Risk management

All investment portfolios have the objective realizing returns, therefore they’re exposed to different sources of risk. Portfolios are exposed to market risk: price, volatility and correlation, interest rate or currency changes. Additionally, they are can be exposed to counterparty defaults: credit risk. Next to this, investment can have a very long-term nature, or market liquidity could dry up: liquidity risk.

Finally, investments can be executed incorrectly due to process errors, calculation or human mistakes: operational risk. The objective of risk management is measuring and making all these risk quantifiable such that can be controlled better. It what follows we explain concepts on value-at-risk, the expected shortfall, the optimal hedge ratio, the greeks, dynamic hedging and the Altman-z-score. Thereafter we zoom in on volatility calculations for use of risk management. We consider the calculation of the EWMA volatility but also intraday variants such as realized volatility and Parkinson volatility.