Understanding Risk: The Theory and Practice of Financial Risk Management, 1st Edition (Paperback) book cover

Understanding Risk

The Theory and Practice of Financial Risk Management, 1st Edition

By David Murphy

Chapman and Hall/CRC

470 pages | 136 B/W Illus.

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Description

Sound risk management often involves a combination of both mathematical and practical aspects. Taking this into account, Understanding Risk: The Theory and Practice of Financial Risk Management explains how to understand financial risk and how the severity and frequency of losses can be controlled. It combines a quantitative approach with a more informal style, giving readers a blend of analysis and intuition.

Divided into four parts, the book begins by introducing the basics of risk management and the behavior of financial instruments. The next section focuses on regulatory capital standards and models, addressing value-at-risk (VaR) models, portfolio credit risk, tranching, operational risk, and the Basel accords. The author then deals with asset/liability management (ALM) and liquidity management. The last part explores structured finance and a variety of new trading instruments, including inflation-linked products, sophisticated equity basket options, and convertible bonds.

With numerous exercises, figures, and examples throughout, this book offers valuable insight on various aspects of financial risk management.

Reviews

“David Murphy has used his extensive knowledge to provide a comprehensive guide to market, credit, and operational risk. Written at a fairly nontechnical level, the text is accessible to those with only a basic knowledge of financial mathematics, option theory, and financial markets. Murphy focuses on practical problems, presenting numerous examples and exercises. Stressing intuition rather than detailed mathematical analysis, he brings readers a clear insight to the current challenges facing professionals today.

This up-to-date treatment of risk is a welcome change from many other texts currently available. The contents are extremely comprehensive and, most importantly, relevant to the profession. It is not easy to select highlights, but the chapter on credit risk and credit risk capital models stands out. It covers all the latest concepts including securitization, tranching, CDOs, structuring, index products, and more. And notably this is one of the few texts that deals with liquidity risk properly, even though it is one of the most challenging areas of risk management today.

Few professionals with experience equal to Murphy’s have the time or the ability to provide accounts as detailed and accessible as this. I urge risk managers, traders, regulators, financial consultants, researchers, teachers, and students of risk management to read this book.”

—Professor Carol Alexander, Chair of Risk Management and Director of Research, University of Reading, UK

Table of Contents

INTRODUCTION

part 1: Risk Management and the Behavior of Products

Markets, Risks, and Risk Management in Context

Financial Markets Overview

Trading and Market Behavior

Basic Ideas in Risk Management

Culture and Organization

Some External Constraints

Derivatives and Quantitative Market Risk Management

Returns, Options, Sensitivities

Portfolios and Risk Aggregation

Understanding the Behavior of Derivatives

Interest Rate Derivatives and Yield Curve Models

Single Name Credit Derivatives

Valuation, Hedging, and Model Risk

part 2: Economic and Regulatory Capital Models

Capital: Motivation and Provision

Motivations for Capital

Capital Instrument Features

Regulatory Capital Provision

Market Risk Capital Models

General Market Risk Capital Models

Some Limitations to and Extensions of Value-at-Risk Models

Risk Systems and Risk Data

Credit Risk and Credit Risk Capital Models

The Banking Book: Introducing the Products and the Risks

Credit Risk for Small Numbers of Obligators

An Introduction to Tranching and Portfolio Credit Derivatives

Credit Portfolio Risk Management

Political and Country Risk

Operational Risk and Further Topics in Capital Estimation

An Introduction to Operational Risk

The Tails and Operational Risk Modeling

Allocating Capital and Other Risks

BANK REGULATION AND CAPITAL REQUIREMENTS

Regulatory Capital and the Basel Accords

Basel II: Beyond the Capital Rules

Part 3: Treasury and Liquidity Risks

THE TREASURY AND ASSET/LIABILITY MANAGEMENT

An Introduction to Asset/Liability Management (ALM)

Banking Book Income and Funding the Bank

ALM in Practice

Trading Book ALM

LIQUIDITY RISK MANAGEMENT

The Liquidity of Securities and Deposits

Liquidity Management

Off-Balance-Sheet Liquidity and Contingent Funding

Stresses of Liquidity

Part 4: Some Trading Businesses and Their Challenges

AN INTRODUCTION TO STRUCTURED FINANCE

Contractual Relations

Asset-Backed Securities

Securitization Structures

NOVEL ASSET CLASSES, BASKET PRODUCTS, AND CROSS-ASSET TRADING

Inflation-Linked Products

Equity Basket Products

Convertible Bonds

Equity/Credit Trading

New Products

CONCLUDING REMARKS

INDEX

About the Series

Chapman and Hall/CRC Financial Mathematics Series

Learn more…

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT000000
MATHEMATICS / General
MAT029000
MATHEMATICS / Probability & Statistics / General