ◽  
Financial Distress ◽  
Design Methodology ◽  
Management Practices ◽  
Content Type ◽  
Black Scholes ◽  
Ex Ante ◽  
Monotonic Relation

Purpose – The purpose of this paper is to investigate whether a non-monotonic relationship may exist between financial distress and foreign exchange (FX) exposure. The authors hypothesize that firms with higher FX exposures are those with the lowest levels of financial distress because the costs of hedging exceed the benefits and those with highest levels of financial distress due to the conflict of interest between shareholders and bondholders. Design/methodology/approach – The methodology allows for the possibility of a non-monotonic relation between financial distress and FX exposure for firms known to have ex-ante exposures. The approach is to include a Black-Scholes-Merton financial distress measure and standard accounting-based financial distress measures. Findings – The results support the hypothesis of a non-monotonic relationship between financial distress and exposure; companies with the lowest and highest levels of financial distress are willing to bear greater FX exposures. Originality/value – The authors examine whether a non-monotonic relationship may exist between distress and FX exposure. Intuition for this non-monotonic relationship is provided by Stulz (1996) as he describes the risk management practices of firms with low, medium, and high default probabilities.

Sign in / Sign up

Export Citation Format

Share Document