TY - BOOK AU - Hull, John C. TI - Risk management and financial institutions SN - 9788126560615 U1 - 332.10681 PY - 2019/// CY - New Delhi PB - Wiley India Pvt. Ltd. KW - Financial institutions--Management KW - Risk management KW - Financial risk management N1 - TABLE OF CONTENTS Business Snapshots xxiii Preface xxv Chapter 1 Introduction 1 1.1 Risk vs. Return for Investors 2 1.2 The Efficient Frontier 6 1.3 The Capital Asset Pricing Model 8 1.4 Arbitrage Pricing Theory 14 1.5 Risk vs. Return for Companies 14 1.6 Risk Management by Financial Institutions 18 1.7 Credit Ratings 19 Summary 20 Further Reading 20 Practice Questions and Problems (Answers at End of Book) 21 Further Questions 22 Part 1: Financial Institutions and Their Trading 23 Chapter 2 Banks 25 2.1 Commercial Banking 26 2.2 The Capital Requirements of a Small Commercial Bank 28 2.3 Deposit Insurance 30 2.4 Investment Banking 31 2.5 Securities Trading 36 2.6 Potential Conflicts of Interest in Banking 38 2.7 Today’s Large Banks 39 2.8 The Risks Facing Banks 42 Summary 43 Further Reading 43 Practice Questions and Problems (Answers at End of Book) 44 Further Questions 44 Chapter 3 Insurance Companies and Pension Plans 47 3.1 Life Insurance 48 3.2 Annuity Contracts 51 3.3 Mortality Tables 52 3.4 Longevity and Mortality Risk 56 3.5 Property-Casualty Insurance 57 3.6 Health Insurance 60 3.7 Moral Hazard and Adverse Selection 61 3.8 Reinsurance 62 3.9 Capital Requirements 63 3.10 The Risks Facing Insurance Companies 64 3.11 Regulation 64 3.12 Pension Plans 66 Summary 70 Further Reading 71 Practice Questions and Problems (Answers at End of Book) 71 Further Questions 72 Chapter 4 Mutual Funds, ETFs, and Hedge Funds 75 4.1 Mutual Funds 75 4.2 Exchange-Traded Funds 79 4.3 Active vs. Passive Management 80 4.4 Regulation 82 4.5 Hedge Funds 83 4.6 Hedge Fund Strategies 88 4.7 Hedge Fund Performance 93 Summary 94 Further Reading 95 Practice Questions and Problems (Answers at End of Book) 95 Further Questions 96 Chapter 5 Trading in Financial Markets 97 5.1 The Markets 97 5.2 Clearing Houses 98 5.3 Long and Short Positions in Assets 99 5.4 Derivatives Markets 101 5.5 Plain Vanilla Derivatives 102 5.6 Non-Traditional Derivatives 114 5.7 Exotic Options and Structured Products 117 5.8 Risk Management Challenges 118 Summary 120 Further Reading 122 Practice Questions and Problems (Answers at End of Book) 122 Further Questions 125 Chapter 6 The Credit Crisis of 2007–2008 127 6.1 The U.S. Housing Market 128 6.2 Securitization 131 6.3 The Losses 137 6.4 What Went Wrong? 138 6.5 Lessons from the Crisis 140 Summary 141 Further Reading 142 Practice Questions and Problems (Answers at End of Book) 142 Further Questions 143 Chapter 7 Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds 145 7.1 Volatility and Asset Prices 146 7.2 Risk-Neutral Valuation 147 7.3 Scenario Analysis 152 7.4 When Both Worlds Have to Be Used 153 7.5 The Calculations in Practice 154 7.6 Estimating Real-World Processes 155 Summary 156 Further Reading 157 Practice Questions and Problems (Answers at End of Book) 157 Further Questions 158 Part 2: Market Risk 159 Chapter 8 How Traders Manage Their Risks 161 8.1 Delta 161 8.2 Gamma 169 8.3 Vega 171 8.4 Theta 173 8.5 Rho 174 8.6 Calculating Greek Letters 174 8.7 Taylor Series Expansions 175 8.8 The Realities of Hedging 177 8.9 Hedging Exotic Options 178 8.10 Scenario Analysis 180 Summary 181 Further Reading 181 Practice Questions and Problems (Answers at End of Book) 181 Further Questions 182 Chapter 9 Interest Rate Risk 185 9.1 The Management of Net Interest Income 186 9.2 Types of Rates 188 9.3 Duration 193 9.4 Convexity 196 9.5 Generalization 198 9.6 Nonparallel Yield Curve Shifts 200 9.7 Principal Components Analysis 204 9.8 Gamma and Vega 207 Summary 208 Further Reading 209 Practice Questions and Problems (Answers at End of Book) 209 Further Questions 210 Chapter 10 Volatility 213 10.1 Definition of Volatility 213 10.2 Implied Volatilities 215 10.3 Are Daily Percentage Changes in Financial Variables Normal? 217 10.4 The Power Law 220 10.5 Monitoring Daily Volatility 222 10.6 The Exponentially Weighted Moving Average Model 225 10.7 The GARCH(1,1) Model 227 10.8 Choosing Between the Models 229 10.9 Maximum Likelihood Methods 229 10.10 Using GARCH(1,1) to Forecast Future Volatility 235 Summary 239 Further Reading 239 Practice Questions and Problems (Answers at End of Book) 240 Further Questions 241 Chapter 11 Correlations and Copulas 243 11.1 Definition of Correlation 243 11.2 Monitoring Correlation 245 11.3 Correlation and Covariance Matrices 248 11.4 Multivariate Normal Distributions 250 11.5 Copulas 252 11.6 Application to Loan Portfolios: Vasicek’s Model 258 Summary 264 Further Reading 264 Practice Questions and Problems (Answers at End of Book) 265 Further Questions 266 Chapter 12 Value at Risk and Expected Shortfall 269 12.1 Definition of VaR 271 12.2 Examples of the Calculation of VaR 272 12.3 A Drawback of VaR 273 12.4 Expected Shortfall 274 12.5 Coherent Risk Measures 274 12.6 Choice of Parameters for VaR and ES 278 12.7 Marginal, Incremental, and Component Measures 283 12.8 Euler’s Theorem 284 12.9 Aggregating VaRs and ESs 285 12.10 Back-Testing 285 Summary 289 Further Reading 289 Practice Questions and Problems (Answers at End of Book) 290 Further Questions 291 Chapter 13 Historical Simulation and Extreme Value Theory 293 13.1 The Methodology 293 13.2 Accuracy of VaR 299 13.3 Extensions 301 13.4 Computational Issues 306 13.5 Extreme Value Theory 307 13.6 Applications of EVT 310 Summary 313 Further Reading 313 Practice Questions and Problems (Answers at End of Book) 314 Further Questions 314 Chapter 14 Model-Building Approach 317 14.1 The Basic Methodology 318 14.2 Generalization 321 14.3 The Four-Index Example Revisited 323 14.4 Handling Term Structures 326 14.5 Extensions of the Basic Procedure 331 14.6 Risk Weights and Weighted Sensitivities 332 14.7 Handling Non-Linearity 333 14.8 Model-Building vs.Historical Simulation 339 Summary 340 Further Reading 340 Practice Questions and Problems (Answers at End of Book) 341 Further Questions 342 Part 3: Regulation 345 Chapter 15 Basel I, Basel II, and Solvency II 347 15.1 The Reasons for Regulating Banks 347 15.2 Bank Regulation Pre-1988 348 15.3 The 1988 BIS Accord 350 15.4 The G-30 Policy Recommendations 353 15.5 Netting 354 15.6 The 1996 Amendment 356 15.7 Basel II 359 15.8 Credit Risk Capital Under Basel II 360 15.9 Operational Risk Capital Under Basel II 369 15.10 Pillar 2: Supervisory Review 370 15.11 Pillar 3: Market Discipline 370 15.12 Solvency II 371 Summary 372 Further Reading 373 Practice Questions and Problems (Answers at End of Book) 373 Further Questions 375 Chapter 16 Basel II.5, Basel III, and Other Post-Crisis Changes 377 16.1 Basel II.5 378 16.2 Basel III 381 16.3 Contingent Convertible Bonds 390 16.4 Use of Standardized Approaches and SA-CCR 390 16.5 Dodd–Frank Act 392 16.6 Legislation in Other Countries 394 Summary 396 Further Reading 397 Practice Questions and Problems (Answers at End of Book) 397 Further Questions 398 Chapter 17 Regulation of the OTC Derivatives Market 399 17.1 Clearing in OTC Markets 400 17.2 Post-Crisis Regulatory Changes 404 17.3 Impact of the Changes 408 17.4 CCPs and Bankruptcy 412 Summary 412 Further Reading 413 N2 - Risk Management and Financial Institutions, explains all aspects of financial risk and financial institution regulation, helping you better understand the financial markets—and their potential dangers. Inside, you’ll learn the different types of risk, how and where they appear in different types of institutions, and how the regulatory structure of each institution affects risk management practices. Comprehensive ancillary materials include software, practice questions, and all necessary teaching supplements, facilitating more complete understanding and providing an ultimate learning resource. All financial professionals need to understand and quantify the risks associated with their decisions. This book provides a complete guide to risk management with the most up to date information. • Understand how risk affects different types of financial institutions • Learn the different types of risk and how they are managed • Study the most current regulatory issues that deal with risk • Get the help you need, whether you’re a student or a professional Risk management has become increasingly important in recent years and a deep understanding is essential for anyone working in the finance industry; today, risk management is part of everyone's job. For complete information and comprehensive coverage of the latest industry issues and practices, Risk Management and Financial Institutions, Fifth Edition is an informative, authoritative guide ER -