Option risk, measuring

This chapter looks at how options behave in response to changes in market conditions and the main issues that a market maker in options must consider when writing the contracts. It also reviews the Greeks —the sensitivity measures applied to option books—and an important set of interest rate options caps and floors. 

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This is why the decision analysis should be the form through which the risk information is communicated, stating the available options, risks, costs, benefits, and their distribution within the society. Risk management involves an evaluation of cost/effectiveness of risk reduction measures so that priorities can be made. Evaluating the measures in order to reduce the risk and implementing the cost-effective ones, is to manage the risk. 

As these parameters are monitored and changes in risk identified, critical issues can be escalated for more detailed review. Once several risk reduction strategies are identified, the same types of risk evaluation criteria (e.g., risk index, risk matrix, or other quantitative measures) described earlier in this book can be used to assess the relative benefits of each proposed risk mitigation option. Risk reduction can thus be defined as the process of evaluating and identifying options available to reduce risk, that achieve the desired level of risk reduction, and can be justified on a cost-benefit basis. 

In addition to the risk reduction benefits, the costs of risk mitigation options need to be evaluated. Due to the uncertainties associated with semi-quantitative and quantitative risk analysis results, a relative risk comparison, as compared to absolute measures of risk and benefits, is recommended. To conduct this type of relative comparison, incremental risk analysis can be used to evaluate the cost effectiveness of risk mitigation options, or determine the optimal combination of risk mitigation options. Figure 7.4 illustrates example results of this type of analysis, and uses the options from the F-N curve in Figure 7.3 as the basis for comparison. 

The scales and measurement options discussed in this chapter are presented in the order which they might be used to manage new employee safety. Section 9.2 examines measures of new employee safety expectations. Sect. 9.3 examines measures which provide an awareness of helping safety risks, and Sect. 9.4... 

The option-adjusted spread (OAS) is the most important measure of risk for bonds with embedded options. It is the average spread required over the yield curve in order to take into account the embedded option element. This is, therefore, the difference between the yield of a bond with embedded option and a government benchmark bond. The spread incorporates the future views of interest rates and it can be determined with an iterative procedure in which the market price obtained by the pricing model is equal to expected cash flow payments (coupons and principal). Also a Monte Carlo simulation may be implemented in order to generate an interest rate path. Note that the option-adjusted spread is influenced by the parameters implemented into the valuation model as the yield curve, but above all by the volatility level assumed. This is referred to volatility dependent. The higher the volatility, the lower the option-adjusted spread for a callable bond and the higher for a putable bond. 

An evaluation of both the frequency and the consequences of potential hazardous events to make a logical decision on whether the installation of a particular safety measure can be justified on safety and loss control grounds. Frequency and consequences are usually combined to produce a measure of risk, which can be expressed as the average loss per year in terms of injury or damage arising from an incident. The risk calculations of different design alternatives can be compared to determine the safest and most economical options. Calculated risk may be compared to set criteria that have been accepted by society or required by laws. See also Qualitative Risk Analysis. 

Flood risk management includes the analysis and assessment of risks and the formulation and implementation of risk reduction options. Risk analysis includes hazard as well as vulnerability determination and estimates the integral risk. Risk assessment deals with the evaluation and weighing of costs and benefits to derive a tolerable level of risk, taking risk perception into accoimt. Risk reduction deals with planned and realized measures and instruments supposed to decrease risks before (pre-flood), during the event and after an event (post-flood). Figure 38.1 shows the three tasks included in flood risk management. 

Risk management measures - options generation Identify choices available to the decision makers and factors that will influence the decisions and risk factors, as decisions are rarely based on one single factor alone. 

This gives two choices ia interpreting calculated NRR values, ie, a direct comparison of NRR values for different options or a comparison of the NRR value of each option with a previously defined NRR cutoff level for acceptabiUty. The NPV, DTC, and NRR can be iaterpreted as discounted measures of the return, iavestment, and return rate, analogous to the parameters of the earher example. These three parameters characterize a venture over its entire life. Additional parameters can be developed to characterize the cash flow pattern duting the early venture years. Eor example, the net payout time (NPT) is the number of operating years for the cumulative discounted cash flow to sum to zero. This characterizes the early cash flow pattern it can be viewed as a discounted measure of the expected operating time that the investment is at risk. 

An effective HE or cost-effectiveness analysis is designed to answer certain questions, such as Is the treatment effective What will it cost and How do the gains compare with the costs By combining answers to all of these questions, the technique helps decision makers weigh the factors, compare alternative treatments, and decide which treatments are most appropriate for specific situations. Typically, one chooses the option with the least cost per unit of measure gained the results are represented by the ratio of cost to effectiveness (C E). With this type of analysis, called a cost-effectiveness analysis (CEA), various disease end points that are affected by therapy (risk markers, disease severity, death) can be assessed by corresponding indexes of therapeutic outcome (mmHg blood pressure reduction, hospitalizations averted, life years saved, respectively). It is beyond the scope of this chapter to elaborate further on principles of cost-effectiveness analyses. A number of references are available for this purpose [11-13]. 

The degree of confidence in the final estimation of risk depends on variability, uncertainty, and assumptions identified in all previous steps. The nature of the information available for risk characterization and the associated uncertainties can vary widely, and no single approach is suitable for all hazard and exposure scenarios. In cases in which risk characterization is concluded before human exposure occurs, for example, with food additives that require prior approval, both hazard identification and hazard characterization are largely dependent on animal experiments. And exposure is a theoretical estimate based on predicted uses or residue levels. In contrast, in cases of prior human exposure, hazard identification and hazard characterization may be based on studies in humans and exposure assessment can be based on real-life, actual intake measurements. The influence of estimates and assumptions can be evaluated by using sensitivity and uncertainty analyses. - Risk assessment procedures differ in a range of possible options from relatively unso-... 

As a practical matter, risk reduction should always be considered before proceeding with QRA. If the cost of proposed risk-reduction measures is high, a detailed QRA may be justified. In this event, various risk-reduction options can be evaluated to determine which options produce the greatest benefit at the lowest cost. Additional guidance on risk-based decision making is available in the CCPS s Tools for Making Acute Risk Decisions with Chemical Process Apphcations (Ref. 77). 

Deciding which risk-reduction method to use maybe difficult. In many instances, appropriate decisions can be made without resorting to quantitative techniques. However, in some cases, particularly when the options are costly, quantitative risk analysis (QRA) and risk-based decision-making approaches may be an effective basis for measuring the improvement in safety arising from the proposed options. These approaches can also be used in prioritizing safety improvements and balancing cost and production issues. 

Alteplase has proven effective in the early treatment of patients with acute myocardial infarction (i.e. those treated within 12 h after the first symptoms occur). Significantly increased rates of patient survival (as measured 1 day and 30 days after the initial event) are noted when tPA is administered in favour of streptokinase, a standard therapy (see later). tPA has thus established itself as a first-line option in the management of acute myocardial infarction. A therapeutic dose of 90-100 mg (often administered by infusion over 90 min) results in a steady-state alteplase concentration of 3-4 mg l 1 during that period. However, the product is cleared rapidly by the liver, displaying a serum half-life of approximately 3 min. As is the case for most thrombolytic agents, the most significant risk associated with tPA administration is the possible induction of severe haemorrhage. 

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