Business Snapshots xxiii
Preface xxv
Chapter 1 Introduction: Risk-Return Trade-offs 1
Part 1: Financial Institutions 23
Chapter 2 Banks 25
Chapter 3 Insurance Companies and Pension Plans 47
Chapter 4 Fund Managers 75
Part 2: Financial Markets 97
Chapter 5 Financial Instruments 99
Chapter 6 The OTC Derivatives Market 129
Chapter 7 Securitization and the Global Financial Crisis 145
Chapter 8 Volatility 163
Chapter 9 Correlations and Copulas 193
Chapter 10 Valuation and Scenario Analysis 217
Part 3: Market Risk 231
Chapter 11 Value at Risk and Expected Shortfall 233
Chapter 12 Historical Simulation and Extreme Value Theory 257
Chapter 13 Model-Building Approach 279
Chapter 14 Interest Rate Risk 293
Chapter 15 Derivatives Risk 319
Chapter 16 Scenario Analysis and Stress Testing 347
Part 4: Credit Risk 365
Chapter 17 Estimating Default Probabilities 367
Chapter 18 xVAs 393
Chapter 19 Credit Value at Risk 413
Part 5: Other Risks 429
Chapter 20 Operational Risk 431
Chapter 21 Liquidity Risk 449
Chapter 22 Model Risk Management 477
Chapter 23 Climate Risk, ESG, and Sustainability 497
Chapter 24 Enterprise Risk Management 513
Part 6: Regulation 531
Chapter 25 Basel I, Basel II, and Solvency II 533
Chapter 26 Basel II.5, Basel III, and Other Post-Crisis Changes 563
Chapter 27 Fundamental Review of the Trading Book 585
Chapter 28 Economic Capital and RAROC 599
Part 7: Other Topics 617
Chapter 29 Financial Innovation 619
Chapter 30 Risk Management Mistakes to Avoid 641
Part 8: Appendices 653
Appendix A Compounding Frequencies for Interest Rates 655
Appendix B Zero Rates, Forward Rates, and Zero-Coupon Yield Curves 659
Appendix C Valuing Forward and Futures Contracts 663
Appendix D Valuing Swaps 665
Appendix E Valuing European Options 669
Appendix F Valuing American Options 673
Appendix G Taylor Series Expansions 677
Appendix H Eigenvectors and Eigenvalues 681
Appendix I Principal Components Analysis 685
Appendix J Manipulation of Credit Transition Matrices 687
Appendix K Valuation of Credit Default Swaps 689
Appendix L Synthetic CDOs and Their Valuation 693
Appendix M SIMM 697
Answers to Questions and Problems 701
Glossary 743
RMFI Software 771
Table for N(x) When x ≥ 0 775
Table for N(x) When x ≤ 0 777
Index 779
