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Consortium, 1997-2003. — 1194 p.
Throughout history, the weather has determined the fate of nations, businesses, and individuals. Nations have gone to war to take over lands with a better climate. Individuals have starved because their crops were made worthless by poor weather. Businesses faltered because the goods they produced were not in demand as a result of unexpected weather developments. Avoiding losses due to inclement weather was the dream of poets and the stuff of science fiction novels - until it became the work of financial engineers, the individuals who devise new financial instruments and strategies to enable firms and individuals to better pursue their financial goals. Over the last few years, financial products that can be used by individuals and firms to protect themselves against the financial consequences of inclement weather have been developed and marketed. While there will always be sunny and rainy days, businesses and individuals can now protect themselves against the financial consequences of unexpectedly bad weather through the use of financial instruments. The introduction of financial instruments that help firms and individuals to deal with weather risks is just one example of the incredible growth in the availability of financial instruments for managing risks. Never in the course of history have firms and individuals been able to mitigate the financial impact of risks as effectively through the use of financial instruments as they can now.Contents: Introduction Investors, Derivatives, and Risk Management Creating value with risk management An integrated approach to risk management Forward and futures contracts Risk measures and optimal hedges with forward and futures contracts Hedging costs and the portfolio approach to hedging Identifying and managing cash flow exposures Measuring and managing interest rate risks Options, downside risk, and nonlinear exposures The binomial model and dynamic hedging strategies The Black-Scholes model Risk measurement and risk management with nonlinear payoffs Options on bonds and interest rates The demand and supply for derivative products Swaps Using Exotic Options Credit risks and credit derivatives Recent developments in the practice of risk management
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Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1. The basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1.2. Models and derivatives markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.3. Using derivatives the right way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 1.4. Nineteen steps to using derivatives the right way . . . . . . . . . . . . . . . . . . . . 19 Literature Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 1.1. Payoff of derivative which pays the 10m times the excess of the square of the decimal interest rate over 0.01. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 1.2. Hedging with forward contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Panel A. Income to unhedged exporter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Panel B. Forward contract payoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Panel C. Hedged firm income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 1.3. Payoff of share and call option strategies . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 1.3.A. Payoff of buying one share of Am