Author : Donald R. van Deventer, Kenji Imai
About the Book
The book Financial Risk Analytics is the first book written by
experienced risk managers that is designed to explain, in comprehensive
yet understandable terminology, the analytics of interest rate risk,
credit rate risk, foreign exchange risk and capital allocation from A to
Z. Risk management experts Donald R. van Deventer and Kenji Imai show in
a very practical, concrete way how the term structure models used to
price interest rate derivatives can be used to hedge all common products
in banking, insurance and investment management, allowing the same risk
management approach for an entire institution that is normally taken for
a derivatives portfolio alone.
Financial Risk Analytics allows you to develop a comprehensive
understanding of this complex subject, including:
The basics of present value, forward rates and interest rate
compounding. American fixed income option vs. European options. The wide
variety of alternative term structure models to the basic Vasicek model.
Bridging the gap between the idealized assumptions used for valuation
and the realities that must be reflected in management actions.
Financial institution risk management is a complex, highly technical
pursuit that is often difficult to grasp. The result can be choosing
ineffective risk management techniques over superior counterparts, or
completely missing the mark on meaningful risk management altogether.
Financial Risk Analytics introduces and expands upon prevalent
market theories. It is indispensable in its common-sense approach to
risk management in today's environment.
Reviews
"Financial Risk Analytics fills the gaps left by dry, fixed-income
valuation formulas in finance textbooks with the best market-tested and
up-to-date complex bond valuation and risk measurement practices
available today .... a valued high-level and accessible reference."-
David Shimko, J. P. Morgan
"This book is a detailed, well-organized, practitioner-oriented
compendium of models and computational procedures for valuation of fixed
income securities and derivatives, and the assessment of their risk
characteristics." - Olderich A. Vasicek, KMV Corporation
Book Contents
- Fixed-Income Mathematics Price, Accrued Interest, and Value
Present Value Compound Interest Conventions and Formulas Yields and
Yield-to-Maturity Calculations Calculating Forward Interest Rates and
Bond Prices Summary
- Yield Curve Smoothing Cubic Spline Yield Smoothing Cubic Spline
Price Smoothing Maximum Smoothness Forward Rates Smoothing
Coupon-Bearing Bond Data or Other Data Conclusion Appendix: Proof of
the Theorem
- Duration and Convexity: The Traditional Risk Management Tools
Macaulay's Duration: The Original Formula Using Duration for Hedging
Duration: The Market Convention The Perfect Hedge: The Difference
between the Original Macaulay and Conventional Durations Convexity and
its Uses Conclusion
- Duration as a Term Structure Model What Is a Term Structure Model
and Why Do We Need One? The Vocabulary of Term Structure Models Ito's
Lemma Ito's Lemma for More than One Random Variable Using Ito's Lemma
to Build a Term Structure Model Duration as a Term Structure Model
Conclusions about the Use of Duration's Parallel Shift Assumptions
- The Vasicek and Extended Vasicek Models The Merton Model The
Extended Merton Model The Vasicek Model The Extended Vasicek/Hull and
White Model An Example of the Hedging Implications of Tier Structure
Models Compared to the Duration Approach Conclusion
- Risk-Neutral Interest Rates and European Options on Bonds An
Introduction to Risk-Neutral Interest Rates and the No-Arbitrage
Assumption Relationship between the Expected Short Rate, Expected
Risk-Neutral Short Rate, and Forward Rates A General Valuation Formula
for Valuation of Interest-Rate-Related Securities in the Vasicek Model
Derivation of the Closed-Form Valuation Formula The Value of European
Options on a Zero Coupon Bond European Puts on Zero Coupon Bonds
Options on Coupon-Bearing Bonds An Example
- Forward and Futures Contracts Forward Contracts on Zero Coupon
Bonds Forward Rate Agreements Eurodollar Futures-type Forward
Contracts Futures on Zero Coupon Bonds: The Sydney Futures Exchange
Bank Bill Contract Futures on Coupon-Bearing Bonds: Example Using the
SIMEX Japanese Government Bond Future Eurodollar, Euroyen, and
Euromark Futures Contracts
- European Options on Forward and Futures Contracts Valuing Options
on Forwards and Futures European Options on Forward Contracts on Zero
Coupon Bonds European Options on Forward Rate Agreements European
Options on a Eurodollar Futures-type Forward Contract European Options
on Futures on Zero Coupon Bonds European Options on Futures on
Coupon-Bearing Bonds Options on Eurodollar, Euroyen, and Euromark
Futures Contracts
- Caps and Floors Introduction to Caps and Floors Caps as European
Options on Forward Rate Agreements Forming Other Cap-Related
Securities
- Interest Rate Swaps and Swaptions Introduction to Interest Rate
Swaps Valuing the Floated-Rate Payment on a Swap The Observable Fixed
Rate in the Swap Market An Introduction to Swaptions Valuation of
European Swaptions Valuation of American Swaptions
- Exotic Swap and Option Structures Introduction to Exotic Swaps and
Options Arrears Swaps Digital Options Digital Range Notes Range
Floaters Min-Max Floaters Other Derivative Securities
- American Fixed-Income Options Introduction to American Options An
Overview of Numerical Techniques for Fixed-Income Option Valuation
Monte Carlo Simulation Finite Difference Methods Binomial Lattices
Bushy Trees Trinomial Lattices Valuing Securities on the Lattice:
European and American Calls
- Irrational Exercise of Fixed-Income Options Irrationality Analysis
of Irrationality Criteria for a Powerful Explanation The Transactions
Cost Approach Irrational Exercise of European Options Valuing a Zero
Coupon Bond with an Irrationality Exercised Embedded Call Option The
Irrational Exercise of American Options Implied Irrationality and
Hedging
- Mortgage-Backed Securities Introduction to the Analysis of
Mortgage-Backed Securities Prepayment Speeds and the Valuation of
Mortgages Constant Prepayment Speeds as a Principal Amortization
Assumption Fitting Actual GNMA Data with a Single Prepayment Speed
Model Can We Forecast Prepayment Rates? Option-Adjusted Spread The
Transactions Cost Approach to Prepayments Implications for OAV Spread,
CMOs, and ARMs
- Nonmaturity Deposits An Introduction to Nonmaturity Deposits The
Value of the Deposit Franchise Total Cash Flow of Nonmaturity Deposits
Deposit Valuation with Constant Balances or Known Variation in
Balances Random Deposit Balances with Constant Interest Rates The
Valuation of Deposits Whose Rates and Balances Vary with Open-Market
rates Using the Jarrow-van Deventer Formula in Practice Appendix:
Derivation of Valuation Formulas in Section 15.5 (Random Deposits
Balances with Constant Interest Rates)
- The Valuation of Risky Debt Introduction to the Value of Risky
Debt The Merton Model of Risky Debt Risky Debt with Stochastic
Interest Rates Implications of the Valuation of Risky Debt Other
Approaches to the Valuation of Risky Debt
- Foreign Exchange Markets: A Term Structure Model Approach
Introduction to Foreign Exchange Forwards and Options Foreign Exchange
Forwards Foreign Exchange Options Implications of a Term Structure
Model-Based FX Options Formula Improved Accuracy of the Stochastic
Interest Rate FX Model Extensions of the Stochastic Interest Rate
Approach to Foreign Currency-Related Securities Pricing
- Alternative Term Structure Models Introduction to Alternative Term
Structure Models Alternative One-Factor Interest Rate Models
Two-Factor Interest Rate Models The Heath, Jarrow, and Morton Approach
Term Structure Model Selection
- Estimating the Parameters of Term Structure Models Introduction to
the Estimation of Term Structure Model Parameters Traditional Academic
Approach Volatility Curve Approach Advanced Volatility Curve Approach
Implied Parameters from an Observable Yield Curve The Best Approach
Hedging and Risk Measurement Introduction to Hedging and Risk
Measurement Portfolio Selection: What Assets Should We Sell and What
Assets Should We Buy? What Level of Risk Maximizes Shareholder Value?
How Should the Aggregate Level of Risk Be Measured? The Best Hedge
Performance Evaluation: Which Managers Did Well? Risk-Adjusted Return
on Capital Summing Up
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Financial Risk Analytics A Term Structure Model Approach for
Banking, Insurance & Investment Management