Financial Derivatives

The ratio of the average forecast profits over the project's lifetime.

Difference between the present value of projected inflows and the projected outflows.

A real option is a choice made available with business investment opportunities, referred to as "real" because it typically references a tangible asset instead of financial instrument.

Ovesrestimation of the value, to simplistic, hard to find good proxies, overvalue unpredictable projects, time period can be problematic, garbage in - garbage out problem.

The london interbank offered rate

Short-term agreements to sell and repurchase securities at a specified rate

In order to be valued at zero, the Present Value of the CFs of each of the two streams must be equal.

Take benefit from comparative advantage. Transforming a fixed rate loand into a floating loan or vice versa.

One party agrees to pay on a fixed notional principal for a number of years and the other agrees to pay floating.

Usually referes to LIBOR or LIBOR + some fixed percentage.

Usually investment banks match counterparties and charge a fee. IB can make markets and charge a spread.

Transform borrowing currency.

Extendable: One party can extend the life of the swap, Puttable: one party has their right to terminate the swap early if favourable to them, Swaptions: right in Future to enter into a sap where predetermined fixed rate is exchanged for floating.

Value and analyze complex instruments, portfolios and investments by simulating the various sources of uncertainty.

Simulates the underlaying physical process and then calculates the average result of the process.

The potential that a chosen action leads to an undesirable outcome.

Weighted average of the likely payoffs of an asset.

Chance taht the actual return on an investment may be very different than the expected return.

Is a measure of the dispersion of a set of data points around their mean value.

Identification, assessment and prioritization of risks followed by the economical application of resources to minimize, monitor and control the probability/impact of unfortuante ecents.

transfer risk to another party, avoid the risk activity/investment, reduce the negative effect, accepting some or all of the consequences.

Predicted loss at a specific confidence level over a certain period of time.

It does not describe the worst loss and not the losses in the left tail. It is measured with some error. Furthermore, it assumes that the portfolio is static.

Claims to estimate the risk of rare events, which is impossible; Gives false confidence; Leads to excess risk taking.

Stands for generalized autoregressive conditional heteroskedasticity; weighted average of past squared returns.

An order placed with a broker to sell a security when it reaches a certain price. Limits the potential loss of an investor.

Expected return on the portfolio in the worst q% of cases. Also known as conditional value at risk.

Loss from failure of ordinary business processes?

The trust which allows one party to provide resources to another pyrty where that second party does not reimburse the first party immeduately but instead arranges either to repay or return those resources at a later date.

The risk of a loss arising from a borrower who does not make payments as promised; Event is called a default.

Payoff which depends on companies or countries bonds.

Financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event.

Bankrupty, failure to pay, or restructuring.

It is the price paid annually for protection on the bonds.