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| Foreword | |
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| Preface | |
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| Acknowledgments | |
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| About the Author | |
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| Introduction | |
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| Lessons from a Crisis | |
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| Financial Risk and Actuarial Risk | |
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| Simulation and Subjective Judgment | |
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| Institutional Background | |
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| Moral Hazard-Insiders and Outsiders | |
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| Ponzi Schemes | |
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| Adverse Selection | |
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| The Winner's Curse | |
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| Market Making versus Position Taking | |
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| Operational Risk | |
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| Operations Risk | |
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| The Risk of Fraud | |
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| The Risk of Nondeliberate Incorrect Information | |
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| Disaster Risk | |
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| Personnel Risk | |
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| Legal Risk | |
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| The Risk of Unenforceable Contracts | |
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| The Risk of Illegal Actions | |
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| Reputational Risk | |
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| Accounting Risk | |
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| Funding Liquidity Risk | |
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| Enterprise Risk | |
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| Identification of Risks | |
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| Operational Risk Capital | |
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| Financial Disasters | |
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| Disasters Due to Misleading Reporting | |
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| Chase Manhattan Bank/Drysdale Securities | |
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| Kidder Peabody | |
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| Barings Bank | |
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| Allied Irish Bank (AIB) | |
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| Union Bank of Switzerland (UBS) | |
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| Soci�t� G�n�rale | |
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| Other Cases | |
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| Disasters Due to Large Market Moves | |
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| Long-Term Capital Management (LTCM) | |
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| Metallgesellschaft (MG) | |
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| Disasters Due to the Conduct of Customer Business | |
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| Bankers Trust (BT) | |
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| JPMorgan, Citigroup, and Enron | |
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| Other Cases | |
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| The Systemic Disaster of 2007-2008 | |
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| Overview | |
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| The Crisis in CDOs of Subprime Mortgages | |
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| Subprime Mortgage Originators | |
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| CDO Creators | |
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| Rating Agencies | |
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| Investors | |
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| Investment Banks | |
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| Insurers | |
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| The Spread of the Crisis | |
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| Credit Contagion | |
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| Market Contagion | |
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| Lessons from the Crisis for Risk Managers | |
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| Subprime Mortgage Originators | |
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| CDO Creators | |
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| Rating Agencies | |
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| Investors | |
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| Investment Banks | |
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| Insurers | |
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| Credit Contagion | |
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| Market Contagion | |
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| Lessons from the Crisis for Regulators | |
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| Mortgage Originators | |
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| CDO Creators | |
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| Rating Agencies | |
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| Investors | |
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| Investment Banks | |
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| Insurers | |
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| Credit Contagion | |
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| Market Contagion | |
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| Broader Lessons from the Crisis | |
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| Managing Financial Risk | |
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| Risk Measurement | |
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| General Principles | |
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| Risk Management of Instruments That Lack Liquidity | |
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| Market Valuation | |
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| Valuation Reserves | |
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| Analysis of Revenue | |
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| Exposure to Changes in Market Prices | |
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| Risk Measurement for Position Taking | |
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| Risk Control | |
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| VaR and Stress Testing | |
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| VaR Methodology | |
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| Simulation of the P&L Distribution | |
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| Measures of the P&L Distribution | |
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| Stress Testing | |
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| Overview | |
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| Economic Scenario Stress Tests | |
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| Stress Tests Relying on Historical Data | |
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| Uses of Overall Measures of Firm Position Risk | |
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| Model Risk | |
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| How Important Is Model Risk? | |
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| Model Risk Evaluation and Control | |
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| Scope of Model Review and Control | |
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| Roles and Responsibilities for Model Review and Control | |
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| Model Verification | |
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| Model Verification of Deal Representation | |
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| Model Verification of Approximations | |
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| Model Validation | |
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| Continuous Review | |
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| Periodic Review | |
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| Liquid Instruments | |
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| Illiquid Instruments | |
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| Choice of Model Validation Approach | |
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| Choice of Liquid Proxy | |
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| Design of Monte Carlo Simulation | |
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| Implications for Marking to Market | |
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| Implications for Risk Reporting | |
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| Trading Models | |
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| Managing Spot Risk | |
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| Overview | |
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| Foreign Exchange Spot Risk | |
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| Equity Spot Risk | |
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| Physical Commodities Spot Risk | |
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| Managing Forward Risk | |
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| Instruments | |
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| Direct Borrowing and Lending | |
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| Repurchase Agreements | |
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| Forwards | |
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| Futures Contracts | |
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| Forward Rate Agreements | |
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| Interest Rate Swaps | |
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| Total Return Swaps | |
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| Asset-Backed Securities | |
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| Mathematical Models of Forward Risks | |
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| Pricing Illiquid Flows by Interpolation | |
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| Pricing Long-Dated Illiquid Flows by Stack and Roll | |
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| Flows Representing Promised Deliveries | |
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| Indexed Flows | |
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| Factors Impacting Borrowing Costs | |
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| The Nature of Borrowing Demand | |
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| The Possibility of Cash-and-Carry Arbitrage | |
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| The Variability of Storage Costs | |
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| The Seasonality of Borrowing Costs | |
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| Borrowing Costs and Forward Prices | |
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| Risk Management Reporting and Limits for Forward Risk | |
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| Managing Vanilla Options Risk | |
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| Overview of Options Risk Management | |
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| The Path Dependence of Dynamic Hedging | |
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| A Simulation of Dynamic Hedging | |
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| Risk Reporting and Limits | |
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| Delta Hedging | |
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| Building a Volatility Surface | |
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| Interpolating between Time Periods | |
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| Interpolating between Strikes-Smile and Skew | |
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| Extrapolating Based on Time Period | |
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| Summary | |
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| Managing Exotic Options Risk | |
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| Single-Payout Options | |
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| Log Contracts and Variance Swaps | |
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| Single-Asset Quanto Options | |
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| Convexity | |
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| Binary Options | |
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| Contingent Premium Options | |
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| Accrual Swaps | |
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| Time-Dependent Options | |
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| Forward-Starting and Cliquet Options | |
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| Compound Options | |
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| Path-Dependent Options | |
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| Standard Analytic Models for Barriers | |
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| Dynamic Hedging Models for Barriers | |
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| Static Hedging Models for Barriers | |
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| Barrier Options with Rebates, Lookback, and Ladder Options | |
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| Broader Classes of Path-Dependent Exotics | |
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| Correlation-Dependent Options | |
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| Linear Combinations of Asset Prices | |
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| Risk Management of Options on Linear Combinations | |
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| Index Options | |
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| Options to Exchange One Asset for Another | |
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| Nonlinear Combinations of Asset Prices | |
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| Correlation between Price and Exercise | |
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| Correlation-Dependent Interest Rate Options | |
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| Models in Which the Relationship between Forwards Is Treated as Constant | |
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| Term Structure Models | |
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| Relationship between Swaption and Cap Prices | |
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| Credit Risk | |
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| Short-Term Exposure to Changes in Market Prices | |
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| Credit Instruments | |
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| Models of Short-Term Credit Exposure | |
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| Risk Reporting for Market Credit Exposures | |
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| Modeling Single-Name Credit Risk | |
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| Estimating Probability of Default | |
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| Estimating Loss Given Default | |
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| Estimating the Amount Owed at Default | |
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| The Option-Theoretic Approach | |
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| Portfolio Credit Risk | |
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| Estimating Default Correlations | |
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| Monte Carlo Simulation of Portfolio Credit Risk | |
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| Computational Alternatives to Full Simulation | |
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| Risk Management and Reporting for Portfolio Credit Exposures | |
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| Risk Management of Multiname Credit Derivatives | |
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| Multiname Credit Derivatives | |
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| Modeling of Multiname Credit Derivatives | |
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| Risk Management and Reporting for Multiname Credit Derivatives | |
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| CDO Tranches and Systematic Risk | |
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| Counterparty Credit Risk | |
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| Overview | |
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| Exchange-Traded Derivatives | |
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| Over-the-Counter Derivatives | |
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| Overview | |
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| The Loan-Equivalent Approach | |
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| The Collateralization Approach | |
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| The Collateralization Approach-Wrong-Way Risk | |
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| The Active Management Approach | |
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| References | |
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| About the Companion Website | |
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| Index | |