RISK MANAGEMENT TECHNIQUES

TYPES OF MARGINS

ILLUSTRATION 1

1. Mr Maruti entered establish a long position in 200 shares of TISCO at a future price of Rs 600, with a contract size of 200. the initial margin is Rs 30000 and the maintenance margin is Rs 20000. the settlement price on the five trading days were given as follows:

You are required to calculate mark to market cash flows.

TRADING DAY

SETTLEMENT PRICE

1 6002 5503 6504 6005 605

Basis is the difference between the spot price (cash price) and futures price of an underlying asset.

Basis = St– Ft

BASIS RISK in hedging

Standard method used in derivatives market.

Weaknesses of VaR based on two-fold.

Developing Risk management value chain.

1. Suitability

2. Flexibility

3. Speed versus Accuracy

4. Back-Testing