Financial Risk Management is designed to provide the readers with a stronger foundation in measurement and management of financial risks. This book takes the readers through the subject in a step-wise manner with the aim of providing necessary knowledge and skills for evaluating and dealing with financial risks. This book is primarily meant for graduate students of Management, and it would also prove helpful to the students intending to appear in the FRM examination conducted by Global Association of Risk Professionals (GARP) as well as practicing risk managers.

Contents:

Chapter 1 Introduction to Financial Risk Management

• 1.1 Introduction
• 1.2 Risk Management
• 1.3 Benefits of Risk Management
• 1.4 Types of Risks
• 1.5 Financial Markets
• 1.6 Types of Financial Risks
• 1.7 Market Risk
• 1.8 Credit/Counterparty Risk
• 1.9 Operational Risk
• 1.10 Model Risk
• 1.11 Risk and Risk Factors
• 1.12 Financial Risk Management
• 1.13 Steps in the Risk Management Process

Chapter 2 Market Risk: Sensitivity Measures

• 2.1 Introduction
• 2.2 Sensitivity Measures of Market Risk

Chapter 3 Volatility and Correlation

• 3.1 Introduction
• 3.2 Estimation of Volatility
• 3.3 Standard Approach
• 3.4 Weighting Schemes
• 3.5 The ARCH Model
• 3.6 The EWMA Model
• 3.7 GARCH (1,1) Model
• 3.8 Forecasting Future Volatility for Option Pricing
• 3.9 Component GARCH Model
• 3.10 Asymmetric Volatility
• 3.11 Implied Volatilities
• 3.12 Volatility Indices
• 3.13 Predicting Correlations

Chapter 4 Value at Risk and Expected Shortfall

• 4.1 Introduction
• 4.2 Value at Risk
• 4.3 Expected Shortfall (ES)
• 4.4 Choice of VaR Parameters
• 4.5 Aggregation of VaR and ES
• 4.6 Calculating VaR
• 4.7 Parametric and Nonparametric VaR
• 4.8 HS Approach
• 4.9 Monte Carlo Simulation Approach
• 4.10 Parametric VaR
• 4.11 VaR for Non-normal Distributions
• 4.12 Parametric Versus Nonparametric VaR
• 4.13 Marginal VaR
• 4.14 Component VaR
• 4.15 Back Testing
• 4.16 Stress Testing
• 4.17 Risk Metrics

Chapter 5 Management of Market Risk

• 5.1 Introduction
• 5.2 Portfolio Diversification
• 5.3 Hedging
• 5.4 Insurance-Type Contracts
• 5.5 Portfolio Insurance
• 5.6 Internal Hedges
• 5.7 Basel Guidelines

Chapter 6 Estimating Default and Migration Probabilities

• 6.1 Introduction
• 6.2 Credit Risk VaR
• 6.3 Measuring Probability of Default
• 6.4 Migration Probabilities
• 6.5 Basel Guidelines

Chapter 7 Credit Value at Risk

• 7.1 Introduction
• 7.2 Exposure at Default
• 7.3 Loss Given Default
• 7.4 Credit Risk Correlations
• 7.5 Expected and Unexpected Loss
• 7.6 Credit Risk Models

Chapter 8 Credit Risk Management

• 8.1 Introduction
• 8.2 Marking-to-Market
• 8.3 Netting
• 8.4 Collateralization
• 8.5 Downgrade Triggers
• 8.6 Loan Syndication
• 8.7 Guarantees and Letters of Credit
• 8.8 Credit Rationing
• 8.9 Debt Covenants
• 8.10 Monitoring
• 8.11 Put options
• 8.12 Credit Derivatives
• 8.13 Credit insurance
• 8.14 Securitization
• 8.15 Basel Guidelines

Chapter 9 Operational Risk

• 9.1 Introduction
• 9.2 Types of Operational Risk Losses
• 9.3 Measurement of Operational Risk
• 9.4 Managing Operational Risk

Chapter 10 Liquidity Risk

• 10.1 Introduction
• 10.2 Types of Liquidity Risk
• 10.3 Funding Liquidity Risk
• 10.4 Managing Liquidity Risk
• 10.5 Liquidity Black Holes
• 10.6 Basel III Regulations

Chapter 11 Model Risk

• 11.1 Introduction
• 11.2 Models for Pricing Standard Products
• 11.3 Models for Non-standard Products
• 11.4 Sources of Model Risk
• 11.5 Quantifying Model Risk
• 11.6 Managing Model Risk
• 11.7 Regulatory Requirement
• 11.8 Model Development
• 11.9 Model Validation

Chapter 12 Asset Liability Management

• 12.1 Introduction
• 12.2 Objectives of ALM
• 12.3 Interest Rate Risk
• 12.4 Liquidity Funding Risk
• 12.5 Organization of the ALM Function
• 12.6 Reserve Bank of India Guidelines on ALM by Indian Banks

Chapter 13 Enterprise Risk Management

• 13.1 Introduction
• 13.2 Economic Capital
• 13.3 Risk Appetite
• 13.4 Risk Culture
• 13.5 Top-down Approach
• 13.6 Bottom-up Approach
• 13.7 Risk Allocation
• 13.8 Risk-Adjusted Performance Measurement
• 13.9 Risk-Based Pricing

Chapter 14 Financial Innovation

• 14.1 Introduction
• 14.2 Important Financial Innovations
• 14.3 Role of Finance Theories and Models in Stimulating Financial Innovation
• 14.4 Factors that Motivate Financial Innovation
• 14.5 Diffusion of Financial Innovations
• 14.6 Classification and Functions of the Financial Innovations
• 14.7 Implications of Innovations on Financial Markets
• 14.8 The Future of Financial Innovation

Chapter 15 Role of Analytics in Risk Management

• 15.1 Introduction
• 15.2 Types of Data Analytics
• 15.3 Steps in Risk Analytics
• 15.4 Financial Risk Analytics
• 15.5 Benefits of Risk Analytics
• 15.6 Challenges in Use of Data Analytics

Summary

Glossary

Assignment Material

Caselets

Appendix A Sovereign Risk and Financial Crisis

• A.1 Introduction
• A.2 Sovereign Risk
• A.3 Credit Crisis 2007
• A.4 Flash Crashes

Appendix B Solvency II Guidelines

• B.1 Introduction
• B.2 Objectives of Solvency II
• B.3 Applicability
• B.4 Pillars

Appendix C Introduction to Probability Theory

• C.1 Probability
• C.2 Properties of Probability
• C.3 Characteristics of Probability Distributions

Appendix D Introduction to Financial Derivatives

• D.1 Derivative
• D.2 Types of Derivative Contracts
• D.3 Put-call Parity Theorem

Appendix E Financial Risk Management during COVID-19