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Business Snapshots | |
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Preface | |
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Introduction | |
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Risk vs. Return for Investors | |
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The Efficient Frontier | |
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The Capital Asset Pricing Model | |
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Arbitrage Pricing Theory | |
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Risk vs. Return for Companies | |
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Risk Management by Financial Institutions | |
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Credit Ratings | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Banks | |
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Commercial Banking | |
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The Capital Requirements of a Small Commercial Bank | |
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Deposit Insurance | |
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Investment Banking | |
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Securities Trading | |
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Potential Conflicts of Interest in Banking | |
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Today’s Large Banks | |
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The Risks Facing Banks | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Insurance Companies and Pension Plans | |
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Life Insurance | |
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Annuity Contracts | |
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Mortality Tables | |
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Longevity and Mortality Risk | |
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Property-Casualty Insurance | |
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Health Insurance | |
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Moral Hazard and Adverse Selection | |
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Reinsurance | |
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Capital Requirements | |
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The Risks Facing Insurance Companies | |
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Regulation | |
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Pension Plans | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Mutual Funds and Hedge Funds | |
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Mutual Funds | |
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Hedge Funds | |
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Hedge Fund Strategies | |
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Hedge Fund Performance | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Trading in Financial Markets | |
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The Markets | |
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Long and Short Positions in Assets | |
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Derivatives Markets | |
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Plain Vanilla Derivatives | |
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Clearing Houses | |
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Margin | |
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Non-Traditional Derivatives | |
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Exotic Options and Structured Products | |
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Risk Management Challenges | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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The Credit Crisis of 2007 | |
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The U.S. Housing Market | |
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Securitization | |
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The Crisis | |
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What Went Wrong? | |
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Lessons from the Crisis | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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How Traders Manage Their Risks | |
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Delta | |
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Gamma | |
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Vega | |
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Theta | |
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Rho | |
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Calculating Greek Letters | |
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Taylor Series Expansions | |
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The Realities of Hedging | |
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Hedging Exotic Options | |
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Scenario Analysis | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Interest Rate Risk | |
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The Management of Net Interest Income | |
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LIBOR and Swap Rates | |
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Duration | |
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Convexity | |
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Generalization | |
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Nonparallel Yield Curve Shifts | |
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Interest Rate Deltas in Practice | |
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Principal Components Analysis | |
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Gamma and Vega | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Value at Risk | |
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Definition of VaR | |
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Examples of the Calculation of VaR | |
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VaR vs. Expected Shortfall | |
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VaR and Capital | |
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Coherent Risk Measures | |
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Choice of Parameters for VaR | |
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Marginal VaR, Incremental VaR, and Component VaR | |
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Euler’s Theorem | |
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Aggregating VaRs | |
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Back-Testing | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Volatility | |
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Definition of Volatility | |
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Implied Volatilities | |
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Are Daily Percentage Changes in Financial | |
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Variables Normal? | |
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The Power Law | |
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Monitoring Daily Volatility | |
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The Exponentially Weighted Moving Average Model | |
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The GARCH(1,1) Model | |
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Choosing Between the Models | |
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Maximum Likelihood Methods | |
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Using GARCH(1,1) to Forecast Future Volatility | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Correlations and Copulas | |
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Definition of Correlation | |
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Monitoring Correlation | |
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Multivariate Normal Distributions | |
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Copulas | |
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Application to Loan Portfolios: Vasicek’s Model | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Basel I, Basel II, and Solvency II | |
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The Reasons for Regulating Banks | |
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Bank Regulation Pre-1988 | |
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The 1988 BIS Accord | |
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The G-30 Policy Recommendations | |
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Netting | |
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The 1996 Amendment | |
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Basel II | |
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Credit Risk Capital Under Basel II | |
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Operational Risk Capital Under Basel II | |
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Pillar 2: Supervisory Review | |
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Pillar 3: Market Discipline | |
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Solvency II | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Basel 2.5, Basel III, and Dodd-Frank | |
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Basel 2.5 | |
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Basel III | |
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Contingent Convertible Bonds | |
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Dodd-Frank Act | |
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Legislation in Other Countries | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Market Risk VaR: The Historical Simulation Approach | |
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The Methodology | |
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Accuracy | |
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Extensions | |
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Computational Issues | |
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Extreme Value Theory | |
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Applications of EVT | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Market Risk VaR: The Model-Building Approach | |
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The Basic Methodology | |
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Generalization | |
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Correlation and Covariance Matrices | |
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Handling Interest Rates | |
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Applications of the Linear Model | |
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Linear Model and Options | |
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Quadratic Model | |
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Monte Carlo Simulation | |
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Non-Normal Assumptions | |
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Model-Building vs. Historical Simulation | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Credit Risk: Estimating Default Probabilities | |
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Credit Ratings | |
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Historical Default Probabilities | |
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Recovery Rates | |
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Credit Default Swaps | |
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Credit Spreads | |
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Estimating Default Probabilities from Credit Spreads | |
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Comparison of Default Probability Estimates | |
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Using Equity Prices to Estimate Default Probabilities | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Counterparty Credit Risk in Derivatives | |
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Credit Exposure on Derivatives | |
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Bilateral Clearing | |
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Central Clearing | |
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CVA | |
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The Impact of a New Transaction | |
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CVA Risk | |
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Wrong Way Risk | |
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DVA | |
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Some Simple Examples | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Credit Value at Risk | |
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Ratings Transition Matrices | |
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Vasicek’s Model | |
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Credit Risk Plus | |
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CreditMetrics | |
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Credit VaR in the Trading Book | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Scenario Analysis and Stress Testing | |
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Generating the Scenarios | |
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Regulation | |
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What to Do with the Results | |
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Summary | |
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Further Reading | |
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Practice Questions and Problems | |
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Further Questions | |
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Operational Risk | |
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What is Operational Risk? | |
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Determination of Regulatory Capital | |
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Categorization of Operational Risks | |
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Loss Severity and Loss Frequency | |
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Implementation of AMA | |
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Proactive Approaches | |