John Hull - Risk Management and Financial Institutions.pdf

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CONTENTS IN BRIEF
Business Snapshots
Preface
Introduction
Financial Products and How They are Used for Hedging
How Traders Manage Their Exposures
Interest Rate Risk
Volatility
Correlation and Copulas
Bank Regulation and Basel II
The VaR Measure
Market Risk VaR: Historical Simulation Approach
Market Risk VaR: Model-Building Approach
Credit Risk: Estimating Default Probabilities
Credit Risk Losses and Credit VaR
Credit Derivatives
Operational Risk
Model Risk and Liquidity Risk
Economic Capital and RAROC
Weather, Energy, and Insurance Derivatives
Big Losses and What We Can Learn from Them
Appendix A: Valuing Forward and Futures Contracts
Appendix B: Valuing Swaps
Appendix C: Valuing European Options
Appendix D: Valuing American Options
Appendix E: Manipulation of Credit Transition Matrices
Answers to Questions and Problems
Glossary of Terms
Derivagem Software
Tables for
N(x)
Index
xiii
xv
1
27
55
79
1ll
143
165
195
217
233
255
277
299
321
343
365
385
395
407
409
413
417
421
423
457
479
484
487
1.
2.
3.
4.
5.
6.
7.
8.
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18.
Contents
Business Snapshots
Preface
Introduction
1.1
Risk vs. return for investors
1.2
Risk vs. return for companies
1.3
Bank capital
1.4
Approaches to managing risk
1.5
The management of net interest income
Summary
Further reading
Questions and problems
Assignment questions
Chapter 2 Financial products and how they are used for hedging
2.1
The markets
2.2
When to hedge
2.3
The "plain vanilla" products
2.4
Using the products for hedging
2.5
Exotic options and structured deals
2.6
Dangers
Summary
Further reading
Questions and problems
Assignment questions
Chapter 3 How
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
traders manage their exposures
Delta
Gamma
Vega
Theta
Rho
Calculating Greek letters
Taylor series expansions
The realities of hedging
Chapter 1
xiii
xv
1
2
12
15
18
20
22
23
24
25
27
27
28
30
43
46
48
48
50
50
53
55
55
63
65
67
69
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72
viii
3.9
3.10
Hedging exotics
Scenario analysis
Summary
Further reading
Questions and problems
Assignment questions
Contents
73
74
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76
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127
133
137
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140
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149
Chapter 4 Interest rate risk
4.1
Measuring interest rates
4.2
Zero rates and forward rates
4.3
Treasury rates
4.4
LIBOR and swap rates
4.5
Duration
4.6
Convexity
4.7
Application to portfolios
4.8
Nonparallel yield curve shifts
4.9
Interest rate deltas
4.10 Principal components analysis
4.11 Gamma and vega
Summary
Further reading
Questions and problems
Assignment questions
Chapter
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5
Volatility
Definition of volatility
Implied volatilities
Estimating volatility from historical data
Are daily percentage changes in financial variables
normal?
Monitoring daily volatility
The exponentially weighted moving average model
The GARCH(1,1) model
Choosing between the models
Maximum-likelihood methods
Using GARCH(1,1) to forecast future volatility
Summary
Further reading
Questions and problems
Assignment questions
Chapter 6
Correlations and Copulas
6.1
Definition of correlation
6.2
Monitoring correlation
6.3
Multivariate normal distributions
Contents
ix
6.4
6.5
Copulas
Application to loan portfolios
Summary
Further reading
Questions and problems
Assignment questions
regulation and Basel II
Reasons for regulating bank capital
Pre-1988
The 1988 BIS Accord
The G-30 policy recommendations
Netting
The 1996 Amendment
Basel II
Credit risk capital under Basel II
Operational risk under Basel II
Supervisory review
Market discipline
Summary
Further reading
Questions and problems
Assignment questions
152
159
161
161
162
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165
167
168
169
172
174
176
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189
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194
Chapter 7 Bank
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
' 7.9
7.10
7.11
Chapter 8 The VaR measure
195
8.1
Definition of VaR
196
8.2
VaR vs. expected shortfall
198
8.3
Properties of risk measures
199
8.4
Choice of parameters for VaR
202
8.5
Marginal VaR, incremental VaR, and component VaR... 206
8.6
Back testing
208
8.7
Stress testing
212
Summary
213
Further reading
214
Questions and problems
215
Assignment questions
216
Chapter 9 Market risk VaR: historical simulation approach
9.1
The methodology
9.2
Accuracy
9.3
Extensions
9.4
Extreme value theory
9.5
Application
Summary
Further reading
217
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