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Risk Management and Capital Adequacy PDF

576 Pages·2003·7.65 MB·English
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Gallati_fm_1p_j.qxd 2/27/03 9:15 AM Page i RISK MANAGEMENT AND CAPITAL ADEQUACY This page intentionally left blank. Gallati_fm_1p_j.qxd 2/27/03 9:15 AM Page iii RISK MANAGEMENT AND CAPITAL ADEQUACY RETO R. GALLATI McGraw-Hill New York / Chicago / San Francisco / Lisbon London / Madrid / Mexico City / Milan / New Delhi San Juan / Singapore / Sydney / Toronto ebook_copyright 7x9.qxd 7/23/03 10:53 AM Page 1 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data- base or retrieval system, without the prior written permission of the publisher. 0-07-142558-6 The material in this eBook also appears in the print version of this title: 0-07-140763-4. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales pro- motions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at [email protected] or (212) 904-4069. TERMSOFUSE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS”. McGRAW-HILLAND ITS LICENSORS MAKE NO GUAR- ANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACYOR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANYINFORMA- TION THATCAN BE ACCESSED THROUGH THE WORK VIAHYPERLINK OR OTHERWISE, AND EXPRESSLYDISCLAIM ANYWARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOTLIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITYOR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the func- tions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inac- curacy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of lia- bility shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. DOI: 10.1036/0071425586 Gallati_fm_1p_j.qxd 2/27/03 9:15 AM Page v When I was young, people called me a gambler. As the scale of my operations increased I became known as a speculator. Now I am called a banker. But I have been doing the same thing all the time. —Sir Ernest Cassell Banker to Edward VII This page intentionally left blank. Gallati_fm_1p_j.qxd 2/27/03 9:15 AM Page vii To my parents with love and gratitude Gallati_fm_1p_j.qxd 2/28/03 2:10 PM Page viii A C K N O W L E D G M E N T S The suggestion that I write a book about risk came from the late Fischer Black, while I was working at Goldman Sachs. The vastness of the project is daunting. The topic touches on the most profound depths of statistics, mathematics, psychology, and economics. I would like to thank the editors and reviewers and those who provided comments, especially M.R. Carey and Jean Eske, who carefully read the entire manuscript and provided valuable comments, corrections, and advice. I end with a note of thanks to my family, my friends, and my faculty colleagues at Sloan, who inspired much of the enthusiasm that went into the creation of this book and endured me with patience. RETO R. GALLATI Cambridge, Massachusetts February 2003 Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use. Gallati_fm_1p_j.qxd 2/28/03 2:10 PM Page ix For more information about this title, click here. C O N T E N T S ACKNOWLEDGMENTS viii INTRODUCTION xvii Chapter 1 Risk Management: AMaturing Discipline 1 1.1 Background 1 1.2 Risks: AView of the Past Decades 5 1.3 Definition of Risk 7 1.4 Related Terms and Differentiation 8 1.5 Degree of Risk 10 1.6 Risk Management: AMultilayered Term 11 1.6.1 Background 11 1.6.2 History of Modern Risk Management 11 1.6.3 Related Approaches 13 1.6.4 Approach and Risk Maps 22 1.7 Systemic Risk 22 1.7.1 Definition 22 1.7.2 Causes of Systemic Risk 26 1.7.3 Factors That Support Systemic Risk 26 1.7.4 Regulatory Mechanisms for Risk Management 27 1.8 Summary 28 1.9 Notes 30 Chapter 2 Market Risk 33 2.1 Background 33 2.2 Definition of Market Risk 34 2.3 Conceptual Approaches for Modeling Market Risk 37 2.4 Modern Portfolio Theory 39 2.4.1 The Capital Asset Pricing Model 41 2.4.2 The Security Market Line 43 ix Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.

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Under the new Basle Guidelines, all financial institutions subject to local banking laws will soon be required to operate under dramatically different risk exposure rules. Risk Management and Capital Adequacy provides details on the key risk approaches under these new guidelines and is the first boo
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