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Derivatives and Risk Management

This document discusses derivatives and risk management. It covers reasons to manage risk such as debt capacity and financial distress. It defines option types like calls and puts, and strike price. It discusses the Black-Scholes model for pricing options using variables like stock price, strike price, time to expiration, risk-free rate, and volatility. It provides the Black-Scholes formulas and explains terms like the normal distribution function. It also compares forward and futures contracts.

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Dedy Arman
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104 views13 pages

Derivatives and Risk Management

This document discusses derivatives and risk management. It covers reasons to manage risk such as debt capacity and financial distress. It defines option types like calls and puts, and strike price. It discusses the Black-Scholes model for pricing options using variables like stock price, strike price, time to expiration, risk-free rate, and volatility. It provides the Black-Scholes formulas and explains terms like the normal distribution function. It also compares forward and futures contracts.

Uploaded by

Dedy Arman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Derivatives and Risk

Management
Prepared by Dr. Herman Ruslim
Reasons to Manage Risk
1. Debt Capacity;
2. Maintaining the optimal capital budget
over time;
3. Financial Distress;
4. Comparative advantages in hedging;
5. Borrowing costs;
6. Tax Effects
7. Compensation System
Option Types and Markets
• Option: A contract that gives its holder the right
to buy (or sell) an asset at a predetermined price
within a specified period of time;
• Strike Price: The price that must be paid for a
share of common stock when an option is
exercised;
• Call Option: an option to buy or call a share of
stock at a certain price within a specified period;
• Put Option: an option to sell a share of stock at a
certain price within a specified period
Exercise Value
• Exercise Value = Current price of the
stock – Strike price;
Estimating Volatility from
Historical Data
1. Take observations S0, S1, . . . , Sn at intervals of
 years
2. Define the continuously compounded return as:

3. Calculate the standard deviation, s , of the ui ´s


4. The historical volatility estimate is:
The Concepts Underlying Black-
Scholes
• The option price and the stock price
depend on the same underlying source of
uncertainty
• We can form a portfolio consisting of the
stock and the option which eliminates this
source of uncertainty
• The portfolio is instantaneously riskless
and must instantaneously earn the risk-
free rate
The Black-Scholes Formulas
 rT
c  S 0 N ( d1 )  X e N ( d 2 )
 rT
p Xe N (  d 2 )  S 0 N (  d1 )
2
ln( S0 / X )  (r   / 2)T
where d1 
 T
2
ln( S0 / X )  (r   / 2)T
d2   d1   T
 T
The N(x) Function
• N(x) is the probability that a normally
distributed variable with a mean of zero
and a standard deviation of 1 is less than x
• See Normal distribution tables
Properties of Black-Scholes
Formula
• As S0 becomes very large c tends to
S – Xe-rT and p tends to zero

• As S0 becomes very small c tends to zero


and p tends to Xe-rT – S
Contoh Soal
Diketahui: S0= 20
X= 20
t= 3bln= 0.25
Rf = 12%
2
σ = 0.16

Jawaban
Ln (20/20) + {0.12+(0.16/2)} (0.25)
d1 =
0.40 (0.50)

0 + 0.05
= 0.25
0.20

d2 = d1 - 0.4 0.25 = 0.25 - 0.20 = 0.05

N(0.25)= 0.5987 N(0.05) = 0.5199


Jawaban

-(0.12) (0.25)
C = $ 20 [N(d1)] - 20e [N(d2)]

-(0.12)(0.25)
20[0.5987] - 20. 2.7183 0.5199

= 11.97 - 10.09 = 1.88

-(0.12)(0.25)
P= 20.2.7183 0.4801 - 20[0.4013} =
9.318216 -8.026 1.29
Forward Contract Versus Future
Contracts
• Forward Contract are agreements where one
party agrees to buy a commodity at a specified
price on a specific future date and the other
party agrees to make the sale, Goods are
actually delivered under forward contracts.
Unless both parties are financially strong, there
is a danger that one party will default on the
contract, especially if the price of the commodity
changes markedly after the agreement is
reached
Future Contract
• Future Contract is similar to a forward contract, but
with three key differences:
1. Future contracts are “marked to market” on a daily
basis, meaning that gains and losses are noted and
money must be put to cover losses. This greatly
reduces the risk of default that exists with forward
contracts;
2. With future, physical delivery of the underlying asset is
virtually never taken – the two parties simply settle up
with cash for the difference between contracted price
and the actual price on the expiration date;
3. Futures Contracts are generally standardized
instruments that are traded on exchanges, whereas
forward contract are generally tailor made, are
negotiated between two parties, and are not traded
after they have been signed.

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