Book description
The most complete, up to date guide to risk management in finance
Risk Management and Financial Institutions explains all aspects of financial risk and financial institution regulation, helping readers better understand the financial markets and potential dangers. This new fourth edition has been updated to reflect the major developments in the industry, including the finalization of Basel III, the fundamental review of the trading book, SEFs, CCPs, and the new rules affecting derivatives markets. There are new chapters on enterprise risk management and scenario analysis. Readers learn the different types of risk, how and where they appear in different types of institutions, and how the regulatory structure of each institution affects risk management practices. Comprehensive ancillary materials include software, practice questions, and all necessary teaching supplements, facilitating more complete understanding and providing an ultimate learning resource.
All financial professionals need a thorough background in risk and the interlacing connections between financial institutions to better understand the market, defend against systemic dangers, and perform their jobs. This book provides a complete picture of the risk management industry and practice, with the most up to date information.
Understand how risk affects different types of financial institutions
Learn the different types of risk and how they are managed
Study the most current regulatory issues that deal with risk
Risk management is paramount with the dangers inherent in the financial system, and a deep understanding is essential for anyone working in the finance industry; today, risk management is part of everyone's job. For complete information and comprehensive coverage of the latest industry issues and practices, Risk Management and Financial Institutions is an informative, authoritative guide.
Table of contents
- Business Snapshots
- Preface
-
Chapter 1: Introduction
- 1.1 Risk vs. Return for Investors
- 1.2 The Efficient Frontier
- 1.3 The Capital Asset Pricing Model
- 1.4 Arbitrage Pricing Theory
- 1.5 Risk vs. Return for Companies
- 1.6 Risk Management by Financial Institutions
- 1.7 Credit Ratings
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
-
Part One: Financial Institutions and Their Trading
-
Chapter 2: Banks
- 2.1 Commercial Banking
- 2.2 The Capital Requirements of a Small Commercial Bank
- 2.3 Deposit Insurance
- 2.4 Investment Banking
- 2.5 Securities Trading
- 2.6 Potential Conflicts of Interest in Banking
- 2.7 Today's Large Banks
- 2.8 The Risks Facing Banks
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Note
-
Chapter 3: Insurance Companies and Pension Plans
- 3.1 Life Insurance
- 3.2 Annuity Contracts
- 3.3 Mortality Tables
- 3.4 Longevity and Mortality Risk
- 3.5 Property-Casualty Insurance
- 3.6 Health Insurance
- 3.7 Moral Hazard and Adverse Selection
- 3.8 Reinsurance
- 3.9 Capital Requirements
- 3.10 The Risks Facing Insurance Companies
- 3.11 Regulation
- 3.12 Pension Plans
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 4: Mutual Funds and Hedge Funds
-
Chapter 5: Trading in Financial Markets
- 5.1 The Markets
- 5.2 Clearing Houses
- 5.3 OTC Market Changes
- 5.4 Long and Short Positions in Assets
- 5.5 Derivatives Markets
- 5.6 Plain Vanilla Derivatives
- 5.7 Non-Traditional Derivatives
- 5.8 Exotic Options and Structured Products
- 5.9 Risk Management Challenges
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 6: The Credit Crisis of 2007
- Chapter 7: Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds
-
Chapter 2: Banks
-
Part Two: Market Risk
- Chapter 8: How Traders Manage Their Risks
-
Chapter 9: Interest Rate Risk
- 9.1 The Management of Net Interest Income
- 9.2 Types of Rates
- 9.3 Duration
- 9.4 Convexity
- 9.5 Generalization
- 9.6 Nonparallel Yield Curve Shifts
- 9.7 Interest Rate Deltas in Practice
- 9.8 Principal Components Analysis
- 9.9 Gamma and Vega
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
-
Chapter 10: Volatility
- 10.1 Definition of Volatility
- 10.2 Implied Volatilities
- 10.3 Are Daily Percentage Changes in Financial Variables Normal?
- 10.4 The Power Law
- 10.5 Monitoring Daily Volatility
- 10.6 The Exponentially Weighted Moving Average Model
- 10.7 The GARCH(1,1) Model
- 10.8 Choosing Between the Models
- 10.9 Maximum Likelihood Methods
- 10.10 Using GARCH(1,1) to Forecast Future Volatility
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 11: Correlations and Copulas
-
Chapter 12: Value at Risk and Expected Shortfall
- 12.1 Definition of VaR
- 12.2 Examples of the Calculation of VaR
- 12.3 A Drawback of VaR
- 12.4 Expected Shortfall
- 12.5 Coherent Risk Measures
- 12.6 Choice of Parameters for VaR and ES
- 12.7 Marginal, Incremental, and Component Measures
- 12.8 Euler's Theorem
- 12.9 Aggregating VaRs and ESs
- 12.10 Back-Testing
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 13: Historical Simulation and Extreme Value Theory
-
Chapter 14: Model-Building Approach
- 14.1 The Basic Methodology
- 14.2 Generalization
- 14.3 Correlation and Covariance Matrices
- 14.4 Handling Interest Rates
- 14.5 Applications of the Linear Model
- 14.6 Linear Model and Options
- 14.7 Quadratic Model
- 14.8 Monte Carlo Simulation
- 14.9 Non-Normal Assumptions
- 14.10 Model-Building vs. Historical Simulation
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
-
Part Three: Regulation
-
Chapter 15: Basel I, Basel II, and Solvency II
- 15.1 The Reasons for Regulating Banks
- 15.2 Bank Regulation Pre-1988
- 15.3 The 1988 BIS Accord
- 15.4 The G-30 Policy Recommendations
- 15.5 Netting
- 15.6 1996 Amendment
- 15.7 Basel II
- 15.8 Credit Risk Capital Under Basel II
- 15.9 Operational Risk Capital Under Basel II
- 15.10 Pillar 2: Supervisory Review
- 15.11 Pillar 3: Market Discipline
- 15.12 Solvency II
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 16: Basel II.5, Basel III, and Other Post-Crisis Changes
- Chapter 17: Fundamental Review of the Trading Book
-
Chapter 15: Basel I, Basel II, and Solvency II
-
Part Four: Credit Risk
- Chapter 18: Managing Credit Risk: Margin, OTC Markets, and CCPs
-
Chapter 19: Estimating Default Probabilities
- 19.1 Credit Ratings
- 19.2 Historical Default Probabilities
- 19.3 Recovery Rates
- 19.4 Credit Default Swaps
- 19.5 Credit Spreads
- 19.6 Estimating Default Probabilities from Credit Spreads
- 19.7 Comparison of Default Probability Estimates
- 19.8 Using Equity Prices to Estimate Default Probabilities
- 19.9 Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 20: CVA and DVA
- Chapter 21: Credit Value at Risk
-
Part Five: Other Topics
- Chapter 22: Scenario Analysis and Stress Testing
-
Chapter 23: Operational Risk
- 23.1 Defining Operational Risk
- 23.2 Determination of Regulatory Capital
- 23.3 Categorization of Operational Risks
- 23.4 Loss Severity and Loss Frequency
- 23.5 Implementation of AMA
- 23.6 Proactive Approaches
- 23.7 Allocation of Operational Risk Capital
- 23.8 Use of Power Law
- 23.9 Insurance
- 23.10 Sarbanes-Oxley
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 24: Liquidity Risk
-
Chapter 25: Model Risk
- 25.1 Marking to Market
- 25.2 Models for Linear Products
- 25.3 Physics vs. Finance
- 25.4 How Models are Used for Pricing Standard Products
- 25.5 Hedging
- 25.6 Models for Nonstandard Products
- 25.7 Dangers in Model Building
- 25.8 Detecting Model Problems
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
-
Chapter 26: Economic Capital and RAROC
- 26.1 Definition of Economic Capital
- 26.2 Components of Economic Capital
- 26.3 Shapes of the Loss Distributions
- 26.4 Relative Importance of Risks
- 26.5 Aggregating Economic Capital
- 26.6 Allocation of Economic Capital
- 26.7 Deutsche Bank's Economic Capital
- 26.8 RAROC
- Summary
- Further Reading
- Practice Questions and Problems (Answers at End of Book)
- Further Questions
- Notes
- Chapter 27: Enterprise Risk Management
- Chapter 28: Risk Management Mistakes to Avoid
-
Part Six: Appendices
- Appendix A: Compounding Frequencies for Interest Rates
- Appendix B: Zero Rates, Forward Rates, and Zero-Coupon Yield Curves
- Appendix C: Valuing Forward and Futures Contracts
- Appendix D: Valuing Swaps
- Appendix E: Valuing European Options
- Appendix F: Valuing American Options
- Appendix G: Taylor Series Expansions
- Appendix H: Eigenvectors and Eigenvalues
- Appendix I: Principal Components Analysis
- Appendix J: Manipulation of Credit Transition Matrices
- Appendix K: Valuation of Credit Default Swaps
- Appendix L: Synthetic CDOs and Their Valuation
- Answers to Questions and Problems
- Glossary
- DerivaGem Software
- Table for N(x) When x ≤ 0
- Table for N(x) When x ≥ 0
- Index
- EULA
Product information
- Title: Risk Management and Financial Institutions, 4th Edition
- Author(s):
- Release date: March 2015
- Publisher(s): Wiley
- ISBN: 9781118955949
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