Risk Management in Trading -- Contents -- Preface -- CHAPTER 1 Trading and Hedge Funds -- OVERVIEW OF BOOK -- TRADING DESKS -- HEDGE FUNDS -- HEDGE FUNDS TODAY -- STRATEGIES -- Global Macro -- Relative Value -- Event-Driven -- FUND OF FUNDS -- RISK MANAGEMENT -- RISK AND TRADING DECISIONS -- Backtesting and Trade Forensics -- Calculating Profi ts and Losses -- Hedging -- Setting Position Limits -- Managing Option Risk -- Managing Credit Risk -- TRADING -- MAKING A TRADE -- Front Office -- Support and Control -- Processing (Back Office) -- TRADES -- MARKETS -- MARKET AND LIMIT ORDERS -- Market Orders -- Limit Orders (Limit Buy, Limit Sell) -- Stop Orders (Stop Buy, Stop Sell) -- Stop Limit Orders -- ORDER LIFESPAN -- Day Orders -- Good till Canceled (GTC) -- Fill-or-Kill (FOK) -- At-Open, At-Close -- TRADING POSITIONS -- PRICES -- MANAGING TRADING RISK -- WHAT IS RISK? -- RISK AND REWARD -- MONITORING RISK -- Identifying and Classifying Risk -- Measuring and Quantifying Risk -- Risk Monitoring -- Compliance and Reporting -- MANAGING RISK -- Risk Avoidance -- Risk Reduction -- Risk Transfer -- Risk Acceptance -- TEST YOUR KNOWLEDGE -- CHAPTER 2 Financial Markets -- FINANCIAL INSTRUMENTS -- REAL ASSETS -- FINANCIAL ASSETS -- DERIVATIVES -- COMMODITY SPOT MARKET -- EQUITIES (STOCKS) -- BONDS (FIXED INCOME, DEBT) -- CURRENCIES (FOREIGN EXCHANGE) -- FORWARDS AND COMMODITY SWAPS -- FUTURES -- INTEREST RATE SWAPS -- OPTIONS -- TEST YOUR KNOWLEDGE -- CHAPTER 3 Financial Mathematics -- OVERVIEW -- VARIABLES AND FUNCTIONS -- RANDOM NUMBERS -- STATISTICS -- MEAN, MEDIAN, AND MODE -- VARIANCE AND VOLATILITY -- SKEW AND KURTOSIS -- RANDOM WALKS (STOCHASTIC PROCESSES) -- MEAN REVERSION -- CORRELATION -- DIVERSIFICATION -- NORMAL DISTRIBUTIONS -- LOG-NORMAL DISTRIBUTIONS -- CALCULUS -- FUNCTIONS -- FIRST DERIVATIVE -- Second Derivative -- Integration.

CALCULUS INTEGRATION -- CALCULUS DERIVATIVES -- CALCULUS TAYLOR SERIES -- TIME VALUE OF MONEY -- TEST YOUR KNOWLEDGE -- CHAPTER 4 Backtesting and Trade Forensics -- SYSTEMATIC TRADING -- DATA VALIDATION -- STRATEGY TESTING -- Historical Backtesting -- Out-of-Sample Testing -- Forward Testing/Paper Trading -- Live Testing -- TRANSACTION COSTS AND SLIPPAGE -- MONTE CARLO TESTING -- Develop Random Inputs -- Generate Simulation -- Calculate Results -- Aggregate Results -- MODEL RISK -- Bad Assumptions -- Bad Market Data -- Parameter Estimation Errors -- COMPARING STRATEGIES -- COMBINING STRATEGIES -- TRADE SURVEILLANCE -- Accurate Data -- Holistic View of Risk -- Pre-Trade and Intraday Monitoring -- TEST YOUR KNOWLEDGE -- CHAPTER 5 Mark to Market -- PROFITS AND LOSSES -- MARKET PRICE -- MARKET LIQUIDITY AND MARK TO MARKET -- MTM AND MARKET CRASHES -- MTM ACCOUNTING -- HIGHEST AND BEST USE -- FAIR VALUE HIERARCHY -- EFFICIENT MARKETS -- DOMINANT TRADERS -- Long Term Capital Management -- JP Morgan's London Whale -- TEST YOUR KNOWLEDGE -- CHAPTER 6 Value-at-Risk -- POSITION LIMITS -- WHAT IS VALUE-AT-RISK? -- TRADING LIMITS -- PERCENT RETURNS -- PARAMETRIC VAR -- ESTIMATING VOLATILITY FOR PARAMETRIC VAR -- Equally Weighted Historical Volatility -- Exponentially Weighted Volatility -- GARCH Historical Volatility -- Implied Volatility -- CALCULATING PORTFOLIO VAR -- VARIANCE/COVARIANCE MATRIX -- NON-PARAMETRIC VAR -- VAR LIMITS IN PRACTICE -- THE MISUSE OF VAR -- Expected Shortfall -- TEST YOUR KNOWLEDGE -- CHAPTER 7 Hedging -- HEDGING -- HOW IS HEDGING USED? -- HEDGING COSTS MONEY -- MINIMUM VARIANCE HEDGE RATIO -- MISMATCHED CASH FLOWS -- HEDGE EFFECTIVENESS TESTING -- HEDGE-ACCOUNTING MEMO -- Step 1. Identify the hedged item -- Step 2. Select the type of hedge accounting thatwill be applied -- Step 3. Describe the hedge.

Step 4. Document the risk management objectivesand strategy -- Step 5. Specify the hedge-effectiveness tests -- REGRESSION TESTS -- LOGARITHMIC RETURNS -- TEST YOUR KNOWLEDGE -- CHAPTER 8 Options, Greeks, and Non-Linear Risks -- OPTIONS -- GREEKS -- THE VALUE OF OPTIONS -- BLACK SCHOLES FORMULA -- DELTA -- GAMMA -- RELATIONSHIP BETWEEN PUT/CALL PARITY AND GAMMA -- THETA -- VEGA -- RHO AND PHI -- TEST YOUR KNOWLEDGE -- CHAPTER 9 Credit Value Adjustments (CVA) -- TRADING IS A SOCIAL ACTIVITY -- CREDIT RISK -- EXPOSURE AT DEFAULT (EAD) -- LOSS GIVEN DEFAULT (LGD) -- PROBABILITY OF DEFAULT (PD) -- Credit Rating Model -- Cumulative PD -- Building PD Forward Curves -- Market-Based -- CORRELATION BETWEEN PD AND LGD -- CREDIT LIMITS AND COUNTERPARTY EXPOSURE -- CURRENT EXPOSURE AND POTENTIAL FUTURE EXPOSURE -- CALCULATING A CREDIT VALUE ADJUSTMENT -- MULTI-PERIOD CVA CALCULATION -- SETTLEMENT RISK -- TEST YOUR KNOWLEDGE -- Afterword -- Answer Key -- About the Author -- Index.