How do you risk manage portfolios that contain financial derivatives? financial derivatives

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These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link.
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Derivatives are specific types of instruments that derive their value over time from the performance of an underlying asset: eg equities, bonds, commodities.
A derivative is traded between two parties – who are referred to as the counterparties. These counterparties are subject to a pre-agreed set of terms and conditions that determine their rights and obligations.

The most common types of derivatives are options, futures, forwards, swaps and swaptions. I have created videos already explaining all of these financial products.

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Market risk refers to the sensitivity of an asset or portfolio to overall market price movements such as interest rates, inflation, equities, currency and property.

In addition to market risk, derivatives carry counterparty credit risk. Counterparty risk arises when one of the parties defaults, resulting in a replacement risk for the non-defaulting party. As the use of derivatives has grown, systems and methodologies to monitor and mitigate counterparty risk have become more sophisticated. Regulators have also been enhancing the accounting standards (eg IFRS 13) and capital frameworks to capture counterparty risk.

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Whilst VaR remains an important metric for measuring market risk exposure, there are limitations with this measure. Regulators are increasingly recommending a broader range of risk metrics to evaluate risk exposure. Ultimately, each investor needs to adopt the best combination of risk metrics for their unique asset/liability, funding and risk profile. .

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How do you risk manage portfolios that contain financial derivatives?

How do you risk manage portfolios that contain financial derivatives?

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How do you risk manage portfolios that contain financial derivatives?
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13 comments

Thomas Eriksson 25/09/2021 - 11:31 PM

Working as a Microwave Design Engineer in Sweden. I have started to learn more about Macro and Micro economics and statistics. I'm saving in stock and funds. I hope to learn about risk and portfolio Management.

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SusieAspen 25/09/2021 - 11:31 PM

My degrees are in Education, Reading and Special Education. I'm a licensed school superintendent in the USA, but have been unable to obtain employment in this area. I have also been a special education director at several schools and decided I don't like schools in the USA, so I have been grading school administrator exams that administrators need to pass for their license, along with teacher candidate portfolios for an international company for the past eleven years. I want to do something different with the rest of my life, so I am listening to your videos for now.

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ThatGuy WithTheKendama 25/09/2021 - 11:31 PM

Learned this about stops early in a lucky accident, personally I'm not a sophisticated investor but I want to learn. Thanks for the nuggets I'll have to pick up your book👍

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ProfessorDanks 25/09/2021 - 11:31 PM

Nice!
I’m currently a senior at a university and in a program that manages 2million in equities and fixed income.
We are now starting a new derivatives paper portfolio

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Josh Bolton 25/09/2021 - 11:31 PM

Just learning everything i can. I have some money saved up.

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brad wobig 25/09/2021 - 11:31 PM

great video series Patrick. I have been in the industry for 20 years and made it through 2 years of CFA training before giving up on that dream out of laziness. My strategy is normally to hold mostly US treasuries and luckily i bought a bunch of 4-5 year bank CD's in Q1 2019, before the fed started lowering rates. I have a good percentage in 3% 60 month CD's, and I also will sell a cash covered put/s on an index, I will buy a slightly more out of the money, less expensive put, to protect againts downside loss. My goal is to have a profit of about 1% per month using the net of selling the put and buying the put. With that 1%-2% profit monthly on the options and an annual return from the treasuries and CD's of around 2%. I can get a very safe average return of about 10%.

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Christopher Gacek 25/09/2021 - 11:31 PM

Just quit my job is commercial print to trade futures. Trying to cut my teeth on industry jargon. Great videos my Boyle.

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sunnohh 25/09/2021 - 11:31 PM

Work in the industry for close to a decade, degree in econ and finance. Love seeing actual academic and practical facts get out there on stocktube.

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DeebzFromThe90s 25/09/2021 - 11:31 PM

I work in municipal gov't in a small city in Canada as an building energy consultant. I work on energy models of our buildings and keep our consumption low. I am a financial minimalist who is aggressively investing my savings, particularly in innovation/solar/e-commerce ETFs. I am fully allocated (almost my entire net worth) in these ETFs. I am attempting to max out my TFSA with long investments before I move onto exclusively options in a margin account. I believe I have the theory down, and occasionally I will buy some calls when I am bullish on a stock, when volatility seems low, and the set up (decreasing volatility/swings in a wedge) is right. I am looking to short options for premium once I open that margin account, and I'll be starting off the margin limit making extremely small trades until I have enough experience and consistency. Your videos have been incredibly helpful as most YouTubers merely cover the basics; I love your videos on VAR/Delta-hedging/etc., all of which goes above and beyond. Thank you!

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Christian Dencker 25/09/2021 - 11:31 PM

Now I get it ! Thanks ! 👌

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Mohammad Nafisi 25/09/2021 - 11:31 PM

Hi Patrick. I am a junior in college. I have read about the markets and financial tools for a year. I would say I have above average knowledge but no where near a professional. Looking forward to learning more from you.

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marc gerges 25/09/2021 - 11:31 PM

Hi Patrick, your treatment of the Ponzi story was insightful and heartfelt…thank you

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Belvendran ranjan 25/09/2021 - 11:31 PM

Pls show some real example to understand better with graph and price movement

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