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Financial Risk Management: A Practitioner's Guide to Managing Market and Credit Risk PDF

657 Pages·2012·5.96 MB·English
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Contents Cover Series Title Page Copyright Dedication Foreword Preface Acknowledgments About the Author Chapter 1: Introduction 1.1 LESSONS FROM A CRISIS 1.2 FINANCIAL RISK AND ACTUARIAL RISK 1.3 SIMULATION AND SUBJECTIVE JUDGMENT Chapter 2: Institutional Background 2.1 MORAL HAZARD—INSIDERS AND OUTSIDERS 2.2 PONZI SCHEMES 2.3 ADVERSE SELECTION 2.4 THE WINNER'S CURSE 2.5 MARKET MAKING VERSUS POSITION TAKING Chapter 3: Operational Risk 3.1 OPERATIONS RISK 3.2 LEGAL RISK 3.3 REPUTATIONAL RISK 3.4 ACCOUNTING RISK 3.5 FUNDING LIQUIDITY RISK 3.6 ENTERPRISE RISK 3.7 IDENTIFICATION OF RISKS 3.8 OPERATIONAL RISK CAPITAL Chapter 4: Financial Disasters 4.1 DISASTERS DUE TO MISLEADING REPORTING 4.2 DISASTERS DUE TO LARGE MARKET MOVES 4.3 DISASTERS DUE TO THE CONDUCT OF CUSTOMER BUSINESS Chapter 5: The Systemic Disaster of 2007–2008 5.1 OVERVIEW 5.2 THE CRISIS IN CDOS OF SUBPRIME MORTGAGES 5.3 THE SPREAD OF THE CRISIS 5.4 LESSONS FROM THE CRISIS FOR RISK MANAGERS 5.5 LESSONS FROM THE CRISIS FOR REGULATORS 5.6 BROADER LESSONS FROM THE CRISIS Chapter 6: Managing Financial Risk 6.1 RISK MEASUREMENT 6.2 RISK CONTROL Chapter 7: VaR and Stress Testing 7.1 VAR METHODOLOGY 7.2 STRESS TESTING 7.3 USES OF OVERALL MEASURES OF FIRM POSITION RISK Chapter 8: Model Risk 8.1 HOW IMPORTANT IS MODEL RISK? 8.2 MODEL RISK EVALUATION AND CONTROL 8.3 LIQUID INSTRUMENTS 8.4 ILLIQUID INSTRUMENTS 8.5 TRADING MODELS Chapter 9: Managing Spot Risk 9.1 OVERVIEW 9.2 FOREIGN EXCHANGE SPOT RISK 9.3 EQUITY SPOT RISK 9.4 PHYSICAL COMMODITIES SPOT RISK Chapter 10: Managing Forward Risk 10.1 INSTRUMENTS 10.2 MATHEMATICAL MODELS OF FORWARD RISKS 10.3 FACTORS IMPACTING BORROWING COSTS 10.4 RISK MANAGEMENT REPORTING AND LIMITS FOR FORWARD RISK Chapter 11: Managing Vanilla Options Risk 11.1 OVERVIEW OF OPTIONS RISK MANAGEMENT 11.2 THE PATH DEPENDENCE OF DYNAMIC HEDGING 11.3 A SIMULATION OF DYNAMIC HEDGING 11.4 RISK REPORTING AND LIMITS 11.5 DELTA HEDGING 11.6 BUILDING A VOLATILITY SURFACE 11.7 SUMMARY Chapter 12: Managing Exotic Options Risk 12.1 SINGLE-PAYOUT OPTIONS 12.2 TIME-DEPENDENT OPTIONS 12.3 PATH-DEPENDENT OPTIONS 12.4 CORRELATION-DEPENDENT OPTIONS 12.5 CORRELATION-DEPENDENT INTEREST RATE OPTIONS Chapter 13: Credit Risk 13.1 SHORT-TERM EXPOSURE TO CHANGES IN MARKET PRICES 13.2 MODELING SINGLE-NAME CREDIT RISK 13.3 PORTFOLIO CREDIT RISK 13.4 RISK MANAGEMENT OF MULTINAME CREDIT DERIVATIVES Chapter 14: Counterparty Credit Risk 14.1 OVERVIEW 14.2 EXCHANGE-TRADED DERIVATIVES 14.3 OVER-THE-COUNTER DERIVATIVES References About the Companion Website Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e- commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. Cover image: John Wiley & Sons, Inc. Cover design: © Tom Fewster iStockphoto, © samxmeg iStockphoto Copyright © 2013 by Steven Allen. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. The First Edition of this book was published in 2003 by John Wiley & Sons, Inc. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572- 4002. Wiley publishes in a variety of print and electronic formats and by print-on- demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Cataloging-in-Publication Data: Allen, Steven, 1945– Financial risk management [electronic resource]: a practitioner's guide to managing market and credit risk / Steven Allen. — 2nd ed. 1 online resource. Includes bibliographical references and index. Description based on print version record and CIP data provided by publisher; resource not viewed. ISBN 978-1-118-17545-3 (cloth); 978-1-118-22652-0 (ebk.); ISBN 978-1-118- 23164-7 (ebk.); ISBN 978-1-118-26473-7 (ebk.) 1. Financial risk management. 2. Finance. I. Title. HD61 658.15'5—dc23 2012029614 To Caroline For all the ways she has helped bring this project to fruition And for much, much more

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