Risk Management and Financial Institutions

All Finance Professionals Need to Understand Risk

Companies must take risks to survive and prosper, but deciding which risks are acceptable, which are not, and what action to take is the tricky part. To be successful, all finance professionals need a solid understanding of risk.

Risk Management and Financial Institutions, written by one of the most respected authorities on financial risk management, is thorough, textbook–level instruction for all finance professionals, on all aspects of financial risk.

Fully revised and updated, this top–selling book clarifies such complex topics as the diff erent types of financial institutions and how they are regulated, valuation and scenario analysis, credit risk, margin and collateral, volatility, and much more.

You'll find new coverage of timely subjects, such as central clearing, scenario analysis, enterprise risk management, and the latest regulatory issues and gain access to a supplementary website with additional software and helpful learning aids.

Business Snapshots xxi

Preface xxiii

Chapter 1: Introduction 1

PART ONE : FINANCIAL INSTITUTIONS AND THEIR TRADING

Chapter 2: Banks 25

Chapter 3: Insurance Companies and Pension Plans 45

Chapter 4: Mutual Funds and Hedge Funds 71

Chapter 5: Trading in Financial Markets 93

Chapter 6: The Credit Crisis of 2007 121

Chapter 7: Valuation and Scenario Analysis: The Risk–Neutral and Real Worlds 137

PART TWO : MARKET RISK

Chapter 8: How Traders Manage Their Risks 153

Chapter 9: Interest Rate Risk 175

Chapter 10: Volatility 201

Chapter 11: Correlations and Copulas 231

Chapter 12: Value at Risk and Expected Shortfall 255

Chapter 13: Historical Simulation and Extreme Value Theory 277

Chapter 14: Model–Building Approach 299

PART THREE : REGULATION

Chapter 15: Basel I, Basel II, and Solvency II 325

Chapter 16: Basel II.5, Basel III, and Other Post–Crisis Changes 353

Chapter 17: Fundamental Review of the Trading Book 373

PART FOUR : CREDIT RISK

Chapter 18: Managing Credit Risk: Margin, OTC Markets, and CCPs 383

Chapter 19: Estimating Default Probabilities 401

Chapter 20: CVA and DVA 429

Chapter 21: Credit Value at Risk 447

PART FIVE : OTHER TOPICS

Chapter 22: Scenario Analysis and Stress Testing 463

Chapter 23: Operational Risk 481

Chapter 24: Liquidity Risk 501

Chapter 25: Model Risk 527

Chapter 26: Economic Capital and RAROC 547

Chapter 27: Enterprise Risk Management 565

Chapter 28: Risk Management Mistakes to Avoid 579

PART SIX : APPENDICES

Appendices 591

Answers to Questions and Problems 629

Glossary 669

DerivaGem Software 689

Tables for N(x) 695

Index 699

JOHN C. HULLis the Maple Financial Professor of Derivatives and Risk Management at the Joseph L. Rotman School of Management, University of Toronto, and codirector of Rotman's Master of Finance program. He has been a consultant to many North American, Japanese, and European fi nancial institutions, and is the author of three books, which are widely used by both practitioners and academics, and an associate editor of eight academic journals.