Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management
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Practical tools and advice for managing financial risk, updated for a post-crisis world
Advanced Financial Risk Management bridges the gap between the idealized assumptions used for risk valuation and the realities that must be reflected in management actions. It explains, in detailed yet easy-to-understand terms, the analytics of these issues from A to Z, and lays out a comprehensive strategy for risk management measurement, objectives, and hedging techniques that apply to all types of institutions. Written by experienced risk managers, the book covers everything from the basics of present value, forward rates, and interest rate compounding to the wide variety of alternative term structure models.
Revised and updated with lessons from the 2007-2010 financial crisis, Advanced Financial Risk Management outlines a framework for fully integrated risk management. Credit risk, market risk, asset and liability management, and performance measurement have historically been thought of as separate disciplines, but recent developments in financial theory and computer science now allow these views of risk to be analyzed on a more integrated basis. The book presents a performance measurement approach that goes far beyond traditional capital allocation techniques to measure risk-adjusted shareholder value creation, and supplements this strategic view of integrated risk with step-by-step tools and techniques for constructing a risk management system that achieves these objectives.
- Practical tools for managing risk in the financial world
- Updated to include the most recent events that have influenced risk management
- Topics covered include the basics of present value, forward rates, and interest rate compounding; American vs. European fixed income options; default probability models; prepayment models; mortality models; and alternatives to the Vasicek model
Comprehensive and in-depth, Advanced Financial Risk Management is an essential resource for anyone working in the financial field.
Philip A. Fisher Collected Works, Foreword by Ken Fisher: Common Stocks and Uncommon Profits, Paths to Wealth through Common Stocks, Conservative Investors Sleep Well, and Developing an Investment Philosophy
recovery from the 2008 collapse of firms like Bear Stearns, Lehman Brothers, FHLMC, FNMA, AIG, Wachovia, and Washington Mutual (see Exhibit 3.8). Dickler, Jarrow, and van Deventer find that the most frequent local minimums or maximums are at months 5, 10, 22, 34, 58, 79, 113, 144, 202. EXHIBIT 3.2 Analysis of Federal Reserve H15 Release Data Regimes Start Date End Date Data Regime Number of Observations 1/2/1962 7/1/1969 6/1/1976 2/15/1977 1/4/1982 10/1/1993 7/31/2001 2/19/2002 2/9/2006
the interest rate (which we will call the formula rate from here on) used as the formula for setting the coupon on the bond. See the examples for valuation of bonds where the index rate and the formula rate are different. Example In this example, the coupon formula is based on LIBOR, which is a yield curve that was intended to be consistent with the credit risk of major international banks. Lately, this consistency has eroded, but we ignore that fact in this chapter. In this example, our
on known terms. What would be the forward price, as of today, of the “when issued bond,” if we know its offering date? The answer is again a straightforward application of the basic present value equation. If the actual dollar amount of the coupon payment on a fixed coupon bond is C and principal is repaid at time tn, the forward value (price plus accrued interest) of the bond at the issuance date t0 is C Forward value of fixed coupon bond ¼ hP n i Pðti Þ þ Pðtn Þ½Principal i¼1 Pðt0 Þ
the parameters of the best yield curve are not unique without one more constraint. We impose this constraint to obtain unique coefﬁcients and then optimize the parameter used in this constraint to achieve the best yield curve. We explore choice 9b later in this chapter. The constraint here is imposed on the yield curve, not the forward rate curve. Now that all of these choices have been made, both the functional form of the line segments for yields and the parameters that are consistent with the
Self-Insurance vs. Third-Party Insurance Calculating the Jarrow-Merton Put Option Value and Answering the Key 4 1 26 Questions Valuing and Simulating the Jarrow-Merton Put Option What’s the Hedge? Liquidity, Performance, Capital Allocation, and Own Default Risk CHAPTER 37 Liquidity Analysis and Management: Examples from the Credit Crisis Liquidity Risk Case Studies from the Credit Crisis Case Studies in Liquidity Risk Largest Funding Shortfalls American International Group (AIG) Consolidated