Financial Risk Manager Handbook By Philippe Jorion

Financial Risk Manager Handbook By Philippe Jorion Financial Risk Manager Handbook is a comprehensive reference and training guide for financial risk management written by Philippe … … Jorion, Professor of Finance at the Graduate School of Management at the University of California at Irvine. The Handbook focuses on practical financial risk management techniques and solutions that are the core of the Global Association of Risk Professionals (GARP) Financial Risk Manager (FRM) designation exam. The FRM exam focuses on …

Part I, Quantitative Analysis (Chapters 1-4), reviews fundamentals of bonds, probability, statistics and Monte Carlo methods. Most actuaries can probably skip the first three chapters, as they are covered in greater detail on the actuarial syllabus. However, the Monte Carlo chapter provides a concise introduction to Markov processes, geometric Brownian motion, and binomial trees—all foundational concepts of modern capital market simulation studies. Section 4.3 even includes the Cholesky factorization as a means of generating simulated variables with a desired correlation structure. Part II, Capital Markets (Chapters 5-10), provides a broad, high-level overview of all the major categories of capital market instruments. It introduces derivatives (forwards, futures and swaps), options, fixed income securities, fixed income derivatives, equity markets, and currencies and commodities markets. The emphasis of these chapters is on practical and concise. Readers familiar with for example the CAS Exam 8 material will find the Handbook’s treatment much more limited. Part III, Market Risk Management (Chapters 11-17), is one of the lengthiest parts— with good reason. Chapter 11 begins with an introduction to market risk measurement (principally Value-at-Risk or VAR), giving the details behind the theory and application of this market standard approach. Limitations of VAR are also discussed, as well as the need to supplement VAR analyses with stress testing. Chapter 12 then goes into the identification of risk drivers. The simplest framework separates exposure from risk factors—that should make all actuaries feel right at home! Next, attention is focused on discontinuities in returns, event risk and liquidity. Chapter 13 then delves into risk sources: currency volatility, correlations, and devaluation; yield curve issues, bond prices credit spreads, and prepayment; equity including the CAPM and APT models; and finally commodities. It’s a menu of rich topics. Chapters 14-17 explore the essentials of linear and non-linear hedging; normal and non- normal risk factor models; and methods for calculating VAR under either so-called “local” (closed-form) or “full” valuation methods (including either Monte Carlo or historical simulations). Chapter 15 on non-linear hedging provides an excellent overview of the infamous “Greeks” - ?, ?, ?, ?, and ? - that pepper so many option risk management publications. A solid introduction like this really helps break the often- intimidating jargon barrier. Part IV, Credit Risk Management (Chapters 18-23), is also extensive with good reason—like Part III. Chapter 18 introduces the terminology of credit risk—e.g., settlement risk, credit exposure, default, and loss given default. Chapter 19 then explains “Measuring Actuarial Default Risk,” which ought to make every actuary beam with pride! In reality, this chapter covers the “pseudo-collective risk” approach to default based on exposures, default rates (~claim counts), and losses given default (~claim severities). Significant research exists on this technique; this chapter only scratches the surface. Suffice it to say the “cross-over” of actuarial techniques from insurance to the capital markets is complete in the realm of credit risk.

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