Financial Risk Management. Final paper, 2016
Charlotte Shortback is a character in “2312”, a science-fiction novel by Kim Stanley Robinson. In his
fictional future, global warming has turned the Earth into a wet, jungle-like planet. New York City is 11
meters under water. In other places, desperate efforts are under way to hold glaciers in place with liquid
nitrogen and dams. The book explains that modern history has three periods: the Accelerando (~2160
to 2200, when human lifespans were greatly extended and the terraforming of Mars was completed);
the Ritard, when the people of Mars lapsed into isolationism; and the Dithering (2005 to 2060), when
people understood the science of climate change but did little to prevent it; nor did they try to colonize
Terrorized by his own predictions, and concerned for his offspring, Mr. Robinson has asked you to
design a financial product that hedges against the effects of The Dithering. The global average
temperature has been rising over the last 50 years, and the global CO2 emissions have been rising
significantly over the same period (see charts). Robinson wants to issue two types of derivatives
(assume European for simplicity’s sake): a) one whose payout is a function of the average temperature
and b) one that is a function of the global CO2 emissions
Design a methodology to determine the fair price of his products. This should consider a) the
incentive structure for the potential buyers (hint: use a credit risk framework), b) the
geographic nature of the product (should it be sold globally, regionally or locally) and c) the
term and interest structure. As reference, note that in essence he is exchanging short-term
gains for long-term uncertainty through a quasi-insurance product.
2. Calculate the value at risk for the deal. Assess the quality of VaR as a risk management analysis
for this kind of deal.
3. Determine the amount of capital that he should hold to be able to face adverse loss scenarios.
4. Advise on the soundness of his idea. Note that this would be a financial product like no other.
Since the loss scenarios match particularly adverse geo-economic circumstances, a lot of things
can go really badly.
5. Assess mechanisms to effectively benefit his offspring (and Charlotte). What is the effect of
time, and the time value of money? Hint: consider the length and impact of “the Dithering
write a short memo explaining your views.
The memo should not exceed 1,500 words. No additional words will be considered for grading
purposes. Devote the time to make it shorter.
Any assumption should be explicitly mentioned in an annex (that won’t be considered for the
word count limit). Note that it is of essence to come up with a useful assumption structure.
Include as many sensitivity analyses as possible. Use charts, tables, etc.
Try to be as far-reaching as possible. Show command of the content – enrichment exercises,
homework articles, etc. A key component of your grade will precisely be your capacity to lever
every tool discussed during the course.
Categoría: Traducción y Contenidos
¿Cuántas palabras?: Hasta 2000 palabras
Es un proyecto o una posición?: Un proyecto
Disponibilidad requerida: Según se necesite