Market Risk Management Last revised: March 02, 2002
New, this month:
- 11/7/01 Ask Dr. Risk!: Forward Delta.
- 8/28/00 Books: Extremal value theory
- 8/28/00 Dr. Risk's Derivatives DictionaryTM: DEaR, VaR
- 8/28/00 Dr. Risk's Links: VaR links
On this page:
Ask Dr. Risk! | Books | Derivatives DictionaryTM | Links
Ask Dr. Risk!
Dr. Risk promises you at least a brief response to your important question, as soon as he has a free moment. A question of sufficiently general interest to make it into the 'Zine, tends to generate a more comprehensive response. All questions and answers become the property of The William Margrabe Group, Inc.
11/7/01 Forward Delta (11/7/00)
Dear Dr. Risk – Could you explain me what exactly forward delta si and where canI find a formula for it. – Guy Nuclear
[9 months later:] Dear Guy –
If
you want a formula for it, then Dr. Risk assumes you have a use for it. If you
have a use for it, then that use provides context that sheds light on "what
exactly forward delta [is]". If you have that information, then would you
please
share it with Dr. Risk and thereby clarify your question?
Until your clarification arrives, Dr. Risk guesses that forward delta came up in
the context of hedging an option's market risk in the forward market for the
underlying, rather than the spot market. In such a case, the obvious definition
for forward delta is the sensitivity (first derivative) of option value with
respect to the forward price, rather than with respect to the underlying spot
price. However, that tells you the size of the hedge in futures contracts, not
in forward contracts.
The difference is that futures contracts have variation margin, while forward contracts don't. Consequently, even though in a world of non stochastic rates of interest the forward price and futures price are identical, and the first derivative of option value with respect to forward price equals that with respect to futures price, the hedge in futures contracts differs from the hedge in forward contracts.
More precisely, if the futures price moves one dollar, then the value of the futures contract moves one dollar (times the size of the contract), but the value of a forward contract moves the present value of one dollar at delivery (times the size of the contract). Consequently, one needs more forward contracts than futures contracts to hedge a given option. – Dr. Risk
Dear Dr. – Thank you for the prompt answer :-) [Guy Nuclear's witty banter, reflecting the nine-month gap between his question and Dr. Risk's answer.] ] I kind of had a sense of what forward delta is used for but I wanted to see a formula. The reason is that I had to maintain some code (written by another genius) which apparently makes use of this animal. However, the way he computes it struck me as a bit weird. So I wanted to make sure whether he did it right after all. Thanks – GN
Dear Guy – Thank you for the cashier’s check for $1000. :-) [There was no cashier's check. This was just an example of Dr. Risk's witty repartee.] – Dr. Risk
Links
Links
related to market risk are below.
Links related to other financial topics are here.
Value-at-Risk
- 8/28/00 Capital Markets Risk Advisors. "... a gold mine of risk management articles, presentations and speeches ..." (Derivatives Strategy, 2/00)
- 8/28/00 The RiskMetrics Group. "... a free, online course called 'Exploring Risk ..." and much more. (DS, 2/00)
- 8/28/00 Value at Risk Resources. "... the best web site on value-at-risk the world has ever seen." (DS, 2/00)
- 8/28/00 SAS Institute.
Other
- 8/28/00 RiskCenter. An on-line source of news about risk.
Derivatives
DictionaryTM
Terms
and definitions relating to credit risk are below. The main Derivatives DictionaryTM
is here.
Here we have only terms relating to market risk. Find the entire Derivatives DictionaryTM at www.margrabe.com/Dictionary.html.
- 8/28/00 Daily Earnings at Risk
- Value-at-Risk, with a one-day horizon.
- 8/28/00 DEaR
- Daily Earnings at Risk (q.v.)
- 8/28/00 Value-at-Risk (VaR)
- A loss of value that a trading entity will suffer 100 a percent of the time during its VaR horizon. The trading entity might be a trader, a product desk, a regional desk, a department in a bank, or an entire bank or other institutional investor. The percentage, or tail size, is the probability that the loss will be greater than the VaR. Five percent is a typical tail size. The horizon is the period of time over which P&L hypothetically evolves. Two weeks is a typical horizon for VaR. If the horizon is one day, then VaR is Daily Earnings at Risk (q.v.).
- 8/28/00 VaR
- Value-at-Risk (q.v.)
Dr. Risk's Bookshelf
8/8/00 Modelling Extremal Events (8/28/00)
Dear Dr. Risk – are there any recent books/publications on "Extreme Value Theory?" – Brent
 |
Dear Brent – Dr. Risk's Bookshelf contains one book on this topic: Embrechts, Paul; Klüppelberg, Claudia; and Mikosch, Thomas. Modeling Extremal Events. Berlin: Springer, 1997. With 645 pages and 100 figures, it seems authoritative and encyclopedic. The book starts with persuasive motivational material, including disturbing tables of the top 30 insurance losses and top 30 losses of life (1970-1995). The rest of the book is highly mathematical, beginning with the classical theory of the risk of ruin and going far beyond. – Dr. Risk |
 |
Dear Brent – You might consider, also: Reiss, R.D. , and Thomas, M. Statistical Analysis of Extreme Values : From Insurance, Finance, Hydrology and Other Fields. Berlin: Spring, 1997. Dr. Risk has not seen it, but Claudia Klüppelberg had a few good words for it. – Dr. Risk |
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in the derivatives trade press.
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