Market Risk Management and Capital Markets

Market risk management refers to the capital markets tools and techniques used to hedge the risk of adverse market movements. These include futures, forwards, and options in the fixed-income and foreign exchange markets; the theory of hedging; and value at risk. Options valuation; “the Greeks”; and definitions and formulas relating to parametric techniques, Monte Carlo simulations, and historical value-at-risk shortcuts are important tools in assessing and managing market risk. Key concepts include: basic option positions (puts and calls, buying and selling); the Black-Scholes model and its variations; options sensitivities (delta, gamma, vega, rho and theta); barrier options; calculating hedge ratios; translating volatility to different confidence levels and time horizons; and put-call parity and interest rate parity.