Preface to Volume IV

Financial risk management is a relatively new discipline. It is driven internally by the need for optimal returns on risk-based capital and, ultimately, by the survival of the firm. External drivers include clients, who are typically risk averse, and industry regulators, whose objectives are to protect investors and to promote competition, although their ultimate concern is for financial stability in the global economy. In recent years market volatility has been rising as trading focuses on increasingly complex instruments whose risks are extremely difficult to assess. The origins of financial securities, futures and options go back several centuries, yet we are only just beginning to understand how to quantify the risks of complex financial products realistically, even though this makes all the difference between success and failure in the financial industry.

I liken the risk management profession as it stands today to that of medicine in the eighteenth century. Until this time general ill health in the population and continual outbreaks of uncontrolled diseases were met with ignorance, masked by mumbo-jumbo, in the medical profession. As a result average life expectancy was short and, for most, the quality of life was poor. But in the nineteenth century a number of comprehensive texts such as Gray's Anatomy1 began to educate the medical profession. Such is the knowledge we have acquired during the past two centuries that nowadays even a general practitioner ...

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