Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

7.3 Conclusion

We now turn to examining risk measurement in detail. Chapter 8 focuses on the tools that form the foundation of quantitative risk measurement: volatility and VaR. Chapter 9 then applies these tools to a particularly simple portfolio, the U.S. Treasury bond and CAC index futures introduced in Chapter 1. The goal of Chapter 9 is to work through a simple example in enough detail to make the ideas come alive. Although Chapters 8 and 9 concentrate on market risk, nearly all the ideas, ideas about how to conceptualize the P&L distribution and how to summarize and estimate the distribution, apply equally well to credit and other forms of risk.

Chapter 10 focuses on risk reporting and portfolio analysis tools. These tools help us to move from static monitoring of the risk (the strength of volatility and VaR) to active management of risk. Volatility and VaR help us calibrate what the scale of potential losses is and they tell us about the spread in the P&L distribution. But managing risk requires understanding the sources of risk and how changes in the portfolio are likely to alter our exposure to losses. As such, Chapter 10 is probably the most important and useful chapter in this book.

Chapter 11 turns to credit risk—risk ultimately resulting from the actual or potential default (bankruptcy), or nonperformance of contracts. In many ways, the quantitative analysis of credit risk is no different from market risk—we care about the P&L distribution and can use the volatility ...