Risk Management Definition

Risk Management

2007-2008

Introduction

Risk management has to determine what risks exist in an investment and handle the risks in good investment objectives.

Risk management is very important in Finance. In this assignment, we will understand in a first part the basic measures of the risk management. Then we will have more interest of the implementation of the Value at Risk. In the environment of Hedge Fund, we have to develop the risk factors. And finally, in order to manage a trading book, we will describe the limit structure and the tools to use in order to measure the risk.

1. Describe the advantages and disadvantages for each of the following risk measures:

a. DV01

Definition: DV01, also called dollar value of a 1 basis point move, is a measure showing the dollar value of a one basis point decrease in interest rates.

It shows the change in a bond's price compared to a decrease in the bond's yield.

It is also the reference for the Basic Point Value, a method to measure interest rate risk.

Advantage Disadvantages

- It makes easier to calculate the BPV

DV01 = Initial Price – Price at 1BPV

- Permit to observe the higher risk level of future trade

- Easy to understand

- Thanks to the calculation of BPV and the correlation with DV01, we can:

- apply