The Use Of Derivatives For Portfolio


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The Use Of Derivatives For Portfolio

  1. 1. The Use of Derivatives for Portfolio Performance and Risk N.SATHISH KUMAR T.PRIYANKA B.SHANKARI
  2. 2. INTRODUCTION <ul><li>Recent decades have witnessed a dramatic shift in the nature of risk in global financial markets, in which the volatility of many asset classes has increased. In an environment in which investors are continuously exposed to a broad range of dynamic risks, derivatives have become a valuable tool used in the risk management practices of institutions. As a product of developments arising from the literature, derivative markets have experienced significant growth in both the size and scope of the securities available to traders. 2 These innovations have provided users with a wide range of alternatives in managing their financial market exposures. </li></ul>
  3. 3. Objective of the study <ul><li>Effective use of derivative instrument in risk and return point. </li></ul><ul><li>Using these instruments diversifying the risk </li></ul>
  4. 4. Methodology <ul><li>Risk metrics ---difference-in-means tests </li></ul><ul><li>Classifying momentum trades --difference-in-standard-deviation tests </li></ul><ul><li>Event study of option trades --goodness-of-fit tests </li></ul>
  5. 5. HYPOTHESES <ul><li>The use of derivatives causes significant impacts on the performance and risk of Australian investment managers. </li></ul><ul><li>Active investment managers are using options markets to implement momentum-based trading strategies. </li></ul><ul><li>Active investment managers are using options markets to engage in informed trading. </li></ul>
  6. 6. Distributional moments and risk measures <ul><li>Results of diference-in-means tests </li></ul>Mean contracts net Mean contracts long Mean contracts short Mean net delta exposure Mean long delta exposure Mean short delta exposure Mean Fund Size Number of Funds 74.93 90.2459% 24.25 54.3645% 0.19 0.1243% 0.07 -0.0017% 0.02 -0.0001% 73.98 90.2521% 23.77 54.3706% 0.17 0.1131% 0.04 0.0003% 0.01 0.0001% 0.95 -0.0061% 0.48 -0.0061% 0.02 -0.0112% 0.03 -0.0020% 0.00 -0.0002% 74.93 90.2459% 24.25 54.3645% 0.19 3.1345% 0.07 0.0165% 0.02 0.0001% 73.98 90.2521% 23.77 54.3706% 0.17 2.8525% 0.04 0.0278% 0.01 -0.0012% 0.95 -0.0061% 0.48 -0.0061% 0.02 -0.2820% 0.03 -0.0113% 0.00 0.0013% $346,065,932 34
  7. 7. conclusion <ul><li>The consequence of derivative use is analyzed using a number of performance and risk measures we find the use of derivatives have a negligible impact on fund returns. This finding is attributed to low levels of derivative exposure relative to total fund size . We also evaluate how derivatives are used by considering the trading strategies executed by investment managers. The option trading patterns of active institutional investors are shown to be consistent with the execution of momentum trading strategies. The study also documents that active investment managers prefer to use derivatives to have risk diversification . </li></ul>