chap024 Risk Management

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国际贸易双语教案Chap024 (17)

Chapter 16Payments among NationsOverviewThis chapter begins the discussion of international finance and macroeconomics—the subject of Parts Three and Four of the book. Its major purpose is to show how the balance of payments accounts for international transactions and how the different balances (or sub-balances) can be interpreted. It also presents the international investment position.A country's balance of payments records all economic transactions between the residents of the country and residents of the rest of the world. Each transaction or exchange results in two opposite flows of value. By convention, a credit or positive item is the flow for which the country is paid—it is the item that the country gives up in the transaction, and it sets up a claim on the foreign resident, so that funds (or "money") flow into the country. A debit or negative item is the flow that the country must pay for—it is the item that the country receives in the transaction, and it sets up a foreign claim on a resident of the country, so that funds (or "money") flow out of the country.Each transaction has both a credit and a debit item—double-entry bookkeeping—at least once we create a fictional "goodwill" item for things that are given away (unilateral or unrequited transfers). Therefore, if we add up all items for the country's balance of payments, it must add up to zero. What we find interesting about the balance of payments is not that it must completely add up to zero, but rather how it does so. What are the values of different categories of items? Typically, the first categories we examine are items that are international flows of goods (or merchandise), services, income, and gifts—the current account. Services include flows of transportation, financial services, education, consulting, and so forth. Income includes flows of payments such as interest, dividends, and profits. In addition to the full current account balance, we can also examine the goods and services balance.The (private) financial account includes items that are nonofficial international flows of financial assets. (With the 14th edition, we shift to using the name “financial account,” following the recently adopted standard terminology, in place of the traditional name “capital account.”) Financial capital inflows are credit items—capital or funds flow into the country as the country "exports" financial assets (by increasing liabilities to foreigners or decreasing assets previously obtained from foreigners). Financial capital outflows are debit items—capital or funds flow out of the country as the country "imports" financial assets (by increasing the country's assets obtained from foreigners or decreasing its liabilities to foreigners). Direct investments are international capital flows between units of a company located in different countries (Chapter 15 has a detailed discussion of foreign direct investment and multinational firms). If the investor does not have management control, international investments in stocks and bonds are usually called international portfolio investments. Cross-border loans and bank deposits are other capital flows included in the financial account.The third and final major part of the country's balance of payments records official international flows of financial assets that serve as official international reserves. The country's monetary authority (usually, its central bank) undertakes these transactions. Official international reserves include financial assets denominated in readily accepted foreign currencies, the country's holdings of Special Drawing Rights (SDRs), the country's reserve position at the International Monetary Fund (IMF), and gold.If all items are recorded correctly, the sum of all of these items equal zero. In practice, they are not and do not, so that a line called "statistical discrepancy" is added to make the accounts add to zero. It represents the net of many items that are mismeasured or missed (net errors and omissions).The current account balance (CA) has several meanings. First, CA equals the value of the country's net flow (I f) of foreign investments (both private and official). Second, CA equals the difference between national saving and domestic real investment (S - I d). Third, because CA is approximately equal to the difference (X - M) between the value of the country's exports of goods and services and the value of its imports of goods and services, CA is (approximately) equal to the difference between domestic production of goods and services and national expenditures on goods and services (Y - E). The text shows how the current account and goods and services balances have changed over time for four countries—the United States, Canada, Japan, and Mexico.The overall balance should indicate whether a country's balance of payments has achieved an overall pattern that is sustainable over time. While there is no perfect indicator of overall balance, we often examine the country's official settlements balance (B), which is the sum (CA + FA) of the current account balance and the private financial account balance (including the statistical discrepancy). The official settlements balance also equals the (negative of the) official reserves balance (OR). Most of the official reserves flows indicate official intervention by the monetary authorities in the foreign exchange market.The international investment position is a statement of the stocks of a country's foreign assets and foreign liabilities at a point in time. The text shows that the United States has changed from being an international debtor to creditor and back to a debtor during the past century.TipsA decision that an instructor must make is whether or not to cover the posting of individual transactions to the credit and debit items. The discussion of posting of individual items is in Appendix E. Chapter 16 itself focuses on using information from the balance of payments.We believe that students generally can grasp the meaning of the balance of payments by focusing on the various lines (showing types of items) and balances—as long as the students also see that it is double-entry bookkeeping so that all items must add up to zero. Instructors who want their students to see how individual transactions enter into the balance of payments should assign and cover the material in Appendix E in conjunction with Chapter 16.A good source of up-to-date information on many countries is Balance of Payments Statistics from the International Monetary Fund (IMF). The format for the current account is similar to the presentation used in the text. What we call the financial account in the text is actually the combination of the Financial Account and the Capital Account in the IMF presentation method. In addition, the official reserves account shown by the IMF includes only changes in official reserve assets held by the country’s own central bank or monetary authority. The omission of changes in foreign official holdings of the country’s liabilities is not a major issue for most countries, but it is important for a country like the United States, whose own liabilities are held in large amounts by foreign central banks.Suggested answers to questions and problems(in the textbook)2. Disagree, at least as a general statement. One meaning of a current account surplus is thatthe country is exporting more goods and services than it is importing. One might easilyjudge that this is not good—the country is producing goods and services that areexported, but the country is not at the same time getting the imports of goods and services that would allow it do more consumption and domestic investment. In this way a current account deficit might be considered good—the extra imports allow the country toconsume and invest domestically more than the value of its current production. Another meaning of a current account surplus is that the country is engaging in foreign financialinvestment—it is building up its claims on foreigners, and this adds to national wealth.This sounds good, but as noted above it comes at the cost of foregoing current domesticpurchases of goods and services. A current account deficit is the country running down its claims on foreigners or increasing its indebtedness to foreigners. This sounds bad, but it comes with the benefit of higher levels of current domestic expenditure. Differentcountries at different times may weigh the balance of these costs and benefits differently, so that we cannot simply say that a current account surplus is better than a current account deficit.4. Disagree. If the country has a surplus (a positive value) for its official settlementsbalance, then the value for its official reserves balance must be a negative value of thesame amount (so that the two add to zero). A negative value for this asset item means that funds are flowing out in order for the country to acquire more of these kinds of assets.Thus, the country is increasing its holdings of official reserve assets.6. a. CA = I f, so if net foreign investment increases, then the value of the current accountincreases.b. If both exports (a positive item) and imports (a negative item) increase by $10 billion,the value of the current account balance stays the same.c. CA = Y - E, so the combination of an increase in production (Y) by $100 billion andan increase in expenditures (E) by $150 billion results in a decrease in the value of thecurrent account balance.d. The transport equipment is an export of goods, so it is a positive item in currentaccount. It must be paired with a negative item of the same amount showing theunilateral transfer (gift). Because both of these items are included in the currentaccount, the value of the current account balance stays the same.8. a. Goods and services balance: $330 - 198 + 196 - 204 = $124Current account balance: $330 - 198 + 196 - 204 + 3 - 8 = $119Official settlements balance: $330 - 198 + 196 - 204 + 3 - 8 + 102 - 202 + 4 = $23b. Change in official reserve assets (net) = -official settlements balance = -$23.The country is increasing its net holdings of official reserve assets.10. a. International investment position (billions): $30 + 20 + 15 - 40 - 25 = $0.The country is neither an international creditor nor a debtor. Its holding of internationalassets equals its liabilities to foreigners.b. A current account surplus permits the country to add to its net claims on foreigners.For this reason the country's international investment position will become a positivevalue. The flow increase in net foreign assets results in the stock of net foreign assetsbecoming positive.。

RISK MANAGEMENT(DOC)

RISK MANGEMENTAs always:∙20/10 position sizing rules.∙Maximum trade risk is 2% of trading equity.∙Daily stop-loss is 6% of trading equity.∙Monthly stop-loss is 10% of trading equity.∙Intraday trade limit—3:o After 2 wins or 2 losses, go do something else (stop trading!).o After 1 win and 1 loss, take a 3rd trade only if the direction is supported by the hourly price action.20/10 position sizing rules:∙Before I can trade a new strategy in a real-money account, I must trade that new strategy in a demo account (1-lot position) until my last 20-trade block shows acumulative profit and more winning than losing trades; and my last 10 trades in that block also show a cumulative profit with more winning than losing trades.∙Repeat the above step trading the new strategy in a real-money mini account.∙For each block of 20 trades that shows a cumulative profit with more winning than losing trades, I may add 1 lot to a trade position; but if the last 10 trades in a newblock of trades fail to show a cumulative profit or have more losing trades thanwinning ones, I must immediately reduce my trade position size by 1 lot.My trading equity is the total value of cash, cash equivalents, and open positions in my trading account(s).1.Calculate 2% of my trading equity after each closed trade. This is the maximum Imay risk on a new trade opportunity. I may risk less!2.Calculate 6% of my trading equity as of the close of trading each day. This is mydaily stop-loss for the next trade day—hit this level of net dollar loss during thecurrent day’s trading and I must immediately close all open positions, and shut off my trading screens until the next trading day.3.Calculate 10% of my trading equity as of the close of trading on the last day of eachmonth. This is my monthly stop-loss—hit this level of net dollar loss during thecurrent month’s trading and I must immediately close all open positions, and refrain from trading in a real-money account until the first trading day of the next month.Continuing to trade in a demo account is encouraged.There is still little or no regulation of Forex brokers. This is a serious risk, and I manage it by having multiple brokers and having only one trading account per broker; and by deposit or withdrawal, starting each new month with a maximum $10,000 balance in each account.Money ManagementMoney management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is.It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.There are different money management strategies. They all aim at preserving your balance from high risk exposure.First of all, you should understand the following term Core equityCore equity = Starting balance - Amount in open positions.If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade,your core equity will be 8,000$It's important to understand what's meant by core equity since your money management will depend on this equity.We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway,you can adapt this strategy to fit smaller or bigger trading accounts.Money management strategyYour risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%We prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3% 1% risk of a 100,000$ account = 1,000$You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.If you are a short term trader and you place your stop loss 50 pips below/above your entry point .50 pips = 1,000$1 pips = 20$The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage,your trade size will be 200,000$If the trade is stopped, you will lose 1,000$ which is 1% of your balance.This trade will require 10,000$ = 10% of your balance.If you are a long term trader and you place your stop loss 200 pips below/above your entry point.200 pips = 1,000$1 pip = 5$The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$If the trade is stopped, you will lose 1,000$ which is 1% of your balance.This trade will require 2,500$ = 2.5% of your balance.This's just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This's how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.DiversificationTrading one currnecy pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your coreequity not of your starting balance!. Itmeans that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$It's important that you diversify your prders between currencies that have low correlation.For example, If you have long EUR/USD then you shouldn't long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (1% risk rule) then you can trade 5,000$ EUR/USD and 5,000$ GBP/USD. In this way,you will be risking 0.5% on each position.The Martingale and anti-martingale strategyIt's very important to understand these 2 strategies.-Martingale rule = increasing your risk when losing !This's a startegy adopted by gamblers which claims that you should increase the size of you trades when losing. It's applied in gambling in the following way Bet 10$,if you lose bet 20$,if you lose bet 40$,if you lose bet 80$,if you lose bet 160$..etcThis strategy assumes that after 4 or 5 losing trades,your chance to win is bigger so you should add more money to recover your loss! The truth is that the odds are same in spite of your previous loss! If you have 5 losses in a row ,still your odds for 6th bet 50:50! The same fatal mistake can be made by some novice traders. For example,if a trader started with a abalance of 10,000$ and after 4 losing trades (each is 1,000$) his balance is 6000$. The trader will think that he has higher chances of winning the 5th trade then he will increase ths size of his position 4 times to recover his loss. If he lose,his balance will be 2,000$!! He will never recover from 2,000$ to his startiing balance 10,000$. A disciplined trader should never use such gambling method unless he wants to lose his money in a short time.-Anti-martingale rule = increase your risk when winning& decrease your risk when losingIt means that the trader should adjust the size of his positions according to his new gains or losses. Example: Trader A starts with a balance of 10,000$. His standard trade size is 1,000$After 6 months,his balance is 15,000$. He should adjust his trade size to 1,500$Trader B starts with 10,000$.His standard trade size is 1,000$After 6 months his balance is 8,000$. He should adjust his trade size to 800$High return strategyThis strategy is for traders looking for higher return and still preserving their starting balance.According to your money management rules,you should be risking 1% of you balance. If you start with10,000$ and your trade size is 1,000$ (Risk 1%) After 1 year,your balance is 15,000$. Now you have your initial balance + 5,000$ profit. You can increase your potential profit by risking more from this profit while restricting your initial balance risk to 1%. For example,you can calcualte your trade in the following pattern:1% risk 10,000$ (initial balance)+ 5% of 5,000$ (profit)In this way,you will have more potential for higher returns and on the same time you are still risking 1% of your initial deposit.3 keys to successful trading are:1. StrategyYou must have a proven set of rules to tell you when to enter, when to exit and when to stay out of the market. 2. Money ManagementYou must practice proper money management by controlling your risk. Great traders do not risk more than 3% of their capital per trade.3. State of MindYou must be disciplined and not let emotions rule you when it comes to trading. In order to do so, one of the most effective ways that I know is to have a trading plan and follow it diligently.Looks simple but not everyone is discipline to accomplish that.You can drive fear and greed completely only when you1) Realize that trading is a business and 2) Good money management skills.The simple rules for high profitsYour brain is your trading engine. Your engine can make you either a loser or a winner.Drop the emotions; your power is your intelligence.Stay 200% FOCUSED.Do not be greedy. Trade as long as you have planned.The luck won’t help you.Invest in yourself. Spend much time reading and studying the techniques of the successful traders, then practice with a demo account.If you fail, call it a day and do something else then will distract you. You can do yoga, sports, meet a friend. You have to stop thinking about trading.Auslanco - GBP/JPY and GBP/USD (newstrade)Dear traders....I decided to start my own thread because there are some other great traders who can provide very valuable analysis of GBP/JPY on the other thread , and I feel that my trade calls are overshadowing those good analysis contributed by other experienced traders.This thread is mainly focused for new traders who want to learn my trading methods.Money Management & Trading habits:Maximum 2% risk per pair. What that means is when you calculate your stop losses your stop loss amount has to be within 2% of your account .If the trade goes against you, the maximum you will loose is 2% of your account. This way it also prevents you from getting panic attacks when the trade retrace against you resulting you close the trade pre matur ely. If your desired stop losses do not come within 2% of your account don’t take that trade. As I always say, you may miss one trade but there are millions more to come.You always have to calculate your risk every time before you enter your trades.Your risk to profit ratio has to be minimum 1:1. That means if you are taking a 2% risk on a trade make sure your profit target would be at least 2%.Always have realistic targets. My aim is 300 % capital growth per year. The lesser your target is lesser the risk of losing your own money. Even if you have 50% capital growth per year you are doing better than 90% of the worlds biggest hedge funds.More trades you take the more you expose your account for losses. No trader in this world can profit from every single market move.Patience plays a big part in trading. Take the trades only if you are at least 90% sure of profiting from it. If you are not sure stay away from the trade. Staying on the sideline is as good as winning.Never trade against the trend. Specially with a high volatile pair like GBP/JPY. It may give you couple of winning trades. But it’s going to get you in the long run.Always have a trading strategy ... make a habit to stick to it doesn’t matter how desperate you are. Always trust your strategy but not bloomberg or some statement from citibank. Don’t go with your gut feeling because 95% of the time your gut feeling is wrong.Your charts are your forex bible. Everything what you need to know about forex is on your charts. You will learn something new everyday from you charts.Specialize in one or two pairs. Every single pair has it’s own characteristics. No two pairs are the same. Don’t trade all the pairs your broker can offer. If you specialize in one or two pairs very soon you will be able to read the pair like a road map .Stay away from the ranging markets. There will be enough of trend break outs on this pair than you ever want. Why take any extra risks trying to chase 20 pips on a ranging markets when you can grab 200 pips on a break out.As Monarc mentioned traders are a greedy bunch. Less greedy once are the most successful once.Don’t try to chase every single pip or market movement. Have a realistic weekly or monthly target as a percentage of your account . Not the number of pips. If you have already achieved that target stay away from the market. As I mentioned before.. the more you trade there is more risk of losing your money.The losses are part of the game. Do not try to cover all your previous losses from your next trade. First your trading plan has to include at least 50% of losing trades. Then you can cut down on the number of losing trades while you gain experience and confidence.When you start you must demo trade at least for the first 3 months to build a trading strategy. Then for the next 3 months trade on a demo account or a micro account and test your strategy coupled with a good money management strategy. When you are fully confident then trade with your real account.Use minimum account leverage. Don’t abuse it. My recommendation for new traders is maximum one mini lot for every $2500 or one full lot for every $25000.At last ... remember there is no easy way to become a good consistently profitable trader. No one can become a profitable trader overnight. As everything else in life it takes time, patience lots of sacrifices and learning. Don’t be afraid of mistakes.It took me 8 months to make my first consistent $100 per week. Since then making money is like a walk in the park.Basic Forex Money Management PlanToday's article is based on money management for trading forex successfully. If you are a new trader or experienced trader,it will help you for both.Now, it is time to ask what is money management or what does it mean by money management?For understanding easily, I'll explain four questions related it.Q1: How much risk per trade will you take on your capital when market go against you?Suppose, you have $10,000 balance in your account. What is the portion of balance you agree to lose per trade if market suddenly moves against your desired direction. Is it 1%, 2%, 3%, 4%, 5% or up to 100% of your capital?Q2: How much profit will you take when market go towards you?It means what is your profit target level, when price hit your target, you come out from market. Every trader has his own profit target level according to calculation.Q3: What is the ratio of risk-reward?How much you are willing to risk for the chance of a good profit. It may be worth risking 50 points to make 100 points, but it may not be worth risking 50 points to make 30 points.Q4: what is the win-loss ratio?A ratio of the total number of winning trades to the number of losing trades. It does not take into account how much was won or lost simply if they were winners or losers.If you made 30 trades and of them 12 were winners 18 were losers, your win/loss ratio would be 2:3. Your probability of success would be 40%.Definition: Money management is used in Investment management and deals with the question of how much risk a decision maker should take in situations where uncertainty is present. More precisely what percentage or what part of the decision maker's wealth should be put into risk in order to maximize the decision maker's utility function.Why should we follow the money management?The main reason is that we can survive in trading for long time! We should remember that survival is the first task, after that we can make money.Some basic rules of good money management:1. Risk only 2-3% of total balanceMost of the time new traders think that big volume means high return of money, you should know that big volume also helps to vanish your capital rapidly. I think 2-3% of your capital is more enough to earn a well money for long run.On the other hand who took 10% risk per trade under worst situations lost 60% of his capital. By this simple calculation, you got the main reason to maintain proper money management.4. A practical example of applying money management rulesRisking no more than 2-3% of the total account per trade... How does it work in practice? Let's use an example to understand it. We have opened a trading account of $1000 USD with a broker and got 20:1 leverage. So, now we haveleveraged ourselves to $20 000 USD to begin trading with.More money means a higher trading power. Correct. But, the higher the trading power, the higher the risks; and when we talk about risks we talk about a real account value which will decrease with every loss sustained during trading.So, when we say risking no more than 2-3% of a total account value we mean the real account value-which is $1000 USD in our case.Now, let's start trading and do the math.Let's say, we have decided to risk 2% of the account in each trade.$1000 x 2% = $20 USD.This means that when the price goes against us, we will need to be out of the trade once we are $20 dollars down.Ok, time to trade. Our trading power measures $20 000 USD(thanks to our leverage).What will happen if we try to trade them all at once: for one $20 000 dollar trading lot order our Forex broker gives us a pip value of $2 dollars. This means that with each pip gained we will have +$2 USD in our pocket. Butthis also means that with each pip lost our real account will shrink by $2 dollars.Since we can afford to lose only $20 dollars in one trade, we'll exiting a trade once the market makes... -10 pips! Yes, only 10 pips is required this time to reach our 2% limit.10 pips * $2 USD per 1 pip = $20 dollars, which is our 2% account limit according with the money managementrule we've chosen to follow.Now, let's try to trade a $10 000 dollar position. Thepip value for this position size will be $1 USD.The math goes as follows: we can stay in trade until market makes -20 pips against us. Yes, this time we can sustain a bigger market shift. If we decrease our trading lot to $5000 USD, our sustainability will raise to -40 pips against our trade.(The pip value for $5000 dollar lot will be $0.50 cents).And so on.As you can see, with the money management rule in place our real account is under control. And even ifleverage allows trading larger positions, the risks should be always under control.If you want to learn trading Forex, you can participate in my forex trading course in Bangladesh.Trading is a delicate balance of Strategy , Money management and Psychology.Let us focus on major Trading Psychologies-1) Personal Psychology2) Psychology of Money management3) Trading method psychologyTrader’s Personal PsychologyThis umbrella includes all the qualities of your mind- Greed , Fear, Ignorance, Arrogance, Humbleness, Peace etc. Before we continue any further let us know the fact that Greed and fear are same. The only difference is in your perception.Greed and FearWhenever you feel greedy , there is an indirect message into your subconscious that you are also fearful.Thus being greedy will invite fear automatically. Let’s remember the early days wh en you started trading and hoped that it turned out to be hundreds of thousand dollars winner! You positioned yourself in the market on greed using the depths of leverage you can. Thus you were greedy, but at the same moment you invited fear of losing not only what you have but also gaining in debts. Your this fearful behavior within did put you under immense pressure and finally you landed up in the worst situation. Thus driving the greed automatically drives the fear within you. Greed is the Action and fear is the Reaction. Treat trading as a BUSINESS. Why you want to double your account every month. Keeping a realist approach of 5 to 10% a month is decent enough to trade for living. The problem with many small players is 5 or 10% a month is BS and thus they want to gear for doubling or tripling the account in a month. But you then invite greed and fear factor. Be realistic about trading. This is not gambling (unless you make it), it’s about surviving. You can only survive here if you treat this as busines s. You can drive fear and greed completely only when you1) Realize that trading is a business and 2) Good money management skills. We will deal it more later on.More on Personal terCheersWinstonIgnoranceIt is the lack to know what you must know! As traders we must constantly realize that markets change. The only unchangeable truth in markets is that it changes all the time on all time frames. You must set aside a day in a week for your own updation of knowledge. You can surf the net, join trading fourms and do everything all you can. When you are aware of the latest developments, Ignorance is automatically dissolved. Thus Trading methods, Broker discussions and other major Fundamental news are really very important. They act like Sugar in Tea. Trading methods are essentially Sugar in Tea. Without it the whole Tea would be bitter. Only a drop of tea in lump of sugar would kill the taste of tea.ArroganceIt is the overconfidence or The BIG ego coming your way. Many a times you will win in the market consecutively and that is the moment you are on top of the world. It happened with me, others and will also happen to you. But let me assure you that it will take no time for the markets to break your arrogance. Thus, you win or lose just have fun. No feeling of sadness or no arrogance when winning. This is the key to winning trading psychology.The King of Beast – ATTACHED EXPECTATIONThis attitude alone is sufficient to melt you down in almost all the aspects of life. There is noting mystic reason about not having this psychology. The simple and logical reason is FOCUS. Almost all the religious scriptures have stressed the importance of this attitude tons of times. When you start focusing on outcome, it implies that you want the external things behave according to your thought out plan. This means you are controlling the markets if you are attached with the outcome. You want the life to go on according to you. But you hardly realize that life was before you and still be there after you. How could you control the outcome? If you can’t control the outcome how could you have Attached Expectation? They say mind is an Amplifier. It can amplify one thing at a time. When you amplify Results, how can you perform very well? You hardly channel your energy in real performing activity. This is the keyreason that you should not have attached expectation. However why would you want to do a thing without any goal. Even I can’t do it? Who can do it purely? Having a Balanced Expectation is the Key to success in any forms of life. In the background I know I want to make money. But when I am trading I just have fun and focus all my energy on the process. Again this could be compared with the Tea –Sugar analogy. Your Sweet Tea is the goal. But if your Tea is full of Sugar, could it taste nice?I hope that by now, you must have released most of your mental blocks which were restricting you from being a profitable trader. You have now just realized that the animal within you is lovely Pet. But now you have to get friendly with it.Trader’s Psychology of Money managementHere, we have focused our attention only on management of a trade. Firstly I would recommend you to start a small live account. This will take you on a journey-like experience without much to lose. With small live accounts you can still feel the Liveliness of your friend /enemy within. It does not matter even if you blow couple of live accounts. In fact if you are not blowing your small live accounts in the beginning of your trading career, I would smell it fishy. You must get used to live trading so much that it then becomes a part of your Right Brain. At this stage you start doing things automatically without efforts. Tell me did you try sleeping? What was the result? Remember the last time you had a sound sleep? I bet you can’t remember because you did it effortlessly and without knowing. Same thing applies in trading. The time when things will be automatic in trading, you are on that path of your trading career that hardly anyone gets it!Some people risk 1%, some 2, 3, 4, 5…10…20….. And some all they have. You still practice the Money Management style unknowingly. Whenever you start risking more than 3 or 5% of your equity, you are automatically inviting the Beast like Greed and Fear within you and I bet they will kill most of you at some point of your trading career. Most Successful traders do not risk more than 1% of their account on single trade. What is important is you should not risk your COMFORT ZONE. (Thanks to Bill M. Williams)The moment you risk anything more than your Comfort Zone, all the enemies within you wait to kill you at some point. What is a Comfort zone? It is really subjective. Suppose you have 1000$ to start with, 1% risk means 10$ , 2% is 20$ and 10% is 100$ .Some of you may be Comfortable with even 100$ risk. Now , you have One Million$ Live account. 0.5 % risk means 5000$, 1% is 10,000$, 2% is 20,000$ and 10% is 100,000$. I bet many people will go for as less as 0.1% i.e. 1000$ risk if were to handle a one million $ account.Thus it is not a hard and fast rule that you should risk only x% on your Live Account. Thus your risk should be COMFORT ZONE + TECHNICALLY ALLOWED RISK. Technically allowed risk is not 10% or 5%. It ranges any where from 0.1% to 2%. This is because Trading is a game of Probabilities. Every New hand is independent of the previous hand. You can have and will have at some point of time in your trading career 10 or more consecutive losses.IF YOU ARE NOT PREPARED FOR THIS DISASTER OF HAVING SUCH CONSECUTIVE LOSES, YOU ARE DESTINED TO BE THROWN OUT OF TRADING. Thus Your Risk is defined as COMFORT ZONE + TECHNICALLY ALLOWED RISK. This is the best gift from money management psychology you can ever present to yourself. Trading with the edge is all what you need. You don’t need to focus on single trade outcome.When you take 100 trades irrespective of outcomeswith Comfort Zone risk and a trading method with the edge, winning is sure! Yes you read it right. Give the edge the chance to prove its power. This can be only done when you trade uninterrupted at least for nearly 100 trades!note- there are many other complex MM strategies, however i have presented the most basic , simple , effective and consistently successful MM styleAll the BestWinstonMost of you are well tuned with this type of psychology. You must have searched for high % winning methods, even spent days and nights for Holy Grail. However there is a very big difference between an Expert trader and an amateur. Experts build not an extremely high percent winning strategy. They know that over a period of time, their odds will help them to survive. On the contract, Amateur will definitely have a very high percent winning method initially and still is a loser. The most fundamental reason for this phenomenon is amateurs and most traders try to curve fit their trading methods. The real problem is not with the method, rather within you. You carry a notion that all of your trades should be winning. You constantly optimize it whenever it fails to give the outcome you desired. The irony is you then start to look in the past for filters and come out with yet another modification of your trading method. Now you go for a live account and still suffer loses inspite of your strategy being optimized and curvedfit. This is because the market conditions in “NOW” are different from what you made your filters. This process repeats indefinitely until you are frustrated and end up giving your Trading Career. The root for failure is this type of attitude which wants to avoid the dark side of trading method. I assure you there’s no method without dark side. This dark side gives loses. The only thing under your control is limiting your risk on the basis of this dark side. From now onwards, you should stop curve fitting your trading method. Stop optimizations every time you have streak of losses. Again there should be a balance between optimizing and re-optimizing.Losses can’t be avoided. They will be there to any trading method. Those who promise you 100% winning methods are Snake oil vendors. Do not waste your time with them. The only thing you will gain with them (snake oil vendors) is 1000 things you should never do.Trading methods are needed to be developed according to one’s own personality. If you are D ay trader what a long term investing method do to you? Could it support you? However there are certain methods which only need a change in time frame and give you very good chances of winning in every market. Try to see reality of market without any biases. Your methods should be based on Market structure or market facts. When your methods are robust and successful on most of the markets and across many timeframes, they are backed with market facts and will continue to survive for the longterm with very rare optimizations.I hope you had a great time here! I wish you the true success for taming the untamed within you. This is the only real difference between consistent profitable traders and many losers. Read and re read the Trading Psychology until it sinks into your subconscious. Have a great Trading careerThank you all contributors and others........keep on coming to enrich others..I request all the posters stay away from negative statements and if you feel something is wrong ,please do。

固定收益第4章 risk management

17
(4)利率不发生任何变化
• •
现在假定利率不发生任何变化考虑1、3、5、7年后资产的久期：
1年后久期：8.96 3年后久期：8.6 5年后久期：8.2 7年后久期：7.6

18
•
免疫原理总结：寻求债券（组合）应该满足以下条件：
（1）组合的久期等于负债的久期；（2）债券现金流的初始现值等于负债初始现值。

•
问题：如何通过卖空流动性很强的国债来规避风险？
37
•
市场中有下面两种债券

10年期，票面利率 8%的国债，价格P = $1,109.0 （面值 $1,000） 3 年期，票面利率6.3% 的国债，价格P = $1,008.1 （面值 $1,000）（1）如果只卖空一种国债，那么应卖空多少10年期国债？3年期呢？（2）如果所有债券的到期收益率一夜之间上升 1%，该做市商根据前面的卖空头寸，其交易结果如何？（3）如果他要卖空这两种国债，那么10年期和3年期国债各卖空多少（假设卖空的总价值也为1mm）？
20
久期：10.08
•
与负债的久期大致匹配
16
•
但在5年后，利率又回升到10％后的资产：

现值：

70 1000 70 * 1.08 1285.5 t 15 1.10 t 0 t 1 1 .10
t
4

15
久期：8.2
• •
负债的久期：4.5 所以：

久期已经发生变化，需要重新免疫
•
问题：可以有多种组合，选择哪一种？
30
•
增加第二个目标：

收益率最大化？

chap2利率风险管理2精品课件

1. 利率期限结构
无偏预期理论某一特定时间下的收益曲线反映了当时市场对未来短期利率的预期。长期利率是现行的短期利率与预期的短期利率的几何平均值。缺陷：远期利率并非能对未来利率进行最佳预测（未来利率以及货币政策的不确定性，导致持有长期证券是有风险的）。
螟恭江梧瘪冉褂虐俊腺佑膛钠绎疟藏陌瞎伞售烁叭归致刀盅瞒菌桂迄壶恶chap2利率风险管理(2)chap2利率风险管理(2)
风险管理(2)chap2利率风险管理(2)
Interest Rate Uncertainty & Forward Rates
Example： Suppose that most investors have short-term horizons and therefore are willing to hold the 2-year bond only if its price falls to $881.83. At this price, the expected holding-period return on the 2-year bond is 7% . The risk premium of the 2-year bond, therefore, is 2%; it offers an expected rate of return of 7% versus the 5% risk-free return on the 1-year bond. At this risk premium, investors are willing to bear the price risk associated with interest rate uncertainty. When bond prices reflect a risk premium, however, the forward rate, f2, no longer equals the expected short rate, E(r2). Although we have assumed that E(r2)=6%, it is easy to confirm that f2=8%. The yield to maturity on the 2-year zeros selling at $881.83 is 6.49%, and

Risk Management 风险管理

incidents to identify where accidents are most likely to occur.
Referring
to
resources
such
as
industry
standards and codes of practice.
Conducting safety audits. Consulting with employees to find out where
Analyse the risks
Evaluate the risks Control the risks
Monitor, review and document the process
Communication and consultation
Communication and consultation between the
investigation of all potential risks and identifying and recording the hazards that may be causing
them.
Identifying the risk
Checking records of injuries, accidents and
What is Risk Management?
Risk Management is essentially a systematic process for considering the threats and the opportunities inherent in
a situation or activity, and taking steps to

risk-management-(3)

CONTENTSIntroduction (2)Main Body (2)Definition of Risk Management (2)Category of Enterprise Risk (3)Category of Risk Management (3)Significance of Risk Management (4)Strategy of Risk Management (7)Conclusion (8)Reference (9)IntroductionThe U.S.A sub prime mortgage crisis triggered by the financial crisis, resulting in negative impact for the development of the global economy. And this crisis originated banking which has a strong anti-risk awareness. This event give the enterprise a big alarm about risk management. Risk management is a management process which through risk identification, risk assessment and implementation of risk management methods, reach minimum risk and maximum corporate profits. With the development of the enterprise production and scale, a company’s risky element becomes more and more complicated. This essay will demonstrate what is risk management, why enterprise attach importance to risk management , and how to manage risk.Main BodyDefinition of Risk ManagementThe identification, analysis, assessment, control and avoidance minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention and risk transfer, or any other strategy management of future events.Enterprise Risk Management is a financial activities that the enterprise can adopt scientific and effective methods to prediction, identification, prevention, control and treatment various risk, ensure the continuity, stability and efficiency of the movement of company’s funds with the lowest costs on the basis of completely understand the risks they face.Category of Enterprise RiskEnterprise risk is divided into three categories market risk, credit risk and operational risk. Market risk is the reduction in the value of assets or increased in the value of liabilities caused by changes of the market risk factors. Credit risk another name is default risk is the company lose ability to pay for transactions resulting in the loss of the other company. Operational risk is other risks except market risk and credit risk ou, generally this risk is concerned with the operation of enterprise.The result of the occurrence of these risks is that project delays and greatly increase of costs. The biggest problem can not effectively dealwith these risks is retardation to respond to the risk. Generally the company find problems so late that can not make up or the cost of make up is too much.Category of Risk ManagementGenerally, risk management can be divided into three parts, risk identification, risk analysis and risk resolved. Traditional risk management system only can help us to be statistical and manage risk, these systems are not avoid or solve any risks. In fact, the enterprise have to spend a lot of manpower and resources to solve various risks.Enterprise risk identification is a basic work in the risk analysis and management. The main task is that clearly realize existence of business risks, find the main risk factors, and lay a solid foundation for risk analysis and decisions.After risk identification the enterprise must be carried out risk analysis. This can determine the severity of the influence on the development of enterprises and take appropriate measures, it is actually use methods to estimate and measure on the possibility of risk occurrence or the scope and extent of loss.Enterprise risk decision is aimed at different types and different scale enterprise risk, adopt appropriate measures or methods, make the loss of risk to the enterprise production and business operation activities of the impact decrease to a minimum.Significance of Risk ManagementBarings Bank, founded in 1793, is one of the largest banks in the United Kingdom before the 1990s. 27 February , 1995, the British central bank suddenly announced: Barings Bank will not continue to engage in trading activities and apply asset liquidation. This means that with a 233-year history, worldwide more than 270 million pounds in charge of the British Barings Bank went bankrupt.In 1995, Leeson who is the head of the chief trader and clearing two jobs served as executive manager of Barings Futures Singapore's. Once a trader lose £60,000 because of a operating mistake. when Leeson know, for fear of exposing things that affect his career, he decided to use 88888 "error account." The so-called "error Account" means the bank brokerage business agent of customer transactions that may occur during the accounting errorsaccount. Later, he repeatedly used "error account", so that the bank accounts are displayed profitable transactions. With the passage of time.A vicious circle of error account after using the loss of the company bigger and bigger. Leeson at this time in order to recoup their losses, and at last, take long positions in the kobe earthquake in Japan, and finally caused a loss more than $1 billion. This 233-year history bank instantly collapsed.Barings bankruptcy due to lack of adequate segregation of duties and monitoring mechanisms superior to subordinate engaged in the business. The Company huge operational risk led to its eventual defeat. With the development of economic globalization, the enterprise will face various risks in the market competition, how to identify, assess, monitor, control risk, has become a hot topic. Risk management is a relatively weak link in enterprise management. The weakness of risk awareness risk management work is the important reason for the serious risk events of enterprise. The implementation of the risk management is the requirement of the enterprise, as well as the enterprise participate market competition, to ensure the sustainable, healthy and stable development.Due to the existence of various uncertainties, the company activities inevitably exist various risks.the company must take necessary measures timely to control the risk, thy can avoid or reduce the loss of risk, and ensure the achievement of enterprise aim. Therefore, the effective risk management is vital significance for enterprises.1.They can help enterprises to make the right decisions in the face of risk, and improv ability of managing risks. With the development of globalized, the enterprise face with more and more complicated risks, more and more uncertainties. This is difficult to make a scientific decision for companies. Only through the establishment of effective risk management mechanism, the implementation of effective risk management, the company can make right decision in the vagaries of market.2.They can achieve the enterprise objective, improve economic benefits of enterprise. Enterprise management objective is to pursue profit maximization, but in the process of achieving this objective, will inevitably encounter all kinds of uncertainty factors, which affect the enterprise activities objective. Therefore,enterprise must manage risk, defuse the influence of the variously adverse factors. and ensure the achievement of enterprise management objective.Strategy of Risk Management1.Establishing the enterprise risk management objectives and an effective supervision system. Enterprise risk management framework is built on a specific enterprise supervision framework and appropriate personnel responsibility allocation, the aim is to make risk inherent component part of enterprise.Enterprise risk management must be combined with technology and strategic management. The enterprise risk management must be have clearly objective and plans in the whole enterprise, and combine enterprise business, strategy and objectives, create a risk management process which support by collective of enterprise-wide.2.To establish assessment of risk system. Enterprise risk management pay more attention to risk, expanding the elements of the risk assessment of the internal control framework, and further subdivided into objective setting, risk identification, risk assessment, risk measures and other factors. The various component through risk assessments will be closely linked. The risk assessment includes three basic aspects: Firstly, the skillful and experienced manager; Secondly, the effective method of risk management; Thirdly identifying, analyzing and measuring the ongoing process of risks and opportunities. If the company want to assess the risk, the first is identify risks, and collect, analyze, comprehensive dispose the internal and external data, provide reliable and timely risk management information to the enterprise. To understand the nature and the influence of the risk, analyze the root causes of risk. Established risk data base, analyze the risks and benefits, assess the risk of different enterprise development strategies, finally, select the appropriate measures to deal with risks. Once the risk assessment system developed and put into implementation, it has gradually moved toward the enterprise risk management.3.Establishing effective incentive mechanism .Modern enterprise competition is the human resource competition, talent is the most important and most active in many elements of productive factor, is one of the most valuable wealth of enterprises. the quantity, quality, structure of talents determines the success or failure of enterprises in a large extent. the incentive mechanism can stimulate the fully staff motivation, creativity, potential of employees and make individual employees development and enterprise's development closely linked together.ConclusionIn a word, enterprise risk management needs joint efforts of the Board, management and all staff. Enterprise risk management requires people to long-term continual exploration and continuous improvement. While this work is more challenging, but it would be very useful for achieving corporate objectives, improving operational efficiency, reliability of corporate reportingReference.businessdictionary./definition/risk-management.html/wiki/Barings_Bank/wiki/Enterprise_risk_managementbaike.baidu./link?url=BKBEeAkJrHXFDnfXaRPbmcBcsWAJkAnzmxienTFnrDlLY2Y St9k2KD2RU_qZZocC4-TJhwVxtLO5MgyvdBBaG_wiki.mbalib./wiki/Enterprise_risk_managementThomas L.Barton, William G. Shenkir, and Paul L. Walker, Making Enterprise Risk Management Pay Off, Financial Executives Research Foundation, Upper Saddle River, N.J., 2002.books.google.ie/books?id=ZdpPil_wyJgC&pg=PA268&lpg=PA268&dq=Making+En terprise+Risk+Management+Pay+Off&source=bl&ots=tDZssnUcnf&sig=DNNYe6g A5ofgXRrHAqEh1k6qF8M&hl=en&sa=X&ei=vTc0U8_UAqXb7Aa60oHYBA&ved=0CF0Q6A EwCA#v=onepage&q=Making%20Enterprise%20Risk%20Management%20Pay%20Off& f=falseMichel Crouhy , Dan Galai, Robert Mark, The Essentials of Risk Management, McGraw Hill Education, 2013。

risk management

风险管理系统内部和外部众多风险获得可视性和控制是当今公司的首要任务之一。

随着监管命令和日益活跃股东的近期突变，许多组织越来越敏感地识别其业务的风险领域，无论是财务、业务、信息技术（IT）、品牌还是名誉有关的风险。

公司正在寻求系统地识别措施，优先顺序处理并响应所有类型的商业风险，然后在组织的战略和优先顺序基础上管理任何风险。

MetricStream为记录和评估风险、定义控制、管理评估和审计，识别问题及执行建议和补救计划，提供集成的和灵活的框架。

风险管理系统包括功能强大的风险分析和监测工具，例如，可配置的风险计算器和风险热图。

风险评估和分析MetricStream风险管理系统提供了一个集中的风险框架，以记录和管理组织所面临的所有风险。

基于结构化的方法和算法，它支持风险评估和计算，使组织的风险状况一目了然，并使管理人员优先考虑可以获得最佳的风险/回报结果的应对战略。

控制设计与评估一旦确定主要风险和优先次序，MetricStream利用全美反舞弊性财务报告委员会发起组织的（COSO）框架，使公司能够定义控件集，减轻风险。

该解决方案还允许相关的政策和程序文件作为附件以供参考。

可以设计评估计划，以评估和确保控制的有效性，并分根据角色和职责分配给业主。

整个组织中的风险人员和流程业主可以管理风险评估程序，以确保旨在缓和风险的控制有效性。

该系统支持基于预定标准和清单的评估，并具有一个计分、制表和报告结果的机制。

所有评估的存储库，具有一个简单的搜索功能，确保用户可以查看一个特定的控制是否已被测试，评估的结果，以及是否需要任何补救行动计划。

内部审计MetricStream风险管理提供与内部审计管理的无缝集成，以流线化组织中审计管理进程。

它提供灵活性来管理大范围的与审计有关的活动，数据和程序，以支持风险管理。

它支持所有审计的类型，包括内部审计、经营审计、IT审计、供应商审核和质量审核。

该解决方案提供管理整个审计生命周期连续的功能，包括审计计划和调度，标准审计计划和清单的制定，实地数据收集，审计报告和建议的制定，被审单位对审计建议的评审，审计建议和和补救管理和实施。

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Solutions to Chapter 24Risk Management1. Insurance is a part of risk management that is similar in many ways to hedging. Bothactivities are designed to eliminate the firm’s exposure to a particular source of risk.Hedging and insurance have several advantages. They can reduce the probability ofencountering financial distress, or in extreme cases, bankruptcy. They make the firm’s performance less vulnerable to events not u nder the firm’s control, and therefore enable managers and investors to better evaluate performance. By reducing the impact of such random events, they also facilitate planning.Hedging and insurance make most sense when the source of uncertainty has asignificant impact on the firm’s performance. It is not worth the time or ef fort toprotect against events that cannot materially affect the firm.2. a. She should sell futures. If interest rates rise and bond prices fall, her gain on thefutures will offset the loss on the bonds.b. He should sell futures. If interest rates rise and bond prices fall, the firm’s profitson the futures will offset the lower price the firm will receive for its bonds.3. Scan The Wall Street Journal and you will see a wide array of futures on agriculturalcommodities, as well as other raw materials. Purchasers of any of these commodities can hedge cost risk by buying futures contracts, and producers can hedge revenue risk byselling futures contracts.4. The object of hedging is to eliminate risk. If you eliminate uncertainty, you eliminatethe happy surprises as well as the unhappy ones. If the farmer wishes to lock in thevalue of the wheat, then it is inconsistent to argue later that he is subject to the risk oflosing the opportunity to sell wheat at a price higher than $9.40. Farmers who are in a position to benefit from increases in wheat prices are at least implicitly speculating on wheat prices, not hedging.5. The contract size is 5000 bushels, so the farmer who sells a wheat futures contractrealizes the following cash flows on each contract:Futures priceChange infutures priceCash flow per contract(5,000 ⨯decrease in futures price)Day 1 $9.83 0.00 0Day 2 $9.89 +0.06 -300Day 3 $9.70 -0.19 +950Day 4 $9.50 -0.20 +1,000Day 5 $9.60 +0.10 -500Total -0.23 +1,150The sum of the mark to market cash flows equals the total decrease in the futures price times 5000. This is the same payment that would be required if the contract were not marked to market. Only the timing of the cash flows is affected by marking to market.6. One advantage of holding futures is the greater liquidity (ease of purchasing andselling positions) than is typical in the spot market. Another is the fact that you donot need to buy the commodity. You simply put up the margin on the contract untilthe maturity date of the contract. This saves the opportunity cost of capital on thosefunds for the length of the contract. A third advantage is that, if you hold futuresinstead of the underlying commodity, you will not incur storage, insurance, orspoilage costs on the commodity.The disadvantage of the futures position is that you do not receive the benefits thatmight accrue from holding the underlying asset. For example, holding stock rather than stock index futures allows the investor to receive the dividends on the stocks. Holding copper inventories rather than copper futures allows a producer to avoid inventoryshortage costs.7.Gold Price$800 $860 $920a. Revenues $800,000 $860,000 $920,000Futures contract gain (loss) 80000 20,000 -40,000b. Total revenues $880,000 $880,000 $880,000c. Revenues $800,000 $860,000 $920,000+ Put option payoff 60,000 0 0 -Put option costs 6,000 6,000 6,000 Total revenues $854,000 $854,000 $914,0008.Gold Price$800 $860 $920a. Cost of gold $800,000 $860,000 $920,000+ Cost of call 10,000 10,000 10,000- Call option payoff 0 0 60,000Net outlay $810,000 $870,000 $990,000b. Cost of gold $800,000 $860,000 $920,000+ Cost of call 20,000 20,000 20,000- Call option payoff 0 -20,000 -80,000Net outlay $820,000 $860,000 $860,000The more expensive calls (with the lower exercise price) provide a better outcome(a lower net outlay) when the price of gold is high, but a worse outcome when theprice of gold is low.9.Suppose you lend $100 today, for one year, at 4% and borrow $100 today for two yearsat 5%. Your net cash flow today is zero. In one year, you will receive $104, and you will owe: $100 ⨯ (1.05)2 = $110.25 for payment one more year hence.This is effectively a one-year borrowing agreement at rate:($110.25/$104) – 1 = 0.060 = 6.0%This is the forward rate for year 2. Since you can create a ‘synthetic loan’ at theforward rate, which is less than the bank’s offer, you should reject the offer.10. One way to protect the position is to sell 10 million yen forward. This locks in thedollar value of the yen you will receive if you get the contract. However, if you do not receive the contract, you will have inadvertently ended up speculating against the yen.Suppose the forward price for delivery in 3 months is ¥105/$, and you agree to sellforward 10 million yen or $95,238. Consider the possible outcomes if the spot ratethree months from now will be either ¥100/$ or ¥110/$:¥100/$ ¥110/$If you win contract:Dollar value of contract $100,000 $90,909Profit on forward contract -4,762 4,329Total $95,238 $95,238If you lose contract:Dollar value of contract $ 0 $ 0Profit on forward contract -4,762 4,329Total -$4,762 $4,329If you win the contract, the forward contract locks in the dollar value of the contract at the forward exchange rate. However, if you lose the contract, then your short position in yen will result in losses if the yen appreciates and gains if the yen depreciates. This is a speculative position.Another approach is to buy put options on yen. If you buy options to sell 10 million yen at an exercise price of ¥105/$, then, if you win the contract, you are guaranteed anexchange rate no worse than ¥105/$ if the yen depreciates, but you can benefit fromappreciation in the yen. This appears to be superior to the forward hedge, but remember that the options hedge requires that you purchase the put. This hedge can be costly. 11. Assume that the futures price for oil is $20 per barrel. Petrochemical will take along position to hedge its cost of buying oil. Onnex will take a short position tohedge its revenue from selling oil.Oil Price (dollars per barrel) Cost for Petrochemical $80 $90 $100Cost of 1,000 barrels $80,000 $90,000 $100,000- Cash flow on long futures position -10,000 0 10,000Net cost $90,000 $90,000 $90,000Oil Price (dollars per barrel) Revenue for Onnex $80 $90 $100Revenue from 1,000 barrels $80,000 $90,000 $100,000+ Cash flow on short futures position 10,000 0 -10,000Net revenues $90,000 $90,000 $90,000The advantage of futures is the ability to lock in a riskless position without paying any money. The advantage of the option hedge is that you benefit if prices move in onedirection without losing if they move in the other direction. However, this asymmetry comes at a price: the cost of the option.12. You receive the gold at the maturity date, and you pay the futures price on that date.Your total payments, including the net proceeds from marking to market, equal thefutures price on the day that you enter the futures contract.The futures price is higher than the current spot price for gold. This reflects the factthat the futures contract ensures your receipt of the gold without tying up your money now. The difference between the spot price and the futures price reflects compensation for the time value of money. Another way to put it is that the spot price must be lower than the futures price in order to compensate investors who buy and store gold for the opportunity cost of their funds until the futures maturity date.13. The car manufacturers could have bought dollars forward for a specified number ofeuros (or equivalently, sold euro contracts). This would serve to hedge total profitsbecause, when profits in the U.S. market decrease due to appreciation in the euro, the company would realize greater profits on its futures or forward contracts.On the other hand, it is less clear that such hedging would improve the competitiveposition of the manufacturers. Once the contracts are in place, each firm should still evaluate the car sale as an incremental transaction that is independent of any proceeds from the forward position. Is the dollar price charged on each incremental sale enough to cover the incremental costs incurred in euros? If not, the firm may decide to raise the dollar price regardless of any profits on futures contracts. So, while the hedge canstabilize the value of overall profits in the face of currency risk, it is less likely to affect the competitive position of the firm.14. A currency swap is an agreement to exchange a series of payments in one currencyfor a specified series of payments in another currency. For example, a U.S. firm that will be buying £1 million of supplies per year from a British producer might enterinto a currency swap in which it pays $1.5 million per year and receives £1 millionpounds in return. This arrangement locks in the dollar cost of the parts purchasedfrom the U.K. supplier.An interest rate swap is an exchange of a series of fixed payments for a series ofpayments linked to market interest rates. For example, a bank that pays its depositors an interest rate that rises and falls with the level of general market rates might enter a swap to exchange a fixed payment of $60,000 per year for a floating payment equal to the T-bill rate times $1 million. (For example, if the T-bill rate is 4 percent, then the floating rate payment would be $40,000.) This arrangement locks in the amount ofthe bank’s expense s: the receipt of floating rate payments offsets the payments todepositors, so the bank is left with only the fixed payments on the swap agreement.15. Notice that, while Firm A pays a higher interest rate in both markets (presumablybecause it presents greater default risk), it has a relative disadvantage when borrowing in the U.S., where its cost of funds is 2% higher than Firm B's. In comparison, Firm A gets relatively better terms in euro countries, where its cost of funds is only 1% higher than Fi rm B’s. Instead of borrowing in the desired currency, each firm should borrow in the currency for which it has a comparative advantage. Then the firms can swap cash flows back into the desired currency. Suppose that A sets a goal of reducing its dollar interest rate to 7.5%, which is 0.5% lower than its rate on a dollar loan. Any additional savings from the swap will accrue to Firm B. Here is how the swap might work.Step 1: Firm B borrows $1,000 at a 6% rate in the U.S. (where it has a comparativeadvantage) and is obligated to pay $60 per year for four years and $1,060 in the fifthyear.Step 2: Firm A calculates that the present value of Firm B’s debt payments, using itsown target 7.5% interest rate, is $939.31. Therefore, Firm A borrows this amountof money in Switzerland, where it has its comparative advantage. Firm A borrows939.31 euros. At a 6% interest rate, Firm A must pay:0.06 939.31 = 56.36 euros per year for four yearsAnd then, in the fifth year, Firm A must pay: 56.36 + 939.31 = 995.67 eurosStep 3: The two firms enter a swap arrangement to exchange cash flows equal to theother’s principal and interest payments. So Firm A pays $60 to Firm B and receives56.36 euros per year for four years. In year 5, Firm A pays $1,060 in return for995.67 euros.Firm A’s net cash flows are as follows: It initially receives $939.31 by exchanging the proceeds from its euro borrowing into dollars. It uses the income from the swap to pay its euro bonds, and pays $60 per year for four years and $1,060 in year 5 on the swap.The effective interest rate (yield to maturity) on this loan is 7.5%, which is better than Firm A could have done in the U.S. (To determine the yield, think of Firm A aseffectively issuing a five-year 6% coupon bond for a price of $939.31.)Firm B receives $1,000 initially, which it exchanges for 1,000 euros. Its net cashoutflows in the following years are 56.36 euros per year for five years and an additional payment of 939.31 euros in the fifth year. This corresponds to a yield to maturity of4.53%, which is a better rate than it could have obtained by borrowing in euros directly.(This is the yield to maturity on a bond sold with a coupon rate of 6%, face value939.31, at a price of 1,000.)Each party receives a better rate than would have been available by borrowing directly in the preferred currency.。