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Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks


Trading and Risk Management

In easy to understand language, Wall Street veteran Davis W. Edwards provides a definitive guide to the relationship between trading and risk management. Risk Management in Trading describes how successful traders use quantitative analysis to make trading decisions and control risk. By framing risk management analytics as part of a decision making process rather than a stand-alone effort, the author illustrates how modern risk management techniques can help drive profitability. Edwards also demonstrates how misuse of these techniques can lead to outcomes worse than the ones traders try to prevent.

This book is an excellent resource for MBA students, as well as candidates for the Financial Risk Manager (FRM) or Certified Financial Analyst (CFA) exams. With self-study quizzes that reinforce the main concepts, it is easy for readers to test their learning. Risk Management in Trading is also a great reference for risk management professionals, executives, and anyone who wants to understand how financial disasters happen - and how to make sure they don’t.

DAVIS W. EDWARDS, FRM, ERP, is a senior manager in Deloitte’s Energy Derivatives Pricing Center and a specialist on the topics of risk management, statistical analysis, and valuation of financial derivatives. Prior to joining Deloitte, he worked as a director of credit risk at Macquarie Bank and senior managing director on the proprietary trading desk at Bear Stearns. Davis was an early pioneer in the development of artificial intelligence execution and order-matching systems that revolutionized the NYSE and NASDAQ. Davis is a Certified Energy Risk Professional (ERP) and Financial Risk Manager (FRM) with the Global Association of Risk Professionals and directs the organization’s professional chapter in Houston, Texas.

Preface ix

CHAPTER 1 Trading and Hedge Funds 1

CHAPTER 2 Financial Markets 33

CHAPTER 3 Financial Mathematics 61

CHAPTER 4 Backtesting and Trade Forensics 95

CHAPTER 5 Mark to Market 121

CHAPTER 6 Value-at-Risk 141

CHAPTER 7 Hedging 177

CHAPTER 8 Options, Greeks, and Non-Linear Risks 199

CHAPTER 9 Credit Value Adjustments (CVA) 237

Afterword 267

Answer Key 269

About the Author 299

Index 301