Risk

Finance professionals grapple with risk every day—it's the inescapable partner of all financial market participants. As a result, high-stakes financial professionals are continually trying to streamline and perfect their risk management techniques. Financial risk management quantifies and controls risk (loss potential) and helps drive capital to its optimal use (profit seeking). This book is a much-needed guide for financial firms. It describes the latest risk management tools, financial instruments, and practical implementation strategies. And they're presented in a real-world, nonacademic manner. This book presents the latest information on

• Identifying risk: the spectrum of risks faced by market participants
• Measuring and quantifying risk: ways to track and value market and credit risks
• Managing risk: a practical framework for financial risk management implementation

Also includes "The Ten Commandments of Financial Risk Management," how and when to use the latest financial instruments and derivatives, and setting up a trackable risk management initiative.

Introduction.
How This Book Is Organized.
Risk Management Transparency.
The Spectrum of Risks Chart.

Section I THE RISKS AND THEIR CONTOURS.

1. Global Risk Management's Emergence.
Technology and Communications.
Quantitative Models.
Dealers in Flux, Too.
Major Messages in This Book.
Wrap-Up.

2. The Full Spectrum of Risks.
Operational Risk.
Other Nonfinancial Risks.
Wrap-Up.

3.The Contours of Financial Risk.
Funding Risk: The Primal Arc.
Markets and Risk.
Basis Risk.
Alternative Views an Insights.
New Measurement Tools and Management Techniques.
Credit Risk.
The Contours of Credit Risk.
Portfolio Risk.
Our Journey
Wrap-Up

Section II MARKET RISK MANAGEMENT.

4. Market Risk: Tools and Uses.
Hedge Example.
Arbitrage.
Speculation.
Wrap-Up.

5. Commodity Market Risk Management.
Case Study: Big Auto Co.
Case Study: Innovative Enron.
Commodity Market Features.
Wrap-Up.

6. Currency Market Risk Management.
Market Dynamics.
Valuation and Risk Mechanics.
Risk Illustrations.
End Users.
Intermediaries.
Wrap-Up.

7. Fixed-Income Market Risk Management.
Market Dynamics.
Time Matters.
Valuation.
Risk Mechanics.
Risk Illustrations.
Corporate Users.
Dealers.
The Investors.
Wrap-Up.

8. Equity Market Risk Management.
Valuation and Risk Mechanics.
Risk Illustration.
Equity Derivatives.
Dealers and End Users.
Wrap-Up.
Market Risk Summary.

Section III CREDIT RISK MANAGEMENT.

9.The Schism in Credit Risk Management.
Credit Risk Management Difficulties.
Wrap-Up.

10.Credit Risk Management for Trading.
The Variable Exposure Problem.
Pre-Settlement and Settlement Risk.
Monte Carlo Simulation.
Credit Risk versus Exposure.
Credit Limit Problems.
Charging for Credit.
Systemic Concerns.
Wrap-Up.

11. Credit Risk Management for Traditional Lending.
The Traditional Credit Process: Commercial Loans.
Competition and Change to the Process.
Summary of Changes to the Process.
The Prior Models for Credit Risk.
The New Models for Credit Risk.
Case Study: Bank of Montreal.
Credit Market Trends.
Wrap-Up.

Section IV RISK IN PORTFOLIOS

12. Market Risk in Portfolios.
Portfolio Risk Measures: Their Evolution.
Forecasting for VaR.
VaR Summary.
Stress Testing.
The Lessons of 1998.
Wrap-Up.

13. Simulation.
Case Study: Global Oil Co.
Wrap-Up.

Section V DEVELOPING A GLOBAL RISK MANAGEMENT PROCESS.

14. Risk Management: The Vision and the Reality.
The Vision for Risk Management: Go Global.
The Reality at Global Financial Institutions.
Wrap-Up.

15. The Global Risk Management Development Model.
Management Direction.
Risk Management Development Projects.
Integrating with the Operating.
Infrastructure.
Wrap-Up

16.Developing GRM: What Works, What Doesn't.
The Chase Example.
Features of Success.
Pitfalls to Avoid.
Wrap-Up.

Conclusion.
The Ten Commandments for Going Global with Risk.
Appendix: Financial Risk Definitions.
Notes.
Index.

JAMES T. GLEASON, currently with IBM Consulting, has been a risk management consultant for more than fifteen years at firms that include Coopers & Lybrand and Arthur Andersen & Co. He has worked as an independent consultant to help implement risk management solutions at Citicorp, First National Bank of Chicago, ING-Barings (Netherlands), Rabobank (Netherlands), and other large companies. A contributor to Risk magazine, he resides in Darien, Connecticut.

Advances in technology and risk modeling have boosted derivative markets. The resulting increase in arbitrage activities has narrowed profit margins in all financial markets. Consistent risk methodology is now an essential tool for overcoming competitive pricing and for anticipating the consequences of market turbulence.

It is now possible to calculate the potential impact of every major deal on the overall risk profile of the firm. Market risk and credit risk can be quantified and considered against the expected contribution to shareholder value or return on capital. These measurements create a theoretical framework for harmonizing activity at financial firms.

In practice, however, today’s markets and technologies evolve so rapidly that the requirements and the capabilities shift before any reengineering cycle can be completed. A quagmire of data seriously confounds the task of extracting reliable information for risk management. The data problem becomes acute when you move to global risk management, because a flaw anywhere affects the whole process and is much harder to trace.

Timely, accurate information about all positions is a prerequisite for effective management in this new global marketplace. You can’t run flexible “what if’ stress tests or determine global VaR (value at risk) accurately without a central transaction file. When the next contagion hits, the winners will be the ones who have correctly measured the stress on their whole portfolio and adjusted their holdings to achieve some immunization.

This book shows you how to make your firm one of those winners.

"Written in a clear, accessible style, Risk: The New Management Imperative in Finance should be compulsory reading for directors, senior management, and all who are responsible for risk management. This book is an important addition to risk management literature."
- Stuart M. Turnbull
Vice President, Market Risk Management Division
Canadian Imperial Bank of Commerce

". . . takes us through the fundamentals of global risk management, destroys the sacred cows, cuts through the fog of financial jargon, and exposes a landscape of leverage and derivatives where lightening-speed transactions have far outstripped the capacity of our regulatory institutions to understand--let alone regulate-- effectively."
- Peter C. Goldmark Jr.
Chairman and CEO, International Herald Tribune

"The advice given in the section entitled 'Developing a Global Risk Management Process,' culminating in the ten commandments for going global with risk, should be mandatory reading for any manager contemplating the development of such a system."
- Dr. David Lawrence
Head of Risk Analytics, Citibank London

"Mr. Gleason writes with great clarity. He has the rare ability to discuss financial matters without resorting to trade jargon. This book is a must for all students of current financial risk and markets."
- Brian J. Ranson
Senior Vice President, Bank of Montreal