NEED FOR RISK MANAGMENT
- Thread starter jogyjacob
- Start date
Hi jogyjacob:
Jorion's direction risks are risks of losses due to the UP or DOWN movement of a price, interest rate, etc; e.g., if you own a stock, you are exposed to the "directional risk" the stock may drop.
Also, if you write (go short) a put option, you are exposed to "directional risk" the stock will move down and your counterparty profits
Non-directional, per Jorion, are ALL OTHER RISKS. Among the important are:
* basis risk
* volatility risk
* non-linear risk (bond convexity and option gamma)
Consider the written put that has downside directional risk: it ALSO has non-directional volatility risk. The underlying price can create more volatility (up or down!) that increases the option value to your counterparty and creates a mark-to-market loss for you. Similarly, hedging an underlying commodity exposure with a futures contract still possess basis risk (i.e., that the futures gain/loss won't perfectly offset the underyling exposure) which is not an issue of up-/down direction.
So I think a good example is: to write a put. And see how you are exposed to both directional downside risk (stock down --> option price up), but also non-directional volatility risk (volatility up --> option price up)
It also, btw, relates to hedge fund strategies which can be classified directional / non directional and non-directional includes the so-called arbitrage strategies: they are not betting on up/down but rather relative values between positions.
Hope that helps, Daivd
Jorion's direction risks are risks of losses due to the UP or DOWN movement of a price, interest rate, etc; e.g., if you own a stock, you are exposed to the "directional risk" the stock may drop.
Also, if you write (go short) a put option, you are exposed to "directional risk" the stock will move down and your counterparty profits
Non-directional, per Jorion, are ALL OTHER RISKS. Among the important are:
* basis risk
* volatility risk
* non-linear risk (bond convexity and option gamma)
Consider the written put that has downside directional risk: it ALSO has non-directional volatility risk. The underlying price can create more volatility (up or down!) that increases the option value to your counterparty and creates a mark-to-market loss for you. Similarly, hedging an underlying commodity exposure with a futures contract still possess basis risk (i.e., that the futures gain/loss won't perfectly offset the underyling exposure) which is not an issue of up-/down direction.
So I think a good example is: to write a put. And see how you are exposed to both directional downside risk (stock down --> option price up), but also non-directional volatility risk (volatility up --> option price up)
It also, btw, relates to hedge fund strategies which can be classified directional / non directional and non-directional includes the so-called arbitrage strategies: they are not betting on up/down but rather relative values between positions.
Hope that helps, Daivd
nikogeorgiev
Member
Elaborate Directional risks and non directional risk
Jesus, can't you try and be a little bit polite?
Niko, thanks appreciate the sentiment, but he thanked us in a separate comment. We've been doing this a while, and for what it's worth, the really impolite folks are the ones who pirate and buy our pirated material, and make business difficult for us. To be a paid member and ask *anything* on the forum (as a contribution) is to be a valued customer; people are busy and often don't have time to write an essay, we will take the interaction any way we can get it. It is our job to be polite, not the customer's. Thanks, David
nikogeorgiev
Member
Hi David,
You are doing a great job, replying to each and everyone of us and you should get some appreciation, not only in terms of money. I totally agree with what you said about the illegal copies. It is a problem that is very difficult to cope with. It all comes down to personal ethos
Regards
Niko
You are doing a great job, replying to each and everyone of us and you should get some appreciation, not only in terms of money. I totally agree with what you said about the illegal copies. It is a problem that is very difficult to cope with. It all comes down to personal ethos
Regards
Niko
Jiew Kwang
Member
Hi David,
You are doing a great job, replying to each and everyone of us and you should get some appreciation, not only in terms of money. I totally agree with what you said about the illegal copies. It is a problem that is very difficult to cope with. It all comes down to personal ethos
Regards
Niko
You are doing a great job, replying to each and everyone of us and you should get some appreciation, not only in terms of money. I totally agree with what you said about the illegal copies. It is a problem that is very difficult to cope with. It all comes down to personal ethos
Regards
Niko
I absolutely agree. I have been asking questions since day 1 that i joined and david has answered almost every one of them with clarity. I understand that if everyone asked a question, there may not be enough time to answer everything and sometimes i pick it up some where down the road when i approach it again. thumbs up and i look forward to the webinar tonight (singapore).. morning for you guys..
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