An invaluable resource for any professional seeking to understand modern risk management. It begins with basic concepts and builds carefully to the practical and theoretical ideas necessary for dealing with the complexities of the most sophisticated and relevant financial instruments today. Included spreadsheet tutorial on CD-ROM.



From the Inside Flap

Financial risk management as a field of study and practice continues to rapidly evolve. But despite the long list of books written about this subject, most focus mainly on statistical risk measurement techniques. Financial Risk Management: A Practitioner?s Guide to Managing Market and Credit Risk breaks this mold by providing a comprehensive overview of the entire field of risk management.

Steve Allen, Managing Director in charge of risk methodology at JPMorgan Chase, offers an insider?s view of financial risk management and covers the strategies, principles, and measurement techniques necessary to manage and measure financial risk. Focusing on the management of those risks that can be successfully quantified, Allen explores real-world issues such as proper mark-to-market valuation of trading positions and determination of needed reserves against valuation uncertainty, the structuring of limits to control risk taking, and a review of mathematical models and how they can contribute to risk control.



Financial Risk Management is divided into three equally informative parts, each filled with in-depth insights and valuable advice gleaned from years of risk management experience. Part one provides a general background to financial risk management and illustrates how risk arises in financial firms. You?ll discover key concepts used to manage risk and learn through some of the most prominent financial disasters of the past twenty-five years how to avoid failures in risk management. Part two examines the methodology of market risk management and discusses its application to forward risk, spot risk, vanilla options risk, and exotic options risk. As each type is discussed, a detailed analysis is given of models used to price these risks as well as how these models can be used to measure and control risk. After these issues are thoroughly explored, part three of Financial Risk Management rounds out the discussion with lessons on the management of portfolio risk. Here, you will gain a firm understanding of value-at-risk (VaR), stress testing, and management of portfolio credit risk.



With the communication skills of an academic instructor and the hands-on experience of a market practitioner, Steve Allen has made understanding the field of risk management both informative and engaging. To assist the learning process, Allen has also designed some original Excel? spreadsheets (contained on the companion CD-ROM) to help you develop an intuitive and detailed feel for risk measurement and reporting. Financial Risk Management is the definitive source for practical guidance on managing market and credit risk. With this book at your side, you can take your risk management skills to the next level.



Table of Contents:



Foreword.

Preface.

Acnowledgments.

Introduction.

The Contents of This Book.

The Use of Mathematics in This Book.

Overview.

Institutional Background.

Moral Hazard?Insiders and Outsiders.

Ponzi Schemes.

Adverse Selection.

The Winner?s Curse.

Market Making versus Position Taking.

Operational Risk.

Operations Risk.

Legal Risk.

Reputational Risk.

Accounting Risk.

Funding Liquidity Risk.

Enterprise Risk.

The Identification of Risks.

Operational Risk Capital.

Financial Disasters.

Disasters Due to Misleading Reporting.

Disasters Due to Large Market Moves.

Disasters Due to Conduct of Customer Business.

Managing Market Risk.

Risk Measurement.

Risk Control.

Model Risk.

The Role of Models in Man aging Risk.

Model Control.

Mark to Market vs Mark to Model.

Managing Spot Risk.

Managing Forward Risk.

Instruments.

Mathematical Models of Forward Risk.

Factors Impacting Borrowing and Lending Costs.

Risk Management Reporting and Limits for Forward Risk.

Managing Vanilla Options Risk.

Overview of Options Risk Management.

The Path Dependency of Dynamic Hedging.

A Simulation of Dynamic Hedging.

Risk Reporting and Limits.

Delta Hedging.

Building a Volatility Surface.

Summary.

Managing Exotic Options Risk.

Single-Payout Options.

Time-Dependent Options.

Path-Dependent Options.

Correlation-Dependent Options.

Correlation-Dependent Interest Rate Options.

Value-at-Risk and Stress Testing.

VaR Methodology.

Stress Testing.

Uses of Overall Measures of Firm Position Risk.

Credit Risk.

Short-Term Exposures to Changes in Market Prices.

Long-Term Risk of Default.

Lines of Credit.

Counterparty Credit Risk

Appendix: Spreadsheet Calculators.

Bibliography.

About the CD-ROM.

Index.