Understanding Risk : The Theory and Practice of Financial Risk Management book cover
1st Edition

Understanding Risk
The Theory and Practice of Financial Risk Management

ISBN 9781584888932
Published April 23, 2008 by Chapman and Hall/CRC
470 Pages 136 B/W Illustrations

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Book 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.

Table of Contents

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
Regulatory Capital and the Basel Accords
Basel II: Beyond the Capital Rules
Part 3: Treasury and Liquidity Risks
An Introduction to Asset/Liability Management (ALM)
Banking Book Income and Funding the Bank
ALM in Practice
Trading Book ALM
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
Contractual Relations
Asset-Backed Securities
Securitization Structures
Inflation-Linked Products
Equity Basket Products
Convertible Bonds
Equity/Credit Trading
New Products

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“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