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Hull John C.. Risk Management and Financial Institutions
Business Snapshots
Preface
NEW MATERIAL
SLIDES
QUESTIONS AND PROBLEMS
INSTRUCTOR'S MANUAL
ACKNOWLEDGMENTS
CHAPTER 1. Introduction
1.1 RISK VS. RETURN FOR INVESTORS
1.2 THE EFFICIENT FRONTIER
1.3 THE CAPITAL ASSET PRICING MODEL
1.4 ARBITRAGE PRICING THEORY
1.5 RISK VS. RETURN FOR COMPANIES
1.6 RISK MANAGEMENT BY FINANCIAL INSTITUTIONS
1.7 CREDIT RATINGS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
PART One. Financial Institutions and Their Trading
CHAPTER 2. Banks
2.1 COMMERCIAL BANKING
2.2 THE CAPITAL REQUIREMENTS OF A SMALL COMMERCIAL BANK
2.3 DEPOSIT INSURANCE
2.4 INVESTMENT BANKING
2.5 SECURITIES TRADING
2.6 POTENTIAL CONFLICTS OF INTEREST IN BANKING
2.7 TODAY'S LARGE BANKS
2.8 THE RISKS FACING BANKS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 3. Insurance Companies and Pension Plans
3.1 LIFE INSURANCE
3.2 ANNUITY CONTRACTS
3.3 MORTALITY TABLES
3.4 LONGEVITY AND MORTALITY RISK
3.5 PROPERTY-CASUALTY INSURANCE
3.6 HEALTH INSURANCE
3.7 MORAL HAZARD AND ADVERSE SELECTION
3.8 REINSURANCE
3.9 CAPITAL REQUIREMENTS
3.10 THE RISKS FACING INSURANCE COMPANIES
3.11 REGULATION
3.12 PENSION PLANS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 4. Mutual Funds and Hedge Funds
4.1 MUTUAL FUNDS
4.2 HEDGE FUNDS
4.3 HEDGE FUND STRATEGIES
4.4 HEDGE FUND PERFORMANCE
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 5. Trading in Financial Markets
5.1 THE MARKETS
5.2 CLEARING HOUSES
5.3 OTC MARKET CHANGES
5.4 LONG AND SHORT POSITIONS IN ASSETS
5.5 DERIVATIVES MARKETS
5.6 PLAIN VANILLA DERIVATIVES
5.7 NON-TRADITIONAL DERIVATIVES
5.8 EXOTIC OPTIONS AND STRUCTURED PRODUCTS
5.9 RISK MANAGEMENT CHALLENGES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 6. The Credit Crisis of 2007
6.1 THE U.S. HOUSING MARKET
6.2 SECURITIZATION
6.3 THE CRISIS
6.4 WHAT WENT WRONG?
6.5 LESSONS FROM THE CRISIS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 7. Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds
7.1 VOLATILITY AND ASSET PRICES
7.2 RISK-NEUTRAL VALUATION
7.3 SCENARIO ANALYSIS
7.4 WHEN BOTH WORLDS HAVE TO BE USED
7.5 THE CALCULATIONS IN PRACTICE
7.6 ESTIMATING REAL-WORLD PROCESSES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
PART Two. Market Risk
CHAPTER 8. How Traders Manage Their Risks
8.1 DELTA
8.2 GAMMA
8.3 VEGA
8.4 THETA
8.5 RHO
8.6 CALCULATING GREEK LETTERS
8.7 TAYLOR SERIES EXPANSIONS
8.8 THE REALITIES OF HEDGING
8.9 HEDGING EXOTIC OPTIONS
8.10 SCENARIO ANALYSIS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 9. Interest Rate Risk
9.1 THE MANAGEMENT OF NET INTEREST INCOME
9.2 TYPES OF RATES
9.3 DURATION
9.4 CONVEXITY
9.5 GENERALIZATION
9.6 NONPARALLEL YIELD CURVE SHIFTS
9.7 INTEREST RATE DELTAS IN PRACTICE
9.8 PRINCIPAL COMPONENTS ANALYSIS
9.9 GAMMA AND VEGA
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 10. Volatility
10.1 DEFINITION OF VOLATILITY
10.2 IMPLIED VOLATILITIES
10.3 ARE DAILY PERCENTAGE CHANGES IN FINANCIAL VARIABLES NORMAL?
10.4 THE POWER LAW
10.5 MONITORING DAILY VOLATILITY
10.6 THE EXPONENTIALLY WEIGHTED MOVING AVERAGE MODEL
10.7 THE GARCH(1,1) MODEL
10.8 CHOOSING BETWEEN THE MODELS
10.9 MAXIMUM LIKELIHOOD METHODS
10.10 USING GARCH(1,1) TO FORECAST FUTURE VOLATILITY
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 11. Correlations and Copulas
11.1 DEFINITION OF CORRELATION
11.2 MONITORING CORRELATION
11.3 MULTIVARIATE NORMAL DISTRIBUTIONS
11.4 COPULAS
11.5 APPLICATION TO LOAN PORTFOLIOS: VASICEK'S MODEL
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 12. Value at Risk and Expected Shortfall
12.1 DEFINITION OF VaR
12.2 EXAMPLES OF THE CALCULATION OF VaR
12.3 A DRAWBACK OF VaR
12.4 EXPECTED SHORTFALL
12.5 COHERENT RISK MEASURES
12.6 CHOICE OF PARAMETERS FOR VaR AND ES
12.7 MARGINAL, INCREMENTAL, AND COMPONENT MEASURES
12.8 EULER'S THEOREM
12.9 AGGREGATING VaRs AND ESs
12.10 BACK-TESTING
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 13. Historical Simulation and Extreme Value Theory
13.1 THE METHODOLOGY
13.2 ACCURACY OF VaR
13.3 EXTENSIONS
13.4 COMPUTATIONAL ISSUES
13.5 EXTREME VALUE THEORY
13.6 APPLICATIONS OF EVT
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 14. Model-Building Approach
14.1 THE BASIC METHODOLOGY
14.2 GENERALIZATION
14.3 CORRELATION AND COVARIANCE MATRICES
14.4 HANDLING INTEREST RATES
14.5 APPLICATIONS OF THE LINEAR MODEL
14.6 LINEAR MODEL AND OPTIONS
14.7 QUADRATIC MODEL
14.8 MONTE CARLO SIMULATION
14.9 NON-NORMAL ASSUMPTIONS
14.10 MODEL-BUILDING vs. HISTORICAL SIMULATION
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
PART Three. Regulation
CHAPTER 15. Basel I, Basel II, and Solvency II
15.1 THE REASONS FOR REGULATING BANKS
15.2 BANK REGULATION PRE-1988
15.3 THE 1988 BIS ACCORD
15.4 THE G-30 POLICY RECOMMENDATIONS
15.5 NETTING
15.6 1996 AMENDMENT
15.7 BASEL II
15.8 CREDIT RISK CAPITAL UNDER BASEL II
15.9 OPERATIONAL RISK CAPITAL UNDER BASEL II
15.10 PILLAR 2: SUPERVISORY REVIEW
15.11 PILLAR 3: MARKET DISCIPLINE
15.12 SOLVENCY II
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 16. Basel II.5, Basel III, and Other Post-Crisis Changes
16.1 BASEL II.5
16.2 BASEL III
16.3 CONTINGENT CONVERTIBLE BONDS
16.4 DODD–FRANK ACT
16.5 LEGISLATION IN OTHER COUNTRIES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 17. Fundamental Review of the Trading Book
17.1 NEW MARKET RISK MEASURES
17.2 TRADING BOOK VS. BANKING BOOK
17.3 CREDIT TRADES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTION
PART Four. Credit Risk
CHAPTER 18. Managing Credit Risk: Margin, OTC Markets, and CCPs
18.1 MARGIN AND EXCHANGES
18.2 OTC MARKETS
18.3 CONSEQUENCES OF NEW OTC REGULATIONS
18.4 THE RISK OF A CCP FAILURE
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 19. Estimating Default Probabilities
19.1 CREDIT RATINGS
19.2 HISTORICAL DEFAULT PROBABILITIES
19.3 RECOVERY RATES
19.4 CREDIT DEFAULT SWAPS
19.5 CREDIT SPREADS
19.6 ESTIMATING DEFAULT PROBABILITIES FROM CREDIT SPREADS
19.7 COMPARISON OF DEFAULT PROBABILITY ESTIMATES
19.8 USING EQUITY PRICES TO ESTIMATE DEFAULT PROBABILITIES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 20. CVA and DVA
20.1 CREDIT EXPOSURE ON DERIVATIVES
20.2 CVA
20.3 THE IMPACT OF A NEW TRANSACTION
20.4 CVA RISK
20.5 WRONG-WAY RISK
20.6 DVA
20.7 SOME SIMPLE EXAMPLES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 21. Credit Value at Risk
21.1 RATINGS TRANSITION MATRICES
21.2 VASICEK'S MODEL
21.3 CREDIT RISK PLUS
21.4 CREDITMETRICS
21.5 CREDIT-SENSITIVE INSTRUMENTS IN THE TRADING BOOK
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
PART Five. Other Topics
CHAPTER 22. Scenario Analysis and Stress Testing
22.1 GENERATING THE SCENARIOS
22.2 REGULATION
22.3 WHAT TO DO WITH THE RESULTS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 23. Operational Risk
23.1 DEFINING OPERATIONAL RISK
23.2 DETERMINATION OF REGULATORY CAPITAL
23.3 CATEGORIZATION OF OPERATIONAL RISKS
23.4 LOSS SEVERITY AND LOSS FREQUENCY
23.5 IMPLEMENTATION OF AMA
23.6 PROACTIVE APPROACHES
23.7 ALLOCATION OF OPERATIONAL RISK CAPITAL
23.8 USE OF POWER LAW
23.9 INSURANCE
23.10 SARBANES-OXLEY
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 24. Liquidity Risk
24.1 LIQUIDITY TRADING RISK
24.2 LIQUIDITY FUNDING RISK
24.3 LIQUIDITY BLACK HOLES
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 25. Model Risk
25.1 MARKING TO MARKET
25.2 MODELS FOR LINEAR PRODUCTS
25.3 PHYSICS vs. FINANCE
25.4 HOW MODELS ARE USED FOR PRICING STANDARD PRODUCTS
25.5 HEDGING
25.6 MODELS FOR NONSTANDARD PRODUCTS
25.7 DANGERS IN MODEL BUILDING
25.8 DETECTING MODEL PROBLEMS
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 26. Economic Capital and RAROC
26.1 DEFINITION OF ECONOMIC CAPITAL
26.2 COMPONENTS OF ECONOMIC CAPITAL
26.3 SHAPES OF THE LOSS DISTRIBUTIONS
26.4 RELATIVE IMPORTANCE OF RISKS
26.5 AGGREGATING ECONOMIC CAPITAL
26.6 ALLOCATION OF ECONOMIC CAPITAL
26.7 DEUTSCHE BANK'S ECONOMIC CAPITAL
26.8 RAROC
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 27. Enterprise Risk Management
27.1 RISK APPETITE
27.2 RISK CULTURE
27.3 IDENTIFYING MAJOR RISKS
27.4 STRATEGIC RISK MANAGEMENT
SUMMARY
FURTHER READING
PRACTICE QUESTIONS AND PROBLEMS (ANSWERS AT END OF BOOK)
FURTHER QUESTIONS
CHAPTER 28. Risk Management Mistakes to Avoid
28.1 RISK LIMITS
28.2 MANAGING THE TRADING ROOM
28.3 LIQUIDITY RISK
28.4 LESSONS FOR NONFINANCIAL CORPORATIONS
28.5 A FINAL POINT
FURTHER READING
PART Six. Appendices
APPENDIX A. Compounding Frequencies for Interest Rates
APPENDIX B. Zero Rates, Forward Rates, and Zero-Coupon Yield Curves
APPENDIX C. Valuing Forward and Futures Contracts
APPENDIX D. Valuing Swaps
APPENDIX E. Valuing European Options
APPENDIX F. Valuing American Options
APPENDIX G. Taylor Series Expansions
APPENDIX H. Eigenvectors and Eigenvalues
APPENDIX I. Principal Components Analysis
APPENDIX J. Manipulation of Credit Transition Matrices
APPENDIX K. Valuation of Credit Default Swaps
APPENDIX L. Synthetic CDOs and Their Valuation
Answers to Questions and Problems
CHAPTER 1
CHAPTER 2
CHAPTER 3
CHAPTER 4
CHAPTER 5
CHAPTER 6
CHAPTER 7
CHAPTER 8
CHAPTER 9
CHAPTER 10
CHAPTER 11
CHAPTER 12
CHAPTER 13
CHAPTER 14
CHAPTER 15
CHAPTER 16
CHAPTER 17
CHAPTER 18
CHAPTER 19
CHAPTER 20
CHAPTER 21
CHAPTER 22
CHAPTER 23
CHAPTER 24
CHAPTER 25
CHAPTER 26
CHAPTER 27
Glossary
DerivaGem Software
GETTING STARTED
NEXT STEPS
BOND OPTIONS
CAPS AND SWAPTIONS
CDSs
CDOs
HOW GREEK LETTERS ARE DEFINED
THE APPLICATIONS BUILDER
Table for N(x) When x ≤ 0
Table for N(x) When x ≥ 0
Index
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