Monday, September 10, 2012

Measuring Market Risk – The Delta

By Jasvin Josen
This article appeared in The Edge, Malaysia on June 18, 2012

Maintaining a portfolio of financial instruments is an everyday thing for financial market investors, fund managers, dealers and traders at commercial banks and investment banks. Hand in hand with maintaining the portfolio is managing the risk that the portfolio will incur losses from fluctuation in the securities prices in the portfolio. This is market risk.

Say a trader holds a portfolio of palm oil futures. She knows what its market value is today, but she is uncertain as to its market value a week from today. The trader wants to identify this risk and reduce any exposures that she considers excessive. In other words, she wants manage the market risk. How does she do it?