Portfolio risk management

Portfolio risk management These bonds assure the price protection to portfolios by changes in interest rates. Moreover, they show a low correlation with other asset classes, including bonds. 

VaR models were first developed for the financial industry in the early 1990s. They are considered as a standard measure for market risk and used extensively in portfolio risk management. From the financial point of view, VaR measures the maximum possible loss in the market value of a given portfolio. Considering the characteristics of VaR type risks caused by rare events, the concept of VaR can be applied to risk quantification in supply chain management also. 

Rogers M.J., Gupta A. and Maranas C.D. 2003. Risk Management in Real Options Based Pharmaceutical Portfolio Planning. POCAPO, 241—244. 

In the case of a fully hedged portfolio there is, of course, a cost. The fully hedged portfolio is a portfolio whose return over a specific, short period of time has been transformed to be approximately the return on a short-dated instrument. The flexibility afforded by the futures contracts allows the return to be adjusted according to the risk preferences of the fund manager. Risk-averse fund managers will tend to fully hedge their portfolios risk takers may choose to short fewer contracts and, in effect, use only a partial hedge. 

For more details, see Lionel Martellini, Stephane Priaulet, and Philippe Priaulet, Fixed-Income Securities Valuation, Risk Management and Portfolio Strategies (Hoboken, NJ John Wiley C Sons, Inc., 2003). 

Utilizing the shortfall risk framework an investor s risk aversion can be described more clearly than for example, with a utility function. A common utility function is U = L X fp - Op (William F. Sharpe, A Simplified Model for Portfolio Analysis, Management Science 9 (1963), pp. 277-293). Here determination of the parameter X, which measures the investor s risk aversion, is a problem. 

All this makes risk management more complex for option books than for portfolios of other instruments. Each variable must be considered and, in some cases, derivatives of these variables. The latter are often referred to as the Greeks, because Greek letters are used to denote them all, except volatility sensitivity. This is most commonly represented by vega, although the Greek kappa is also sometimes used. 

Explain the portfolio strategy in risk management. Where and how is it used for risk mitigation Name one company that uses this strategy effechvely and explain how it is done. 

Despite such improvements, exploration remains a high risk activity. Many international oil and gas companies have large portfolios of exploration interests, each with their own geological and fiscal characteristics and with differing probabilities of finding oil or gas. Managing such exploration assets and associated operations in many countries represents a major task. 

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