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DERIVATIVES & RISK MANAGEMENT ASSIGNMENT – II

By: ATTIKA RAJ, ROLL NO: MS10A009, MBA- 2012 BATCH, DOMS, IITM

2/21/2012

I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1

II.

Case Analysis: Commodity Market Derivatives

Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one particular strategy 2. What are the negatives to rolling a spread position? Ans: Negatives to rolling a spread position are: When rolling a spread position the investor expects the following months to which the contract was rolled over to be favourable and thus be able to unload its positions. But, if the market moves in a direction opposite to the one anticipated by the investor it can result in huge losses. Also, if the risk increases for a spread position with the increase in the leverage. In the case of Amaranth hedge fund, it had rolled its short positions prior to august into the next month, hoping that market conditions would change and enable it to unload its positions. There were now no more summer months into which it could roll these positions. By late August, with hurricane season almost over and natural gas supplies plentiful, it appeared likely there would be adequate supplies for the winter. The market fundamentals were strongly indicating that there the winter/summer price spreads should fall. This was disastrous for Amaranth, which was still holding large positions that it had obtained when these spread prices were

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