Management Of Financial Derivative Instrument Risk

The financial derivative instrument is the necessity of the international financial market development. It provides us with an instrument to hedge financial transaction, manage investment portfolios and reducing financing cost. At the same time, the instrument itself has brought a lot of risk to the financial institutions. Therefore management of financial derivatives risk consists the topic of this thesis.The first part of the thesis described the background of the emergence of the financial derivative instrument, it also gives a detailed explanation of the characteristics of this instrument-high risk and high return, and the externality this kind of financial instrument having brought to the society. The uniqueness of the financial derivatives risk is also analyzed in the second part of the thesis. Indued in the second part is the reason of the risk of the financial derivatives. The third part briefly described the general principle of risk management-risk identification, risk measurement, risk appraisal and risk feedback, but the focus of the third part is the monitoring and management of financial derivative risks from various perspectives-international, national and institutional. All three parties must form a perfect co-ordination and form a perfect mechanism in managing the financial derivatives risks and the system approach is recommended in managing the financial derivatives risks. In the fourth part, based on mathematic and statistics model, the market risk model of option is explained in detail, with a case to explain the effectiveness of the delta hedging. The last part of this thesis gives the conclusion of the thesis.