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Remo Minero
| Speaker: |
Dr. Remo Minero (ING Group)
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| Date: |
Wednesday January 23, 2008
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| Title: |
Financial
derivatives and market risk
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Abstract
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Financial
institutions like banks or insurance companies offer their clients a
large variety of financial products. A few examples are mortgages,
loans or life insurances. When selling these products or investing the
insurance premiums in the financial markets, financial institutions
take risks and expose themselves to a potential loss; think for example
of parties that do not repay their loans, or the losses of an insurer
due to a large catastrophe. The goal of this presentation is to
illustrate which kind of mathematical techniques are used by financial
institutions to measure and manage their risk. In particular, this
presentation will focus on market risk, which is the risk associated to
the variation of market variables such as stock prices, interest rates
or foreign exchange rates.
After giving a few examples of market risks, we will introduce the
concept of financial derivative and show how derivatives can be used to
hedge risks. Derivative prices depend on a number of underlying market
variables. In the case of plain vanilla options, the price can be
expressed as the solution of a partial differential equation (PDE). The
pricing PDE for plain vanilla options will be derived and its
properties discussed. Finally, we will address how complex derivatives
are priced and the role of Monte Carlo simulations for the market risk
measurement of a derivative portfolio.
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