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The Professional Risk Managers’ Handbook
留学作业网提供留学生风险管理作业写作需求A Comprehensive Guide to Current Theory and Best Practices
The Official Handbook for the PRM Certification
The PRM Handbook
Contents
Author Biographies
Introduction David R. Koenig
SECTION I - FINANCE THEORY, FINANCIAL INSTRUMENTS AND MARKETS
Preface I Zvi Wiener
A – FINANCE THEORY
I.A.1 Risk and Risk Aversion
Jacques Pezier
I.A.1.1 Introduction
I.A.1.2 Mathematical Expectations: Prices or Utilities?
I.A.1.3 The Axiom of Independence of Choice
I.A.1.4 Maximising Expected Utility
I.A.1.4.1 The Four Basic Axioms
I.A.1.4.2 Introducing the Utility Function
I.A.1.4.3 Risk Aversion (and Risk Tolerance)
I.A.1.4.4 Certain Equivalence
I.A.1.4.5 Summary
I.A.1.5 Encoding a Utility Function
I.A.1.5.1 For an Individual
I.A.1.5.2 For a Firm
I.A.1.5.3 Ironing out Anomalies
I.A.1.6 The Mean–Variance Criterion
I.A.1.6.1 The Criterion
I.A.1.6.2 Estimating Risk Tolerance
I.A.1.6.3 Applications of the Mean–Variance Criterion
I.A.1.7 Risk-Adjusted Performance Measures
I.A.1.7.1 The Sharpe Ratio
I.A.1.7.2 RAPMs in an Equilibrium Market
I.A.1.7.2.1 The Treynor Ratio and Jensen’s Alpha
I.A.1.7.2.2 Application of the Treynor Ratio
I.A.1.7.2.3 Application of Jensen’s Alpha
I.A.1.7.3 Generalising Sharpe Ratios
I.A.1.7.3.1 The Generalised Sharpe Ratio
I.A.1.7.3.2 The Adjusted Sharpe Ratio
I.A.1.7.4 Downside RAPMs
I.A.1.7.4.1 RAROC
I.A.1.7.4.2 Sortino Ratio, Omega Index and other Kappa indices
I.A.1.8 Summary
Appendix I.A.1.A: Terminology
Appendix I.A.1.B: Utility Functions
I.A.1.B.1 The Exponential Utility Function
I.A.1.B.2 The Logarithmic Utility Function
I.A.1.B.3 The Quadratic Utility Function
I.A.1.B.4 The Power Utility Function
I.A.2 Portfolio Mathematics
Paul Glasserman
I.A.2.1 Means and Variances of Past Returns
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I.A.2.1.1 Returns
I.A.2.1.2 Mean, Variance and Standard Deviation
I.A.2.1.3 Portfolio Mean, Variance and Standard Deviation
I.A.2.1.4 Correlation
I.A.2.1.5 Correlation and Portfolio Variance
I.A.2.1.6 Portfolio Standard Deviation
I.A.2.2 Mean and Variance of Future Returns
I.A.2.2.1 Single Asset
I.A.2.2.2 Covariance and Correlation
I.A.2.2.3 Mean and Variance of a Linear Combination
I.A.2.2.4 Example: Portfolio Return
I.A.2.2.5 Example: Portfolio Profit
I.A.2.2.6 Example: Long and Short Positions
I.A.2.2.7 Example: Correlation
I.A.2.3 Mean-Variance Tradeoffs
I.A.2.3.1 Achievable Expected Returns
I.A.2.3.2 Achievable Variance and Standard Deviation
I.A.2.3.3 Achievable Combinations of Mean and Standard Deviation
I.A.2.3.4 Efficient Frontier
I.A.2.3.5 Utility Maximization
I.A.2.3.6 Varying the Correlation Parameter
I.A.2.4 Multiple Assets
I.A.2.4.1 Portfolio Mean and Variance
I.A.2.4.2 Vector Matrix Notation
I.A.2.4.3 Efficient Frontier
I.A.2.5 A Hedging Example
I.A.2.5.1 Problem Formulation
I.A.2.5.2 Gallon-for-Gallon Hedge
I.A.2.5.3 Minimum-Variance Hedge
I.A.2.5.4 Effectiveness of the Optimal Hedge
I.A.2.5.5 Connection with Regression
I.A.2.6 Serial Correlation
I.A.2.7 Normally Distributed Returns
I.A.2.7.1 The Distribution of Portfolio Returns
I.A.2.7.2 Value-at-Risk
I.A.2.7.3 Probability of Reaching a Target
I.A.2.7.4 Probability of Beating a Benchmark
I.A.3 Capital Allocation
Keith Cuthbertson, Dirk Nitzsche
I.A.3.1 An Overview
I.A.3.1.1 Portfolio Diversification
I.A.3.1.2 Tastes and Preferences for Risk versus Return
I.A.3.2 Mean–Variance Criterion
I.A.3.3 Efficient Frontier: Two Risky Assets
I.A.3.3.1 Different Values of the Correlation Coefficient
I.A.3.4 Asset Allocation
I.A.3.4.1 The efficient frontier: n risky assets
I.A.3.5 Combining the Risk-Free Asset with Risky Assets
I.A.3.6 The Market Portfolio and the CML
I.A.3.7 The Market Price of Risk and the Sharpe Ratio
I.A.3.8 Separation Principle
I.A.3.9 Summary
Appendix: Mathematics of the Mean–Variance Model
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I.A.4 The CAPM and Multifactor Models
Keith Cuthbertson, Dirk Nitzsche
I.A.4.1 Overview
I.A.4.2 Capital Asset Pricing Model
I.A.4.2.1 Estimating Beta
I.A.4.2.2 Beta and Systematic Risk
I.A.4.3 Security Market Line
I.A.4.4 Performance Measures
I.A.4.4.1 Sharpe Ratio
I.A.4.4.2 Jensen’s ‘alpha’
I.A.4.5 The Single-Index Model
I.A.4.6 Multifactor Models and the APT
I.A.4.6.1 Portfolio Returns
I.A.4.7 Summary
I.A.5 Basics of Capital Structure
Steven Bishop
I.A.5.1 Introduction
I.A.5.2 Maximising Shareholder Value, Incentives and Agency Costs
I.A.5.2.1 Agency Costs
I.A.5.2.1.1 Agency Cost of Equity
I.A.5.2.1.2 Agency Costs of Debt
I.A.5.2.2 Information Asymmetries
I.A.5.3 Characteristics of Debt and Equity
I.A.5.4 Choice of Capital Structure
I.A.5.4.1 Do not think debt is attractive because the interest rate is lower
than the cost of equity!
I.A.5.4.2 Debt can be attractive
I.A.5.4.2.1 Differential treatment of payments to debt-holders and
shareholders#p#分页标题#e#
I.A.5.4.2.2 Greater Flexibility
I.A.5.4.2.3 Monitoring ‘improves’ performance and reduces the
negative aspect of information asymmetry
I.A.5.4.2.4 Debt enforces a discipline of paying out operating earnings
I.A.5.4.2.5 Debt financing avoids negative signals about
management’s view of the value of equity
I.A.5.4.3 Debt can also be unattractive
I.A.5.4.3.1 Exposure to bankruptcy costs
I.A.5.4.3.2 Exposure to financial distress costs
I.A.5.4.3.3 Agency costs
I.A.5.4.4 Thus choose the point where disadvantages offset advantages
I.A.5.5 Making the capital structure decision
I.A.5.5.1 Guidelines
I.A.5.5.2 What do CFOs say they consider when making a capital structure choice?
I.A.5.6 Conclusion
I.A.6 The Term Structure of Interest Rates
Deborah Cernauskas, Elias Demetriades
I.A.6.1 Compounding Methods
I.A.6.1.1 Continuous versus Discrete Compounding
I.A.6.1.2 Annual Compounding versus More Regular Compounding
I.A.6.1.3 Periodic Interest Rates versus Effective Annual Yield
I.A.6.2 Term Structure – A Definition
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I.A.6.3 Shapes of the Yield Curve
I.A.6.4 Spot and Forward Rates
I.A.6.5 Term Structure Theories
I.A.6.5.1 Pure or Unbiased Expectations
I.A.6.5.2 Liquidity Preference
I.A.6.5.3 Market Segmentation
I.A.6.6 Summary
I.A.7 Valuing Forward Contracts
Don Chance
I.A.7.1 The Difference between Pricing and Valuation for Forward Contracts
I.A.7.2 Principles of Pricing and Valuation for Forward Contracts on Assets
I.A.7.2.1 The Value at Time 0 of a Forward Contract
I.A.7.2.2 The Value at Expiration of a Forward Contract on an Asset
I.A.7.2.3 The Value Prior to Expiration of a Forward Contract on an Asset
I.A.7.2.4 The Value of a Forward Contract on an Asset when there are
Cash Flows on the Asset during the Life of the Contract
I.A.7.2.5 Establishing the Price of a Forward Contract on an Asset
I.A.7.2.6 Pricing and Valuation when the Cash Flows or Holding Costs are
Continuous
I.A.7.2.7 Numerical Examples
I.A.7.3 Principles of Pricing and Valuation for Forward Contracts on Interest Rates
I.A.7.3.1 The Value of an FRA at Expiration
I.A.7.3.2 The Value of an FRA at the Start
I.A.7.3.3 The Value of an FRA During Its Life
I.A.7.3.4 Pricing the FRA on Day 0
I.A.7.3.5 Numerical Examples
I.A.7.4 The Relationship Between Forward and Futures Prices
I.A.8 Basic Principles of Option Pricing
Paul Wilmott
I.A.8.1 Factors Affecting Option Prices
I.A.8.2 Put–Call Parity
I.A.8.3 One-step Binomial Model and the Riskless Portfolio
I.A.8.4 Delta Neutrality and Simple Delta Hedging
I.A.8.5 Risk-Neutral Valuation
I.A.8.6 Real versus Risk-Neutral#p#分页标题#e#
I.A.8.7 The Black–Scholes–Merton Pricing Formula
I.A.8.8 The Greeks
I.A.8.9 Implied Volatility
I.A.8.10 Intrinsic versus Time Value
B – FINANCIAL INSTRUMENTS
I.B.1 General Characteristics of Bonds
Lionel Martellini, Philippe Priaulet
I.B.1.1 Definition of a Bullet Bond
I.B.1.2 Terminology and Convention
I.B.1.3 Market Quotes
I.B.1.3.1 Bond Quoted Price
I.B.1.3.2 Bond Quoted Yield
I.B.1.3.3 Bond Quoted Spread
I.B.1.3.4 Liquidity Spreads
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I.B.1.3.5 The Bid–Ask Spread
I.B.1.4 Non-bullet Bonds
I.B.1.4.1 Strips
I.B.1.4.2 Floating-Rate Notes
I.B.1.4.3 Inflation-Indexed Bonds
I.B.1.5 Summary
I.B.2 The Analysis of Bonds
Moorad Choudhry
I.B.2.1 Features of Bonds
I.B.2.1.1 Type of Issuer
I.B.2.1.2 Term to Maturity
I.B.2.1.3 Principal and Coupon Rate
I.B.2.1.4 Currency
I.B.2.2 Non-conventional Bonds
I.B.2.2.1 Floating-Rate Notes
I.B.2.2.2 Index-Linked Bonds
I.B.2.2.3 Zero-Coupon Bonds
I.B.2.2.4 Securitised Bonds
I.B.2.2.5 Bonds with Embedded Options
I.B.2.3 Pricing a Conventional Bond
I.B.2.3.1 Bond Cash Flows
I.B.2.3.2 The Discount Rate
I.B.2.3.3 Conventional Bond Pricing
I.B.2.3.4 Pricing Undated Bonds
I.B.2.3.5 Pricing Conventions
I.B.2.3.6 Clean and Dirty Bond Prices: Accrued Interest
I.B.2.4 Market Yield
I.B.2.4.1 Yield Measurement
I.B.2.4.2 Current Yield
I.B.2.4.3 Yield to Maturity
I.B.2.5 Relationship between Bond Yield and Bond Price
I.B.2.6 Duration
I.B.2.6.1 Calculating Macaulay Duration and Modified Duration
I.B.2.6.2 Properties of the Macaulay Duration
I.B.2.6.3 Properties of the Modified Duration
I.B.2.7 Hedging Bond Positions
I.B.2.8 Convexity
I.B.2.9 A Summary of Risks Associated with Bonds
I.B.3 Futures and Forwards
Keith Cuthbertson, Dirk Nitzsche
I.B.3.1 Introduction
I.B.3.2 Stock Index Futures
I.B.3.2.1 Contract Specifications
I.B.3.2.2 Index arbitrage and program trading
I.B.3.2.3 Hedging Using Stock Index Futures
I.B.3.2.4 Tailing the Hedge
I.B.3.2.5 Summary
I.B.3.3 Currency Forwards and Futures
I.B.3.3.1 Currency Forward Contracts
I.B.3.3.2 Currency Futures Contracts
I.B.3.3.3 Hedging Currency Futures and Forwards
I.B.3.3.4 Summary
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I.B.3.4 Commodity Futures
I.B.3.5 Forward Rate Agreements
I.B.3.5.1 Settlement Procedures
I.B.3.6 Short-Term Interest-Rate Futures
I.B.3.6.1 US T-bill Futures
I.B.3.6.2 Three-Month Eurodollar Futures
I.B.3.6.3 Sterling Three-Month Futures
I.B.3.6.4 Hedging Interest-Rate Futures#p#分页标题#e#
I.B.3.6.5 Hedge Ratios
I.B.3.6.6 Hedging Using US T-bill Futures
I.B.3.6.7 Summary
I.B.3.7 T-bond Futures
I.B.3.7.1 Contract Specifications
I.B.3.7.1.1 UK Long Gilt Futures Contract
I.B.3.7.1.2 US T-bond Futures Contract
I.B.3.7.2 Conversion Factor and Cheapest to Deliver
I.B.3.7.3 Hedging Using T-bond Futures
I.B.3.7.4 Hedging a Single Bond
I.B.3.7.5 Hedging a Portfolio of Bonds
I.B.3.7.6 Summary
I.B.3.8 Stack and Strip Hedges
I.B.3.9 Concluding Remarks
I.B.4 Swaps
Salih Neftci
I.B.4.1 What is a Swap?
I.B.4.2 Types of Swaps
I.B.4.2.1 Equity Swaps
I.B.4.2.2 Commodity Swaps
I.B.4.2.3 Interest Rate Swaps
I.B.4.2.4 Currency Swaps
I.B.4.2.5 Basis Swaps
I.B.4.2.6 Volatility Swaps
I.B.4.3 Engineering Interest-Rate Swaps
I.B.4.4 Risk of Swaps
I.B.4.4.1 Market Risk
I.B.4.4.2 Credit Risk and Counterparty Risk
I.B.4.4.3 Volatility and Correlation Risk
I.B.4.5 Other Swaps
I.B.4.6 Uses of Swaps
I.B.4.6.1 Uses of Equity Swaps
I.B.4.7 Swap Conventions
I.B.5 Vanilla Options
Paul Wilmott
I.B.5.1 Stock Options – Characteristics and Payoff Diagrams
I.B.5.2 American versus European Options
I.B.5.3 Strategies Involving a Single Option and a Stock
I.B.5.4 Spread Strategies
I.B.5.4.1 Bull and Bear Spreads
I.B.5.4.2 Calendar Spreads
I.B.5.5 Other Strategies
I.B.5.5.1 Straddles and Strangles
I.B.5.5.2 Risk Reversal
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I.B.5.5.3 Collars
I.B.5.5.4 Butterflies and Condors
I.B.6 Credit Derivatives
Moorad Choudhry
I.B.6.1 Introduction
I.B.6.1.1 Why Use Credit Derivatives?
I.B.6.1.2 Classification of Credit Derivative Instruments
I.B.6.1.3 Definition of a Credit Event
I.B.6.2 Credit Default Swaps
I.B.6.3 Credit-Linked Notes
I.B.6.4 Total Return Swaps
I.B.6.4.1 Synthetic Repo
I.B.6.4.2 Reduction in Credit Risk
I.B.6.4.3 Capital Structure Arbitrage
I.B.6.4.4 The TRS as a Funding Instrument
I.B.6.5 Credit Options
I.B.6.6 Synthetic Collateralised Debt Obligations
I.B.6.6.1 Cash Flow CDOs
I.B.6.6.2 What is a Synthetic CDO?
I.B.6.6.3 Funding Synthetic CDOs
I.B.6.6.4 Variations in Synthetic CDOs
I.B.6.6.5 Use of Synthetic CDOs
I.B.6.6.6 Advantages and Limitations of Synthetic Structures
I.B.6.7 General Applications of Credit Derivatives
I.B.6.7.1 Use of Credit Derivatives by Portfolio Managers
I.B.6.7.1.1 Enhancing portfolio returns
I.B.6.7.1.2 Reducing credit exposure
I.B.6.7.1.3 Credit switches and zero-cost credit exposure
I.B.6.7.1.4 Exposure to market sectors
I.B.6.7.1.5 Trading Credit spreads
I.B.6.7.2 Use of Credit Derivatives by Banks#p#分页标题#e#
I.B.6.8 Unintended Risks in Credit Derivatives
I.B.6.9 Summary
I.B.7 Caps, Floors & Swaptions
Lionel Martellini, Philippe Priaulet
I.B.7.1 Caps, Floors and Collars: Definition and Terminology
I.B.7.2 Pricing Caps, Floors and Collars
I.B.7.2.1 Cap Formula
I.B.7.2.2 Floor Formula
I.B.7.2.3 Market Quotes
I.B.7.3 Uses of Caps, Floors and Collars
I.B.7.3.1 Limiting the Financial Cost of Floating-Rate Liabilities
I.B.7.3.2 Protecting the Rate of Return of a Floating-Rate Asset
I.B.7.4 Swaptions: Definition and Terminology
I.B.7.5 Pricing Swaptions
I.B.7.5.1 European Swaption Pricing Formula
I.B.7.5.2 Market Quotes
I.B.7.6 Uses of Swaptions
I.B.7.7 Summary
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I.B.8 Convertible Bonds
Izzy Nelken
I.B.8.1 Introduction
I.B.8.1.1 Convertibles – a definition
I.B.8.1.2 Convertible Bond Market Size
I.B.8.1.3 A Brief History
I.B.8.2 Characteristics of Convertibles
I.B.8.2.1 Relationship with Stock Price
I.B.8.2.2 Call and Put Features
I.B.8.2.3 Players in the Convertible Bond Market
I.B.8.2.4 Convertible Bond Funds
I.B.8.2.5 Convertible Arbitrage Hedge Funds
I.B.8.3 Capital Structure Implications (for Banks)
I.B.8.4 Mandatory Convertibles
I.B.8.5 Valuation and Risk Assessment
I.B.8.6 Summary
I.B.9 Simple Exotics
Catriona March
I.B.9.1 Introduction
I.B.9.2 A Short History
I.B.9.3 Classifying Exotics
I.B.9.4 Notation
I.B.9.5 Digital Options
I.B.9.5.1 Cash-or-Nothing Options
I.B.9.5.2 Asset-or-Nothing Options
I.B.9.5.3 Vanillas and Digitals as Building Blocks
I.B.9.5.4 Contingent Premium Options
I.B.9.5.5 Range Notes
I.B.9.5.6 Managing Digital Options
I.B.9.6 Two Asset Options
I.B.9.6.1 Product and Quotient Options
I.B.9.6.2 Exchange Options
I.B.9.6.3 Outperformance Options
I.B.9.6.4 Other Two-Colour Rainbow Options
I.B.9.6.5 Spread Options
I.B.9.6.6 Correlation Risk
I.B.9.7 Quantos
I.B.9.7.1 Foreign Asset Option Struck in Foreign Currency
I.B.9.7.2 Foreign Asset Option Struck in Domestic Currency
I.B.9.7.3 Implied Correlation
I.B.9.7.4 Foreign Asset Linked Currency Option
I.B.9.7.5 Guaranteed Exchange Rate Foreign Asset Options
I.B.9.8 Second-Order Contracts
I.B.9.8.1 Compound Options
I.B.9.8.2 Typical Uses of Compound Options
I.B.9.8.3 Instalment Options
I.B.9.8.4 Extendible Options
I.B.9.9 Decision Options
I.B.9.9.1 American Options
I.B.9.9.2 Bermudan Options
I.B.9.9.3 Shout Options
I.B.9.10 Average Options
I.B.9.10.1 Average Rate and Average Strike Options
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I.B.9.10.2 Motivations and Uses
I.B.9.10.3 Other Options Involving Averages
I.B.9.10.4 Pricing and Hedging Average Options
I.B.9.11 Options on Baskets of Assets
I.B.9.11.1 Basket Options
I.B.9.11.2 Pricing and Hedging Basket Options
I.B.9.11.3 Mountain Options
I.B.9.12 Barrier and Related Options
I.B.9.12.1 Single-Barrier Options
I.B.9.12.2 No-Touch, One-Touch and Rebates
I.B.9.12.3 Partial-Barrier Options
I.B.9.12.4 Double-Barrier Options
I.B.9.12.5 Even More Barrier Options
I.B.9.12.6 Relationships
I.B.9.12.7 Ladders
I.B.9.12.8 Lookback and Hindsight Options
I.B.9.13 Other Path-Dependent Options
I.B.9.13.1 Forward Start Options
I.B.9.13.2 Reset Options
I.B.9.13.3 Cliquet Options
I.B.9.14 Resolution Methods
I.B.9.15 Summary
C - MARKETS
I.C.1 The Structure of Financial Markets
Colin Lawrence, Alistair Milne
I.C.1.1 Introduction
I.C.1.2 Global Markets and Their Terminology
I.C.1.3 Drivers of Liquidity
I.C.1.3.1 Repo Markets
I.C.1.4 Liquidity and Financial Risk Management
I.C.1.5 Exchanges versus OTC Markets
I.C.1.6 Technological Change
I.C.1.7 Post-trade Processing
I.C.1.8 Retail and Wholesale Brokerage
I.C.1.9 New Financial Markets
I.C.1.10 Conclusion
I.C.2 The Money Markets
Canadian Securities Institute
I.C.2.1 Introduction
I.C.2.2 Characteristics of Money Market Instruments
I.C.2.3 Deposits and Loans
I.C.2.3.1 Deposits from Businesses
I.C.2.3.2 Loans to Businesses
I.C.2.3.3 Repurchase Agreements
I.C.2.3.4 International Markets
I.C.2.3.5 The London Interbank Offered Rate (LIBOR)
I.C.2.4 Money Market Securities
I.C.2.4.1 Treasury Bills
I.C.2.4.2 Commercial Paper
I.C.2.4.3 Bankers’ Acceptances
I.C.2.4.4 Certificates of Deposit
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I.C.2.5 Summary
I.C.3 The Bond Market
Moorad Choudhry, Lionel Martellini, Philippe Priaulet
I.C.3.1 Introduction
I.C.3.2 The Players
I.C.3.2.1 Intermediaries and Banks
I.C.3.2.2 Institutional Investors
I.C.3.2.3 Market Professionals
I.C.3.3 Bonds by Issuers
I.C.3.3.1 Government Bonds
I.C.3.3.2 US Agency Bonds
I.C.3.3.3 Municipal Bonds
I.C.3.3.4 Corporate Bonds
I.C.3.3.5 Eurobonds (International Bonds)
I.C.3.4 The Markets
I.C.3.4.1 The Government Bond Market
I.C.3.4.2 The Corporate Bond Market
I.C.3.4.2.1 The market by country and sector
I.C.3.4.2.2 Underwriting a new issue
I.C.3.4.3 The Eurobond Market
I.C.3.4.4 Market Conventions
I.C.3.5 Credit Risk
I.C.3.6 Summary
I.C.4 The Foreign Exchange Market
Canadian Securities Institute, Toronto#p#分页标题#e#
I.C.4.1 Introduction
I.C.4.2 The Interbank Market
I.C.4.3 Exchange-Rate Quotations
I.C.4.3.1 Direct Dealing
I.C.4.3.2 Foreign Exchange Brokers
I.C.4.3.3 Electronic Brokering Systems
I.C.4.3.4 The Role of the US Dollar
I.C.4.3.5 Market and Quoting Conventions
I.C.4.3.6 Cross Trades and Cross Rates
I.C.4.4 Determinants of Foreign Exchange Rates
I.C.4.4.1 The Fundamental Approach
I.C.4.4.2 A Short-Term Approach
I.C.4.4.3 Central Bank Intervention
I.C.4.5 Spot and Forward Markets
I.C.4.5.1 The Spot Market
I.C.4.5.2 The Forward Market
I.C.4.5.2.1 Forward Discounts and Premiums
I.C.4.5.2.2 Interest-Rate Parity
I.C.4.6 Structure of a Foreign Exchange Operation
I.C.4.7 Summary/Conclusion
I.C.5 The Stock Market
Andrew Street
I.C.5.1 Introduction
I.C.5.2 The Characteristics of Common Stock
I.C.5.2.1 Share Premium and Capital Accounts and Limited Liability
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I.C.5.2.2 Equity Shareholder’s Rights and Dividends
I.C.5.2.3 Other Types of Equity Shares – Preference Shares
I.C.5.2.4 Equity Price Data
I.C.5.2.5 Market Capitalisation (or ‘Market Cap’)
I.C.5.2.6 Stock Market Indices
I.C.5.2.7 Equity Valuation
I.C.5.3 Stock Markets and their Participants
I.C.5.3.1 The Main Participants – Firms, Investment Banks and Investors
I.C.5.3.2 Market Mechanics
I.C.5.4 The Primary Market – IPOs and Private Placements
I.C.5.4.1 Basic Primary Market Process
I.C.5.4.2 Initial Public Offerings
I.C.5.4.3 Private Placements
I.C.5.5 The Secondary Market – the Exchange versus OTC Market
I.C.5.5.1 The Exchange
I.C.5.5.2 The Over-the-Counter Market
I.C.5.6 Trading Costs
I.C.5.6.1 Commissions
I.C.5.6.2 Bid–Offer Spread
I.C.5.6.3 Market Impact
I.C.5.7 Buying on Margin
I.C.5.7.1 Leverage
I.C.5.7.2 Percentage Margin and Maintenance Margin
I.C.5.7.3 Why Trade on Margin?
I.C.5.8 Short Sales and Stock Borrowing Costs
I.C.5.8.1 Short Sale
I.C.5.8.2 Stock Borrowing
I.C.5.9 Exchange-Traded Derivatives on Stocks
I.C.5.9.1 Single Stock and Index Options
I.C.5.9.2 Expiration Dates
I.C.5.9.3 Strike Prices
I.C.5.9.4 Flex Options
I.C.5.9.5 Dividends and Corporate Actions
I.C.5.9.6 Position Limits
I.C.5.9.7 Trading
I.C.5.10 Summary
I.C.6 The Futures Market
Canadian Securities Institute
I.C.6.1 Introduction
I.C.6.2 History of Forward-Based Derivatives and Futures Markets
I.C.6.3 Futures Contracts and Markets
I.C.6.3.1 General Characteristics of Futures Contracts and Markets
I.C.6.3.2 Settlement of Futures Contracts
I.C.6.3.3 Types of Orders
I.C.6.3.4 Margin Requirements and Marking to Market#p#分页标题#e#
I.C.6.3.5 Leverage
I.C.6.3.6 Reading a Futures Quotation Page
I.C.6.3.7 Liquidity and Trading Costs
I.C.6.4 Options on Futures
I.C.6.5 Futures Exchanges and Clearing Houses
I.C.6.5.1 Exchanges
I.C.6.5.2 Futures Exchange Functions
I.C.6.5.3 Clearing Houses
I.C.6.5.4 Marking-to-Market and Margin
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I.C.6.6 Market Participants – Hedgers
I.C.6.7 Market Participants – Speculators
I.C.6.7.1 Locals
I.C.6.7.2 Day Traders
I.C.6.7.3 Position Traders
I.C.6.7.4 Spreaders
I.C.6.7.4.1 Intramarket Spreads
I.C.6.7.4.2 Intercommodity Spreads
I.C.6.7.4.3 Intermarket Spreads
I.C.6.7.4.4 Commodity Product Spread
I.C.6.8 Market Participants – Managed Futures Investors
I.C.6.9 Summary and Conclusion
I.C.7 The Structure of Commodities Markets
Colin Lawrence, Alistair Milne
I.C.7.1 Introduction
I.C.7.2 The Commodity Universe and Anatomy of Markets
I.C.7.2.1 Commodity Types and Characteristics
I.C.7.2.2 The Markets for Trading
I.C.7.2.3 Delivery and Settlement Methods
I.C.7.2.4 Commodity Market Liquidity
I.C.7.2.5 The Special Case of Gold as a Reserve Asset
I.C.7.3 Spot–Forward Pricing Relationships
I.C.7.3.1 Backwardation and Contango
I.C.7.3.2 Reasons for Backwardation
I.C.7.3.3 The No-Arbitrage Condition
I.C.7.4 Short Squeezes, Corners and Regulation
I.C.7.4.1 Historical Experience
I.C.7.4.2 The Exchange Limits
I.C.7.5 Risk Management at the Commodity Trading Desk
I.C.7.6 The Distribution of Commodity Returns
I.C.7.6.1 Evidence of Non-normality
I.C.7.6.2 What Drives Commodity Prices?
I.C.7.7 Conclusions
I.C.8 The Energy Markets
Peter Fusaro
I.C.8.1 Introduction
I.C.8.2 Market Overview
I.C.8.2.1 The Products
I.C.8.2.2 The Risks
I.C.8.2.3 Developing a Cash Market
I.C.8.3 Energy Futures Markets
I.C.8.3.1 The Exchanges
I.C.8.3.2 The Contracts
I.C.8.3.3 Options on Energy Futures
I.C.8.3.4 Hedging in Energy Futures Markets
I.C.8.3.5 Physical Delivery
I.C.8.3.6 Market Changes: Backwardation and Contango
I.C.8.4 OTC Energy Derivative Markets
I.C.8.4.1 The Singapore Market
I.C.8.4.2 The European Energy Markets
I.C.8.4.3 The North American Markets
I.C.8.5 Emerging Energy Commodity Markets
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I.C.8.5.1 Coal Trading
I.C.8.5.2 Weather Derivatives
I.C.8.5.3 Green Trading
I.C.8.5.4 Freight-Rate Swaps
I.C.8.5.5 Derivative Forward Price Curves
I.C.8.6 The Future of Energy Trading
I.C.8.6.1 Re-emergence of Speculative Trading?
I.C.8.6.2 Electronic Energy Trading
I.C.8.6.3 Trading in Asian Markets
I.C.8.7 Conclusion
SECTION II – MATHEMATICAL FOUNDATIONS OF RISK MEASUREMENT
Preface II Carol Alexander
II.A Foundations
Keith Parramore, Terry Watsham
II.A.1 Symbols and Rules
II.A.1.1 Expressions, Functions, Graphs, Equations and Greek
II.A.1.2 The Algebra of Number
II.A.1.3 The Order of Operations
II.A.2 Sequences and Series
II.A.2.1 Sequences
II.A.2.2 Series
II.A.3 Exponents and Logarithms
II.A.3.1 Exponents
II.A.3.2 Logarithms
II.A.3.3 The Exponential Function and Natural Logarithms
II.A.4 Equations and Inequalities
II.A.4.1 Linear Equations in One Unknown
II.A.4.2 Inequalities
II.A.4.3 Systems of Linear Equations in More Than One Unknown
II.A.4.4 Quadratic Equations
II.A.5 Functions and Graphs
II.A.5.1 Functions
II.A.5.2 Graphs
II.A.5.3 The Graphs of Some Functions
II.A.6 Case Study − Continuous Compounding
II.A.6.1 Repeated Compounding
II.A.6.2 Discrete versus Continuous Compounding
II.A.7 Summary
II.B Descriptive Statistics
Keith Parramore, Terry Watsham
II.B.1 Introduction
II.B.2 Data
II.B.2.1 Continuous and Discrete Data
II.B.2.2 Grouped Data
II.B.2.3 Graphical Representation of Data
II.B.2.3.1 The Frequency Bar Chart
II.B.2.3.2 The Relative Frequency Distribution
II.B.2.3.3 The Cumulative Frequency Distribution
II.B.2.3.4 The Histogram
II.B.3 The Moments of a Distribution
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II.B.4 Measures of Location or Central Tendency – Averages
II.B.4.1 The Arithmetic Mean
II.B.4.2 The Geometric Mean
II.B.4.3 The Median and the Mode
II.B.5 Measures of Dispersion
II.B.5.1 Variance
II.B.5.2 Standard Deviation
II.B.5.3 Case Study: Calculating Historical Volatility from Returns Data
II.B.5.4 The Negative Semi-variance and Negative Semi-deviation
II.B.5.5 Skewness
II.B.5.6 Kurtosis
II.B.6 Bivariate Data
II.B.6.1 Covariance
II.B.6.2 The Covariance Matrix
II.B.6.3 The Correlation Coefficient
II.B.6.4 The Correlation Matrix
II.B.6.5 Case Study: Calculating the Volatility of a Portfolio
II.C Calculus
Keith Parramore, Terry Watsham
II.C.1 Differential Calculus
II.C.1.1 Functions
II.C.1.2 The First Derivative
II.C.1.3 Notation
II.C.1.4 Simple Rules
II.C.1.4.1 Differentiating Constants
II.C.1.4.2 Differentiating a Linear Function
II.C.1.4.3 The Gradient of a Straight Line
II.C.1.4.4 The Derivative of a Power of x
II.C.1.4.5 Differentiating a scalar multiple of a function
II.C.1.4.6 Differentiating the Sum of Two Functions of x
II.C.1.4.7 Differentiating the Product of Two Functions of x
II.C.1.4.8 Differentiating the Quotient of Two Functions of x
II.C.1.4.9 Differentiating a Function of a Function
II.C.1.4.10 Differentiating the Exponential Function
II.C.1.4.11 Differentiating the Natural Logarithmic Function
II.C.2 Case Study: Modified Duration of a Bond
II.C.3 Higher-Order Derivatives
II.C.3.1 Second Derivatives
II.C.3.2 Further Derivatives
II.C.3.3 Taylor Approximations
II.C.4 Financial Applications of Second Derivatives
II.C.4.1 Convexity
II.C.4.2 Convexity in Action
II.C.4.3 The Delta and Gamma of an Option
II.C.5 Differentiating a Function of More than One Variable
II.C.5.1 Partial Differentiation
II.C.5.2 Total differentiation
II.C.6 Integral Calculus
II.C.6.1 Indefinite and Definite Integrals
II.C.6.2 Rules for Integration
II.C.6.3 Guessing
II.C.7 Optimisation
II.C.7.1 Finding the Minimum or Maximum of a Function of One Variable
II.C.7.2 Maxima and Minima of Functions of More than One Variable
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II.C.7.3 Optimization Subject to Constraints: Lagrange Multipliers
II.C.7.4 Applications
II.D Linear Algebra
Keith Parramore, Terry Watsham
II.D.1 Matrix Algebra
II.D.1.1 Matrices
II.D.1.2 Vectors and Transposes
II.D.1.3 Manipulation of Matrices
II.D.1.4 Matrix Multiplication
II.D.1.5 Inverting a Matrix
II.D.2 Application of Matrix Algebra to Portfolio Construction
II.D.2.1 Calculating the Risk of an Existing Portfolio
II.D.2.2 Deriving Asset Weights for the Minimum Risk Portfolio
II.D.2.3 Hedging a Vanilla Option Position
II.D.2.3.1 Calculating the position delta
II.D.2.3.2 Establishing the delta-neutral hedge
II.D.2.3.3 Gamma neutrality
II.D.2.3.4 Vega neutrality
II.D.2.3.5 Hedging a short option position
II.D.3 Quadratic Forms
II.D.3.1 The Variance of Portfolio Returns as a Quadratic Form
II.D.3.2 Definition of Positive Definiteness
II.D.4 Cholesky Decomposition
II.D.4.1 The Cholesky Arithmetic
II.D.4.2 Simulation in Excel
II.D.5 Eigenvalues and Eigenvectors
II.D.5.1 Matrices as Transformations
II.D.5.2 Definition of Eigenvector and Eigenvalue
II.D.5.3 Determinants
II.D.5.4 The Characteristic Equation
II.D.5.4.1 Testing for Positive Semi-definiteness
II.D.5.4.2 Using the characteristic equation to find the eigenvalues of a
covariance matrix
II.D.5.4.3 Eigenvalues and eigenvectors of covariance and correlation matrices
II.D.5.5 Principal Components
II.E Probability Theory in Finance
Keith Parramore, Terry Watsham
II.E.1 Definitions and Rules
II.E.1.1 Definitions
II.E.1.1.1 The classical approach
II.E.1.1.2 The Bayesian approach
II.E.1.2 Rules for Probability
II.E.1.2.1 (A or B) and (A and B)
II.E.1.2.2 Conditional Probability
II.E.2 Probability Distributions
II.E.2.1 Random Variables
II.E.2.1.1 Discrete Random Variables
II.E.2.1.2 Continuous Random Variables
II.E.2.2 Probability Density Functions and Histograms
II.E.2.3 The Cumulative Distribution Function
II.E.2.4 The Algebra of Random Variables
II.E.2.4.1 Scalar Multiplication of a Random Variable
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II.E.2.5 The Expected Value of a Discrete Random Variable
II.E.2.6 The Variance of a Discrete Random Variable
II.E.2.7 The Algebra of Continuous Random Variables
II.E.3 Joint Distributions
II.E.3.1 Bivariate Random Variables
II.E.3.2 Covariance
II.E.3.3 Correlation
II.E.3.4 The Expected Value and Variance of a Linear Combination of Random
Variables
II.E.4 Specific Probability Distributions
II.E.4.1 The Binomial Distribution
II.E.4.1.1 Calculating the ‘Number of Ways’
II.E.4.1.2 Calculating the Probability of r Successes
II.E.4.1.3 Expectation and Variance
II.E.4.2 The Poisson Distribution
II.E.4.2.1 Illustrations
II.E.4.2.2 Expectation and Variance
II.E.4.3 The Uniform Continuous Distribution
II.E.4.4.1 Normal Curves
II.E.4.4.2 The Standard Normal Probability Density Function
II.E.4.4.3 Finding Areas under a Normal Curve Using Excel
II.E.4.5 The Lognormal Probability Distribution
II.E.4.5.1 Lognormal Curves
II.E.4.5.2 The Lognormal Distribution Applied to Asset Prices
II.E.4.5.3 The Mean and Variance of the Lognormal Distribution
II.E.4.5.4 Application of the Lognormal Distribution to Future Asset Prices [not
in PRM exam]
II.E.4.6 Student’s t Distribution
II.E.4.7 The Bivariate Normal Distribution
II.F Regression
Keith Parramore, Terry Watsham
II.F.1 Simple Linear Regression
II.F.1.1 The Model
II.F.1.2 The Scatter Plot
II.F.1.3 Estimating the Parameters
II.F.2 Multiple Linear Regression
II.F.2.1 The model
II.F.2.2 Estimating the Parameters
II.F.3 Evaluating the Regression Model
II.F.3.1 Intuitive Interpretation
II.F.3.2 Adjusted R2
II.F.3.3 Testing for Statistical Significance
II.F.4 Confidence Intervals
II.F.4.1 Confidence Intervals for the Regression Parameters
II.F.5 Hypothesis Testing
II.F.5.1 Significance Tests for the Regression Parameters
II.F.5.2 Significance Test for R2
II.F.5.3 Type I and type II errors
II.F.6 Prediction
II.F.7 Breakdown of the OLS Assumptions
II.F.7.1 Heteroscedasticity
II.F.7.2 Autocorrelation
II.F.7.3 Multicollinearity
II.F.8 Random Walks and Mean-Reversion
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II.F.9 Maximum Likelihood Estimation
II.F.10 Summary
II.G Numerical Methods
Keith Parramore, Terry Watsham
II.G.1 Solving (Non-differential) Equations
II.G.1.1 Three Problems
II.G.1.2 Bisection
II.G.1.3 Newton–Raphson
II.G.1.4 Goal Seek
II.G.2 Numerical Optimisation
II.G.2.1 The Problem
II.G.2.2 Unconstrained Numerical Optimisation
II.G.2.3 Constrained Numerical Optimisation
II.G.2.4 Portfolio Optimisation Revisited
II.G.3 Numerical Methods for Valuing Options
II.G.3.1 Binomial Lattices
II.G.3.2 Finite Difference Methods
II.G.3.3 Simulation
II.G.4 Summary
SECTION III – RISK MANAGEMENT PRACTICES
Preface III Elizabeth Sheedy
III.0 Capital Allocation and Risk Adjusted Performance
Andrew Aziz, Dan Rosen
III.0.1 Introduction
III.0.1.1 Role of Capital in Financial Institution
III.0.1.2 Types of Capital
III.0.1.3 Capital as a Management Tool
III.0.2 Economic Capital
III.0.2.1 Understanding Economic Capital
III.0.2.2 The Top-Down Approach to Calculating Economic Capital
III.0.2.2.1 Top-Down Earnings Volatility Approach
III.0.2.2.2 Top-Down Option-Theoretic Approach
III.0.2.3 The Bottom-Up Approach to Calculating Economic Capital
III.0.2.4 Stress Testing of Portfolio Losses and Economic Capital
III.0.2.5 Enterprise Capital Practices – Aggregation
III.0.2.6 Economic Capital as Insurance for the Value of the Firm
III.0.3 Regulatory Capital
III.0.3.1 Regulatory Capital Principles
III.0.3.2 The Basel Committee of Banking Supervision and the Basel Accord
III.0.3.3 Basel I Regulation
III.0.3.3.1 Minimum Capital Requirements under Basel I
III.0.3.3.2 Regulatory Arbitrage under Basel I
III.0.3.3.3 Meeting Capital Adequacy Requirements
III.0.3.4 Basel II Accord – Latest Proposals
III.0.3.4.1 Pillar 1 - Minimum Capital Requirements
III.0.3.4.2 Pillar 2 - Supervisory Review
III.0.3.4.3 Pillar 3 - Market Discipline
III.0.3.5 A Simple Derivation of Regulatory Capital
III.0.4 Capital Allocation and Risk Contributions
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III.0.4.1 Capital Allocation
III.0.4.2 Risk Contribution Methodologies for EC Allocation
III.0.4.2.1 Stand-alone EC Contributions
III.0.4.2.2 Incremental EC Contributions
III.0.4.2.3 Marginal EC Contributions
III.0.4.2.4 Alternative Methods for Additive Contributions
III.0.5 RAROC and Risk-Adjusted Performance
III.0.5.1 Objectives of RAPM
III.0.5.2 Mechanics of RAROC
III.0.5.3 RAROC and Capital Allocation Methodologies
III.0.6 Summary and Conclusions
A – MARKET RISK
III.A.1 Market Risk Management
Jacques Pezier
III.A.1.1 Introduction#p#分页标题#e#
III.A.1.2 Market Risk
III.A.1.2.1 Why is Market Risk Management Important?
III.A.1.2.2 Distinguishing Market Risk from Other Risks
III.A.1.3 Market Risk Management Tasks
III.A.1.4 The Organisation of Market Risk Management
III.A.1.5 Market Risk Management in Fund Management
III.A.1.5.1 Market Risk in Fund Management
III.A.1.5.2 Identification
III.A.1.5.3 Assessment
III.A.1.5.4 Control/Mitigation
III.A.1.6 Market Risk Management in Banking
III.A.1.6.1 Market Risk in Banking
III.A.1.6.2 Identification
III.A.1.6.3 Assessment
III.A.1.6.4 Control/Mitigation
III.A.1.7 Market Risk Management in Non-financial Firms
III.A.1.7.1 Market Risk in Non-Financial Firms
III.A.1.7.2 Identification
III.A.1.7.3 Assessment
III.A.1.7.4 Control/Mitigation
III.A.1.8 Summary
III.A.2 Introduction to Value at Risk Models
Kevin Dowd, David Rowe
III.A.2.1 Introduction
III.A.2.2 Definition of VaR
III.A.2.3 Internal Models for Market Risk Capital
III.A.2.4 Analytical VaR Models
III.A.2.5 Monte Carlo Simulation VaR
III.A.2.5.1 Methodology
III.A.2.5.2 Applications of Monte Carlo simulation
III.A.2.5.3 Advantages and Disadvantages of Monte Carlo VaR
III.A.2.6 Historical Simulation VaR
III.A.2.6.1 The Basic Method
III.A.2.6.2 Weighted historical simulation
III.A.2.6.3 Advantages and Disadvantages of Historical Approaches
III.A.2.7 Mapping Positions to Risk Factors
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III.A.2.7.1 Mapping Spot Positions
III.A.2.7.2 Mapping Equity Positions
III.A.2.7.3 Mapping Zero-Coupon Bonds
III.A.2.7.4 Mapping Forward/Futures Positions
III.A.2.7.5 Mapping Complex Positions
III.A.2.7.6 Mapping Options: Delta and Delta-Gamma Approaches
III.A.2.8 Backtesting VaR Models
III.A.2.9 Why Financial Markets Are Not ‘Normal’
III.A.2.10 Summary
III.A.3 Advanced Value at Risk Models
Carol Alexander, Elizabeth Sheedy
III.A.3.1 Introduction
III.A.3.2 Standard Distributional Assumptions
III.A.3.3 Models of Volatility Clustering
III.A.3.3.1 Exponentially Weighted Moving Average (EWMA)
III.A.3.3.2 GARCH Models
III.A.3.4 Volatility Clustering and VaR
III.A.3.4.1 VaR using EWMA
III.A.3.4.2 VaR and GARCH
III.A.3.5 Alternative Solutions to Non-Normality
III.A.3.5.1 VaR with the Student’s-t distribution
III.A.3.5.2 VaR with EVT
III.A.3.5.3 VaR with Normal Mixtures
III.A.3.6 Decomposition of VaR
III.A.3.6.1 Stand Alone Capital
III.A.3.6.2 Incremental VaR
III.A.3.6.3 Marginal Capital
III.A.3.7 Principal Component Analysis
III.A.3.7.1 PCA in Action
III.A.3.7.2 VaR with PCA
III.A.3.8 Summary
III.A.4 Stress Testing#p#分页标题#e#
Barry Schachter
III.A.4.1 Introduction
III.A.4.2 Historical Context
III.A.4.3 Conceptual Context
III.A.4.4 Stress Testing in Practice
III.A.4.5 Approaches to Stress Testing: An Overview
III.A.4.6 Historical Scenarios
III.A.4.6.1 Choosing Event Periods
III.A.4.6.2 Specifying Shock Factors
III.A.4.6.3 Missing Shock Factors
III.A.4.7 Hypothetical Scenarios
III.A.4.7.1 Modifying the Covariance Matrix
III.A.4.7.2 Specifying Factor Shocks (to ‘create’ an event)
III.A.4.7.3 Systemic Events and Stress-Testing Liquidity
III.A.4.7.4 Sensitivity Analysis
III.A.4.7.5 Hybrid Methods
III.A.4.8 Algorithmic Approaches to Stress Testing
III.A.4.8.1 Factor-Push Stress Tests
III.A.4.8.2 Maximum Loss
III.A.4.9 Extreme-Value Theory as a Stress-Testing Method
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III.A.4.10 Summary and Conclusions
B – CREDIT RISK
III.B.1 Credit Risk Management
Author to be confirmed
III.B.2 Foundations of Credit Risk Modelling
Philipp Schönbucher
III.B.2.1 Introduction
III.B.2.2 What is Default Risk?
III.B.2.3 Exposure, Default and Recovery Processes
III.B.2.4 The Credit Loss Distribution
III.B.2.5 Expected and Unexpected Loss
III.B.2.6 Recovery Rates
III.B.2.7 Conclusion
III.B.3 Credit Exposure
Philipp Schönbucher
III.B.3.1 Introduction
III.B.3.2 Pre-settlement versus Settlement Risk
III.B.3.2.1 Pre-settlement Risk
III.B.3.2.2 Settlement Risk
III.B.3.3 Exposure Profiles
III.B.3.3.1 Exposure Profiles of Standard Debt Obligations
III.B.3.3.2 Exposure Profiles of Derivatives
III.B.3.4 Mitigation of Exposures
III.B.3.4.1 Netting Agreements
III.B.3.4.2 Collateral
III.B.3.4.3 Other Counterparty Risk Mitigation Instruments
III.B.4 Default and Credit Migration
Philipp Schönbucher
III.B.4.1 Default Probabilities and Term Structures of Default Rates
III.B.4.2 Credit Ratings
III.B.4.2.1 Measuring Rating Accuracy
III.B.4.3 Agency Ratings
III.B.4.3.1 Methodology
III.B.4.3.2 Transition Matrices, Default Probabilities and Credit Migration
III.B.4.4 Credit Scoring and Internal Rating Models
III.B.4.4.1 Credit Scoring
III.B.4.4.2 Estimation of the Probability of Default
III.B.4.4.3 Other Methods to Determine the Probability of Default
III.B.4.5 Market Implied Default Probabilities
III.B.4.5.1 Pricing the Calibration Securities
III.B.4.5.2 Calculating implied default probabilities
III.B.4.6 Credit rating and credit spreads
III.B.4.7 Summary
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III.B.5 Portfolio Models of Credit Loss
Michel Crouhy, Dan Galai, Robert Mark#p#分页标题#e#
III.B.5.1 Introduction
III.B.5.2 What Actually Drives Credit Risk at the Portfolio Level?
III.B.5.3 Credit Migration Framework
III.B.5.3.1 Credit VaR for a Single Bond/Loan
III.B.5.3.2 Estimation of Default and Rating Changes Correlations
III.B.5.3.3 Credit VaR of a Bond/Loan Portfolio
III.B.5.4 Conditional Transition Probabilities– CreditPortfolioView
III.B.5.5 The Contingent Claim Approach to Measuring Credit Risk
III.B.5.5.1 Structural Model of Default Risk: Merton’s (1974) Model
III.B.5.5.2 Estimating Credit Risk as a Function of Equity Value
III.B.5.6 The KMV Approach
III.B.5.6.1 Estimation of the Asset Value VA and the Volatility of Asset Return
III.B.5.6.2 Calculation of the ‘Distance to Default’
III.B.5.6.3 Derivation of the Probabilities of Default from the Distance to
Default
III.B.5.6.4 EDF as a Predictor of Default
III.B.5.7 The Actuarial Approach
III.B.5.8 Summary and Conclusion
III.B.6 Credit Risk Capital Calculation
Dan Rosen
III.B.6.1 Introduction
III.B.6.2 Economic Credit Capital Calculation
III.B.6.2.1 Economic Capital and the Credit Portfolio Model
III.B.6.2.1.1 Time Horizon
III.B.6.2.1.2 Credit Loss Definition
III.B.6.2.1.3 Quantile of the Loss Distribution
III.B.6.2.2 Expected and Unexpected Losses
III.B.6.2.3 Enterprise Credit Capital and Risk Aggregation
III.B.6.3 Regulatory Credit Capital: Basel I
III.B.6.3.1 Minimum Credit Capital Requirements under Basel I
III.B.6.3.2 Weaknesses of the Basel I Accord for Credit Risk
III.B.6.3.3 Regulatory Arbitrage
III.B.6.4 Regulatory Credit Capital: Basel II
III.B.6.4.1 Latest Proposal for Minimum Credit Capital requirements
III.B.6.4.2 The Standardised Approach in Basel II
III.B.6.4.3 Internal Ratings Based Approaches: Introduction
III.B.6.4.4 IRB for Corporate, Bank and Sovereign Exposures
III.B.6.4.5 IRB for Retail Exposures
III.B.6.4.6 IRB for SME Exposures
III.B.6.4.7 IRB for Specialised Lending and Equity Exposures
III.B.6.4.8 Comments on Pillar II
III.B.6.5 Basel II: Credit Model Estimation and Validation
III.B.6.5.1 Methodology for PD Estimation
III.B.6.5.2 Point-in-Time and Through-the-Cycle Ratings
III.B.6.5.3 Minimum Standards for Quantification and Credit Monitoring Processes
III.B.6.5.4 Validation of Estimates
III.B.6.6 Basel II: Securitisation
III.B.6.7 Advanced Topics on Economic Credit Capital
III.B.6.7.1 Credit Capital Allocation and Marginal Credit Risk Contributions
III.B.6.7.2 Shortcomings of VaR for ECC and Coherent Risk Measures
III.B.6.8 Summary and Conclusions
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C – OPERATIONAL RISK
III.C.1 The Operational Risk Management Framework
Michael Ong
III.C.1.1 Introduction
III.C.1.2 Evidence of Operational Failures
III.C.1.3 Defining Operational Risk
III.C.1.4 Types of Operational Risk
III.C.1.5 Aims and Scope of Operational Risk Management
III.C.1.6 Key Components of Operational Risk
III.C.1.7 Supervisory Guidance on Operational Risk
III.C.1.8 Identifying Operational Risk – the Risk Catalogue
III.C.1.9 The Operational Risk Assessment Process
III.C.1.10 The Operational Risk Control Process
III.C.1.11 Some Final Thoughts
III.C.2 Operational Risk Process Models
James Lam
III.C.2.1 Introduction
III.C.2.2 The Overall Process
III.C.2.3 Specific Tools
III.C.2.4 Advanced Models
III.C.2.4.1 Top-down models
III.C.2.4.2 Bottom-up models
III.C.2.5 Key Attributes of the ORM Framework
III.C.2.6 Integrated Economic Capital Model
III.C.2.7 Management Actions
III.C.2.8 Risk Transfer
III.C.2.9 IT Outsourcing
III.C.2.9.1 Stakeholder Objectives
III.C.2.9.2 Key Processes
III.C.2.9.3 Performance Monitoring
III.C.2.9.4 Risk Mitigation
III.C.3 Operational Value-at-Risk
Carol Alexander
III.C.3.1 The ‘Loss Model’ Approach
III.C.3.2 The Frequency Distribution
III.C.3.3 The Severity Distribution
III.C.3.4 The Internal Measurement Approach
III.C.3.5 The Loss Distribution Approach
III.C.3.6 Aggregating ORC
III.C.3.7 Concluding Remarks
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留学作业网提供留学生风险管理作业写作需求Introduction
If you're reading this, you are seeking to attain a higher standard. Congratulations!Those of us who have been a part of financial risk management for the past twenty years, haveseen it change from an on-the-fly profession, with improvisation as a rule, to one withsubstantially higher standards, many of which are now documented and expected to be followed.It’s no longer enough to say you know. Now, you and your team need to prove it.As its title implies, this book is the Handbook for the Professional Risk Manager. It is for thoseprofessionals who seek to demonstrate their skills through certification as a Professional RiskManager (PRM) in the field of financial risk management. And it is for those looking simply todevelop their skills through an excellent reference source.With contributions from nearly 40 leading authors, the Handbook is designed to provide youwith the materials needed to gain the knowledge and understanding of the building blocks ofprofessional financial risk management. Financial risk management is not about avoiding risk.Rather, it is about understanding and communicating risk, so that risk can be taken moreconfidently and in a better way. Whether your specialism is in insurance, banking, energy, assetmanagement, weather, or one of myriad other industries, this Handbook is your guide.We encourage you to work through it sequentially. In Section I, we introduce the foundations of finance theory, the financial instruments that provide tools for the mitigation or transfer of risk,and the financial markets in which instruments are traded and capital is raised. After studying thissection, you will have read the materials necessary for passing Exam I of the PRM Certificationprogram.In Section II, we take you through the mathematical foundations of risk assessment. While therearemanynuancesto the practice of risk management that go beyond the quantitative, it isessential today for every risk manager to be able to assess risks. The chapters in this section areaccessible to all PRM members, including those without any quantitative skills. The Excelspreadsheets that accompany the examples are an invaluable aid to understanding themathematical and statistical concepts that form the basis of risk assessment. After studying allthese chapters, you will have read the materials necessary for passage of Exam II of the PRM
Certification program.
In Section III, the current and best practices of Market, Credit and Operational risk managementare described. This is where we take the foundations of Sections I and II and apply them to our2004 © The Professional Risk Managers’ International Association
The PRM Handbook
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