Learn from basics of risk to commodity swap

What is Risk?
Risk is defined as the unexpected volatility of asset prices and/or earnings. There are two major soures of risk :
1) Business Risk – It is the risk that arises out of business decisions. Example : Decision by senior management to create a new product line is a business risk when there is a drop in demand for the product
2) Financial Risk – It is the risk that arises out of firm’s financial market activities. Example : The value of the securities goes down because of market volatility

Stop Loss Limit :
A tool used to limit the loss in a position by eliminating the position after a threshold loss has been exceeded.
Ex: A trader would have set a limit of loss of 10% of the current stock price. If the current stock price is $10.00 and the price falls below $9.00 the trader would sell his stock.
Advantages of Stop Loss Limit:
• Easy to calculate
• Easy to explain
• Can be aggregated across assets
Disadvantages of Stop Loss Limit:
• Since it is an ex-post (after the loss has occurred) this does not prevent the actual loss from occurring
A tool that limits the risk factor exposure.
Ex: A trader can set the duration limit (set the option duration limit) to 1 yr, if the Interest change is more than 1% from the current rate.
Exposure Limit :
Advantages of Exposure Limit:
• Identify the exposure of an asset to an applicable risk factor
Disadvantages of Exposure Limit:
• Difficult to calculate
• Difficult to explain
• Cannot be aggregated across assets
• Fails to quantify the volatility of the risk factors and correlations between risk factors
Financial Risk Management Valueatrisk VaR :
A tool that defines the maximum loss over a defined period of time at a stated level of confidence.
Ex: Portfolio A will have a VAR of $1 million in 1 yr at 95% confidence level.

Advantages of VAR:
• It is an ex-ante tool (Before the fact has occurred)
• Captures risk factors and variation and co-variation of risk factors
• Can be aggregated across assets and with different risk characteristics

Disadvantages of VAR:
• Need accurate inputs otherwise VAR results will not be accurate
Accelerating principal swap is a FOREX/FX trading term.A swap is a derivative financial instrument wherein two counterparties agree upon to exchange one stream of cash flows against another stream.

Common accounting terminologies and their expansion:
Common accounting terminologies and their expansion is given below :
FAS – Financial Accounting Standards Board Statement
SAS – Statement on auditing standards
SSAE – Statement on standards for attestation engagements
SSARS – Statement on standards for Accounting and review services
Accelerating Principal Swap – FOREX TRADING TERM :
Total return swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, loans, or bonds. This is owned by the party receiving the set rate payment.
Total Return Swap :
Total return swaps allow the party receiving the total return to gain exposure and benefit from a reference asset without actually having to own it. These swaps are popular with hedge funds because they get the benefit of a large exposure with a minimal cash outlay.
B-Share Investment Banking Term:
A class in a family of multi-class mutual funds. This class is characterized by a back-end load structure that is paid only when the fund is sold
What is a Perfect market?
A perfect market has the following characteristics :
1) No cost of trading or enforcing contracts
2) Investors have identical information
3) No taxes are levied
4) There are no restrictions on the buying or selling of securities
5) Purchase and sale of securities donot affect the market price of securities
American Depositary Share – ADS:
A U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. American Depositary Shares (ADSs) are issued by depository banks in the U.S. under agreement with the issuing foreign company; the entire issuance is called an American Depositary Receipt (ADR) and the individual shares are referred to as ADSs.
Depending on the level of compliance with U.S. securities regulations the foreign company wishes to follow, the company may either list its shares over-the-counter (OTC) with low reporting requirements or on a major exchange like the NYSE or Nasdaq. Listings on the latter exchanges generally require the same level of reporting as domestic companies, and also require adherence to GAAP accounting rules.

Forex/FX:
The market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.
A- share Investment Banking Term:
In a family of multi-class mutual funds, this is the class that is usually characterized by a loaded fee structure. Class A mutual fund units will commonly have a front- or rear-end load, to compensate for the sales person’s commission. Not all fund companies follow this class structure; however, it is the prominent method of distinction
Futures Contract:
Futures Contract is a contract/agreement between the buyer and the seller to buy or sell an asset at a certain time in the future at a specified price.
Futures contracts are traded on exchanges – CBOT (Chicago Board Of Trade), CME (Chicago Mercantile Exchange).
The two parties involved in the contract don’t know each other. So the exchange provides a mechanism that provides the two parties a guarantee that the contract will be made.
Blue Skying:
Blue Skying is the process of getting the security approved for sale to the public within a state.
This is popularly called as “Blue Skying” the issue.
Blue skying must happen under the following conditions:
1) Broker dealers must be licensed
2) Broker dealers must be registered where security is sold
3) Security should be approved before sale
Compliance department monitors that the above mentioned three steps are met during the process of blue skying.
Bond Futures :
A bond future is a contractual obligation for the contract holder to purchase or sell a bond on a specified date at a predetermined price. A bond future can be bought in a futures exchange market and the prices and dates are determined at the time the future is purchased.
Operational Risk :
Corporate firms operate under complex systems and processes. There are many instances wherein the system can fail. Risk associated with failure of system and people as a whole/ failure of people and systems is generally categorized as operational risk.In general, any risk other than market risk and credit risk is an operational risk.Risks associated with business can also be called as operational risks.
Operational risks are of great significance where there is lot of people interaction. some very good examples are CRM(customer relationship Management) etc..Regulatory standards are mandated to prevent the failure of the systems.A popular regulatory standard used in Banking and financial services industry is Basel II. Basel emerged as Basel I and has matured to Basel II. This dictates the Banking Institution’s regulatory compliance.
Asset or Nothing Call Option:
Asset or Nothing Call Option is an option payoff that is equal to the asset’s price if the asset is above the strike price, otherwise the payoff is zero.These types of options don’t function like regular (plain vanilla) options that pay the difference between the exercise (strike) price and market price at expiry.This pays out one unit of asset if the spot is above the strike at maturity.
Alligator Spread :

Alligator spread is an unprofitable spread regardless of favorable market movements and due to large commissions charged upon the transactions. An alligator spread is usually used in the options market to describe a collection of put and call options that may not be profitable.

What is Arbitrage?

Arbitrage is a kind of hedging technique used in investment management.In general simultaneous selling and buying of stocks to offset losses is referred to as arbitrage. sometimes it helps us achieve profit with less risk.

Swap Bank:

Swap bank is a financial institution that acts as an intermediary for interest and currency swaps. The function of these intermediaries is to find counterparties for those who want to participate in swap agreements. The swap bank typically earns a slight premium for facilitating the swap.

Characteristics of futures contract:
Following characteristics are specified in the futures contract :
Futures contract trade on organized exchanges and have terms that is standardized
Forward contracts are private customized contracts
Exotic Options Vs Options :
Exotic Options Vs Options is a popular confusion among the investor community/ someone who is new to investment banking/option trading.
Exotic options are a special kind of options.
Unlike normal options they are traded over the counter(OTC), where as normal options are traded in exchanges.
Exotic options differ from normal American or European options.
The difference comes from way in which exotic options are structured – underlying securities which comprise the option, manner in which investor receives payoff.
There are many categories of exotic options like -Mountain range options, atlas options etc
Econometrics, What is an econometrics?
Econometrics is a social science that applies tools to the analysis of the economic phenomenon.Tools are economic theory, mathematics and statistical inference.Econometrics is the science that applies mathematical statistics to the economic data.
Data used for analysis can be of three types:
1) Time-series
2) Cross-sectional
3) Pooled
Options Non-linear derivative:
Option is a kind of non-linear derivative.Options are traded both in exchanges and over-the-counter (OTC).
There are two types of options :
1) Call Option
2) Put Option
Call option gives the holder the right to buy the underlying asset at a specified price at a specified date.
Put option gives the holder the right to sell the underlying asset at a specified price at a specified date.
The price in the contract is known as strike price or the exercise price.
The date mentioned in the contract is known as expiration date or maturity.
Futures Contract And Characteristics:
Futures Contract

  • Highly standardized contract specified by exchange
  • The person who buys/sells futures contract is obligated to buy/sell the assets at agreed upon time and at agreed upon price
  • Futures contract is used by speculators who take advantage of price fluctuations of the underlying asset to get a profit
  • Futures contract is used by hedgers to reduce the risk of the underlying asset

Characteristics of Futures Contract

  • Price quotation
  • Contract Size
  • Quality of asset
  • Delivery Time
  • Delivery Location
  • Position Limits
  • Daily Price Limits

Standard Deviation And Normal Distribution:
Standard Deviation:

  • Also known as volatility
  • Describes the spread of returns over the many periods
  • Larger the standard deviation, greater the risk about the returns
  • Denoted by Sigma

Normal Distribution:

  • Can be used to describe the probabilities of outcomes of returns using just the mean and the standard deviation
  • Used for calculate returns distribution in many applications
  • Used to determine the probability of returns above or below a certain level of return
  • Cumulative z-table is used to calculate the probability that a return will be below or above a predefined level

Financial Risk Management:
Financial risk management (FRM) is the process of deducting, assessing and managing financial risks.
What is value at risk(VaR)?
VaR is defined as the maximum loss over a defined period of time at a stated level of confidence given normal market conditions
Types of Var :
1) Delta normal VaR
2) Historical VaR
3) Monte-carlo VaR
Enterprise Risk Management:
Enterprise Risk Management is the process of managing all of a corporation’s risk within an integrated framework.Enterprise risk management helps an organization to obtain a better risk-return trade off, carry out strategic plan in a better fashion,gain competetive advantage, create shareholder value.Instead of managing the risks in a business one at a time ERM (Enterprise Risk Management) manages the risk in a cohesive framework.
Corporate Bond Corporate Notes :
Corporations borrow long term capital through debt instruments known as bonds.Corporations borrow intermediate term financing through notes.Corporations borrow short term financing through commercial loans.
Corporations borrow using short term instruments like commercial papers.
Tick Size:
Tick size is the minimum price of fluctuations of the contract.Exchange sets price movement per day
Contract that moves down by its daily price limit is known as price down
Contract that moves up by its daily price limit is know as price up
Exchange sets max no of contracts a speculator may hold to prevent speculators from having undue influence on market
Position limits does not apply for hedgers
Delivery Date:
The final date by which the underlying commodity for a futures contract must be delivered in order for the terms of the contract to be fulfilled.The maturity date of a currency forward contract.
Commodity Swap:
A swap where exchanged cash flows are dependent on the price of an underlying commodity. This is usually used to hedge against the price of a commodity.
Closing out positions:
Investors reversing their positions.Short futures contract position closes out a position by buying the same contract.Long futures contract position closes out a position by selling the same contract
Reversing a position is also known as offsetting trade.Closing out a position negates an initial position
Buyers and sellers are unimportant in a future contract.Exchange guarantees all trade
Parametric Value At Risk (VaR)

What is a derivative contract?
A derivative contract is a contract that derives its value from an underlying security.
Properties Of Derivative Contract :
1) Finite period
2) Predefined life
3) predefined reference rate/price
What is the difference between securities and derivatives?
1) A security is issued to raise capital to fund projects whereas derivatives are not issued to raise capital.
2) Securities are considered non zero sum games whereas derivatives are considered zero sum games

Know what FRM AIM is learn some AIM

What is a AIM in FRM??
As you start preparing for your FRM (Financial Risk Manager) certification the first term you come across is the “”AIM””.
So, what is a AIM? What does it really convey?

To put in simple terms AIM is the snapshot of the topics/information that a FRM candidate needs to learn to acquire the skills needed for planning, designing, maging and optimizing the risk prtfolio of your client. To put it simple it is the syllabus of FRM exam:).
In learnersreference.com, we’ll be providing information on these AIM’s which will help you to understand the concepts, crack FRM first attempt and land in your Risk manager dream job
Financial Risk Management:
Process of detecting, assessing, managing financial risk
Financial institutions manage financial risks on behalf of clients (Ex: people, firms, governments)
Some of the financial risk certifications are FRM, PRM, CFA
Four major types of financial risk:
Market Risk:

  • Volatility or fluctuation in prices in financial markets results in losses
  • Diversification strategy in portfolios may help reduce market risk

Types of Market Risk:

  • Equity Risk
  • Interest Rate Risk
  • Commodity Risk
  • Currency Risk
  • Absolute Risk
  • Relative Risk

Liquidity Risk:

  • Arises because of the inability to liquidate the position at a fair price that will result in loss
  • Examples include in depressed financial markets firms cannot sell their shares to raise sufficient cash since the value of the shares is lower in depressedfinancial markets

Credit Risk:

  • Arises because of counterparty not fulfilling their obligation/default by counterparty
  • Credit Risk = Probability of Default x Loss given default has occurred
  • Example: Company not paying their dues that they owe because of bankruptcy

Types of Credit Risk:

  • Credit Default Risk
  • Concentration Risk
  • Country Risk

Operational Risk:

  • Risk arising because of poor management decisions, poor monitoring systems, flawed economic models in assessing risk, human errors, fraud
  • Ex: JP Morgan losses to the tune of more than 2 billion dollars in their London office because of lack of strict monitoring controls, Rouge Traders inderivative trading causing loss to the company

Relate Significant market events of the past several decades to the growth of risk management industry :
Several significant events have occurred in the past that has affected the common man, financial institutions and business that has led to huge financial loses.

Some of the significant events in the past are as follows:

  • Black Monday of 1987 that saw a sharp decline in U.S stock price for a single day
  • Asian equity markets decimation of 1997
  • Russian default of 1998
  • 2001 September world trade attack
  • Sub mortgage crisis that started on 2007 and whose impact is felt even today

These events remind us that it is even more important to use financial risk management policies and practices to insulate ourselves from future financial losses.
Past Events triggering Financial Risk Management:
Several significant events have occurred in the past that has affected the common man, financial institutions and business that has led to huge financial loses.

Some of the significant events in the past are as follows:

  • Black Monday of 1987 that saw a sharp decline in U.S stock price for a single day
  • Asian equity markets decimation of 1997
  • Russian default of 1998
  • 2001 September world trade attack
  • Sub mortgage crisis that started on 2007 and whose impact is felt even today

These events remind us that it is even more important to use financial risk management policies and practices to insulate ourselves from future financial

losses.”,”AIM1.3 Relate Significant market events of the past several decades to the growth of risk management industry
Is Intangible Asset Same As Financial Asset?

In this tumbling economy  world economies are stimulated by quantitative easing policy of central banks of the respective economies. In simple terms quantitative easing is pumping of cashflow into country’s banks by central bank. The central banks will purchase financial assets of those financial institutions like banks in return.
So, what is a financial asset?
In simple terms an asset that doesn’t have a physical existence but will yield cashflow in return during a trade. A simple example is a fixed deposit in a bank which derives returns in form of interest based on fixed contractual agreement with the bank/financial institution. It doesn’t have a pysical existence like a piece of land/realestate property
Now comes the common question of is a financial asset intangible asset? Simple answer is not always. An intangible asset in general refers to variables (or) constants that drive business. Some good examples are company brand recognition, intellectual property, patent, business model, company’s rapport with customers, copyright, goodwill etc. They don’t have direct financial value but indirectly support them to generate money and provide financial stability to the firm
Before reimbursement expense ratio:
Before reimbursement expense ratio in mutual funds is the percentage of a fund’s average net assets that is used to cover the annual operating expenses of managing a mutual fund before reimbursements are made to the fund by managers.Also known as the “gross expense ratio”
Different Types Of Broker Dealers:
Different Types Of Broker Dealers exist in the market. A brief listing is given below:
Corporate clearing firm – these firms service the non-clearing firms.
Dealer’s brokers – these firms act as conduit between broker dealers.
Equity dealers – these firms are found in OTC (Over The Counter) market.
Futures trading firm – futures exchange. Futures on commodities like grains, metals, currencies, bonds, common stocks etc are made.
Institutional broker dealers – Act as broker dealers for corporations, mutual funds, trust companies
Investment banking firm – firms involved in IPO (Initial Public Offering)
Market making firms/dealers/trading firms
Merchant banking firms
merger and acquistion specialist
mortgage backed dealers – buyer receives interest and principal periodically
municipal bond dealers – they trade state and local governmen debt products
non-clearing broker dealers – these firms use the services of clearing firms to settle trade
online broker dealers
option market making firms
prime brokers
regional broker dealers
retail firms
specialist firms
third-market broker/dealers – they perform off-board trading wire house
Corporate Bond Corporate Notes:
Corporations borrow long term capital through debt instruments known as bonds.Corporations borrow intermediate term financing through notes.Corporations borrow short term financing through commercial loans.
Corporations borrow using short term instruments like commercial papers.

Flashback drop causes ORA-38305

I created a table and tried testing flashback drop command. This ensures that objects dropped previously will be flashed back from recycle bin. Recycle bin is an interesting feature introduced since Oracle database 10g. This ensures that references to the object are not removed from data dictionary. Since 9i version, object references are totally removed from data dictionary. From Oracle database 10g version till the recent version Oracle database , objects are renamed and stored in recycle bin.
SQL> create table flashbackdroptest(id number);
Table created.
SQL> insert into flashbackdroptest select user_id from dba_users;
40 rows created.
SQL> drop table flashbackdroptest;
Table dropped.
SQL> select count(*) from flashbackdroptest;
select count(*) from flashbackdroptest
*
ERROR at line 1:
ORA-00942: table or view does not exist
SQL> flashback table flashbackdroptest to before drop;
flashback table flashbackdroptest to before drop
*
ERROR at line 1:
ORA-38305: object not in RECYCLE BIN
I tried configuring flashback database and got the error
SQL> shutdown immediate
Database closed.
Database dismounted.
ORACLE instance shut down.
SQL> startup mount;
ORACLE instance started.
Total System Global Area 1071333376 bytes
Fixed Size 1375792 bytes
Variable Size 578814416 bytes
Database Buffers 486539264 bytes
Redo Buffers 4603904 bytes
Database mounted.
SQL> alter database archivelog;
Database altered.
SQL> alter system set db_flashback_retention_target=4320;
System altered.
SQL> alter system set db_recovery_file_Dest_size=500M;
System altered.
SQL> alter system set db_recovery_file_dest=’C:appusernamelearnersreference’;
System altered.
SQL> alter database flashback on;
alter database flashback on
*
ERROR at line 1:
ORA-00439: feature not enabled: Flashback Database
I found that flashback database feature is not an option in standard edition. I use Oracle database standard edition version. For using this features it is essential to have an Oracle database enterprise edition version.

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Repair command throws RMAN-06954


RMAN (Recovery Manager) is a backup solution that comes for free with oracle database. In Oracle Database 11g RMAN performs DRA (Data Recovery Advisor) function. If there is an instance crash, problem in starting the instance RMAN can list the failures, get advise on what failure is, repair the failures. Here is a simple demonstration of the same
RMAN> repair failure;
using target database control file instead of recovery catalog
RMAN-00571: ===========================================================
RMAN-00569: =============== ERROR MESSAGE STACK FOLLOWS ===============
RMAN-00571: ===========================================================
RMAN-03002: failure of repair command at 05/25/2010 12:04:56
RMAN-06954: REPAIR command must be preceded by ADVISE command in same session
RMAN> list failure;
List of Database Failures
=========================
Failure ID Priority Status Time Detected Summary
———- ——– ——— ————- ——-
62 HIGH OPEN 25-MAY-10 One or more non-system datafiles are
missing
RMAN> advise failure;
List of Database Failures
=========================
Failure ID Priority Status Time Detected Summary
———- ——– ——— ————- ——-
62 HIGH OPEN 25-MAY-10 One or more non-system datafiles are missing
analyzing automatic repair options; this may take some time
allocated channel: ORA_DISK_1
channel ORA_DISK_1: SID=9 device type=DISK
analyzing automatic repair options complete
Mandatory Manual Actions
========================
no manual actions available
Optional Manual Actions
=======================
1. If file C:APPUSERNAMElearnersreferencelearnersreferenceSYSAUX01.DBF was
unintentionally renamed or moved, restore it
Automated Repair Options
========================
Option Repair Description
—— ——————
1 Restore and recover datafile 2
Strategy: The repair includes complete media recovery with no data loss
Repair script: c:appusernamediagrdbmslearnersreferencelrhmreco_1904476729.hm
RMAN> repair failure;
Strategy: The repair includes complete media recovery with no data loss
Repair script: c:appusernamediagrdbmslearnersreferencelrhmreco_1904476729.hm
contents of repair script:
# restore and recover datafile
restore datafile 2;
recover datafile 2;
Do you really want to execute the above repair (enter YES or NO)? yes
executing repair script
Starting restore at 25-MAY-10
using channel ORA_DISK_1
channel ORA_DISK_1: starting datafile backup set restore
channel ORA_DISK_1: specifying datafile(s) to restore from backup set
channel ORA_DISK_1: restoring datafile 00002 to C:APPUSERNAMElearnersreferencelearnersreferenceSYSAUX01.DBF
channel ORA_DISK_1: reading from backup piece C:APPusernameFLASH_RECOVERY
_AREAlearnersreferenceBACKUPSET2010_05_25O1_MF_NNNDF_TAG20100525T081331_5ZQHQDLD_.BKP
channel ORA_DISK_1: piece handle=C:APpusernameFLASH_RECOVERY_AREAINFOPED
IAONLINEBACKUPSET2010_05_25O1_MF_NNNDF_TAG20100525T081331_5ZQHQDLD_.BKP tag=TAG20100525T081331
channel ORA_DISK_1: restored backup piece 1
channel ORA_DISK_1: restore complete, elapsed time: 00:00:55
Finished restore at 25-MAY-10
Starting recover at 25-MAY-10
using channel ORA_DISK_1
starting media recovery
media recovery complete, elapsed time: 00:00:05
Finished recover at 25-MAY-10
repair failure complete
Do you want to open the database (enter YES or NO)? yes
database opened
This has listed the failure, provided advice on failure, repaired the failure and opened the database after failure. It is noted that when STARTUP command was issued, database was mounted and failed to open. These commands have been issued by connecting to rman using rman target / and it fixed the issue. Finally there has been successful opening of the database.Also, we need to run the ADVISE command first before running the LIST command.

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