To manage an effective risk management solution, you only need to calculate the value at risk. Ultimately, a successful risk management plan must implement effective hedging policies. Technical analysis is an important part of the strategy.
The recent market reversal caused by the subprime mortgage crisis is obviously a major market adjustment event. Whether working in the risk department of a large bank with more employees or as a co manager of a small consortium, the basic concerns about portfolio management are the same.
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How to maintain the highest quartile performance?
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How to protect assets in times of economic uncertainty;
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How to expand business credit and attract new customer assets?
I often hear experienced portfolio managers in the financial industry say that their risk management plans include using their superb asset selection skills to grasp market opportunities. In further inquiry, it was clear that there was some confusion in using hedging and derivatives as risk management tools.
For institutions such as banks and insurance companies, risk management analysis is undoubtedly an intensive process. Because they often have many different departments. Each department has different tasks and capabilities to increase the parent company’s profit center. But not all companies are so complex. Hedge funds and pension programs can have a large asset base, but they are often straightforward in determining risks.
Value at risk(usually called VAR) can be traced back to many years ago, but it was not until JPMorgan Chase Bank developed the risk measurement model in 1994 that VAR became the main tool for financial institutions to measure risk exposure. The simplest term is that VAR usually measures the potential loss of the product portfolio within one day or one week, and determines the possibility and extent of adverse market fluctuations. Therefore, if the VAR of the asset determines a loss of US $10 million at a 95% confidence level in a week, the probability that the value of the product portfolio will fall by more than US $10 million in a certain week of the year is 5%. The disadvantage of VaR is that we don’t know how much the loss of more than $10 million will be. This will not reduce the effectiveness of being a major risk measurement tool.
A sound risk management strategy must be integrated with the derivatives trading department. Since portfolio managers are aware of the risks they face, they should adopt some form of risk reduction strategy to reduce the possibility of unexpected market or economic events with a portfolio value of more than $10 million. Three options are available:
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Doing nothing is bad for investors’ investment losses. Reputation damage will lead to net decrease of assets;
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Sell a portfolio of $10 million – cash is dead money. If there is no market modification within a few years, it will not help to compensate. If you are too careful, a good portfolio manager will not get the top quarter.
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Hertz – All the largest and most complex financial institutions in the world think this is the answer.
Let’s see how it’s done.
Regular assurance is really simple. Once you understand this concept, its simplicity will surprise you. Let’s take a look at the $100 million stock portfolio that tracks the S&P 500 index. P500 and VAR are calculated in USD 10 million. The experienced CTA will advise portfolio managers to short S&P by $10 million. P500 index futures of futures exchanges. Now, if the product portfolio loses $10 million, the breakup will get $10 million. The end result is zero loss.
Some commentators will argue that market modification may not occur for many years, and the result of offsetting losses will have a negative impact on earnings. Although it is true, there is an answer to this question, which has been debated endlessly. After all, all the purposes of hedging are not to accurately predict the timing of these major market correction events. The answer is to use technical analysis to help you order hedging transactions.
Technical analysis can eliminate the emotional decision of transaction. It also provides traders with fair views on recent events and trends, and long-term events and trends. For example, the head and shoulder formation or the two top formations indicate that important rebounds may end soon and then be urgently modified. Although there may be disputes about the timing, there is no doubt that it needs to be fully addressed. In order to reach the main support level, 30% of the breakups may need to be lifted, and a correction is expected. The formation of the lower end of the rounding should wait for the start of a major rebound, indicating that the entire hedge fund has been cleared.
It is obvious that major market correction events rarely occur, and occur about once every 10-15 years. However, many minor adjustments and returns will seriously damage returns, fund performance and reputation.
If you have ever encountered consideration of the upcoming quarterly earnings or the highest earnings from liquidation, you should first consider hedging, and combine the evidence obtained from the careful analysis of technical indicators. Together, they are powerful tools, but only for those insightful people who think asset protection is as important as high earnings. I Make sure your competitors understand. Your customers will understand. They get more and more complicated every year. It’s important that you do the same.
