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Risk Management and Financial Institutions, 4th Edition

توضیحات

The most complete, up to date guide to risk management in finance

Risk Management and Financial Institutions explains all aspects of financial risk and financial institution regulation, helping readers better understand the financial markets and potential dangers. This new fourth edition has been updated to reflect the major developments in the industry, including the finalization of Basel III, the fundamental review of the trading book, SEFs, CCPs, and the new rules affecting derivatives markets. There are new chapters on enterprise risk management and scenario analysis. Readers learn the different types of risk, how and where they appear in different types of institutions, and how the regulatory structure of each institution affects risk management practices. Comprehensive ancillary materials include software, practice questions, and all necessary teaching supplements, facilitating more complete understanding and providing an ultimate learning resource.

All financial professionals need a thorough background in risk and the interlacing connections between financial institutions to better understand the market, defend against systemic dangers, and perform their jobs. This book provides a complete picture of the risk management industry and practice, with the most up to date information.

  • Understand how risk affects different types of financial institutions
  • Learn the different types of risk and how they are managed
  • Study the most current regulatory issues that deal with risk

Risk management is paramount with the dangers inherent in the financial system, and a deep understanding is essential for anyone working in the finance industry; today, risk management is part of everyone's job. For complete information and comprehensive coverage of the latest industry issues and practices, Risk Management and Financial Institutions is an informative, authoritative guide.


Business Snapshots

Preface

1. Introduction

1.1 Risk vs return for investors

1.2 The efficient frontier

1.3 The capital asset pricing model

1.4 Arbitrage pricing theory

1.5 Risk vs. return for companies

1.6 Risk management by financial institutions

1.7 Credit ratings

Summary

Further reading

Practice questions and problems

Further questions

PART ONE: FINANCIAL INSTITUTIONS AND THEIR TRADING

2. Banks

2.1 Commercial banking

2.2 The capital requirements of a small commercial bank

2.3 Deposit insurance

2.4 Investment banking

2.5 Securities trading

2.6 Potential conflicts of interest in banking

2.7 Today’s large banks

2.8 The risks facing banks

Summary

Further reading

Practice questions and problems

Further questions

3. Insurance Companies and Pension Plans

3.1 Life insurance

3.2 Annuity contracts

3.3 Mortality tables

3.4 Longevity and mortality risk

3.5 Property–casualty insurance

3.6 Health insurance

3.7 Moral hazard and adverse selection

3.8 Reinsurance

3.9 Capital requirements

3.10 The risks facing insurance companies

3.11 Regulation

3.12 Pension plans

Summary

Further reading

Practice questions and problems

Further questions

4. Mutual Funds and Hedge Funds

4.1 Mutual funds

4.2 Hedge funds

4.3 Hedge fund strategies

4.4 Hedge fund performance

Summary

Further reading

Practice questions and problems

Further questions

5. Trading in Financial Markets

5.1 The markets

5.2 Long and short positions in assets

5.3 Derivatives markets

5.4 Plain vanilla derivatives

5.5 Clearing houses

5.6 Nontraditional derivatives

5.7 Exotic options and structured products

5.8 Risk management challenges

Summary

Further reading

Practice questions and problems

Further questions

6. The Credit Crisis of 2007

6.1 The U.S. housing market

6.2 Securitization

6.3 The crisis

6.4 What went wrong

6.5 Lessons from the Crisis

Summary

Further reading

Practice questions and problems

Further questions

7. Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds

7.1 Volatility and asset prices

7.2 Risk-neutral valuation

7.3 Scenario analysis

7.4 When both worlds have to be used

7.5 The calculations in practice

7.6 Estimating real world processes

7.7 Default probabilities

7.8 Risk-neutral valuation revisited

Summary

Further reading

Practice questions and problems

Further questions

PART TWO: MARKET RISK

8. How Traders Manage Their Risks

8.1 Delta

8.2 Gamma

8.3 Vega

8.4 Theta

8.5 Rho

8.6 Calculating Greek letters

8.7 Taylor series expansions

8.8 The realities of hedging

8.9 Hedging exotic options

8.10 Scenario analysis

Summary

Further reading

Practice questions and problems

Further questions

9. Interest Rate Risk

9.1 The management of net interest income

9.2 Types of rates

9.3 Duration

9.4 Convexity

9.5 Generalization

9.6 Nonparallel yield curve shifts

9.7 Interest rate deltas in practice

9.8 Principal components analysis

9.9 Gamma and vega

Summary

Further reading

Practice questions and problems

Further questions

10. Volatility

10.1 Definition of volatility

10.2 Implied volatilities

10.3 Are daily percentage changes in financial variables normal?

10.4 The Power Law

10.5 Monitoring daily volatility

10.6 The exponentially weighted moving average model

10.7 The GARCH(1,1) model

10.8 Choosing between the models

10.9 Maximum-likelihood methods

10.10 Using GARCH(1,1) to forecast future volatility

Summary

Further reading

Practice questions and problems

Further questions

11. Correlations and Copulas

11.1 Definition of correlation

11.2 Monitoring correlation

11.3 Multivariate normal distributions

11.4 Copulas

11.5 Application to loan portfolios: Vasicek’s model

Summary

Further reading

Questions and problems

Assignment questions

12. Value at Risk and Expected Shortfall

12.1 Definition of VaR

12.2 Examples of the calculation of VaR

12.3 A drawback of VaR

12.4 Expected shortfall

12.5 Coherent risk measures

12.6 Choice of parameters for VaR and ES

12.7 Marginal, incremental, and component measures

12.8 Euler’s theorem

12.9 Aggregating VaRs

12.10. Back-testing

Summary

Further reading

Practice questions and problems

Further questions

13. Historical Simulation and Extreme Value Theory

13.1 The methodology

13.2 Accuracy of VaR

13.3 Extensions

13.4 Computational issues

13.5 Extreme value theory

13.6 Applications of EVT

Summary

Further reading

Practice questions and problems

Further questions

14. Model-Building Approach

14.1 The basic methodology

14.2 Generalization

14.3 Correlation and covariance matrices

14.4 Handling interest rates

14.5 Applications of the linear model

14.6 Linear model and options

14.7 Quadratic model

14.8 Monte Carlo simulation

14.9 Nonnormal distributions

14.10 Model building vs historical simulation

Summary

Further reading

Practice questions and problems

Further questions

PART THREE: REGULATION

15. Basel I, Basel II, and Solvency II

15.1 Reasons for regulating banks

15.2 Bank regulation pre-1988

15.3 The 1988 Basel accord

15.4 The G-30 policy recommendations

15.5 Netting

15.6 1996 amendment

15.7 Basel II

15.8 Credit risk capital under Basel II

15.9 Operational risk capital under Basel II

15.10 Pillar 2: supervisory review

15.11 Pillar 3: market discipline

15.12 Solvency II

Summary

Further reading

Practice questions and problems

Further questions

16. Basel II.5, Basel III, and Other Post-Crisis Changes

16.1 Basel II.5

16.2 Basel III

16.3 Contingent convertible bonds

16.4 Dodd–Frank Act

16.5 Legislation in other countries

Summary

Further reading

Practice questions and problems

Further questions

17. Fundamental Review of the Trading Book

17.1 New market risk measures

17.2 Trading book vs. banking book

17.3 Credit trades

Summary

Further reading

Practice questions and problems

Further questions

PART FOUR: CREDIT RISK

18. Margin, Collateral, and CCPs

18.1 Margin and exchanges

18.2 OTC markets

18.3 Consequences on new OTC regulations

18.4 ISDA master agreements and bankruptcy

18.5 CCPs and bankruptcy

Summary

Further reading

Practice questions and problems

Further questions

19. Estimating default probabilities

19.1 Credit ratings

19.2 Historical default probabilities

19.3 Recovery rates

19.4 Credit default swaps

19.5 Credit spreads

19.6 Estimating default probabilities from credit spreads

19.7 Comparison of default probability estimates

19.8 Using equity prices to estimate default probabilities

Summary

Further reading

Practice questions and problems

Further questions

20. CVA and DVA

20.1 Credit exposure on derivatives

20.2 CVA

20.3 The impact of a new transaction

20.4 CVA risk

20.5 Wrong way risk

20.6 DVA

20.7 Some simple examples

Summary

Further reading

Practice questions and problems

Further questions

21. Credit Value at Risk

21.1 Ratings transition matrices

21.2 Vasicek’s model

21.3 Credit risk plus

21.4 CreditMetrics

21.5 Credit-sensitive instruments in the trading book

Summary

Further reading

Practice questions and problems

Further questions

PART FIVE: OTHER TOPICS

22. Scenario Analysis and Stress Testing

22.1 Generating the scenarios

22.2 Regulation

22.3 What to do with the results

Summary

Further reading

Practice questions and problems

Further questions

23. Operational Risk

23.1 Defining operational risk

23.2 Determination of regulatory capital

23.3 Categorization of operational risks

23.4 Loss severity and loss frequency

23.5 Implementation of AMA

23.6 Proactive approaches

23.7 Allocation of operational risk capital

23.8 Use of the power law

23.9 Insurance

23.10 Sarbanes–Oxley

Summary

Further reading

Practice questions and problems

Further questions

24. Liquidity Risk

24.1 Liquidity trading risk

24.2 Liquidity funding risk

24.3 Liquidity black holes

Summary

Further reading

Practice questions and problems

Further questions

25. Model Risk

25.1 Marking to market

25.2 Models for linear products

25.3 Physics vs. finance

25.4 How models are used for pricing standard products

25.5 Hedging

25.6 Models for nonstandard products

25.7 Dangers in model building

25.8 Detecting model problems

Summary

Further reading

Practice questions and problems

Further questions

26. Economic Capital and RAROC

26.1 Definition of economic capital

26.2 Components of economic capital

26.3 Shapes of the loss distributions

26.4 Relative importance of risks

26.5 Aggregating economic capital

26.6 Allocation of economic capital

26.7 Deutsche Bank’s economic capital

26.8 RAROC

Summary

Further reading

Questions and problems

Assignment questions

27. Enterprise Risk Management

27.1 Risk appetite

27.2 Risk culture

27.3 Identifying major risks

Summary

Further reading

Questions and problems

Assignment questions

28. Risk Management Mistakes to Avoid

28.1 Risk limits

28.2 Managing the trading room

28.3 Liquidity risk

28.4 Lessons for nonfinancial corporations

28.5 A final point

Summary

Further reading

PART SIX: APPENDICES

Appendix A: Compounding Frequencies and Interest Rates

Appendix B: Zero Rates, Forward rates, and Zero-Coupon Yield Curves

Appendix C: Valuing Forward and Futures Contracts

Appendix D: Valuing Swaps

Appendix E: Valuing European Options

Appendix F: Valuing American Options

Appendix G: Taylor Series Expansions

Appendix H: Eigenvectors and Eigenvalues

Appendix I: Principal Components Analysis

Appendix J: Manipulation of Credit Transition Matrices

Appendix K: Valuation of Credit Default Swaps

Appendix L: Synthetic CDOs and their Valuation

Answers to questions and problems

Glossary of terms

DerivaGem software

Table for N(x) when x ≤ 0

Table for N(x) when x ≥ 0