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• Cover
• Title Page
• Copyright
• Dedication
• Business Snapshots
• Preface
• Ancillary Material
• Acknowledgments
• Chapter 1: Introduction: Risk‐Return Trade‐offs
• 1.1 Risk vs. Return for Investors
• 1.2 The Efficient Frontier
• 1.3 The Capital Asset Pricing Model
• 1.4 Arbitrage Pricing Theory
• 1.5 Risk vs. Return for Companies
• 1.6 Risk Management by Financial Institutions
• 1.7 Credit Ratings
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Part One: Financial Institutions
• Chapter 2: Banks
• 2.1 Commercial Banking
• 2.2 The Capital Requirements of a Small Commercial Bank
• 2.3 Deposit Insurance
• 2.4 Investment Banking
• 2.5 Securities Trading
• 2.6 Potential Conflicts of Interest in Banking
• 2.7 Today’s Large Banks
• 2.8 The Risks Facing Banks
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 3: Insurance Companies and Pension Plans
• 3.1 Life Insurance
• 3.2 Annuity Contracts
• 3.3 Mortality Tables
• 3.4 Longevity and Mortality Risk
• 3.5 Property‐Casualty Insurance
• 3.6 Health Insurance
• 3.7 Moral Hazard and Adverse Selection
• 3.8 Reinsurance
• 3.9 Capital Requirements
• 3.10 The Risks Facing Insurance Companies
• 3.11 Regulation
• 3.12 Pension Plans
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 4: Fund Managers
• 4.1 Mutual Funds
• 4.2 Exchange‐Traded Funds
• 4.3 Active vs. Passive Management
• 4.4 Regulation
• 4.5 Hedge Funds
• 4.6 Hedge Fund Strategies
• 4.7 Hedge Fund Performance
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Part Two: Financial Markets
• Chapter 5: Financial Instruments
• 5.1 Long and Short Positions in Assets
• 5.2 Derivatives Markets
• 5.3 Plain Vanilla Derivatives
• 5.4 Non‐Traditional Derivatives
• 5.5 Exotic Options and Structured Products
• 5.6 Risk Management Challenges
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 6: The OTC Derivatives Market
• 6.1 A Reference Point: Exchange‐Traded Markets
• 6.2 Clearing in OTC Derivatives Markets
• 6.3 Post‐Crisis Regulatory Changes
• 6.4 Impact of the Changes
• 6.5 CCPs and Bankruptcy
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 7: Securitization and the Global Financial Crisis
• 7.1 The U.S. Housing Market
• 7.2 Securitization
• 7.3 The Losses
• 7.4 What Went Wrong?
• 7.5 Lessons from the Global Financial Crisis
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 8: Volatility
• 8.1 Definition of Volatility
• 8.2 Implied Volatilities
• 8.3 Are Daily Percentage Changes in Financial Variables Normal?
• 8.4 The Power Law
• 8.5 Monitoring Daily Volatility
• 8.6 The Exponentially Weighted Moving Average Model
• 8.7 The GARCH(1,1) Model
• 8.8 Choosing between the Models
• 8.9 Maximum Likelihood Methods
• 8.10 Using GARCH(1,1) to Forecast Future Volatility
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 9: Correlations and Copulas
• 9.1 Definition of Correlation
• 9.2 Monitoring Correlation
• 9.3 Correlation and Covariance Matrices
• 9.4 Multivariate Normal Distributions
• 9.5 Copulas
• 9.6 Application to Loan Portfolios: Vasicek’s Model
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 10: Valuation and Scenario Analysis
• 10.1 Volatility and Asset Prices
• 10.2 Risk‐Neutral Valuation
• 10.3 Scenario Analysis
• 10.4 When Both Worlds Have to Be Used
• 10.5 The Calculations in Practice
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Part Three: Market Risk
• Chapter 11: Value at Risk and Expected Shortfall
• 11.1 Definition of VaR
• 11.2 Examples of the Calculation of VaR
• 11.3 A Drawback of VaR
• 11.4 Expected Shortfall
• 11.5 Coherent Risk Measures
• 11.6 Choice of Parameters for VaR and ES
• 11.7 Marginal, Incremental, and Component Measures
• 11.8 Euler’s Theorem
• 11.9 Aggregating VaRs and ESs
• 11.10 Back‐Testing
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 12: Historical Simulation and Extreme Value Theory
• 12.1 The Methodology
• 12.2 Accuracy of VaR
• 12.3 Extensions
• 12.4 Computational Issues
• 12.5 Extreme Value Theory
• 12.6 Applications of EVT
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 13: Model‐Building Approach
• 13.1 The Basic Methodology
• 13.2 Generalization
• 13.3 The Four‐Index Example Revisited
• 13.4 Extensions of the Basic Procedure
• 13.5 Risk Weights and Weighted Sensitivities
• 13.6 Non‐Linearity
• 13.7 Model‐Building vs. Historical Simulation
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 14: Interest Rate Risk
• 14.1 Types of Rates
• 14.2 Calculating Risk Measures
• 14.3 Principal Components Analysis
• 14.4 The Management of Net Interest Income
• 14.5 Duration
• 14.6 Convexity
• 14.7 Generalization
• 14.8 Nonparallel Yield Curve Shifts
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 15: Derivatives Risk
• 15.1 Delta
• 15.2 Gamma
• 15.3 Vega
• 15.4 Theta
• 15.5 Rho
• 15.6 Calculating Greek Letters
• 15.7 Taylor Series Expansions
• 15.8 The Realities of Hedging Derivatives
• 15.9 Hedging Exotic Options
• 15.10 Scenario Analysis
• 15.11 Approximate Analytical Results
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 16: Scenario Analysis and Stress Testing
• 16.1 Generating the Scenarios
• 16.2 Regulation
• 16.3 What to Do with the Results
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Part Four: Credit Risk
• Chapter 17: Estimating Default Probabilities
• 17.1 Credit Ratings
• 17.2 Historical Default Probabilities
• 17.3 Recovery Rates
• 17.4 Credit Default Swaps
• 17.5 Credit Spreads
• 17.6 Estimating Default Probabilities from Credit Spreads
• 17.7 Comparison of Default Probability Estimates
• 17.8 Using Equity Prices to Estimate Default Probabilities
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 18: xVAs
• 18.1 Credit Exposure on Derivatives
• 18.2 CVA
• 18.3 The Impact of a New Transaction
• 18.4 CVA Risk
• 18.5 Wrong‐Way Risk
• 18.6 DVA
• 18.7 Some Simple Examples
• 18.8 Other xVAs
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 19: Credit Value at Risk
• 19.1 Ratings Transition Matrices
• 19.2 Vasicek’s Model
• 19.3 Credit Risk Plus
• 19.4 Creditmetrics
• 19.5 Credit Spread Risk
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Part Five: Other Risks
• Chapter 20: Operational Risk
• 20.1 Defining Operational Risk
• 20.2 Types of Operational Risk
• 20.3 Loss Severity and Loss Frequency
• 20.4 The Standardized Measurement Approach
• 20.5 Preventing Operational Risk Losses
• 20.6 Allocation of Operational Risk Capital
• 20.7 Use of Power Law
• 20.8 Insurance
• 20.9 Sarbanes–Oxley
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 21: Liquidity Risk
• 21.1 Liquidity Trading Risk
• 21.2 Liquidity Funding Risk
• 21.3 Liquidity Black Holes
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 22: Model Risk Management
• 22.1 Regulatory Guidance
• 22.2 Models in Physics and Finance
• 22.3 Simple Models: Expensive Mistakes
• 22.4 Models for Pricing Actively Traded Products
• 22.5 Models for Less Actively Traded Products
• 22.6 Accounting
• 22.7 What Makes a Successful Pricing Model?
• 22.8 Model‐Building Missteps
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 23: Climate Risk, ESG, and Sustainability
• 23.1 Climate Risk
• 23.2 ESG
• 23.3 Sustainability
• 23.4 Greenwashing
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 24: Enterprise Risk Management
• 24.1 Risk Appetite
• 24.2 Risk Culture
• 24.3 Identifying Major Risks
• 24.4 Strategic Risk Management
• Summary
• Further Reading
• Practice Questions and Problems  (Answers at End of Book)
• Further Questions
• Notes
• Part Six: Regulation
• Chapter 25: Basel I, Basel II, and Solvency II
• 25.1 The Reasons for Regulating Banks
• 25.2 Bank Regulation Pre‐1988
• 25.3 The 1988 BIS Accord
• 25.4 The G‐30 Policy Recommendations
• 25.5 Netting
• 25.6 The 1996 Amendment
• 25.7 Basel II
• 25.8 Credit Risk Capital Under Basel II
• 25.9 Operational Risk Capital Under Basel II
• 25.10 Pillar 2: Supervisory Review
• 25.11 Pillar 3: Market Discipline
• 25.12 Solvency II
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 26: Basel II.5, Basel III, and Other Post-Crisis Changes
• 26.1 Basel II.5
• 26.2 Basel III
• 26.3 Contingent Convertible Bonds
• 26.4 Use of Standardized Approaches and SA-CCR
• 26.5 Dodd–Frank Act
• 26.6 Legislation in Other Countries
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Chapter 27: Fundamental Review of the Trading Book
• 27.1 Background
• 27.2 Standardized Approach
• 27.3 Internal Models Approach
• 27.4 Trading Book vs. Banking Book
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Question
• Notes
• Chapter 28: Economic Capital and RAROC
• 28.1 Definition of Economic Capital
• 28.2 Components of Economic Capital
• 28.3 Shapes of the Loss Distributions
• 28.4 Relative Importance of Risks
• 28.5 Aggregating Economic Capital
• 28.6 Allocation of Economic Capital
• 28.7 Deutsche Bank’s Economic Capital
• 28.8 RAROC
• Summary
• Further Reading
• Practice Questions and Problems (Answers at End of Book)
• Further Questions
• Notes
• Part Seven: Other Topics
• Chapter 29: Financial Innovation
• 29.1 Technological Advances
• 29.2 Payment Systems
• 29.3 Open Banking
• 29.4 Lending
• 29.5 Wealth Management
• 29.6 InsurTech
• 29.7 Regulation and Compliance
• 29.8 How Should Financial Institutions Respond?
• Summary
• Further Reading
• Practice Questions and Problems  (Answers at End of Book)
• Further Questions
• Notes
• Chapter 30: Risk Management Mistakes to Avoid
• 30.1 Risk Limits
• 30.2 Managing the Trading Room
• 30.3 Liquidity Risk
• 30.4 Lessons for Nonfinancial Corporations
• 30.5 A Final Point
• Further Reading
• Notes
• Part Eight: Appendices
• Appendix A: Compounding Frequencies for Interest Rates
• A.1 Continuous Compounding
• Note
• Appendix B: Zero Rates, Forward Rates, and Zero‐Coupon Yield Curves
• B.1 Bond Pricing
• B.2 Bond Yields
• B.3 Treasury Rates
• B.4 Determining Treasury Zero Rates
• Appendix C: Valuing Forward and Futures Contracts
• Appendix D: Valuing Swaps
• D.1 Floating Forward Rates
• D.2 Currency Swaps
• Note
• Appendix E: Valuing European Options
• Note
• Appendix F: Valuing American Options
• Note
• Appendix G: Taylor Series Expansions
• G.1 Functions of Two Variables
• G.2 General Result
• Appendix H: Eigenvectors and Eigenvalues
• Note
• Appendix I: Principal Components Analysis
• Appendix J: Manipulation of Credit Transition Matrices
• Note
• Appendix K: Valuation of Credit Default Swaps
• K.1 Marking to Market a CDS
• Appendix L: Synthetic CDOs and Their Valuation
• Note
• Appendix M: SIMM
• Note
• Answers to Questions and Problems
• Chapter 1
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• Chapter 9
• Chapter 10
• Chapter 11
• Chapter 12
• Chapter 13
• Chapter 14
• Chapter 15
• Chapter 16
• Chapter 17
• Chapter 18
• Chapter 19
• Chapter 20
• Chapter 21
• Chapter 22
• Chapter 23
• Chapter 24
• Chapter 25
• Chapter 26
• Chapter 27
• Chapter 28
• Chapter 29
• Glossary
• RMFI Software
• Getting Started
• Next Steps
• CDSs
• CDOs
• Equity Option Functions
• Value at Risk
• Definition of Greek Letters
• Table for N(x) When x ≥ 0
• Table for N(x) When x ≤ 0
• Index
• End User License Agreement