Risk Management anil Financial Institullons^

Transcription

1 Risk Management anil Financial Institullons^ Third Edition JOHN C. HULL WILEY John Wiley & Sons, Inc.

2 Contents Preface ' xix CHAPTBM Introduction! Risk vs. Return for Investors, The Efficient Frontier The Capital Asset Pricing Model Arbitrage Pricing Theory Risk vs. Return for Companies Risk Management by Financial Institutions Credit Ratings CHAPTER 2 Banks Commercial Banking The Capital Requirements of a Small Commercial Bank Deposit Insurance Investment Banking Securities Trading Potential Conflicts of Interest in Banking Today's Large Banks The Risks Facing Banks CHAPTERS Insurance Companies and Pension Plans Life Insurance Annuity Contracts Mortality Tables Longevity and Mortality Risk Property-Casualty Insurance 51 xvii Vli

3 Viii CONTENTS Health Insurance Moral Hazard and Adverse Selection Reinsurance Capital Requirements The Risks Facing Insurance Companies Regulation Pension Plans CHAPTER 4 Mutual Funds and Hedge Funds Mutual Funds Hedge Funds Hedge Fund Strategies Hedge Fund Performance CHAPTER 5 Trading in Financial Markets The Markets Long and Short Positions in Assets Derivatives Markets Plain Vanilla Derivatives Clearing Houses Margin Non-Traditional Derivatives Exotic Options and Structured Products Risk Management Challenges CHAPTERS The Credit Crisis of The U.S. Housing Market Securitization The Crisis What Went Wrong? Lessons from the Crisis

4 Contents IX CHAPTER 7 How Traders Manage Their Risks Delta Gamma Vega Theta Rho Calculating Greek Letters Taylor Series Expansions The Realities of Hedging Hedging Exotic Options s 7.10 Scenario Analysis t- CHAPTER 8 Interest Rate Risk 8.1 The Management of Net Interest Income 8.2 LIBOR and Swap Rates 8.3 Duration 8.4 Convexity 8.5 Generalization 8.6 Nonparallel Yield Curve Shifts 8.7 Interest Rate Deltas in Practice 8.8 Principal Components Analysis 8.9 Gamma and Vega CHAPTER 9 Value at Risk 9.1 Definition of VaR 9.2 Examples of the Calculation of VaR 9.3 VaR vs. Expected Shortfall 9.4 VaR and Capital 9.5 Coherent Risk Measures 9.6 Choice of Parameters for VaR 9.7 Marginal VaR, Incremental VaR, and Component VaR 9.8 Euler's Theorem 9.9 Aggregating VaRs 9.10 Back-Testing

5 X CONTENTS CHAPTER 101 Volatility Definition of Volatility Implied Volatilities Are Daily Percentage Changes in Financial Variables Normal? The Power Law 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 CHAPTER 11 Correlations and Copulas n.i Definition of Correlation 11.2 Monitoring Correlation 11.3 Multivariate Normal Distributions 11.4 Copulas 11.5 Application to Loan Portfolios: Vasicek's Model CHAPTER 12 Rasel 1, Basel H f and Solvency II 12.1 The Reasons for Regulating Banks 12.2 Bank Regulation Pre The 1988 BIS Accord 12.4 The G-30 Policy Recommendations 12.5 Netting 12.6 The 1996 Amendment 12.7 Basel II 12.8 Credit Risk Capital Under Basel II 12.9 Operational Risk Capital Under Basel II Pillar 2: Supervisory Review Pillar 3: Market Discioline

6 Contents Xi Solvency II CHAPTER 13 Basel 2.5, Basel III, and Dodd-Frank Basel Basel III Contingent Convertible Bonds Dodd-Frank Act Legislation in Other Countries 298! 299, CHAPTER 14 Market Risk VaR: The Historical Simulation Approach The Methodology Accuracy " Extensions Computational Issues Extreme Value Theory Applications of EVT CHAPTER 15 Market Risk VaR: The Model-Building Approach The Basic Methodology Generalization Correlation and Covariance Matrices Handling Interest Rates Applications of the Linear Model Linear Model and Options Quadratic Model Monte Carlo Simulation Non-Normal Assumptions Model-Building vs. Historical Simulation

7 xii CHAPTER 16 Credit Risk: Estimating Default Probabilities 16.1 Credit Ratings 16.2 Historical Default Probabilities 16.3 Recovery Rates 16.4 Credit Default Swaps 16.5 Credit Spreads 16.6 Estimating Default Probabilities from Credit Spreads 16.7 Comparison of Default Probability Estimates 16.8 Using Equity Prices to Estimate Default Probabilities s CHAPTER 1 7 Counterparty Credit Risk In Derivatives 17.1 Credit Exposure on Derivatives 17.2 Bilateral Clearing 17.3 Central Clearing 17.4 CVA 17.5 The Impact of a New Transaction 17.6 CVA Risk 17.7 Wrong Way Risk 17.8 DVA 17.9 Some Simple Examples CHAPTER 18 Credit Value at Risk 18.1 Ratings Transition Matrices 18.2 Vasicek's Model 18.3 Credit Risk Plus 18.4 CreditMetrics 18.5 Credit VaR in the Trading Book CHAPTER 1 9 Scenario Analysis and Stress Testing 19.1 Generating the Scenarios 19.2 Regulation CONTENTS ,

8 Contents xiii 19.3 What to Do with the Results CHAPTER 20 OperaU CHAPTER 21 Liquidity Risk CHAPTER 22 Model Risk onal Risk What is Operational Risk? Determination of Regulatory Capital Categorization of Operational Risks Loss Severity and Loss Frequency Implementation of AMA Proactive Approaches s Allocation of Operational Risk Capital Use of Power Law Insurance Sarbanes-Oxley Liquidity Trading Risk Liquidity Funding Risk Liquidity Black Holes Marking to Market Models for Linear Products Physics vs. Finance How Models are Used for Pricing Standard Products Hedging Models for Nonstandard Products Dangers in Model Building Detecting Model Problems '

9 XlV CONTENTS CHAPTER 23 Economic Capital and RAROC Definition of Economic Capital Components of Economic Capital Shapes of the Loss Distributions Relative Importance of Risks Aggregating Economic Capital Allocation of Economic Capital Deutsche Bank's Economic Capital RAROC, 503 " " s 507 CHAPTER 24 Risk Management Mistakes to Avoid Risk Limits Managing the Trading Room Liquidity Risk Lessons for Nonfinancial Corporations A Final Point Appendix A Compounding Frequencies for Interest Rates 521 Appendix B Zero Rates, Forward Rates, and Zero-Coupon Yield Curves 525 Appendix C Valuing Forward and Futures Contracts 529 Appendix D Valuing Swaps 531 Appendix E Valuing European Options 533 Appendix F Valuing American Options 535 Appendix G Taylor Series Expansions 539 Appendix H Eigenvectors and Eigenvalues 543

10 Contents XV Appendix I Principal Components Analysis 547 Appendix J Manipulation of Credit Transition Matrices 549 Appendix K Valuation of Credit Default Swaps 551 Appendix L Synthetic CDOs and Their Valuation 555 Answers to Questions and Problems 559 Glossary 595 DerlvaGem Software 615 Table for/i/m when* <O 621 Table for NM when x> Index 625