Practical tools and advice for managing financial risk, updated for a post-crisis world Advanced Financial Risk Management bridges the gap between the idealized assumptions used for risk valuation and the realities that must be reflected in management actions. It explains, in detailed yet easy-to-understand terms, the analytics of these issues from A to Z, and lays out a comprehensive strategy for risk management measurement, objectives, and hedging techniques that apply to all types of institutions. Written by experienced risk managers, the book covers everything from the basics of present value, forward rates, and interest rate compounding to the wide variety of alternative term structure models. Revised and updated with lessons from the 2007-2010 financial crisis, Advanced Financial Risk Management outlines a framework for fully integrated risk management. Credit risk, market risk, asset and liability management, and performance measurement have historically been thought of as separate disciplines, but recent developments in financial theory and computer science now allow these views of risk to be analyzed on a more integrated basis. The book presents a performance measurement approach that goes far beyond traditional capital allocation techniques to measure risk-adjusted shareholder value creation, and supplements this strategic view of integrated risk with step-by-step tools and techniques for constructing a risk management system that achieves these objectives. Practical tools for managing risk in the financial world Updated to include the most recent events that have influenced risk management Topics covered include the basics of present value, forward rates, and interest rate compounding; American vs. European fixed income options; default probability models; prepayment models; mortality models; and alternatives to the Vasicek model Comprehensive and in-depth, Advanced Financial Risk Management is an essential resource for anyone working in the financial field.

PART ONE. Risk Management: Definitions and Objectives. CHAPTER 1. A Risk Management Synthesis: Market Risk, Credit Risk, Liquidity Risk, and Asset and Liability Management CHAPTER 2. Risk, Return, Performance Measurement, and Capital Regulation PART TWO. Risk Management Techniques for Interest Rate Analytics. CHAPTER 3. Interest Rate Risk Introduction and Overview CHAPTER 4. Fixed Income Mathematics: The Basic Tools CHAPTER 5. Yield Curve Smoothing CHAPTER 6. Introduction to Heath, Jarrow, and Morton Interest Rate Modeling CHAPTER 7. HJM Interest Rate Modeling with Rate and Maturity-Dependent Volatility CHAPTER 8. HJM Interest Rate Modeling with Two Risk Factors CHAPTER 9. HJM Interest Rate Modeling with Three Risk Factors CHAPTER 10. Valuation, Liquidity, and Net Income CHAPTER 11. Interest Rate Mismatching and Hedging CHAPTER 12. Legacy Approaches to Interest Rate Risk Management CHAPTER 13. Special Cases of Heath, Jarrow, and Morton Interest Rate Modeling CHAPTER 14. Estimating the Parameters of Interest Rate Models PART THREE. Risk Management Techniques for Credit Risk Analytics. CHAPTER 15. An Introduction to Credit Risk: Using Market Signals in Loan Pricing and Performance Measurement CHAPTER 16. Reduced Form Credit Models and Credit Model Testing CHAPTER 17. Credit Spread Fitting and Modeling CHAPTER 18. Legacy Approaches to Credit Risk CHAPTER 19. Valuing Credit Risky Bonds CHAPTER 20. Credit Derivatives and Collateralized Debt Obligations PART FOUR. Risk Management Applications: Instrument by Instrument. CHAPTER 21. European Options on Bonds CHAPTER 22. Forward and Futures Contracts CHAPTER 23. European Options on Forward and Futures Contracts CHAPTER 24. Caps and Floors CHAPTER 25. Interest Rate Swaps and Swaptions CHAPTER 26. Exotic Swap and Options Structures CHAPTER 27. American Fixed Income Options CHAPTER 28. Irrational Exercise of Fixed Income Options CHAPTER 29. Mortgage-Backed Securities and Asset-Backed Securities CHAPTER 30. Nonmaturity Deposits CHAPTER 31. Foreign Exchange Markets CHAPTER 32. Impact of Collateral on Valuation Models: The Example of Home Prices in the Credit Crisis CHAPTER 33. Pricing and Valuing Revolving Credit and Other Facilities CHAPTER 34. Modeling Common Stock and Convertible Bonds on a Default-Adjusted Basis CHAPTER 35. Valuing Insurance Policies and Pension Obligations PART FIVE. Portfolio Strategy and Risk Management. CHAPTER 36. Value-at-Risk and Risk Management Objectives Revisited at the Portfolio and Company Level CHAPTER 37. Liquidity Analysis and Management: Examples from the Credit Crisis CHAPTER 38. Performance Measurement: Plus Alpha vs. Transfer Pricing CHAPTER 39. Managing Institutional Default Risk and Safety and Soundness CHAPTER 40. Information Technology Considerations CHAPTER 41. Shareholder Value Creation and Destruction