Chapter 40

Information Technology Considerations

In the first 39 chapters of this book, we reviewed the tools necessary to construct a fully integrated measure of interest rate risk, market risk, liquidity risk, foreign exchange risk, and credit risk. This measure, the Jarrow-Merton put option, produces an answer to the key question “What is the hedge?” Some of the tools we have discussed were focused on risk management strategy, such as usage of the Jarrow-Merton put option as a comprehensive measure of risk. Other tools have been more mechanical, such as how to value an American call option embedded in a bond when the default of the issuer is a possibility. In this chapter, we focus on another set of issues that have to be faced when implementing a comprehensive risk management system—the information technology aspects of an implementation.

The authors collectively have spent 105 years in the implementation of risk systems in major financial institutions in 23 countries around the world, and our comments below reflect the worldwide best practice in that regard.

COMMON PRACTICE IN RISK MANAGEMENT SYSTEMS: DEALING WITH LEGACY SYSTEMS

Many of the world’s financial institutions face a common situation when preparing to move forward in the risk management systems area. The move forward is usually not motivated by changes in regulatory risk measures, like the Federal Reserve’s Comprehensive Capital Analysis and Review 2012 and similar stress tests introduced in Europe. Particularly ...

Get Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management, 2nd Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.