Sampling: The technique of sampling is usefully applied in various business decisions and operations.
Sampling is used largely in connection with percent defective than with variables because it is easier to classify objects as good or bad than it is to measure them accurately.
There are two types of risk in acceptance sampling:
1. Producer's Risk
2. Consumer's Risk
1. Producer's Risk
In any sampling plan, there is a possibility of rejecting a good lot and thus a producer is exposed to some risk. They should specify the level of fraction-defective below which a lot is considered good. This is called acceptance quality level(AQL)
2. Consumer's Risk
There is a possibility of accepting a bad lot. In such a case, the consumers or buyers are exposed to some risk.
In order to protect themselves against any such possibility, they should specify the level of fraction defective. This is known as lot tolerance percent defective(L.T.P.D.) or Rejectable Quality Level(RQL).
Market Risks
Fair Value for equity derivative and hedging strategies has to consider first which market risk influences their values.
Price risk relates to uncertain changes in the underlying's price, like index and stock
price movement.
Volatility risk refers to the standard deviation of the underlying's returns: however, volatility itself fluctuates over time so that volatility is not constant but rather stochastic.
Crash or Jump risk The stock market crashes of 1987,1998,2001 and 2008 as well as implied volatility of stock index options indicate that there is a significantly positive probability for large market drops: such discontinuities may break down, for example, otherwise sound dynamic hedging strategies.
Interest Rate Risk although equity derivatives generally do not rely on interest rates
or bonds directly their value is indirectly influenced by interest rates via risk-neutral discounting with short rate.
Correlation Risk It measures the co-movement of two or more quantities. Correlation may change over time and become close to 1 perfect among asset classes during times of stress.
Liquidity risk dynamic and static hedging strategies depend on market liquidity for example if certain options are not liquidly traded the desired hedge may not be executable.
Default risk in case of the default of a company represented in the underlying assets, stocks, or bonds of this company depreciate in value.
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