Financial Risk Management For Dummies E-Book

Aaron Brown

• Herausgeber: John Wiley & Sons
• Kategorie: Wissenschaft und neue Technologien
• Sprache: Englisch
• Veröffentlichungsjahr: 2015

Seitenzahl: 736

Beschreibung

Take the risk out of financial risk management Written by bestselling author and past winner of the GARP Award's Risk Manager of the Year, Aaron Brown, Financial Risk Management For Dummies offers thorough and accessible guidance on successfully managing and controlling financial risk within your company. Through easy-to-follow instruction, you'll find out how to manage risk, firstly by understanding it, and then by taking control of it. Plus, you'll discover how to measure and value financial risk, set limits, stop losses, control drawdowns and hedge bets. Financial risk management uses financial instruments to manage exposure to risk within firms, large and small--particularly credit risk and market risk. From managing and measuring risk to working in financial institutions and knowing how to communicate risk to your company and clients, Financial Risk Management For Dummies makes it easy to make sense of the management of risk when working in various different financial institutions and concludes by covering the topic of how to communicate risk -- how to report it properly and how to deal with and comply with all of the regulations. * Covers managing risk and working as a financial risk manager * Provides everything you need to know about measuring financial risk * Walks you through working in financial institutions * Demonstrates how to communicate risk If you work in the financial sector and want to make financial risk management your mission, you've come to the right place!

Leseprobe

Financial Risk Management For Dummies®

Published by: John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester, www.wiley.com

This edition first published 2016

© 2016 John Wiley & Sons, Ltd, Chichester, West Sussex.

Registered office

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.

The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with the respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.

For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at [phone]-3993, or fax [phone]. For technical support, please visit www.wiley.com/techsupport.

For technical support, please visit www.wiley.com/techsupport.

A catalogue record for this book is available from the British Library.

Library of Congress Control Number: 2015951253

ISBN 978-1-119-08220-0 (hardback/paperback) ISBN 978-1-119-08218-7 (ebk)

ISBN 978-1-119-08219-4 (ebk)

Financial Risk Management For Dummies®

Visit www.dummies.com/cheatsheet/financialriskmanagment to view this book's cheat sheet.

Table of Contents

Cover

Introduction

About This Book

Foolish Assumptions

Icons Used In This Book

Beyond the Book

Where to Go From Here

Part I: Getting Started with Risk Management

Chapter 1: Living with Risk

Understanding the Scope of Risk

Working with Financial Risk

Communicating Risk

Chapter 2: Understanding Risk Models

Comparing Frequentism and Bayesianism

Playing Roulette

Getting Scientific with Risk

Chapter 3: Taking Charge of Risk

Distinguishing Risk

Choosing Your Goal

Considering Dangers, Opportunities and Risk

Chapter 4: Managing Financial Risk

Looking at Financial Markets

Playing the Game

Maintaining Equilibrium

Surviving

Chapter 5: Functions of a Financial Risk Manager

Developing from Traders and Trading

Running the Middle Office

Reporting Requirements

Part II: Measuring Financial Risk

Chapter 6: Valuing Risk

Understanding VaR

Putting VaR to Use

Adding Flavours to VaR

Chapter 7: Stress Testing for Success

Testing for Stress

Imagining Stress Events

Building Your Stress

Telling Sad Stories during a Scenario Analysis

Working Backwards

Chapter 8: Speaking Greek

Parsing Portfolios

Deriving Greeks

Bonding

Chapter 9: Accounting for Extremes

Distinguishing Extremes

Spotting Extreme Fallacies

Adding Dimensions

Part III: Managing Financial Risk

Chapter 10: Setting Limits

Describing Basic Limits

Going through the Process

Administering Limits

Chapter 11: Stopping Losses

Understanding Stops

Avoiding Stop Mistakes

Overruling Stops

Monitoring Stop Frequency

Chapter 12: Controlling Drawdowns

Comparing Stopping Loss and Controlling Drawdown

Setting the Baseline Risk Level

Considering Stakeholders

Building a Drawdown Control System

Regrouping after a Drawdown Event

Chapter 13: Hedging Bets

Choosing Goals

Measuring Exposure

Changing Exposure

Monetising Hedges

Part IV: Working in Financial Institutions

Chapter 14: Trading Places

Understanding Traders

Helping Traders

Chapter 15: Banking on Risk

Banking Basics

Regulating Capital

Managing Bank Risk

Chapter 16: Managing Assets and Portfolios

Surveying Financial Institutions and Their Risks

Looking at Asset Management Companies and the Funds They Manage

Comparing Portfolio and Risk Management

Chapter 17: Insuring Risk

Understanding Insurance

Reinsuring

Crunching the Numbers with Actuaries

Part V: Communicating Risk

Chapter 18: Reporting Risk

Appreciating the Role of Risk Management

Writing Reports

Presenting to Boards of Directors

Incorporating Feedback

Chapter 19: Regulating Finance

Looking at Regulators and What They Do

Forging Relationships with Regulators

Banking on Basel

Stressing Regulation

Dealing with Unintended Consequences

Part VI: The Part of Tens

Chapter 20: Ten One-Minute Risk Management Tips

Fear the Market

Plan for Success

Hire Honest People

Listen Another Second

Split the Difference

Don’t Ignore Idiots

Respect the Past

Do the Asymptotics

Check the Data

Encourage Fast Failure

Chapter 21: Ten Days that Shook the (Financial) World

3 February 1637: Tulipmania

1 December 1825: South American Bond Crisis

24 September 1869: Black Friday

31 July 1905: Le roi du sucre et le roi du marché (The sugar king and the market king)

27 March 1980: Silver Thursday

1986–1993: Savings and Loan Crisis

19 October 1987: Black Monday

18 April 1994: Rogue Trader Joseph Jett

6–10 August 2007: Quant Equity Crisis

12 August 2012: The London Whale

Chapter 22: Ten Great Risk Managers in History

Abraham Wald

Alhazen

Dwight Eisenhower

Epicurus

Gideon

Henry Petroski

John Kelly

Nathan Bedford Forrest

Rituparna

Zu Chongzhi

Chapter 23: Ten Great Risk Books

A Demon of Our Own Design

by Richard Bookstaber

Beat the Market

by Ed Thorp

Dynamic Hedging

by Nassim Taleb

Expert Political Judgment

by Philip Tetlock

Finding Alpha

by Eric Falkenstein

Fischer Black and the Revolutionary Idea of Finance

by Perry Mehrling

Gambling and Speculation

by Reuven and Gabrielle Brenner

Iceberg Risk

by Kent Osband

Risk Intelligence

by Dylan Evans

The Foundations of Statistics

by Leonard J Savage

About the Author

Cheat Sheet

Connect with Dummies

End User License Agreement

Guide

Cover

Table of Contents

Begin Reading

Pages

i

ii

v

vi

vii

viii

ix

x

xi

xii

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

261

262

263

264

265

266

267

268

269

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

323

324

325

327

328

329

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

352

353

354

369

370

371

372

Introduction

Risk management is about preparing for anything that might happen. People who try to predict the future are the enemies of risk management. They’re the ones who say, ‘Let’s build a wall on the north side of town because that’s where we predict the attack will come.’ Risk managers know that leaving any gap in the wall means the attackers will exploit the gap.

Preventing disaster is easy – you just don’t take any risk. Risk management is about surviving disaster, not preventing it. If there weren’t disasters, you wouldn’t call it risk. You need risk – and its attendant disasters – to learn, to grow, to excel.

If you want to be a risk manager, this book gives you a good start. You need practice at risk taking, plus some maths and financial theory, plus some practice at finance. If you already have all of those things, you should be writing this book, not reading it.

About This Book

People have been concerned about risk as long as there have been people. Financial Risk Management For Dummies explains the background and some theory about risk, quantitative analysis of risk and modern financial risk management and shows you how to apply them in practice, without jargon or mathematics. Okay, I throw in a few examples that require addition and multiplication, but they’re clearly labelled and can be skipped, and I also give you lots of simple, specific illustrations.

This book tells you what financial risk managers do and why they do it.

Foolish Assumptions

I make three different guesses about who you are and why you’re reading this book:

You’re currently, or hope to be, a financial manager, and you want to delve into the risk management aspect of your job. By itself, this book cannot teach you that, but if you already know the basic financial theory and mathematics or go elsewhere to discover them, this book can show you how to apply them properly to become a good financial risk manager.

You work with financial risk managers and want to understand how they see things. This book can show you the world from their perspective, and help you form constructive partnerships.

You have no professional connection to finance, but want to understand both the good risks in finance, the ones that help the economy grow and people realise their dreams, and the bad risks in finance, the ones that damage the economy and blight lives. This book can help you navigate the modern financial system to achieve financial security.

Icons Used In This Book

These little pieces of margin art bring your attention to exceptionally interesting or useful information. That is, except for text next to the Technical Stuff icon, which is information – usually maths – you may find helpful if you’re interested.

Simple, standalone advice that you can take to improve your risk management.

Standalone stuff it pays to keep in mind.

Stuff I love and the For Dummies editors don’t has this icon. You can skip it if you want, I promise all the important ideas are explained clearly in non-technical language elsewhere. But come on, this stuff is really fun and a little maths won’t hurt you.

This icon marks stuff not to do. In risk management, if you do something you’re not supposed to, it isn’t usually actually dangerous. This icon marks situations that may seem attractive in the short run but that defeat the long-term goals of risk management.

Real-world scenarios, and sometimes real-life maths, get this icon.

Beyond the Book

Risk is a big topic, too big to fit entirely into the book or e-book you’re holding at the moment. I put some additional material on the web. I created cheat sheets (www.dummies.com/cheatsheet/financialriskmanagment) with the key ideas for managing seven specific kinds of risk:

Market risk:

Uncertainty due to changes in market prices.

Credit risk:

Uncertainty due to a failure of an external entity to keep a promise.

Operational risk:

Institutional uncertainties other than market or credit risk.

Liquidity risk:

Uncertainty about terms and the ability to make a transaction when necessary or desired.

Funding risk:

Uncertainty about whether investors will provide sufficient funds.

Reputational risk:

Uncertainty about how your entity will be perceived.

Political risk:

Uncertainty about government actions.

I also stick in some concentrated summaries of four sections of this book: Measuring Risk, Communicating Risk, Managing Risk and Working as a Risk Manager. You can also access bonus material at www.dummies.com/extras/financialriskmanagement, including ten great links that illustrate ten financial risk management lessons is amusing and dramatic fashion, from killer molasses to an Olympic David versus Goliath tale.

Where to Go From Here

If you know nothing about finance or risk and want to be a financial risk manager, I recommend reading this book in order. But, you can jump around to whatever chapters and sections seem interesting. Switching back and forth between theory and practice, between high-level views of the forest and detailed descriptions of individual trees may be the best way to understand what modern financial risk management is all about.

If you know nothing about finance, risk or financial risk management and are walking into work for your first day as a financial risk manager of a major global bank, turn straight to Chapter 10 and follow the directions step-by-step through to the end of Chapter 13.

If you’re really in a hurry, turn right to Chapter 20 and get all the really important stuff in ten minutes. Not ten minutes to read, ten minutes to read and do!

Wherever you start, I trust you’ll find information you can put to use.

Part I

Getting Started with Risk Management

For Dummies can help you get started with lots of subjects. Visit www.dummies.com to discover more and do more with For Dummies.

In this part …

Recognize risk and distinguish it from danger and opportunity.

Choose the right framework to make risk decisions.

Take charge of risk: identify the goal, consider the options, and make the decision.

Manage risk in the front office of a financial institution: set limits, approve trades, approve portfolio strategies, and deal directly with risk takers.

Manage risk in the middle office of a financial institution: determine risk appetite, set risk policy, deal with the board and senior management, and work with regulators.

Manage risk in the back office of a financial institution: create control frameworks, compile reports, monitor constraints, and identify issues.

Chapter 1

Living with Risk

In This Chapter

Exploring the idea of risk

Managing financial risk

Informing people about risk

Life is risk, and risk is life. Nobody knows what tomorrow may bring. As the poet Robert Burns famously put it, ‘The best-laid schemes o’ mice an’ men, gang aft agley, an’ lea’e us nought but grief an’ pain, for promis’d joy!’ (Roughly translated, Burns warns that careful plans can come to nothing.)

While most of us instinctively first think about bad risk, good surprises happen as well. ‘Fortune favours the bold,’ we are told, and, ‘Sometimes things just go your way.’ In fact, risk is more than just sometimes good, it is essential. As another saying goes, ‘The only place with people and no risk is a graveyard.’ Religions, philosophies and especially superstitions are deeply rooted in ideas about risk.