1st Edition

Understanding Risk The Theory and Practice of Financial Risk Management

By David Murphy Copyright 2008
    470 Pages 136 B/W Illustrations
    by Chapman & Hall

    470 Pages
    by Chapman & Hall

    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.

    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


    David Murphy

    “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