Business Snapshots xxi

Preface xxiii

Chapter 1: Introduction 1

PART ONE : FINANCIAL INSTITUTIONS AND THEIR TRADING

Chapter 2: Banks 25

Chapter 3: Insurance Companies and Pension Plans 45

Chapter 4: Mutual Funds and Hedge Funds 71

Chapter 5: Trading in Financial Markets 93

Chapter 6: The Credit Crisis of 2007 121

Chapter 7: Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds 137

PART TWO : MARKET RISK

Chapter 8: How Traders Manage Their Risks 153

Chapter 9: Interest Rate Risk 175

Chapter 10: Volatility 201

Chapter 11: Correlations and Copulas 231

Chapter 12: Value at Risk and Expected Shortfall 255

Chapter 13: Historical Simulation and Extreme Value Theory 277

Chapter 14: Model-Building Approach 299

PART THREE : REGULATION

Chapter 15: Basel I, Basel II, and Solvency II 325

Chapter 16: Basel II.5, Basel III, and Other Post-Crisis Changes 353

Chapter 17: Fundamental Review of the Trading Book 373

PART FOUR : CREDIT RISK

Chapter 18: Managing Credit Risk: Margin, OTC Markets, and CCPs 383

Chapter 19: Estimating Default Probabilities 401

Chapter 20: CVA and DVA 429

Chapter 21: Credit Value at Risk 447

PART FIVE : OTHER TOPICS

Chapter 22: Scenario Analysis and Stress Testing 463

Chapter 23: Operational Risk 481

Chapter 24: Liquidity Risk 501

Chapter 25: Model Risk 527

Chapter 26: Economic Capital and RAROC 547

Chapter 27: Enterprise Risk Management 565

Chapter 28: Risk Management Mistakes to Avoid 579

PART SIX : APPENDICES

Appendices 591

Answers to Questions and Problems 629

Glossary 669

DerivaGem Software 689

Tables for N(x) 695

Index 699

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.