The 2007–2010 financial crisis has highlighted the need to identify and control all risks in a financial portfolio, both direct and indirect, and to design and deploy a practical proactive dynamic hedging strategy. Simultaneous adverse moves in stock markets, interest rates, and credit spreads, combined with accelerated company defaults and credit rating downgrades, have devastated many portfolios and, in some cases, wiped out years of gains and caused the demise of storied financial institutions. While some well-publicized losses have resulted from spectacular lapses of common sense and the abandonment of the very basic due diligence principles, most could have been contained by sound risk management.

In this book the authors, who have successfully managed through the turmoil a complex, highly leveraged portfolio of asset-backed securities with significant equity, fixed-income, credit, and other exposures, offer a practical guide to the triad of identifying, quantifying, and managing market risks. These three fundamental elements of the risk-control process have not previously received the attention they deserve. Indeed, the tasks of identifying and quantifying risks and then selecting an optimal hedge, when there is not a “perfect” one, are just as, if not more, important as understanding the intricacies of exotic derivative valuation, but are usually overlooked. This book expounds the three elements of the risk triad by focusing on applied risk management as opposed ...

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