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Understanding Derivatives in Risk Management

This lecture discusses derivatives, which are financial instruments used to hedge various risks, including exotic options and structured products. It highlights the role of the World Bank in managing pandemic-related risks through derivatives contracts, and explains different types of derivatives such as forwards, futures, swaps, and options. The lecture emphasizes the importance of understanding these instruments for effective risk management.

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4 views2 pages

Understanding Derivatives in Risk Management

This lecture discusses derivatives, which are financial instruments used to hedge various risks, including exotic options and structured products. It highlights the role of the World Bank in managing pandemic-related risks through derivatives contracts, and explains different types of derivatives such as forwards, futures, swaps, and options. The lecture emphasizes the importance of understanding these instruments for effective risk management.

Uploaded by

adobeadobeadobe92
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

LECTURE 2 – RISK MANAGEMENT WITH DERIVATIVES

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Summary

1. What are Derivatives ?


2. Some stories about derivatives contracts
3. The Derivatives complexity
4. Figures about the Derivatives markets

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1. What are Derivatives ?

 Derivatives are used to many kinds of topics to hedge different types


of risks.
 Exotic Options = Structured options (many different securities
behind)
 The World Bank through the Pandemic bonds is trying to hedge the
default repayment of borrowers. The World Bank is receiving money
from investors. If nothing happens the country must repay the loan.
If a pandemic surge in a country, the World bank will cancel the
principal of the concerned counterparty. The World Bank right off the
liability and asset.
 Derivatives contracts allows their users to protect themselves
against risks associated with movements in the process of the
underlying.
 Different types of derivatives: Forward / Futures / Swap / Option
 Forward
 Futures
 Swap
 Option
Forward scheme based on the Price of the underlying

Forward / Futures:

The benefit of futures is its liquidity.

Swaps:

Exemple sur le tel (Interest swaps – exchange fixed rates to floating rates)

Option:

The most important thing to remember is that an option is a RIGHT not an


OBLIGATION in exchange of the payment of a premium.

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