Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management

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John Wiley & Sons, Feb 6, 2013 - Business & Economics - 350 pages
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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.

 

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Contents

Wall Street Lessons from Bubbles
ii
A Risk Management Synthesis
xiv
Crisis
xxiv
Risk Return Performance Measurement
xxvii
Performance Measurement
xxxvii
Interest Rate Risk Introduction and Overview
ii
Fixed Income Mathematics
14
Yield Curve Smoothing
30
Valuing Credit Risky Bonds
128
Credit Derivatives and Collateralized Debt
150
European Options on Bonds
161
Fonvard and Futures Contracts
196
European Options on Forward and Futures
203
Caps and Floors
222
Interest Rate Swaps and Swaptions
243
Exotic Swap and Options Structures
1

Theorem
59
HJM Interest Rate Modeling with Rate
82
HJM Interest Rate Modeling with Two Risk
101
Valuation in the HJM Framework
8-19
HJM Interest Rate Modeling with Three Risk
8-29
Alternative Specifications of the Interest Rate Volatility
5
Valuation in the HJM Framework
25
Valuation of a ZeroCoupon Bond Maturing at Time T 4
31
Valuation Liquidity and Net Income
37
Interest Rate Mismatching and Hedging
10-15
Rate
10-20
Special Cases of Heath Jarrow and Morton
10-47
Estimating the Parameters of Interest Rate
10-81
Portmo Slmlegymflik
15
An Introduction to Credit Risk
18
Reduced Form Credit Models and Credit
43
Credit Spread Fitting and Modeling
81
Conclusion
105
American Fixed Income Options
19
Irrational Exercise of Fixed Income Options
47
MortgageBacked Securities and Asset
65
Nonmaturity Deposits
81
Conclusion
101
Formula
108
Impact of Collateral on Valuation Models
110
Pricing and Valuing Revolving Credit
123
Modeling Common Stock and Convertible
130
Valuing Insurance Policies and Pension
139
ValueatRisk and Risk Management
149
Liguidity Analysis and Management
165
Managing Institutional Default Risk and Safety
38-15
Controlling the Probability of Failure through the Credit Cycle
38-22
Shareholder Value Creation and Destruction
38-36
The Middle Management Perspective
38-44
Index
38-60
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About the author (2013)

DONALD R. VAN DEVENTER founded the Kamakura Corporation in April 1990 and is currently Chairman and CEO. In 2003, he was voted into the Risk Hall of Fame for having made a profound contribution to the field of risk management. He has been involved in financial advisory assignments involving both risk management and mergers and acquisitions. Prior to founding Kamakura Corporation, he was senior vice president of the investment banking department of Lehman Brothers. From 1982 to 1987, he was the treasurer for First Interstate Bancorp in Los Angeles. He holds a PhD in business economics, a joint degree of the Harvard University Department of Economics and the Harvard Graduate School of Business Administration.

Kenji Imai has headed Software Development for Kamakura for sixteen years. Mr. Imai is member of the Managing Committee of Kamakura. Prior to Kamakura, Mr. Imai worked in the derivatives structuring/trading and risk management groups at the Sanwa Bank and S.G. Warburg. He graduated from the University of Tokyo with a BS in civil engineering and from the Sloan School of the Massachusetts Institute of Technology with a MS in management, concentrating on finance.

Mark Mesler is Managing Director and heads Kamakura Risk Information Services, Kamakura's innovative Basel II and III compliant default probability service. Mr. Mesler is in charge of the daily production of the KRIS Merton model, Jarrow reduced form model, and hybrid model default probabilities. Mr. Mesler has twenty-seven years' experience in the financial services information and systems field and is a veteran of State Street Bank, KPMG, Oracle, and the Bank of America. Prior to joining Kamakura Corporation, Mr. Mesler was vice president at Askari Risk Management Solutions, at that time a subsidiary of State Street Bank in Boston.

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