Derivatives Use
Derivatives Use, Trading & Regulation (2006) 12, 228–243. doi:10.1057/palgrave.dutr.1850044
Risk management for derivatives
Practical applications
This paper
—describes how derivatives are used in portfolio management;
—explains how to measure the effective economic value of the investment achieved by a derivative transaction and the role of collateral;
—discusses the different types of risk associated with derivatives, the interaction between derivatives and conventional instruments and, from this,
—addresses the question of how derivatives risk can be measured, managed and, where necessary, controlled.
1138 Avenue Ledru Rollin, 75011 Paris, France. Tel: +33 020 7809 6118; E-mail: frances.cowell@morleyfm.com
2Frances Cowell has worked in the investment management industry since 1983 starting as an equity analyst for Aetna Investment Management in Australia. Since then she has managed domestic and international equity and fixed interest portfolios, and asset allocation. In each case the focus has been applying quantitative techniques, with an emphasis on combining derivatives and physical investments, to construct and manage investment portfolios with predefined risk targets to meet specified investment objectives. In 1998, she moved to the UK to work for QUANTEC, a major provider of portfolio risk management systems, and in 2002 took up duties as Interim Head of Portfolio Risk at Morley Fund Management. She now works in the Portfolio Risk team, specialising in risk management for derivatives and hedge funds.
Received 16 October 2006; Revised 16 October 2006.
Abstract
For conjuring fear, few aspects of investments rival derivatives. This is not surprising given the history of august institutions humbled or even demolished as a result of poor risk management of their derivatives exposures. While some types of derivatives strategies certainly demand a very specific approach to risk management, it cannot be said that derivatives defy risk management.
