2.1. There are two types of risks, known as systematic risk and unsystematic risk. Systematic risk is the one that cannot be mitigated with the help of diversification and strategies; however unsystematic risk is the one that can be mitigated with the help of effective strategies. In terms of quantification, there are three different aspects that are integral known as market risk, credit risk and operational risk. In this particular assignment, all of the analysis will be based on the market risk and its exposure. It has been originated through the Forward and Future Contracts (Christoffersen and Mazzotta, 2004).
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One of the basic problem lies with the assets is their continuously falling values, and this problem will lead to increase the market risk in the asset class (Christoffersen, 2003). Some of the major techniques of Interest rate risk can be used to mitigate the amount of risk exposure from the assets and asset classes, like Forward Rate Agreement (FRA), Interest Rate Guarantee, Interest Rate Future (IRF), Exchange Traded Interest Rate Options and Interest Rate Swaps. All of these options known as Derivative Contracts which are an integral aspect that found under the scenario described of the S&P (Coleman, 2012). One of the basic problems lies in the quantification process is the unavailability of effective data that should be taken into account for the analysis purpose. Apart from that, there is always a probability associated with the quantification which is an indemnity that no result is final, and emphasize totally on the analysis would not be effective (Hampton, 2011). One of the major examples that known as a biggest discrepancy in the field of financial risk management (FRM) is value at risk (VAR), which will be taken into account to analyze the highest amount of risk, a portfolio can attain in a given time period. However, the test still not claim that it will be 100% true, as a proportion of alpha of 95% and 99% associated with it that will be addressed during the analysis of the asset. The problem associated in this scenario is that the portfolio is not going in the right direction, as it was expected, that is why it is required to hedge it with a different portfolio to minimize the level of riskiness.
In the question of fund management, wherein the portfolio worth $ 50 million and has a beta of 0.87. It means that the portfolio is less risky than that of the original market of the Standard & Poor (S&P-500) Index. The risk can be mitigated with the help of counter position, like if the portfolio is of long position, then the derivative contract should be of short. This is the only way from which a drop of 8.7% can be prevented from the drop of 10% from S&P.
2.2. Fundamental analysis and technical analysis are two different parts of the analysis. Fundamental analysis would have been performed on the basis of news and articles about the asset class, while technical analysis is all about analyzing the behavior of the asset class through riskiness and other technical aspects particularly (Hampton, 2011). Not enough can be said for fundamental analysis; however through different website sufficient data can be getting, like unemployment claims that can be found on the forex-factory website. The information regarding the fundamental analysis would have been performed through the analysis of news and other important aspects particularly (Lore and Borodovsky, 2000). On the other hand, it is required to analyze the asset class with technical skills. In this provision, the technical analysis would be like to analyze the riskiness in the asset class by analyzing the dividend yield, and the US free interest rate. The risk exposure can be assessed accordingly and effectively with the same aspect, by analyzing the asset class of the fund management.
Standard Deviation is one of the most important technical analytical tools used by the managers to analyze the level of variation from the overall fund, and it should be used here accordingly. If the essence of technical analysis would be applied on the given graph from the time period of 1980 to 1995, then there is a trend line that can be assessed. From the above mentioned graph, it is evaluated that the trend if showing downward trend in the worth of the asset class, that can be found with the help of the trend lines. Each year’s trend is showing a downward trend, which is an indemnity that further decrease in the price will be expected in the worth of the asset class. The trend line is showing that the value of the asset class is decreasing year on year, and later on it has a chance to further decrease in the future. Hence, a SHORT strategy is recommended.
References
Christoffersen, P. (2003). Elements of financial risk management. Amsterdam: Academic Press.
Christoffersen, P. and Mazzotta, S. (2004). The informational content of the over-the-counter currency options. Frankfurt am Main: Europ. Central Bank.
Coleman, T. (2012). Quantitative risk management. Hoboken, New Jersey: John Wiley & Sons, Inc.
Hampton, J. (2011). The AMA handbook of financial risk management. New York: American Management Association.
Lore, M. and Borodovsky, L. (2000). The professional's handbook of financial risk management. Oxford: Butterworth-Heinemann.
