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THE
ESSENTIALS OF
RISK
MANAGEMENT
SECOND EDITION
MICHEL CROUHY, DAN GALAI. ROBERT MARK
Mc Graw Hill Education
New York Chicago San Francisco Athens London Madrid Mexico City Milan
New Delhi Singapore Sydney Toronto
CONTENTS
Foreword vii
Foreword xi
Introduction to the Second Edition: Reforming Risk Management for the Post-Crisis Era xv
1. Risk Management: A Helicopter View 1 1.1 Typology of Risk Exposures 23
2. Corporate Risk Management: A Primer 45 3. Banks and Their Regulators:
The Post-Crisis Regulatory Framework 67 3.1 Basel I 117 3.2 The 1996 Market Risk Amendment 125 3.3 Basel II and Minimum Capital Requirements for Credit Risk 131 3.4 Basel 2.5: Enhancements to the Basel II Framework 137 3.5 Contingent Convertible Bonds 143
4. Corporate Governance and Risk Management 151 5. A User-Friendly Guide to the Theory of Risk and Return 183 6. Interest Rate Risk and Hedging with Derivative Instruments 203 7. Measuring Market Risk: Value-at-Risk,
Expected Shortfall, and Similar Metrics 233 8. Asset/Liability Management 265 9. Credit Scoring and Retail Credit Risk Management 305
10. Commercial Credit Risk and the Rating of Individual Credits 333 10.1 Definitions of Key Financial Ratlos 363
v
vi • Contents
11. Quantitative Approaches to Credit Portfolio Risk and Credit Modeling 365 11.1 The Basic Idea of the Reduced Form Model 407
12. The Credit Transfer Markets—and Their Implications 411 12.1 Why the Rating of CDOs by Rating Agencies Was Misleading 467
13. Counterparty Credit Risk: CVA, DVA, and FVA 471 14. Operational Risk 499 15. Model Risk 529 16. Stress Testing and Scenario Analysis 555
16.1 The 2013 Dodd-Frank Severely Adverse Scenarios 581 17. Risk Capital Attribution and
Risk-Adjusted Performance Measurement 583
Epilogue: Trends in Risk Management 609 Index 619