Risk Management Tools

Abstract

A portfolio or fund manager needs risk management tools to be able to quantify the risks inherent in the portfolio. Indeed, if the portfolio is composed of equity derivatives, then its value depends on the variations of the different parameters that could impact the market price of these derivatives. In the case of equity options, the premium is affected by several parameters such as the actual price of the equity underlying, the volatility, the expected dividends, the interest rates and the time to maturity. There exists a series of tools or measures that help the fund manager quantify the sensitivity of the different derivatives depending on the behavior of the above parameters; these are known as the “Greeks.”