**PDF Free Download | Advanced Financial Risk Management 2nd Edition by Kenji Imai and Mark Mesler**

## Contents of Advanced Financial Risk Management

- Introduction: Wall Street Lessons from Bubbles
- Key Fallacies in Risk Management
- Selected Events in the Credit Crisis
- PART ONE Risk Management: Definitions and Objectives
- CHAPTER A Risk Management Synthesis: Market Risk, Credit Risk, Liquidity Risk,
- and Asset and Liability Management
- Risk Management: Definitions and Objectives
- Advances in Integrated Risk Management and Institutional
- Barriers to Progress
- Measuring the Trade-Offs between Risk and Return
- When Bad Things Happen to Good People
- U.S. Savings and Loan Crisis
- Long-Term Capital Management
- The Credit Crisis
- A Thousand Cuts
- CHAPTER Risk, Return, Performance Measurement, and Capital Regulation
- Practical Quantification of Risk
- Perils and Pitfalls in the Measurement of Risk: The Impact
- of Selection Bias
- Biases in Return vs. a Relative Benchmark
- Historical Value at Risk: Selection Bias Again
- Monte CarloBased Value at Risk
- Expected Losses on Tranches of Collateralized Debt Obligations
- Measuring Return: Market vs. Accounting Returns
- Introduction to Transfer Pricing: Extracting Interest Rate Risk
- in a Financial Accounting Context
- Bank of America,
- First Interstate,
- Performance Measurement and Capital Regulation
- Perspectives on Measuring Risk: One Source of Risk or Many
- Sources of Risk?
- Interest Rate Risk Management Evolution
- Equity Risk Management Evolution
- vii
- Option Risk Management Evolution
- Credit Risk Management Evolution
- Managing Risk and Strategy, Business by Business
- Risk and Strategy Management in a Complex Financial Institution
- What Causes Financial Institutions to Fail?
- The Role of Capital in Risk Management and Business Strategy
- Capital-Based Risk Management in Banking Today: Pros and Cons
- History of Capital-Based Regulations in Commercial Banking
- PART TWO Risk Management Techniques for Interest Rate Analytics
- CHAPTER Interest Rate Risk Introduction and Overview
- Background Information on Movements in the U.S. Treasury
- Yield Curve
- A Step-by-Step Approach to Analyzing Interest Rate Risk
- The Interest Rate Risk Safety Zone
- CHAPTER Fixed Income Mathematics: The Basic Tools
- Modern Implications of Present Value
- Price, Accrued Interest, and Value
- Calculation of Accrued Interest
- Present Value
- The Basic Present Value Calculation
- Example
- Calculating the Value of a Fixed Coupon Bond with
- Principal Paid at Maturity
- Calculating the Coupon of a Fixed Coupon Bond with
- Principal Paid at Maturity When the Value Is Known
- Example
- The Value of an Amortizing Loan
- Calculating the Payment Amount of an Amortizing Bond
- When the Value Is Known
- Risk Management Implications
- Calculating the Value of a Floating-Rate Bond or Loan with
- Principal Paid at Maturity
- Example
- Risk Management Implications
- Compound Interest Conventions and Formulas
- Future Value of an Invested Amount Earning at a Simple Interest
- Rate of y Compounded m Times per Year for n Periods
- Future Value of an Invested Amount Earning at a Simple Interest
- Rate of y Compounded Continuously for n Years
- Example
- Present Value of a Future Amount If Funds Are Invested at a
- Simple Interest Rate of y Compounded m Times per
- Year for n Periods
- Present Value of a Future Amount If Funds Are Invested at a Simple
- Interest Rate of y Compounded Continuously for n Years
- Compounding Formulas and Present Value Factors P(t)
- Yields and Yield-to-Maturity Calculations
- The Formula for Yield to Maturity
- Yield to Maturity for Long or Short First Coupon Payment Periods
- Calculating Forward Interest Rates and Bond Prices
- Implied Forward Interest Rates on Zero-Coupon Bonds
- Example
- Implied Forward Zero-Coupon Bond Prices
- Present Value of Forward Fixed Coupon Bond
- Implied Forward Price on a Fixed Coupon Bond
- Implied Forward Coupon on a Fixed Coupon Bond
- Other Forward Calculations
- Summary
- CHAPTER Yield Curve Smoothing
- Example A: Stepwise Constant Yields and Forwards vs. Nelson-Siegel
- Deriving the Form of the Yield Curve Implied by Example A
- Fitting the Nelson-Siegel Approach to Sample Data
- Example D: Quadratic Yield Splines and Related Forward Rates
- Deriving the Form of the Yield Curve Implied by Example D
- Example F: Cubic Yield Splines and Related Forwards
- Deriving the Form of the Yield Curve Implied by
- Example F Assumptions
- Example H: Maximum Smoothness Forward
- Rates and Related Yields
- Deriving the Parameters of the Quartic Forward Rate Curves
- Implied by Example H Assumptions
- Comparing Yield Curve and Forward Rate Smoothing Techniques
- Ranking Smoothing Techniques by Smoothness of the
- Forward Rate Curve
- Ranking Smoothing Techniques by Length of the
- Forward Curve
- Trading Off Smoothness vs. the Length of the Forward Rate Curve
- The Shimko Test for Measuring Accuracy of Smoothing Techniques
- Smoothing Yield Curves Using Coupon-Bearing Bond Prices as Inputs
- Appendix: Proof of the Maximum Smoothness Forward Rate Theorem
- CHAPTER Introduction to Heath, Jarrow, and Morton Interest Rate Modeling
- Objectives of the Example and Key Input Data
- Key Implications and Notation of the HJM Approach
- Pseudo-Probabilities
- The Formula for Zero-Coupon Bond Price Shifts
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Valuation in the HJM Framework
- Valuation of a Zero-Coupon Bond Maturing at Time T
- Valuation of a Coupon-Bearing Bond Paying Annual Interest
- Valuation of a Digital Option on the One-Year U.S. Treasury Rate
- Conclusion
- CHAPTER HJM Interest Rate Modeling with Rate and Maturity-Dependent Volatility
- Objectives of the Example and Key Input Data
- Key Implications and Notation of the HJM Approach
- Pseudo-Probabilities
- The Formula for Zero-Coupon Bond Price Shifts
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Valuation in the HJM Framework
- Valuation of a Zero-Coupon Bond Maturing at Time T
- Valuation of a Coupon-Bearing Bond Paying Annual Interest
- Valuation of a Digital Option on the One-Year U.S. Treasury Rate
- Conclusion
- CHAPTER HJM Interest Rate Modeling with Two Risk Factors
- Probability of Yield Curve Twists in the U.S. Treasury Market
- Objectives of the Example and Key Input Data
- Introducing a Second Risk Factor Driving Interest Rates
- Key Implications and Notation of the HJM Approach
- Pseudo-Probabilities
- The Formula for Zero-Coupon Bond Price Shifts with
- Two Risk Factors
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Valuation in the HJM Framework
- Valuation of a Zero-Coupon Bond Maturing at Time T
- Valuation of a Coupon-Bearing Bond Paying Annual Interest
- Valuation of a Digital Option on the One-Year
- U.S. Treasury Rate
- Replication of HJM Example in Common Spreadsheet Software
- Conclusion
- CHAPTER HJM Interest Rate Modeling with Three Risk Factors
- Probability of Yield Curve Twists in the U.S. Treasury Market
- Objectives of the Example and Key Input Data
- Risk Factor : Annual Changes in the One-Year U.S.
- Treasury Spot Rate
- Alternative Specifications of the Interest Rate Volatility Surface
- Key Implications and Notation of the HJM Approach
- Pseudo-Probabilities
- The Formula for Zero-Coupon Bond Price Shifts with
- Three Risk Factors
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Building the Bushy Tree for Zero-Coupon Bonds
- Maturing at Time T
- Valuation in the HJM Framework
- Valuation of a Zero-Coupon Bond Maturing at Time T
- Valuation of a Coupon-Bearing Bond Paying Annual Interest
- Valuation of a Digital Option on the One-Year
- U.S. Treasury Rate
- Conclusion
- CHAPTER Valuation, Liquidity, and Net Income
- How Many Risk Factors Are Necessary to Accurately
- Model Movements in the Risk-Free Yield Curve?
- Revisiting the Phrase “No Arbitrage”
- Valuation, Liquidity Risk, and Net Income
- Risk-Neutral and Empirical Probabilities of Interest
- Rate Movements
- Monte Carlo Simulation Using HJM Modeling
- Common Pitfalls in Interest Rate Risk Management
- Pitfalls in the Use of One-Factor Term Structure Models
- Common Pitfalls in Asset and Liability Management
- Summarizing the Problems with Interpolated Monte Carlo
- Simulation for Risk Analysis
- CHAPTER Interest Rate Mismatching and Hedging
- Political Factions in Interest Rate Risk Management
- Pension Fund Considerations
- Life Insurance Companies and Property and Casualty Insurance
- Companies
- Commercial Banks
- Making a Decision on Interest Rate Risk and Return:
- The Safety Zone
- Obvious Interest Rate Risk Decisions
- Assessing the Risk and Return Trade-Offs from a
- Change in Interest Rate Risk
- CHAPTER Legacy Approaches to Interest Rate Risk Management
- Gap Analysis and Simulation Models
- Measuring Interest Rate Risk: A Review
- Legacy Rate Risk Tools: Interest Rate Sensitivity Gap Analysis
- The Safety Zone
- What’s Wrong with Gap Analysis?
- Legacy Rate Risk Tools: Multiperiod Simulation
- Key Assumptions in Simulation
- Data Aggregation in Simulation Modeling
- Constraining the Model
- Modeling the Maturity Structure of a Class of Assets
- Periodicity of the Analysis
- Exceptions to the Exact Day Count Trend
- Legacy Rate Risk Tools: Duration and Convexity
- Macaulay’s Duration: The Original Formula
- Using Duration for Hedging
- Comparing a Duration Hedge with Hedging in the HJM Framework
- Duration: The Traditional Market Convention
- The Formula for Yield to Maturity
- Yield to Maturity for Long or Short First Coupon Payment Periods
- Applying the Yield-to-Maturity Formula to Duration
- Modified Duration
- The Perfect Duration Hedge: The Difference between the
- Original Macaulay and Conventional Durations
- Convexity and Its Uses
- Convexity: A General Definition
- Convexity for the Present Value Formula
- Hedging Implications of the Convexity Concept
- Conclusion
- CHAPTER Special Cases of Heath, Jarrow, and Morton Interest Rate Modeling
- What Is an Academic Term Structure Model and Why
- Was It Developed?
- The Vocabulary of Term Structure Models
- Ito’s Lemma
- Ito’s Lemma for More Than One Random Variable
- Using Ito’s Lemma to Build a Term Structure Model
- Duration as a Term Structure Model
- Conclusions about the Use of Duration’s Parallel Shift Assumptions
- The Vasicek and Extended Vasicek Models
- The Merton Term Structure Model: Parallel Yield Curve Shifts
- The Extended Merton Model
- The Vasicek Model
- The Extended VasicekHull and White Model
- Alternative Term Structure Models
- Alternative One-Factor Interest Rate Models
- Two-Factor Interest Rate Models
- Chen’s Three-Factor Term Structure Model
- Reprising the HJM Approach
- Appendix A: Deriving Zero-Coupon Bond Prices in the
- Extended Merton/Ho and Lee Model
- Appendix B: Deriving Zero-Coupon Bond Prices in the
- Vasicek Model
- Appendix C: Valuing Zero-Coupon Bonds in the Extended
- Vasicek Model
- CHAPTER Estimating the Parameters of Interest Rate Models
- Revisiting the Meaning of No Arbitrage
- A Framework for Fitting Term Structure Models
- Fitting Zero-Coupon Bond Prices and Volatility Parameters Jointly
- Steps in Fitting the Interest Rate Volatility Assumptions
- Example : Fitting Interest Rate Volatility When
- Six Callable Bonds Are Observable
- Example : The Consequences of Fewer Inputs
- Example : The Case of One Input
- Interest Rate Parameter Fitting in Practical Application
- PART THREE Risk Management Techniques for Credit Risk Analytics
- CHAPTER An Introduction to Credit Risk: Using Market Signals in Loan
- Pricing and Performance Measurement
- Market Prices for Credit Risk
- Critical Sources of Market Data on Credit Risk
- Bond Prices
- Credit Default Swap Prices
- First to Default Swaps
- Collateralized Debt Obligations
- Interest Rate Swap Prices
- Equity Prices
- Increased Accuracy in Pricing
- Increased Clarity in Corporate Strategy
- Increased Sophistication in Risk Management
- Increased Precision in Measuring the Safety and
- Soundness of Financial Institutions
- Credit Default Swaps: The Dangers of Market Manipulation
- Daily Nondealer Trading Volume for , Reference Names
- Credit Default Swap Trading Volume in Municipals and
- Sub-Sovereigns
- Credit Default Swap Trading Volume in Sovereign Credits
- Implications of CDS Trading Volume Data
- CHAPTER Reduced Form Credit Models and Credit Model Testing
- The Jarrow-Turnbull Model
- The Jarrow-Turnbull Framework
- The Jarrow Model
- Zero-Coupon Bond Prices in the Jarrow Model
- The Jarrow Model and the Issue of Liquidity in the Bond Market
- The Jarrow-Merton Put Option as a Risk Index and a Practical Hedge
- Fitting the Jarrow Model to Bond Prices, Credit Derivatives
- Prices, and Historical Default Databases
- Fitting the Jarrow Model to Debt Prices
- Fitting to Current Price Data and Historical Price Data
- Fitting the Jarrow Model to Credit Derivatives Prices
- Fitting the Jarrow Model to a Historical Database of Defaults
- Fitting the Jarrow Model to Retail, Small Business, and
- Governmental Counterparties
- Correlations in Default Probabilities
- The Jarrow and Jarrow-Turnbull Models: A Summary
- Tests of Credit Models Using Historical Data
- An Introduction to Credit Model Testing
- Misunderstandings about Credit Model Testing
- The Two Components of Credit Model Performance
- Measuring Ordinal Ranking of Companies by Credit Risk
- The Predictive ROC Accuracy Ratio: Techniques and Results
- The Predictive Capability of the Jarrow-Chava Reduced
- Form Model Default Probabilities
- Measuring the Predictive ROC Accuracy Ratio
- Reduced Form Model vs. Merton Model Performance
- Consistency of Estimated and Actual Defaults
- Recent Results from North America
- The Falkenstein and Boral Test
- Performance of Credit Models vs. Naïve Models of Risk
- ROC Accuracy Ratios for Merton Model Theoretical
- Version vs. Selected Naïve Models
- Tests of Credit Models Using Market Data
- Testing Credit Models: The Analogy with Interest Rates
- Market Data Test : Accuracy in Fitting Observable
- Yield Curves and Credit Spreads
- Market Data Test : Tests of Hedging Performance
- Market Data Test : Consistency of Model Implications with Model Performance
- Market Data Test : Comparing Performance with Credit
- Spreads and Credit Default Swap Prices
- Appendix: Converting Default Intensities to Discrete
- Default Probabilities
- Converting Monthly Default Probabilities to Annual Default
- Probabilities
- Converting Annual Default Probabilities to Monthly Default
- Probabilities
- Converting Continuous Instantaneous Probabilities of
- Default to an Annual Default Probability or Monthly
- Default Probability
- Converting Continuous Default Probability to an
- Annual Default Probability
- Converting Continuous Default Probability to a
- Monthly Default Probability
- Converting an Annual Default Probability to a Continuous
- Default Intensity
- Converting a Monthly Default Probability to a Continuous
- Default Intensity
- CHAPTER Credit Spread Fitting and Modeling
- Introduction to Credit Spread Smoothing
- The Market Convention for Credit Spreads
- A Better Convention for Credit ModelIndependent Credit Spreads
- Deriving the Full Credit Spread of a Risky Issuer
- Credit Spread Smoothing Using Yield CurveSmoothing Techniques
- Setting the Scene: Smoothing Results for the Risk-Free Curve
- A Naïve Approach: Smoothing ABC Yields by Ignoring
- the Risk-Free Curve
- Fitting Credit Spreads with Cubic Splines
- Maximum Smoothness Forward Credit Spreads
- Comparing Results
- Data Problems with Risky Issuers
- The Case of LIBOR
- Determinants of Credit Spread Levels
- The Credit Risk Premium: The Supply and Demand for Credit
- Conclusion
- CHAPTER Legacy Approaches to Credit Risk
- The Rise and Fall of Legacy Ratings
- Ratings: What They Do and Don’t Do
- Through the Cycle vs. Point in Time, a Distinction
- without a Difference
- Stress Testing, Legacy Ratings, and Transition Matrices
- Transition Matrices: Analyzing the Random Changes in
- Ratings from One Level to Another
- Moral Hazard in “Self-Assessment” of Ratings Accuracy
- by Legacy Rating Agencies
- Comparing the Accuracy of Ratings and Reduced Form Default
- Probabilities
- Problems with Legacy Ratings in the to Credit Crisis
- The Jarrow-Merton Put Option and Legacy Ratings
- The Merton Model of Risky Debt
- The Intuition of the Merton Model
- The Basic Merton Model
- Valuing Multipayment Bonds with the Merton Model of Risky Debt
- Estimating the Probability of Default in the Merton Model
- Implying the Value of Company Assets and Their Return Volatility σ
- Mapping the Theoretical Merton Default Probabilities to
- Actual Defaults
- The Merton Model When Interest Rates Are Random
- The Merton Model with Early Default
- Loss Given Default in the Merton Model
- Copulas and Correlation between the Events of Default of
- Two Companies
- Back to the Merton Case
- Problems with the Merton Model: Summing Up
- Appendix
- Assumptions
- Using Ito’s Lemma to Expand Changes in the Value of
- Company Equity
- CHAPTER Valuing Credit Risky Bonds
- The Present Value Formula
- Valuing Bonds with No Credit Risk
- Simulating the Future Values of Bonds with No Credit Risk
- Current and Future Values of Fixed Income Instruments:
- HJM Background and a Straight Bond Example
- Valuation of a Straight Bond with a Bullet
- Principal Payment at Maturity
- Valuing an Amortizing Loan
- Valuing Risk-Free, Floating-Rate Loans
- Valuing Bonds with Credit Risk
- Simulating the Future Values of Bonds with Credit Risk
- Valuing the Jarrow-Merton Put Option
- CHAPTER Credit Derivatives and Collateralized Debt Obligations
- Credit Default Swaps: Theory
- Credit Default Swaps: Practice
- Collateralized Debt Obligations: Theory
- Collateralized Debt Obligations: A Worked Example of
- Reduced Form Simulation
- Collateralized Debt Obligations: Practice
- The Copula Method of CDO Valuation: A Postmortem
- Valuing the JarrowMerton Put Option
- PART FOUR Risk Management Applications: Instrument by Instrument
- CHAPTER European Options on Bonds
- Example: European Call Option on Coupon-Bearing Bond
- Example: Coupon-Bearing Bond with Embedded
- European Call Option
- European Options on Defaultable Bonds
- HJM Special Case: European Options in the One-Factor
- Vasicek Model
- Options on Coupon-Bearing Bonds
- The Jarrow-Merton Put Option
- CHAPTER Forward and Futures Contracts
- Forward Contracts on Zero-Coupon Bonds
- Forward Rate Agreements
- Eurodollar Futures-Type Forward Contracts
- Futures on Zero-Coupon Bonds: The Sydney
- Futures Exchange Bank Bill Contract
- Futures on Coupon-Bearing Bonds: Dealing with the
- Cheapest to Deliver Option
- Eurodollar and Euroyen Futures Contracts
- Defaultable Forward and Futures Contracts
- CHAPTER European Options on Forward and Futures Contracts
- Valuing Options on Forwards and Futures:
- Notations and Useful Formulas
- European Options on Forward Contracts on Zero-Coupon Bonds
- European Options on Forward Rate Agreements
- European Options on a Eurodollar Futures-Type Forward Contract
- European Options on Futures on Coupon-Bearing Bonds
- European Options on Money Market Futures Contracts
- Defaultable Options on Forward and Futures Contracts
- CHAPTER Caps and Floors
- Caps as European Options on Forward Rate Agreements
- Forming Other Cap-Related Securities
- Valuing a Cap
- Valuing a Floor
- Valuing a Floating Rate Loan with a Cap
- Value of a Loan with a Cap and a Floor
- Variations on Caps and Floors
- Measuring the Credit Risk of Counterparties on Caps and Floors
- CHAPTER Interest Rate Swaps and Swaptions
- Interest Rate Swap Basics
- Valuing the Interest Rate Swaps
- The Observable Fixed Rate in the Swap Market
- An Introduction to Swaptions
- Valuation of European Swaptions
- Valuation of American Swaptions
- Defaultable Interest Rate Swaps and Swaptions
- CHAPTER Exotic Swap and Options Structures
- Arrears Swaps
- Digital Option
- Digital Range Notes
- Range Floater
- Other Derivative Securities
- Credit Risk and Exotic Derivatives Structures
- CHAPTER American Fixed Income Options
- An Overview of Numerical Techniques for Fixed
- Income Option Valuation
- An Example of Valuation of a Callable Bond with a
- Three-Factor HJM Bushy Tree
- What Is the Par Coupon on a Callable Bond?
- An Example of Valuation of a Rationally Prepaid
- Amortizing Loan
- Monte Carlo Simulation
- Conclusions
- Finite Difference Methods
- Binomial Lattices
- Trinomial Lattices
- HJM Valuation of American Fixed Income Options
- When Default Risk Is Present
- CHAPTER Irrational Exercise of Fixed Income Options
- Analysis of Irrationality: Criteria for a Powerful Explanation
- The Transactions Cost Approach
- Irrational Exercise of European Options
- The Irrational Exercise of American Options
- A Worked Example Using an Amortizing Loan with
- Rational and Irrational Prepayment Behavior
- Implied Irrationality and Hedging
- Credit Risk and Irrational Prepayment Behavior
- CHAPTER Mortgage-Backed Securities and Asset-Backed Securities
- Transactions Costs, Prepayments, Default, and Multinomial Logit
- Legacy Prepayment Analysis of Mortgage-Backed Securities
- Legacy Approaches: Prepayment Speeds and the
- Valuation of Mortgages
- Constant Prepayment Speeds Are Simply a Principal
- Amortization Assumption
- Legacy Approaches: Option-Adjusted Spread
- Implications for OAV Spread, CMOs, and ARMs
- Logistic Regression, Credit Risk, and Prepayment
- Mortgage-Servicing Rights: The Ultimate Structured Product
- An Introduction to the Valuation of Mortgage-Servicing Rights
- Comparing Best Practice and Common Practice in
- Valuing and Hedging Mortgage-Servicing Rights
- Valuation Yield Curve for Cash Flows
- Simulation of Random Movements in Yields
- The Role of Home Prices in Defaults and Prepayments
- Other Sources of Cash Flow Related to
- Mortgage-Servicing Rights
- Incorrect Hedging of Mortgage-Servicing Rights
- Conclusion
- CHAPTER Nonmaturity Deposits
- The Value of the Deposit Franchise
- Total Cash Flow of Nonmaturity Deposits
- Specifying the Rate and Balance Movement Formulas
- The Impact of Bank Credit Risk on Deposit Rates and Balances
- Case Study: German Three-Month Notice Savings Deposits
- The Regulators’ View
- Conclusion
- CHAPTER Foreign Exchange Markets
- Setting the Stage: Assumptions for the Domestic and
- Foreign Economies
- Foreign Exchange Forwards
- Numerical Methods for Valuation of Foreign Currency Derivatives
- Legacy Approaches to Foreign Exchange Options Valuation
- Implications of a Term Structure Model-Based FX Options Formula
- The Impact of Credit Risk on Foreign Exchange Risk Formulas
- CHAPTER Impact of Collateral on Valuation Models: The Example of
- Home Prices in the Credit Crisis
- The Impact of Changing Home Prices on Collateral Values
- in the Credit Crisis
- Modeling Variations in Collateral Values
- The Impact of Collateral Values on a Rationally Prepaid Mortgage
- Conclusions about the Impact of Collateral Values
- CHAPTER Pricing and Valuing Revolving Credit and Other Facilities
- Analyzing Revolving Credit and Other Facilities
- Fluctuating Credit Risk and Revolving Credit Drawdowns
- Incorporating Links between Credit Quality and Line Usage
- Is a Line of Credit a Put Option on the Debt of the Issuer?
- CHAPTER Modeling Common Stock and Convertible Bonds on a Default-Adjusted Basis
- Modeling Equities: The Traditional Fund Management Approach
- Modeling Equities: The Derivatives Approach
- Modeling Equities: A Credit RiskAdjusted Approach
- Options on the Common Stock of a Company That Can Go Bankrupt
- Convertible Bonds of a Company That Can Go Bankrupt
- CHAPTER Valuing Insurance Policies and Pension Obligations
- Life Insurance: Mortality Rates vs. Default Probabilities
- Cyclicality in Default Probabilities and Mortality Rates
- Valuing Life Insurance Policies
- Pension Obligations
- Property and Casualty Insurance
- The Jarrow-Merton Put Option
- PART FIVE Portfolio Strategy and Risk Management
- CHAPTER Value-at-Risk and Risk Management Objectives Revisited at the
- Portfolio and Company Level
- The Jarrow-Merton Put Option as a Measure of Total Risk:
- An Example
- A Four-Question PassFail Test for Financial Institutions’
- CEOs and Boards of Directors
- Why Do These Four Questions Matter?
- An Alphabet of Extra-Credit Questions
- Is Your Value-at-Risk from Value-at-Risk?
- VaR vs. the Put Option for Capital Allocation
- Why Are the VaR and Put Approaches So Different:
- Self-Insurance vs. Third-Party Insurance
- Calculating the Jarrow-Merton Put Option Value and
- Answering the Key Questions
- Valuing and Simulating the Jarrow-Merton Put Option
- What’s the Hedge?
- Liquidity, Performance, Capital Allocation, and
- Own Default Risk
- CHAPTER Liquidity Analysis and Management: Examples from the Credit Crisis
- Liquidity Risk Case Studies from the Credit Crisis
- Case Studies in Liquidity Risk
- Largest Funding Shortfalls
- American International Group (AIG)
- Consolidated JPMorgan Chase, Bear Stearns, and
- Washington Mutual
- State Street
- Morgan Stanley
- Dexia Credit Local New York Branch
- Implications of the Credit Crisis History for Liquidity
- Risk Management and Analysis
- Types of Liquidity Events
- Liquidity Risk and Credit Risk Linkages
- Measuring Liquidity Risk as a Line of Credit in the
- Jarrow-Merton Put Option Sense
- Integrating Managerial Behavior and Market Funds Supply
- in Liquidity Risk Measurement
- Determining the Optimal Liquidity Strategy
- Summing Up
- CHAPTER Performance Measurement: Plus Alpha vs. Transfer Pricing
- Transaction-Level Performance Measurement vs. Portfolio-
- Level Performance Measurement
- Plus Alpha Benchmark Performance vs. Transfer Pricing
- Why Default Risk Is Critical in Performance Measurement
- of Equity Portfolios
- “Plus Alpha” Performance Measurement in Insurance and Banking
- Decomposing the Reasons for Plus or Minus Alpha in a Fixed
- Income Portfolio
- A Worked Example of Modern Fixed Income Performance Attribution
- The Jarrow-Merton Put Option and Capital
- Using the Jarrow-Merton Put Option for Capital Allocation
- Introduction
- Using the Jarrow-Merton Put Option Concept for Capital Allocation
- Extending the Jarrow-Merton Capital Allocation
- to a Multiperiod Framework
- Summing Up
- CHAPTER Managing Institutional Default Risk and Safety and Soundness
- Step : Admitting the Possibility of Failure
- Managing the Probability of Failure
- Are Ratings a Useful Guide?
- Are CDS Spreads a Useful Guide?
- Using Quantitative Default Probabilities
- Controlling the Probability of Failure through the Credit Cycle
- Hedging Total Risk to Maximize Shareholder Value
- Implications for Basel II, Basel III, and Solvency II
- Simulating Your Own Probability of Default
- CHAPTER Information Technology Considerations
- Common Practice in Risk Management Systems: Dealing with
- Legacy Systems
- Upgrading the Risk Infrastructure: The Request for Proposal Process
- Paid Pilots as Final Proof of Concept
- Keys to Success in Software Installation
- Vendor Size: Larger Vendor or Small Vendor?
- Being a Best Practice User
- CHAPTER Shareholder Value Creation and Destruction
- Do No Harm
- Measure the Need to Change
- Rating Your Primary Risk System
- Master the Politics and Exposition of Risk Management:
- Shareholder Value Creation
- Daily Management Reporting of Total Risk
- Moving from Common Practice to Best Practice
- The Senior Management Perspective
- The Middle Management Perspective
- The Working-Level Perspective
- Getting Help to Create Shareholder Value