Advanced Financial Risk Management : Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management.
Title:
Advanced Financial Risk Management : Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management.
Author:
Van Deventer, Donald R.
ISBN:
9781118278574
Personal Author:
Edition:
2nd ed.
Physical Description:
1 online resource (876 pages)
Contents:
Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management -- Copyright -- Contents -- Introduction: Wall Street Lessons from Bubbles -- Key Fallacies in Risk Management -- If It Hasn't Happened to Me Yet, It Won't Happen to Me, Even If It's Happened to Someone Else. -- Silo Risk Management Allows My Firm to Choose the "Best of Breed" Risk Model for Our Silo. -- I Don't Care What's Wrong with the Model. Everyone Else Is Using It. -- I Don't Care What's Wrong with the Assumptions. Everyone Else Is Using Them. -- Mathematical Models Are Superior to Computer Simulations. -- Big North American and European Banks Are More Sophisticated Than Other Banks around the World and We Want to Manage Risk Like They Do. -- Goldman Says They Do It This Way and That Must Be Right. -- Selected Events in the Credit Crisis -- Part One: Risk Management: Definitions and Objectives -- Chapter 1: A Risk Management Synthesis: Market Risk, Credit Risk, Liquidity Risk, and Asset and Liability Management -- Risk Management: Definitions and Objectives -- Advances in Integrated Risk Management and Institutional Barriers to Progress -- Measuring the Trade-Offs between Risk and Return -- When Bad Things Happen to Good People -- U.S. Savings and Loan Crisis -- Long-Term Capital Management -- The 2006-2011 Credit Crisis -- A Thousand Cuts -- Chapter 2: Risk, Return, Performance Measurement, and Capital Regulation -- Practical Quantification of Risk -- Perils and Pitfalls in the Measurement of Risk: The Impact of Selection Bias -- Biases in Return vs. a Relative Benchmark -- Historical Value at Risk: Selection Bias Again -- Monte Carlo-Based Value at Risk -- Expected Losses on Tranches of Collateralized Debt Obligations -- Measuring Return: Market vs. Accounting Returns.
Introduction to Transfer Pricing: Extracting Interest Rate Risk in a Financial Accounting Context -- Bank of America, 1973-1979 -- First Interstate, 1982-1987 -- Performance Measurement and Capital Regulation -- Perspectives on Measuring Risk: One Source of Risk or Many Sources of Risk? -- Interest Rate Risk Management Evolution -- Equity Risk Management Evolution -- Option Risk Management Evolution -- Credit Risk Management Evolution -- Managing Risk and Strategy, Business by Business -- Risk and Strategy Management in a Complex Financial Institution -- What Causes Financial Institutions to Fail? -- The Role of Capital in Risk Management and Business Strategy -- Capital-Based Risk Management in Banking Today: Pros and Cons -- History of Capital-Based Regulations in Commercial Banking -- Part Two: Risk Management Techniques for Interest Rate Analytics -- Chapter 3: Interest Rate Risk Introduction and Overview -- Background Information on Movements in the U.S. Treasury Yield Curve -- A Step-by-Step Approach to Analyzing Interest Rate Risk -- The Interest Rate Risk Safety Zone -- Chapter 4: Fixed Income Mathematics: The Basic Tools -- Modern Implications of Present Value -- Price, Accrued Interest, and Value -- Calculation of Accrued Interest -- Present Value -- The Basic Present Value Calculation -- Example -- Calculating the Value of a Fixed Coupon Bond with Principal Paid at Maturity -- Calculating the Coupon of a Fixed Coupon Bond with Principal Paid at Maturity When the Value Is Known -- Example -- The Value of an Amortizing Loan -- Calculating the Payment Amount of an Amortizing Bond When the Value Is Known -- Risk Management Implications -- Calculating the Value of a Floating-Rate Bond or Loan with Principal Paid at Maturity -- Example -- Risk Management Implications -- Compound Interest Conventions and Formulas.
Future Value of an Invested Amount Earning at a Simple Interest Rate of y Compounded m Times per Year for n Periods -- Future Value of an Invested Amount Earning at a Simple Interest Rate of y Compounded Continuously for n Years -- Example -- Present Value of a Future Amount If Funds Are Invested at a Simple Interest Rate of y Compounded m Times per Year for n Periods -- Present Value of a Future Amount If Funds Are Invested at a Simple Interest Rate of y Compounded Continuously for n Years -- Compounding Formulas and Present Value Factors P(t) -- Yields and Yield-to-Maturity Calculations -- The Formula for Yield to Maturity -- Yield to Maturity for Long or Short First Coupon Payment Periods -- Calculating Forward Interest Rates and Bond Prices -- Implied Forward Interest Rates on Zero-Coupon Bonds -- Example -- Implied Forward Zero-Coupon Bond Prices -- Present Value of Forward Fixed Coupon Bond -- Implied Forward Price on a Fixed Coupon Bond -- Implied Forward Coupon on a Fixed Coupon Bond -- Other Forward Calculations -- Summary -- Chapter 5: Yield Curve Smoothing -- Example A: Stepwise Constant Yields and Forwards vs. Nelson-Siegel -- Deriving the Form of the Yield Curve Implied by Example A -- Fitting the Nelson-Siegel Approach to Sample Data -- Example D: Quadratic Yield Splines and Related Forward Rates -- Deriving the Form of the Yield Curve Implied by Example D -- Example F: Cubic Yield Splines and Related Forwards -- Deriving the Form of the Yield Curve Implied by Example F Assumptions -- Example H: Maximum Smoothness Forward Rates and Related Yields -- Deriving the Parameters of the Quartic Forward Rate Curves Implied by Example H Assumptions -- Comparing Yield Curve and Forward Rate Smoothing Techniques -- Ranking 23 Smoothing Techniques by Smoothness of the Forward Rate Curve.
Ranking 23 Smoothing Techniques by Length of the Forward Curve -- Trading Off Smoothness vs. the Length of the Forward Rate Curve -- The Shimko Test for Measuring Accuracy of Smoothing Techniques -- Smoothing Yield Curves Using Coupon-Bearing Bond Prices as Inputs -- Appendix: Proof of the Maximum Smoothness Forward Rate Theorem -- Chapter 6: Introduction to Heath, Jarrow, and Morton Interest Rate Modeling -- Objectives of the Example and Key Input Data -- Key Implications and Notation of the HJM Approach -- Pseudo-Probabilities -- The Formula for Zero-Coupon Bond Price Shifts -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 2 -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 4 -- Valuation in the HJM Framework -- Valuation of a Zero-Coupon Bond Maturing at Time T = 4 -- Valuation of a Coupon-Bearing Bond Paying Annual Interest -- Valuation of a Digital Option on the One-Year U.S. Treasury Rate -- Conclusion -- Chapter 7: HJM Interest Rate Modeling with Rate and Maturity-Dependent Volatility -- Objectives of the Example and Key Input Data -- Key Implications and Notation of the HJM Approach -- Pseudo-Probabilities -- The Formula for Zero-Coupon Bond Price Shifts -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 2 -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 4 -- Valuation in the HJM Framework -- Valuation of a Zero-Coupon Bond Maturing at Time T = 4 -- Valuation of a Coupon-Bearing Bond Paying Annual Interest -- Valuation of a Digital Option on the One-Year U.S. Treasury Rate -- Conclusion -- Chapter 8: HJM Interest Rate Modeling with Two Risk Factors -- Probability of Yield Curve Twists in the U.S. Treasury Market -- Objectives of the Example and Key Input Data -- Introducing a Second Risk Factor Driving Interest Rates.
Key Implications and Notation of the HJM Approach -- Pseudo-Probabilities -- The Formula for Zero-Coupon Bond Price Shifts with Two Risk Factors -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 2 -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 3 -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 4 -- Valuation in the HJM Framework -- Valuation of a Zero-Coupon Bond Maturing at Time T = 4 -- Valuation of a Coupon-Bearing Bond Paying Annual Interest -- Valuation of a Digital Option on the One-Year U.S. Treasury Rate -- Replication of HJM Example 3 in Common Spreadsheet Software -- Conclusion -- Chapter 9: HJM Interest Rate Modeling with Three Risk Factors -- Probability of Yield Curve Twists in the U.S. Treasury Market -- Objectives of the Example and Key Input Data -- Risk Factor 1: Annual Changes in the One-Year U. S. Treasury Spot Rate -- Alternative Specifications of the Interest Rate Volatility Surface -- Key Implications and Notation of the HJM Approach -- Pseudo-Probabilities -- The Formula for Zero-Coupon Bond Price Shifts with Three Risk Factors -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 2 -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 3 -- Building the Bushy Tree for Zero-Coupon Bonds Maturing at Time T = 4 -- Valuation in the HJM Framework -- Valuation of a Zero-Coupon Bond Maturing at Time T = 4 -- Valuation of a Coupon-Bearing Bond Paying Annual Interest -- Valuation of a Digital Option on the One-Year U.S. Treasury Rate -- Conclusion -- Chapter 10: Valuation, Liquidity, and Net Income -- How Many Risk Factors Are Necessary to Accurately Model Movements in the Risk-Free Yield Curve? -- Revisiting the Phrase "No Arbitrage" -- Valuation, Liquidity Risk, and Net Income.
Risk-Neutral and Empirical Probabilities of Interest Rate Movements.
Abstract:
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.
Local Note:
Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2017. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.
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