Advanced financial risk management: tools and techniques for integrated credit risk and interest rate risk management

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John Wiley & Sons, 2005 - Business & Economics - 668 pages
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"This invaluable book combines a rigorous primer on risk management and fixed income analytics with sophisticated treatment of modern financial instruments and markets. I am particularly impressed with the authors' treatment of modern credit risk management models and techniques. Any serious student of the fields of risk management and investment strategies will find this volume extremely useful." - Edward I. Altman, Director, Credit & Debt Markets Research Program, Max L. Heine Professor of FinanceNew York University, Stern School of Business

"Derivatives traders in credit default swaps and collateralized debt obligations are using state of the art technology that integrates both interest rate and credit risk. In this groundbreaking book, Don van Deventer, formerly treasurer of one of the largest banks in the United States and a member of the RISK hall of fame, Kenji Imai, and Mark Mesler show why it's desirable and practical to apply these same concepts to the total balance sheet of a financial institution. This book should be on every risk manager's essential reading list." - Robert Jarrow, Ronald and Susan Lynch Professor of Investment Management, Johnson School of Business, Cornell University

"Van Deventer, Imai, and Mesler utilize their incomparable academic and professional experience and their technical expertise to comprehensively express their perspectives on how integrated interest rate and credit risk management creates shareholder value. I recommend this book to banking and hedge fund professionals seeking a complete education in current interest rate and credit risk management practices." - David P. Belmont, Author of Value Added Risk Management in Financial Institutions

"Successful risk management demands up-to-date knowledge of asset-liabilities management, market, credit and operational risk; and the ability to implement sound quantitative tools and techniques. This book provides an insightful overview of credit and interest rate risk, and discusses a broad treatment of the related modeling theory and methods. In particular, it discusses the pros and cons of both structural and reduced form models of credit risk. The presentation is accessible, foregoing unnecessary technical details. Written by experienced professionals, it offers both technical information and advice that can help practitioners involved in managing credit and interest rate risk." - J.R. Sobehart, VP - Senior Analyst, Credit and Operational Risk Analytics, Citigroup Risk Architecture

"In clear prose, the authors show why market-based tools such as put option theory, interest rate analytics, mark-to-market thinking, and bond prices are so important to modern credit risk management. Helpful examples pepper each chapter, illustrating and developing important concepts. This reader-friendly book is both a reference manual and a teaching companion for developing risk management skills." - Drake Pike, Head of Credit Risk Management, Asia ex-Japan Lehman Brothers

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Contents

Introduction
1
Definitions and Dbiectives
3
Market Risk Credit Risk Liquidity Risk and Asset and Liability Management
5
Risk Return and Performance
15
Capital Regulation Risk Management and Perlormance
47
Introduction and Overview
65
Interest Rate Risk Mismatching and Hedging
75
Gap Analysis and Simulation Models
81
Valuing Credit Risky Bonds
395
Credit Derivatives and Collateralized Debt Obligations
403
European Options on Bonds
417
Forward and Futures Contracts
439
European Options on Forward and Futures Contracts
455
Caps and Floors
465
Interest Rate Swaps and Swaptions 411
471
Exotic Swap and Option Structures 411
477

The Basic Tools
93
Yield Curve Smoothing
121
Interest Rate Analytics
165
Duration and Convexity
167
CHAPTER 1D Duration as a Term Structure Model
185
The Vasicek and Extended Vasicek Models
199
Alternative Term Structure Models
227
Estimating the Parameters ot Term Structure Models
241
Credit Risk Models
257
Using Market Signals in Loan Pricing and Performance Measurement
259
Ratings and
267
An Introduction to the
275
Reduced Form Credit Models
293
Credit Spread Fitting and Modeling
329
Interest Rate and Credit Model Testing
347
Tests oi Credit Models Using Historical Data
349
Tests ot Credit Models Using Market Data
373
Tests ot Interest Rate Models Using a Credit
381
Risk Management Applications Instrument by Instrument
393
American Fixed Income Options
485
Irrational Exercise oi Fixed Income Options
507
MortgageBacked Securities and AssetBacked Securities
519
NonMaturity Deposits
549
A Term Structure
577
The Impact oi Collateral on Valuation Models
585
Pricing and Valuing Revolving Credit and
591
Modeling Common Stock and Convertible Bonds on a DetaultAdjusted Basis
597
Valuing Insurance Policies and Pension Obligations
603
Risk Management Objectives Revisited at the Portfolio and Company Level
609
Liquidity Risk Analysis and Management
619
Plus Alpha versus
631
Managing Institutional Detault Risk and Salety and Soundness
641
lntormation Technology Considerations
647
Shareholder Value Creation and Destruction
655
Bibliography
661
Index
667
Copyright

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About the author (2005)

Donald R. Van Deventer founded the Kamakura Corporation in April 1990 and is currently President. 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, for the municipalities affected in the Orange County bankruptcy, in a major derivatives dispute between JPMorgan and a Korean securities firm, Bank Negara Malaysia, ITT Financial Corporation and many other leading institutions. Prior to founding Kamakura Corporation, he was Senior Vice President of in the investment banking department of Lehman Brothers (then Shearson Lehman Hutton). From 1982 to 1987, he was the treasurer for First Interstate Bancorp in LA, USA. He holds a Ph.D. in Business Economics, a joint degree of the Harvard University Department of Economics and the Harvard Graduate School of Business Administration.

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