Details

Financial Risk Management

A Practitioner's Guide to Managing Market and Credit Risk
Wiley Finance, Band 721 2. Aufl.

von: Steven Allen
84,99 €
Verlag:	Wiley
Format:	EPUB
Veröffentl.:	31.12.2012
ISBN/EAN:	9781118231647
Sprache:	englisch
Anzahl Seiten:	608

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Beschreibungen

Titelbeschreibung

A top risk management practitioner addresses the essential aspects of modern financial risk management In the Second Edition of Financial Risk Management + Website, market risk expert Steve Allen offers an insider's view of this discipline and covers the strategies, principles, and measurement techniques necessary to manage and measure financial risk. Fully revised to reflect today's dynamic environment and the lessons to be learned from the 2008 global financial crisis, this reliable resource provides a comprehensive overview of the entire field of risk management. Allen explores real-world issues such as proper mark-to-market valuation of trading positions and determination of needed reserves against valuation uncertainty, the structuring of limits to control risk taking, and a review of mathematical models and how they can contribute to risk control. Along the way, he shares valuable lessons that will help to develop an intuitive feel for market risk measurement and reporting. <ul> <li>Presents key insights on how risks can be isolated, quantified, and managed from a top risk management practitioner</li> <li>Offers up-to-date examples of managing market and credit risk</li> <li>Provides an overview and comparison of the various derivative instruments and their use in risk hedging</li> <li>Companion Website contains supplementary materials that allow you to continue to learn in a hands-on fashion long after closing the book</li> </ul> Focusing on the management of those risks that can be successfully quantified, the Second Edition of Financial Risk Management + Websiteis the definitive source for managing market and credit risk.

Inhaltsverzeichnis

Foreword xvii Preface xix Acknowledgments xxiii About the Author xxvii Chapter 1 Introduction 1 1.1 Lessons from a Crisis 1 1.2 Financial Risk and Actuarial Risk 2 1.3 Simulation and Subjective Judgment 4 Chapter 2 Institutional Background 7 2.1 Moral Hazard—Insiders and Outsiders 7 2.2 Ponzi Schemes 17 2.3 Adverse Selection 19 2.4 The Winner’s Curse 21 2.5 Market Making versus Position Taking 24 Chapter 3 Operational Risk 29 3.1 Operations Risk 31 3.1.1 The Risk of Fraud 31 3.1.2 The Risk of Nondeliberate Incorrect Information 35 3.1.3 Disaster Risk 36 3.1.4 Personnel Risk 36 3.2 Legal Risk 37 3.2.1 The Risk of Unenforceable Contracts 37 3.2.2 The Risk of Illegal Actions 40 3.3 Reputational Risk 41 3.4 Accounting Risk 42 3.5 Funding Liquidity Risk 42 3.6 Enterprise Risk 44 3.7 Identification of Risks 44 3.8 Operational Risk Capital 45 Chapter 4 Financial Disasters 49 4.1 Disasters Due to Misleading Reporting 49 4.1.1 Chase Manhattan Bank/Drysdale Securities 52 4.1.2 Kidder Peabody 53 4.1.3 Barings Bank 55 4.1.4 Allied Irish Bank (AIB) 57 4.1.5 Union Bank of Switzerland (UBS) 59 4.1.6 Société Générale 61 4.1.7 Other Cases 66 4.2 Disasters Due to Large Market Moves 68 4.2.1 Long‐Term Capital Management (LTCM) 68 4.2.2 Metallgesellschaft (MG) 75 4.3 Disasters Due to the Conduct of Customer Business 77 4.3.1 Bankers Trust (BT) 77 4.3.2 JPMorgan, Citigroup, and Enron 79 4.3.3 Other Cases 80 Chapter 5 The Systemic Disaster of 2007–2008 83 5.1 Overview 83 5.2 The Crisis in CDOs of Subprime Mortgages 85 5.2.1 Subprime Mortgage Originators 86 5.2.2 CDO Creators 88 5.2.3 Rating Agencies 89 5.2.4 Investors 92 5.2.5 Investment Banks 93 5.2.6 Insurers 106 5.3 The Spread of the Crisis 108 5.3.1 Credit Contagion 108 5.3.2 Market Contagion 109 5.4 Lessons from the Crisis for Risk Managers 111 5.4.1 Subprime Mortgage Originators 111 5.4.2 CDO Creators 111 5.4.3 Rating Agencies 111 5.4.4 Investors 111 5.4.5 Investment Banks 112 5.4.6 Insurers 114 5.4.7 Credit Contagion 115 5.4.8 Market Contagion 115 5.5 Lessons from the Crisis for Regulators 115 5.5.1 Mortgage Originators 116 5.5.2 CDO Creators 116 5.5.3 Rating Agencies 117 5.5.4 Investors 118 5.5.5 Investment Banks 118 5.5.6 Insurers 126 5.5.7 Credit Contagion 126 5.5.8 Market Contagion 129 5.6 Broader Lessons from the Crisis 132 Chapter 6 Managing Financial Risk 133 6.1 Risk Measurement 133 6.1.1 General Principles 133 6.1.2 Risk Management of Instruments That Lack Liquidity 144 6.1.3 Market Valuation 147 6.1.4 Valuation Reserves 152 6.1.5 Analysis of Revenue 156 6.1.6 Exposure to Changes in Market Prices 157 6.1.7 Risk Measurement for Position Taking 159 6.2 Risk Control 161 Chapter 7 VaR and Stress Testing 169 7.1 VaR Methodology 170 7.1.1 Simulation of the P&L Distribution 173 7.1.2 Measures of the P&L Distribution 187 7.2 Stress Testing 192 7.2.1 Overview 192 7.2.2 Economic Scenario Stress Tests 193 7.2.3 Stress Tests Relying on Historical Data 197 7.3 Uses of Overall Measures of Firm Position Risk 201 Chapter 8 Model Risk 209 8.1 How Important Is Model Risk? 210 8.2 Model Risk Evaluation and Control 212 8.2.1 Scope of Model Review and Control 213 8.2.2 Roles and Responsibilities for Model Review and Control 214 8.2.3 Model Verification 219 8.2.4 Model Verification of Deal Representation 222 8.2.5 Model Verification of Approximations 223 8.2.6 Model Validation 226 8.2.7 Continuous Review 232 8.2.8 Periodic Review 234 8.3 Liquid Instruments 237 8.4 Illiquid Instruments 241 8.4.1 Choice of Model Validation Approach 241 8.4.2 Choice of Liquid Proxy 243 8.4.3 Design of Monte Carlo Simulation 245 8.4.4 Implications for Marking to Market 247 8.4.5 Implications for Risk Reporting 249 8.5 Trading Models 250 Chapter 9 Managing Spot Risk 253 9.1 Overview 253 9.2 Foreign Exchange Spot Risk 257 9.3 Equity Spot Risk 258 9.4 Physical Commodities Spot Risk 259 Chapter 10 Managing Forward Risk 263 10.1 Instruments 270 10.1.1 Direct Borrowing and Lending 270 10.1.2 Repurchase Agreements 271 10.1.3 Forwards 272 10.1.4 Futures Contracts 272 10.1.5 Forward Rate Agreements 274 10.1.6 Interest Rate Swaps 275 10.1.7 Total Return Swaps 276 10.1.8 Asset‐Backed Securities 278 10.2 Mathematical Models of Forward Risks 282 10.2.1 Pricing Illiquid Flows by Interpolation 284 10.2.2 Pricing Long‐Dated Illiquid Flows by Stack and Roll 291 10.2.3 Flows Representing Promised Deliveries 293 10.2.4 Indexed Flows 295 10.3 Factors Impacting Borrowing Costs 299 10.3.1 The Nature of Borrowing Demand 299 10.3.2 The Possibility of Cash‐and‐Carry Arbitrage 300 10.3.3 The Variability of Storage Costs 301 10.3.4 The Seasonality of Borrowing Costs 302 10.3.5 Borrowing Costs and Forward Prices 303 10.4 Risk Management Reporting and Limits for Forward Risk 304 Chapter 11 Managing Vanilla Options Risk 311 11.1 Overview of Options Risk Management 313 11.2 The Path Dependence of Dynamic Hedging 318 11.3 A Simulation of Dynamic Hedging 321 11.4 Risk Reporting and Limits 329 11.5 Delta Hedging 344 11.6 Building a Volatility Surface 346 11.6.1 Interpolating between Time Periods 346 11.6.2 Interpolating between Strikes—Smile and Skew 347 11.6.3 Extrapolating Based on Time Period 352 11.7 Summary 355 Chapter 12 Managing Exotic Options Risk 359 12.1 Single‐Payout Options 364 12.1.1 Log Contracts and Variance Swaps 367 12.1.2 Single‐Asset Quanto Options 369 12.1.3 Convexity 370 12.1.4 Binary Options 371 12.1.5 Contingent Premium Options 377 12.1.6 Accrual Swaps 378 12.2 Time‐Dependent Options 378 12.2.1 Forward‐Starting and Cliquet Options 378 12.2.2 Compound Options 379 12.3 Path‐Dependent Options 381 12.3.1 Standard Analytic Models for Barriers 383 12.3.2 Dynamic Hedging Models for Barriers 385 12.3.3 Static Hedging Models for Barriers 387 12.3.4 Barrier Options with Rebates, Lookback, and Ladder Options 402 12.3.5 Broader Classes of Path‐Dependent Exotics 403 12.4 Correlation‐Dependent Options 404 12.4.1 Linear Combinations of Asset Prices 405 12.4.2 Risk Management of Options on Linear Combinations 409 12.4.3 Index Options 413 12.4.4 Options to Exchange One Asset for Another 415 12.4.5 Nonlinear Combinations of Asset Prices 417 12.4.6 Correlation between Price and Exercise 422 12.5 Correlation‐Dependent Interest Rate Options 425 12.5.1 Models in Which the Relationship between Forwards is Treated as Constant 426 12.5.2 Term Structure Models 430 12.5.3 Relationship between Swaption and Cap Prices 437 Chapter 13 Credit Risk 445 13.1 Short‐Term Exposure to Changes in Market Prices 446 13.1.1 Credit Instruments 447 13.1.2 Models of Short‐Term Credit Exposure 451 13.1.3 Risk Reporting for Market Credit Exposures 456 13.2 Modeling Single‐Name Credit Risk 457 13.2.1 Estimating Probability of Default 458 13.2.2 Estimating Loss Given Default 465 13.2.3 Estimating the Amount Owed at Default 468 13.2.4 The Option‐Theoretic Approach 471 13.3 Portfolio Credit Risk 479 13.3.1 Estimating Default Correlations 479 13.3.2 Monte Carlo Simulation of Portfolio Credit Risk 482 13.3.3 Computational Alternatives to Full Simulation 486 13.3.4 Risk Management and Reporting for Portfolio Credit Exposures 490 13.4 Risk Management of Multiname Credit Derivatives 493 13.4.1 Multiname Credit Derivatives 493 13.4.2 Modeling of Multiname Credit Derivatives 495 13.4.3 Risk Management and Reporting for Multiname Credit Derivatives 498 13.4.4 CDO Tranches and Systematic Risk 500 Chapter 14 Counterparty Credit Risk 505 14.1 Overview 505 14.2 Exchange‐Traded Derivatives 506 14.3 Over‐the‐Counter Derivatives 512 14.3.1 Overview 512 14.3.2 The Loan‐Equivalent Approach 513 14.3.3 The Collateralization Approach 515 14.3.4 The Collateralization Approach—Wrong‐Way Risk 521 14.3.5 The Active Management Approach 526 References 533 About the Companion Website 547 Index 553

Autorenportrait

STEVEN ALLEN is a risk management consultant, specializing in risk measurement and valuation with a particular emphasis on illiquid and hard-to-value assets. Until his retirement in 2004, he was Managing Director in charge of risk methodology at JPMorgan Chase, where he was responsible for model validation, risk capital allocation, and the development of new measures of valuation, reserves, and risk for both market and credit risk. Previously, he was in charge of market risk for derivative products at Chase. He has been a key architect of Chase's value-at-risk and stress testing systems. Prior to his work in risk management, Allen was the head of analysis and model building for all Chase trading activities for over ten years. Since 1998, Allen has been associated with the Mathematics in Finance Master's Program at New York University's Courant Institute of Mathematical Sciences. In this program, he has served as Clinical Associate Professor and Deputy Director and has created and taught courses in risk management, derivatives mathematics, and interest rate and credit models. He was a member of the board of directors of the International Association of Financial Engineers and continues to serve as co-chair of their Education Committee.

Back cover copy

The world of financial risk management continues to evolve, and in order to keep up with this dynamic discipline, you need the most up-to-date information possible. That's why Steve Allen, a risk expert with over thirty years of experience in this field, has created the Second Edition of Financial Risk Management. While written to reflect current market conditions—and address lessons learned from the recent financial crisis—this reliable resource still remains true to the first edition's successful approach of making a complex topic understandable. It skillfully covers the strategies, principles, and measurement techniques necessary to effectively manage and measure financial risk. It also explores important real-world issues such as proper mark-to-market valuation of trading positions, the determination of needed reserves against valuation uncertainty, the structuring of limits to control risk taking, and a review of mathematical models and how they can contribute to risk control. Engaging and informative, this book offers a balanced account of financial risk management. Initial chapters provide a general background to financial risk management, detailing an institutional framework for understanding how risk arises in financial firms and how it is managed. Here, you'll become familiar with key concepts used by today's risk managers and learn from some of the most prominent financial disasters of the past thirty years—including the 2007–2008 crisis. The next part of the book, which focuses on the principles of financial risk management, first lays out an integrated framework for this difficult endeavor, and then takes a closer look at value-at-risk (VaR), stress testing, and the control of model risk. After these issues are thoroughly explored, the final part of Financial Risk Management, Second Edition applies the principles, previously covered, to each specific type of financial risk: spot risk, forward risk, vanilla options risk, exotic options risk, credit risk, and counterparty credit risk. As each type is discussed, a detailed analysis is given of models used to price these risks as well as how these models can be used to measure and control risk. Focusing on the management of those risks that can be successfully quantified, Financial Risk Management, Second Edition is an essential resource for both seasoned risk professionals and aspiring students. And with its companion website—which contains Microsoft Excel® spreadsheets built specifically to illustrate material in the book—you can quickly begin to develop an intuitive feel for risk measurement and reporting.