The challenges of the current financial environment have revealed the need for a new generation of professionals who combine training in traditional finance disciplines with an understanding of sophisticated quantitative and analytical tools. Risk Management and Simulation shows how simulation modeling and analysis can help you solve risk management problems related to market, credit, operational, business, and strategic risk. Simulation models and methodologies offer an effective way to address many of these problems and are easy for finance professionals to understand and use. Drawing on the authors extensive teaching experience, this accessible book walks you through the concepts, models, and computational techniques.
How Simulation Models Can Help You Manage Risk More Effectively
Organized into four parts, the book begins with the concepts and framework for risk management. It then introduces the modeling and computational techniques for solving risk management problems, from model development, verification, and validation to designing simulation experiments and conducting appropriate output analysis. The third part of the book delves into specific issues of risk management in a range of risk types. These include market risk, equity risk, interest rate risk, commodity risk, currency risk, credit risk, liquidity risk, and strategic, business, and operational risks. The author also examines insurance as a mechanism for risk management and risk transfer. The final part of the book explores advanced concepts and techniques. The book contains extensive review questions and detailed quantitative or computational exercises in all chapters. Use of MATLAB® mathematical software is encouraged and suggestions for MATLAB functions are provided throughout.
Learn Step by Step, from Basic Concepts to More Complex Models
Packed with applied examples and exercises, this book builds from elementary models for risk to more sophisticated, dynamic models for risks that evolve over time. A comprehensive introduction to simulation modeling and analysis for risk management, it gives you the tools to better assess and manage the impact of risk in your organizations. The book can also serve as a support reference for readers preparing for CFA exams, GARP FRM exams, PRMIA PRM exams, and actuarial exams.
I Risk and Regulation
Defining Risk
Types of Risk
Getting Started with Modeling Risk
MATLAB Tools for Distributions
Framework for Risk Management
How to Handle Risk?
Example Contexts to Apply the Framework
MATLAB Tools for Risk Measures
Regulations and Risk Management
Regulations Overview
Regulations and Banking
Regulations and Investment Banking
Regulations and Insurance
II Modeling and Simulation of Risk
Principles of Simulation and Generating Random Variates
Principles of Simulation
Random Number Generation
Generation of Discrete Random Variates
Generation of Continuous Random Variates
Testing Random Variates
Validation of Model
Output Analysis
MATLAB Tools for Simulation
Modeling Risk Evolving over Time
Stochastic Processes
Discrete-Time Evolution of Risk
Continuous-Time Evolution of Risk
Modeling Correlation
MATLAB Tools for Modeling Risk Evolving over Time
Building and Solving Models of Risk
Deterministic Financial Modeling
Introducing Stochasticity in the Modeling
Defining New Integrals
Analytical Solutions
Solving Models Using Simulation
Estimating Parameters
MATLAB Tools for Building and Solving Models of Risk
III Risk Management
Managing Equity Market Risk
Mitigating Equity Risk
Transferring Equity Risk
Equity Hedging Strategies
MATLAB Tools for Equity and Portfolios
Managing Interest Rates and Other Market Risks
Pricing Fixed Income Instruments
Interest-Rate Risk Management
Managing Commodities Risk
Managing Foreign Exchange Risk
Value-at-Risk and Stress Testing for Market Risk Management
MATLAB Tools for Fixed Income, Commodities, and Exchange Rates
Credit Risk Management
Retail Credit Risk
Commercial Credit Risk
Credit Risk Hedging Instruments
Portfolio Credit Risk Management
MATLAB Tools for Credit Risk
Strategic, Business, and Operational Risk Management
Strategic Risk Management
Business Risk Management
Asset-Liability Management
Operational Risk Management
Risk Management Using Insurance
Basic Concepts of Insurance
Principle behind Insurance
Types of Insurance
Risk Management Framework for Pure Risk
Risk Management by Insurers
IV Advanced Simulation
Advanced Simulation Topics
Variance Reduction Techniques
Simulation-Based Optimization
MATLAB Tools for Variance Reduction and Optimization
Bibliography
Index