Risk Management and Financial Institutions

Business Snapshots xxiiiPreface xxvChapter 1 Introduction 1Part 1: Financial Institutions and Their Trading 23Chapter 2 Banks 25Chapter 3 Insurance Companies and Pension Plans 47Chapter 4 Mutual Funds, ETFs, and Hedge Funds 75Chapter 5 Trading in Financial Markets 97Chapter 6 The Credit Crisis of 2007-2008 127Chapter 7 Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds 145Part 2: Market Risk 159Chapter 8 How Traders Manage Their Risks 161Chapter 9 Interest Rate Risk 185Chapter 10 Volatility 213Chapter 11 Correlations and Copulas 243Chapter 12 Value at Risk and Expected Shortfall 269Chapter 13 Historical Simulation and Extreme Value Theory 293Chapter 14 Model-Building Approach 317Part 3: Regulation 345Chapter 15 Basel I, Basel II, and Solvency II 347Chapter 16 Basel II.5, Basel III, and Other Post-Crisis Changes 377Chapter 17 Regulation of the OTC Derivatives Market 399Chapter 18 Fundamental Review of the Trading Book 415Part 4: Credit Risk 429Chapter 19 Estimating Default Probabilities 431Chapter 20 CVA and DVA 459Chapter 21 Credit Value at Risk 479Part 5: Other Topics 495Chapter 22 Scenario Analysis and Stress Testing 497Chapter 23 Operational Risk 515Chapter 24 Liquidity Risk 537Chapter 25 Model Risk Management 565Chapter 26 Economic Capital and RAROC 585Chapter 27 Enterprise Risk Management 603Chapter 28 Financial Innovation 621Chapter 29 Risk Management Mistakes to Avoid 643Part 6: Appendices 655Appendix A Compounding Frequencies for Interest Rates 657Appendix B Zero Rates, Forward Rates, and Zero-Coupon Yield Curves 661Appendix C Valuing Forward and Futures Contracts 667Appendix D Valuing Swaps 669Appendix E Valuing European Options 673Appendix F Valuing American Options 677Appendix G Taylor Series Expansions 681Appendix H Eigenvectors and Eigenvalues 685Appendix I Principal Components Analysis 689Appendix J Manipulation of Credit Transition Matrices 691Appendix K Valuation of Credit Default Swaps 693Appendix L Synthetic CDOs and Their Valuation

JOHN C. HULL is the Maple Financial Professor of Derivatives and Risk Management at the Joseph L. Rotman School of Management, University of Toronto, and codirector of Rotman's Master of Finance and Master of Financial Risk Management programs. He has been a consultant to many North American, Japanese, and European financial institutions.