Financial Risk Manager Handbook E-Book

Philippe Jorion

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 1266

Veröffentlichungsjahr: 2010

Beschreibung

The essential reference for financial risk management Filled with in-depth insights and practical advice, the Financial Risk Manager Handbook is the core text for risk management training programs worldwide. Presented in a clear and consistent fashion, this completely updated Sixth Edition, mirrors recent updates to the new two-level Financial Risk Manager (FRM) exam, and is fully supported by GARP as the trusted way to prepare for the rigorous and renowned FRM certification. This valuable new edition includes an exclusive collection of interactive multiple-choice questions from recent FRM exams. Financial Risk Manager Handbook, Sixth Edition supports candidates studying for the Global Association of Risk Professional's (GARP) annual FRM exam and prepares you to assess and control risk in today's rapidly changing financial world. Authored by renowned risk management expert Philippe Jorion, with the full support of GARP, this definitive guide summarizes the core body of knowledge for financial risk managers. * Offers valuable insights on managing market, credit, operational, and liquidity risk * Examines the importance of structured products, futures, options, and other derivative instruments * Contains new material on extreme value theory, techniques in operational risk management, and corporate risk management Financial Risk Manager Handbook is the most comprehensive guide on this subject, and will help you stay current on best practices in this evolving field. The FRM Handbook is the official reference book for GARP's FRM certification program.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Preface

About the Author

About GARP

FINANCIAL RISK MANAGER (FRM®) CERTIFICATION

OTHER GARP CERTIFICATIONS

GARP DIGITAL LIBRARY

GARP EVENTS AND NETWORKING

Introduction

Part One: Foundations of Risk Management

Chapter 1: Risk Management

1.1 RISK MEASUREMENT

1.2 EVALUATION OF THE RISK MEASUREMENT PROCESS

1.3 PORTFOLIO CONSTRUCTION

1.4 ASSET PRICING THEORIES

1.5 VALUE OF RISK MANAGEMENT

1.6 IMPORTANT FORMULAS

1.7 ANSWERS TO CHAPTER EXAMPLES

Part Two: Quantitative Analysis

Chapter 2: Fundamentals of Probability

2.1 CHARACTERIZING RANDOM VARIABLES

2.2 MULTIVARIATE DISTRIBUTION FUNCTIONS

2.3 FUNCTIONS OF RANDOM VARIABLES

2.4 IMPORTANT DISTRIBUTION FUNCTIONS

2.5 DISTRIBUTION OF AVERAGES

2.6 IMPORTANT FORMULAS

2.7 ANSWERS TO CHAPTER EXAMPLES

2.8 APPENDIX A: REVIEW OF MATRIX MULTIPLICATION

2.9 APPENDIX B: NORMAL DISTRIBUTION

Chapter 3: Fundamentals of Statistics

3.1 PARAMETER ESTIMATION

3.2 REGRESSION ANALYSIS

3.3 IMPORTANT FORMULAS

3.4 ANSWERS TO CHAPTER EXAMPLES

Chapter 4: Monte Carlo Methods

4.1 SIMULATIONS WITH ONE RANDOM VARIABLE

4.2 IMPLEMENTING SIMULATIONS

4.3 MULTIPLE SOURCES OF RISK

4.4 IMPORTANT FORMULAS

4.5 ANSWERS TO CHAPTER EXAMPLES

Chapter 5: Modeling Risk Factors

5.1 REAL DATA

5.2 NORMAL AND LOGNORMAL DISTRIBUTIONS

5.3 DISTRIBUTIONS WITH FAT TAILS

5.4 TIME VARIATION IN RISK

5.5 IMPORTANT FORMULAS

5.6 ANSWERS TO CHAPTER EXAMPLES

Part Three: Financial Markets and Products

Chapter 6: Bond Fundamentals

6.1 DISCOUNTING, PRESENT VALUE, AND FUTURE VALUE

6.2 PRICE-YIELD RELATIONSHIP

6.3 BOND PRICE DERIVATIVES

6.4 DURATION AND CONVEXITY

6.5 IMPORTANT FORMULAS

6.6 ANSWERS TO CHAPTER EXAMPLES

6.7 APPENDIX: APPLICATIONS OF INFINITE SERIES

Chapter 7: Introduction to Derivatives

7.1 DERIVATIVES MARKETS

7.2 FORWARD CONTRACTS

7.3 FUTURES CONTRACTS

7.4 SWAP CONTRACTS

7.5 IMPORTANT FORMULAS

7.6 ANSWERS TO CHAPTER EXAMPLES

Chapter 8: Option Markets

8.1 OPTION PAYOFFS

8.2 OPTION PREMIUMS

8.3 VALUING OPTIONS

8.4 OTHER OPTION CONTRACTS

8.5 VALUING OPTIONS BY NUMERICAL METHODS

8.6 IMPORTANT FORMULAS

8.7 ANSWERS TO CHAPTER EXAMPLES

Chapter 9: Fixed-Income Securities

9.1 OVERVIEW OF DEBT MARKETS

9.2 FIXED-INCOME SECURITIES

9.3 PRICING OF FIXED-INCOME SECURITIES

9.4 FIXED-INCOME RISK

9.5 ANSWERS TO CHAPTER EXAMPLES

Chapter 10: Fixed-Income Derivatives

10.1 FORWARD CONTRACTS

10.2 FUTURES

10.3 SWAPS

10.4 Options

10.5 IMPORTANT FORMULAS

10.6 ANSWERS TO CHAPTER EXAMPLES

Chapter 11: Equity, Currency, and Commodity Markets

11.1 EQUITIES

11.2 EQUITY DERIVATIVES

11.3 CURRENCIES

11.4 CURRENCY DERIVATIVES

11.5 COMMODITIES

11.6 COMMODITY DERIVATIVES

11.7 IMPORTANT FORMULAS

11.8 ANSWERS TO CHAPTER EXAMPLES

Part Four: Valuation and Risk Models

Chapter 12: Introduction to Risk Models

12.1 INTRODUCTION TO FINANCIAL MARKET RISKS

12.2 COMPONENTS OF RISK MEASUREMENT SYSTEMS

12.3 DOWNSIDE RISK MEASURES

12.4 VAR PARAMETERS

12.5 STRESS-TESTING

12.6 VAR: LOCAL VERSUS FULL VALUATION

12.7 IMPORTANT FORMULAS

12.8 ANSWERS TO CHAPTER EXAMPLES

Chapter 13: Managing Linear Risk

13.1 UNITARY HEDGING

13.2 Optimal Hedging

13.3 Applications of Optimal Hedging

13.4 IMPORTANT FORMULAS

13.5 ANSWERS TO CHAPTER EXAMPLES

Chapter 14: Nonlinear (Option) Risk Models

14.1 OPTION MODELS

14.2 OPTION GREEKS

14.3 OPTION RISKS

14.4 IMPORTANT FORMULAS

14.5 ANSWERS TO CHAPTER EXAMPLES

Part Five: Market Risk Management

Chapter 15: Advanced Risk Models: Univariate

15.1 BACKTESTING

15.2 EXTREME VALUE THEORY

15.3 COHERENT RISK MEASURES

15.4 IMPORTANT FORMULAS

15.5 ANSWERS TO CHAPTER EXAMPLES

Chapter 16: Advanced Risk Models: Multivariate

16.1 RISK MAPPING

16.2 JOINT DISTRIBUTIONS OF RISK FACTORS

16.3 VAR METHODS

16.4 LIMITATIONS OF RISK SYSTEMS

16.5 EXAMPLE

16.6 IMPORTANT FORMULAS

16.7 ANSWERS TO CHAPTER EXAMPLES

APPENDIX: SIMPLIFICATION OF THE COVARIANCE MATRIX

Chapter 17: Managing Volatility Risk

17.1 IMPLIED VOLATILITY

17.2 IMPLIED CORRELATION

17.3 VARIANCE SWAPS

17.4 DYNAMIC TRADING

17.5 CONVERTIBLE BONDS AND WARRANTS

17.6 IMPORTANT FORMULAS

17.7 ANSWERS TO CHAPTER EXAMPLES

Chapter 18: Mortgage-Backed Securities Risk

18.1 PREPAYMENT RISK

18.2 SECURITIZATION

18.3 TRANCHING

18.4 IMPORTANT FORMULAS

18.5 ANSWERS TO CHAPTER EXAMPLES

Part Six: Credit Risk Management

Chapter 19: Introduction to Credit Risk

19.1 SETTLEMENT RISK

19.2 OVERVIEW OF CREDIT RISK

19.3 MEASURING CREDIT RISK

19.4 CREDIT RISK DIVERSIFICATION

19.5 IMPORTANT FORMULAS

19.6 ANSWERS TO CHAPTER EXAMPLES

Chapter 20: Measuring Actuarial Default Risk

20.1 CREDIT EVENT

20.2 DEFAULT RATES

20.3 RECOVERY RATES

20.4 ASSESSING CORPORATE AND SOVEREIGN RATINGS

20.5 REGULATION OF CREDIT RATING AGENCIES

20.6 IMPORTANT FORMULAS

20.7 ANSWERS TO CHAPTER EXAMPLES

Chapter 21: Measuring Default Risk from Market Prices

21.1 CORPORATE BOND PRICES

21.2 EQUITY PRICES

21.3 IMPORTANT FORMULAS

21.4 ANSWERS TO CHAPTER EXAMPLES

Chapter 22: Credit Exposure

22.1 CREDIT EXPOSURE BY INSTRUMENT

22.2 DISTRIBUTION OF CREDIT EXPOSURE

22.3 EXPOSURE MODIFIERS

22.4 CREDIT RISK MODIFIERS

22.5 IMPORTANT FORMULAS

22.6 ANSWERS TO CHAPTER EXAMPLES

APPENDIX: ISDA MASTER NETTING AGREEMENT

Chapter 23: Credit Derivatives and Structured Products

23.1 INTRODUCTION

23.2 CREDIT DEFAULT SWAPS

23.3 OTHER CONTRACTS

23.4 STRUCTURED PRODUCTS

23.5 CDO Market

23.6 DISCUSSION

23.7 IMPORTANT FORMULAS

23.8 ANSWERS TO CHAPTER EXAMPLES

Chapter 24: Managing Credit Risk

24.1 MEASURING THE DISTRIBUTION OF CREDIT LOSSES

24.2 MEASURING EXPECTED CREDIT LOSS

24.3 MEASURING CREDIT VAR

24.4 PORTFOLIO CREDIT RISK MODELS

24.5 CONCLUSIONS

24.6 IMPORTANT FORMULAS

24.7 ANSWERS TO CHAPTER EXAMPLES

Part Seven: Operational and Integrated Risk Management

Chapter 25: Operational Risk

25.1 IMPORTANCE OF OPERATIONAL RISK

25.2 IDENTIFYING OPERATIONAL RISK

25.3 ASSESSING OPERATIONAL RISK

25.4 MANAGING OPERATIONAL RISK

25.5 THE BASEL OPERATIONAL RISK CHARGE

25.6 IMPORTANT FORMULAS

25.7 ANSWERS TO CHAPTER EXAMPLES

APPENDIX: CAUSAL NETWORKS

Chapter 26: Liquidity Risk

26.1 SOURCES OF LIQUIDITY RISK

26.2 ASSET LIQUIDITY RISK

26.3 FUNDING LIQUIDITY RISK

26.4 MANAGING LIQUIDITY RISK

26.5 IMPORTANT FORMULAS

26.6 ANSWERS TO CHAPTER EXAMPLES

Chapter 27: Firmwide Risk Management

27.1 INTEGRATED RISK MANAGEMENT

27.2 BEST PRACTICES REPORTS

27.3 ORGANIZATIONAL STRUCTURE

27.4 CONTROLLING TRADERS

27.5 RISK-ADJUSTED PERFORMANCE AND RAROC

27.6 IMPORTANT FORMULAS

27.7 ANSWERS TO CHAPTER EXAMPLES

Chapter 28: The Basel Accord

28.1 STEPS IN THE BASEL ACCORD

28.2 DEFINITION OF CAPITAL

28.3 THE BASEL I CREDIT RISK CHARGE

28.4 ILLUSTRATION: CITIBANK

28.5 THE BASEL II ACCORD

28.6 THE MARKET RISK CHARGE

28.7 CONCLUSIONS

28.8 IMPORTANT FORMULAS

28.9 ANSWERS TO CHAPTER EXAMPLES

Part Eight: Investment Risk Management

Chapter 29: Portfolio Risk Management

29.1 INSTITUTIONAL INVESTORS

29.2 PERFORMANCE EVALUATION

29.3 RISK BUDGETING

29.4 IMPORTANT FORMULAS

29.5 ANSWERS TO CHAPTER EXAMPLES

Chapter 30: Hedge Fund Risk Management

30.1 THE HEDGE FUND INDUSTRY

30.2 LEVERAGE, LONG POSITIONS, AND SHORT POSITIONS

30.3 HEDGE FUNDS: MARKET RISKS

30.4 HEDGE FUNDS: SPECIFIC RISKS

30.5 DEALING WITH HEDGE FUND RISKS

30.6 IMPORTANT FORMULAS

30.7 ANSWERS TO CHAPTER EXAMPLES

Index

FRM Test Bank

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Copyright © 2011 by Philippe Jorion, except for FRM sample questions, which are copyright 1997–2011 by GARP. The FRM designation is a GARP trademark. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Jorion, Philippe. Financial risk manager handbook plus test bank : FRM Part I/Part II, 6th Edition / Philippe Jorion. – 6th ed. p. cm. Includes index. ISBN 978-0-470-90401-5 (paper/online) 1. Financial risk management. 2. Risk management. 3. Corporations–Finance. I. Title. HD61.J67 2009 658.15′5–dc22 2010047263

Preface

The Financial Risk Manager Handbook Plus Test Bank provides the core body of knowledge for financial risk managers. Risk management has rapidly evolved over the past decade and has become an indispensable function in many institutions.

This Handbook was originally written to provide support for candidates taking the FRM examination administered by GARP. As such, it reviews a wide variety of practical topics in a consistent and systematic fashion. It covers quantitative methods, major financial products, as well as market, credit, operational, and integrated risk management. It also discusses investment risk management issues essential for risk professionals.

This edition has been thoroughly updated to reflect recent developments in financial markets and changes in the structure of the FRM program. The book is now structured to correspond to the two levels of the FRM exams. All of the chapters have been updated to account for recent developments in financial markets and regulations. In particular, current issues are integrated in the second part of the book. New chapters have been added, including chapters that deal with advanced univariate and multivariate models, as well as advanced option models. Finally, this Handbook incorporates the latest questions from the FRM examinations. Modern risk management systems cut across the entire organization. This breadth is reflected in the subjects covered in this Handbook. The Handbook was designed to be self-contained, but only for readers who already have some exposure to financial markets. To reap maximum benefit from this book, readers ideally should have taken the equivalent of an MBA-level class on investments.

Finally, I want to acknowledge the help received in writing this Handbook. In particular, I would like to thank the numerous readers who shared comments on previous editions. Any comment or suggestion for improvement will be welcome. This feedback will help us to maintain the high quality of the FRM designation.

Philippe Jorion October 2010

About the Author

Philippe Jorion is a Professor of Finance at the Paul Merage School of Business at the University of California at Irvine. He has also been a professor at Columbia University, Northwestern University, the University of Chicago, and the University of British Columbia. In addition, he taught the risk management class in the Master of Financial Engineering programs at the University of California at Berkeley and University of California at Los Angeles. He holds an M.B.A. and a Ph.D. from the University of Chicago and a degree in engineering from the University of Brussels. Dr. Jorion is also a managing director at Pacific Alternative Asset Management Company (PAAMCO), a global fund of hedge funds with approximately $10 billion under management. PAAMCO is one of the few funds of funds to require position-level transparency from all invested hedge funds. This information is used to provide various measures of portfolio risk as well as to develop tools that help investors to understand the drivers of the funds' alpha and to detect style drift.

Dr. Jorion is the author of more than 100 publications directed to academics and practitioners on the topics of risk management and international finance. He has also written a number of books, including Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County, the first account of the largest municipal failure in U.S. history, and Value at Risk: The New Benchmark for Managing Financial Risk, which is aimed at finance practitioners and has become an industry standard.

Philippe Jorion is a frequent speaker at academic and professional conferences. He is on the editorial board of a number of finance journals and was editor in chief of the Journal of Risk.

About GARP

Founded in 1996, the Global Association of Risk Professionals (GARP) is the leading not-for-profit association for world-class financial risk certification, education, and training, with close to 100,000 members representing 167 countries. With deep expertise and a strong reputation, GARP sets global standards and creates risk management programs valued worldwide. All GARP programs are developed with input from experts around the world to ensure that concepts and content reflect globally accepted practices.

GARP is dedicated to advancing the risk profession. For more information about GARP, please visit www.garp.com.

FINANCIAL RISK MANAGER (FRM®) CERTIFICATION

The benchmark FRM designation is the globally accepted risk management certification for financial risk professionals. The FRM objectively measures competency in the risk management profession based on globally accepted standards. With a compound annual growth rate of 25% over the past seven years, the FRM program has experienced significant growth in every financial center around the world. Now 16,000+ individuals hold the FRM designation in over 90 countries. In addition, organizations with five or more FRM registrants grew from 105 in 2003 to 424 in 2008, further demonstrating the FRM program's global acceptance.

The FRM Continuing Professional Education (CPE) program, offered exclusively for certified FRM holders, provides the perspective and framework needed to further develop competencies in the ever-evolving field of risk management.

For more information about the FRM program, please visit www.garp.com/frmexam.

OTHER GARP CERTIFICATIONS

International Certificate in Banking Risk and Regulation (ICBRR)

The ICBRR allows individuals to expand their knowledge and understanding of the various risks, regulations, and supervisory requirements banks must face in today's economy, with emphasis on the Basel II Accord. This certificate is ideal for employees who are not professional risk managers but who have a strong need to understand risk concepts. The ICBRR program is designed for employees in nonrisk departments such as internal audit, accounting, information technology (IT), legal, compliance, and sales, acknowledging that everyone in the organization is a risk manager!

Energy Risk Professional Program

The Energy Risk Professional (ERP®) program is designed to measure a candidate's knowledge of the major energy markets and gauge their ability to manage the physical and financial risks inherent in the complex world of energy. This program is valuable for anyone working in or servicing the energy field, requiring an understanding of the physical and financial markets, how they interrelate, and the risks involved.

GARP DIGITAL LIBRARY

As the world's largest digital library dedicated to financial risk management, the GARP Digital Library (GDL) is the hub for risk management education and research material. The library's unique iReadings™, allow users to download individual chapters of books, saving both time and money. There are over 1,000 readings available from 12 different publishers. The GDL collection offers readings to meet the needs of anyone interested in risk management.

For more information, please visit www.garpdigitallibrary.org.

GARP EVENTS AND NETWORKING

GARP hosts major conventions throughout the world, where risk professionals come together to share knowledge, network, and learn from leading experts in the field. Conventions are bookended with interactive workshops that provide practical insights and case studies presented by the industry's leading practitioners.

GARP regional chapters provide an opportunity for financial risk professionals to network and share new trends and discoveries in risk management. Each of our 52 chapters holds several meetings each year, in some locations more often, focusing on issues of importance to the risk management community, either globally or locally.

Introduction

GARP's formal mission is to be the leading professional association for financial risk managers, managed by and for its members and dedicated to the advancement of the risk profession through education, training, and the promotion of best practices globally. As a part of delivering on that mission, GARP has again teamed with Philippe Jorion to produce the sixth edition of the Financial Risk Manager Handbook Plus Test Bank.

The Handbook follows GARP's FRM Committee's published FRM Study Guide, which sets forth primary topics and subtopics covered in the FRM exam. The topics are selected by the FRM Committee as being representative of the theories and concepts utilized by risk management professionals as they address current issues.

Over the years the Study Guide has taken on an importance far exceeding its initial intent of providing guidance for FRM candidates. The Study Guide is now being used by universities, educators, and executives around the world to develop graduate-level business and finance courses, as a reference list for purchasing new readings for personal and professional libraries, as an objective outline to assess an employee's or job applicant's risk management qualifications, and as guidance on the important trends currently affecting the financial risk management profession.

Given the expanded and dramatically growing recognition of the financial risk management profession globally, the Handbook has similarly assumed a natural and advanced role beyond its original purpose. It has now become the primary reference manual for risk professionals, academicians, and executives around the world. Professional risk managers must be well versed in a wide variety of risk-related concepts and theories, and must also keep themselves up-to-date with a rapidly changing marketplace. The Handbook is designed to allow them to do just that. It provides a financial risk management practitioner with the latest thinking and approaches to financial risk-related issues. It also provides coverage of advanced topics with questions and tutorials to enhance the reader's learning experience.

This sixth edition of the Handbook includes revised coverage of the primary topic areas covered by the FRM examination. Importantly, this edition also includes the latest lessons from the recent credit crisis, as well as new and more recent sample FRM questions.

The Handbook continues to keep pace with the dynamic financial risk profession while simultaneously offering serious risk professionals an excellent and cost-effective tool to keep abreast of the latest issues affecting the global risk management community.

Developing credibility and global acceptance for a professional certification program is a lengthy and complicated process. When GARP first administered its FRM exam in 1997, the concept of a professional risk manager and a global certification relating to that person's skill set was more theory than reality. That has now completely changed, as the number of current FRM holders exceeds 16,000.

The FRM is now the benchmark for a financial risk manager anywhere around the world. Professional risk managers having earned the FRM credential are globally recognized as having achieved a level of professional competency and a demonstrated ability to dynamically measure and manage financial risk in a real-world setting in accordance with global standards.

GARP is proud to continue to make this Handbook available to financial risk professionals around the world. Philippe Jorion, a preeminent risk professional, has again compiled an exceptional reference book. Supplemented by an interactive Test Bank, this Handbook is a requirement for any risk professional's library.

The Test Bank is a preparatory review for anyone studying for the FRM exam and for risk professionals interested in self-study to review and improve their knowledge of market, credit, and operational risk management. The Test Bank contains hundreds of multiple-choice questions from the 2007, 2008, and 2009 FRM exams, with answers and solutions provided. The Test Bank can be downloaded following the instructions on the FRM™ Test Bank Download page at the end of this book.

Global Association of Risk Professionals October 2010

Part One

Foundations of Risk Management