Market Risk (Wahrenburg)

Market risk is the possibility that one party will experience losses due to factors that affect the overall performance of investments in the financial markets.

• Market Risk affects the performance of the entire market simultaneously

• cannot be diversifies

• may arise due to ICSEO

• Interest Rates

• Credit Spreads

• Stock Prices

• Exchange Rates

• Option implied volatility

Value at Risk is the maximal expected portfolio depreciation,

1. under normal conditions

2. over a specific period

3. at specific confidence interval

• Combining passive exposure with an options-based return-enhancement strategy

• A risk-managed option overlay that aims to generate outperformance with low correlation to the underlying beta portfolio

Gain the desired alpha exposure

• Build the option positions that will enhance the beta performance

• Combination of both long- and short-volatility positions

Gain the desired beta exposure

• Allocating the entire capital to a passive vehicle (ETF)

• Use that exposure as margin collateral for any short option positions

• No debt financing is used and therefore there is no vulnerability to an increase in borrowing costs