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Portfolio risk; Derivatives

1. The derivatives market is complex because derivative buying and selling includes many things like financial contracts, including debt and structured debts and deposits, swaps, other obligations, futures, options, floors, caps, and forwards, and various combinations of these. Reporting may be hard to understand because derivatives are often forward looking and there can be many parts to the statement. They also have no real value themselves.

To improve the methods for valuing derivatives so that the reporting becomes more transparent. make the value of these available as soon as they change on financial websites open to the public.
Question: Don't we have useful models for valuing derivatives?

2. Since options have no value, there is no way one can truly figure out his Alpha or Beta number for risk. The standard deviation model needs to be modified to allow for derivatives (based on type, contract length and how purchased). This could help calculate a more correct estimate of portfolio risk.

One of the circumstances is based on structured debt (bonds) during times of interest rates rising will likely lose value, so this is risk. Put based in an account of a young investor with not too much equity before a market/stock(s) rally if the derivative is covered or uncovered. That will decrease the risk.

Question: Isn't an options risk already measured by its volatility? Is the answer perhaps to adjust for leverage in the portfolio? Isn't portfolio insurance (buying puts) a rather expensive long-term strategy?

Solution Preview

1. The derivatives market is complex because derivative buying and selling includes many things like financial contracts, including debt and structured debts and deposits, swaps, other obligations, futures, options, floors, caps, and forwards, and various combinations of these. Reporting may be hard to understand because derivatives are often forward looking and there can be many parts to the statement. They also have no real value themselves.

To improve the methods for valuing derivatives so that the reporting becomes more transparent: make the value of these available ...

Solution Summary

The improved methods for valuing derivatives for the reporting to become more transparent are given.

$2.19