Ever since I started running risk management training workshops and teaching Executive MBA students, I had been looking for a textbook that walked the middle ground between plain English, as few mathematical equations as possible and exactly the right topics I needed to teach. It had to be concise and to the point yet cover the basics of quantifying risk, implementing risk policies, derivative pricing, product types and real life market applications. Easy to read but deep enough to be a handy desk reference, perhaps a cross between a HBS case and a customized text book.
The book that came closest to this was Paul Wilmot on Quantitative Finance. But the 3 volume Wilmot or the single volume Wilmost summarized text was beyond the price range of most of my students in the region.
Towards the end of 2008 we started work on a project that resulted in the product that became Risk Frameworks and Applications. Let me be honest and upfront, we had to let a few formulae in (Paul Petty will never forgive me) since the simplest pricing model also required elementary mathematics. But we compensated this failing by including as many rich cases as we could find that would help students understand and appreciate the world risk managers and derivative traders live in.
It was a book inspired by questions, not answers. While the first edition weighed in 195 pages and covered the basic essence of topics I taught while teaching derivative pricing, risk management and product application courses, it quickly became apparent that the list of topics need to be expanded. Work on Risk Frameworks and Applications started even before the first edition hit the printing press.
The second edition came out as an electronic edition this evening. New topics include multiple chapters on Asset Liability Management, Fixed Income Instruments and pricing. From the mundane Forward Rate Agreement to the exotic commodity linked note. Also a brand new chapter on building Monte Carlo simulators as well as on valuation of mortgage backed securities with multiple interest rate models. Once again the focus is on pricing and applications and building models in excel spreadsheets rather than complex derivations.
At almost 400 pages, the book is double the size of the first edition and possibly contains 70% of the content found on this site. Like all good book, this is a book that we wrote primarily for ourselves. We hope that you have as much fun reading it as we had putting it together. To buy your copies at the discounted introductory price please see the Online Finance Course Store. The book is listed under the Corporate Finance Section.
Ps. Here is the summarized table of content for those of you who would like a quick look see…
TABLE OF CONTENTS
PART 1: INTRODUCTION TO RISK MANAGEMENT FRAMEWORKS
Chapter 1 – Framework
Chapter Two – Applications
Chapter Three – Calculating Value at Risk
PART 2: DERIVATIVES
Chapter One – Terminology
Chapter Two – Products & Pricing
Chapter Three – Variations
PART 3: DERIVATIVE PRICING
PART 4: ADVANCED TOPICS
Building Equities, Commodities, Currencies and Interest Rate Monte Carlo (MC) Simulators in Excel
Monte Carlo Simulation Application: Forecasting the Monetary Policy Rate decision
Advanced Fixed Income Securities
Forward Rate Agreements
Forward Contracts
Swaps
Caps and Floors
Accrual Swaps
Range Accrual Note
Commodity Linked Note
Asset Liability Management
Duration and Convexity
ALM Risk Measurement Tools
Applications
Liquidity Management
Liquidity Ratios and Analysis
Liquidity Management
The Treasury Function
Trade Flows (FX desk)
The Treasury Function Operations
Valuation of Mortgage Backed Security (MBS) Pools
Valuation of Mortgage Backed Securities
Factoring in Prepayments
Annexure A – Modeling Defaults – The KMV structured approach
Annexure B – Calculating Option Adjusted Spread
Annexure C –Calibration of the Cox, Ingersoll and Ross (CIR) model
Principal Component Analysis (PCA)
PART 5: UNDERSTANDING COMMODITIES RISK
The Crude Oil Price Debate
Gold and the Australian Dollar
Correlations between Crude Oil and Other Commodities
Crude Palm Oil Futures
Crude Oil and Inflation
Historical Spreads in Bond Yields
Volatility Trends in Commodity Prices
Commodity Correlations
PART 6: RISK METRICS