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A risk applications textbook with a difference: Risk Frameworks, 2nd Edition is here

A risk applications textbook with a difference: Risk Frameworks, 2nd Edition is here



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 Wilmot 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 derivative 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 of stochastic equations.

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 books, this is a book that we wrote primarily for ourselves. While Hull and Wilmot are great texts to bang your heads against when you are studying for an actuarial or risk certification exam, building models or explaining the working of your simulator to board members requires a text written for mortals by mere mortals.

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 Finance Training Courses. The book is listed under the Corporate Finance Section in the store.

Ps. Here is the summarized table of content for those of you who would like a quick look see…

(See below, Table of content and Bibliography)


Chapter1 – Framework
Chapter Two – Applications

Chapter Three – Calculating Value at Risk
Chapter One – Terminology
Chapter Two – Products & Pricing
Chapter Three – Variations
  1. Building Equities, Commodities, Currencies and Interest Rate Monte Carlo (MC) Simulators in Excel
  2. Monte Carlo Simulation Application: Forecasting the Monetary Policy Rate decision
  3. Advanced Fixed Income Securities
    • Forward Rate Agreements
    • Forward ContractsSwaps
    • Caps and Floors
    • Accrual Swaps
    • Range Accrual Note
    • Commodity Linked Note
  4. Asset Liability Management
    • Duration and Convexity
    • ALM Risk Measurement Tools
    • Applications
  5. Liquidity Management
    • Liquidity Ratios and Analysis
    • Liquidity Management
  6. The Treasury Function
    • Trade Flows (FX desk)
    • The Treasury Function Operations
  7. Valuation of Mortgage Backed Security (MBS) Pools
    • Valuation of Mortgage Backed Securities
    • Factoring in Prepayments
  8. Annexure A – Modeling Defaults – The KMV structured approach
  9. Annexure B – Calculating Option Adjusted Spread
  10. Annexure C –Calibration of the Cox, Ingersoll and Ross (CIR) model
  11. Principal Component Analysis (PCA)
  1. The Crude Oil Price Debate
  2. Gold and the Australian Dollar
  3. Correlations between Crude Oil and Other Commodities
  4. Crude Palm Oil Futures
  5. Crude Oil and Inflation
  6. Historical Spreads in Bond Yields
  7. Volatility Trends in Commodity Prices
  8. Commodity Correlations
  1. Numerical Option Pricing, Mark Broadie and Paul Glasserman, Columbia University
  2. TN 96-02. Risk Neutral Pricing in Discrete Time, D. M. Chance
  3. The boy’s guide to pricing and hedging, Emmanuel Derman, Columbia University
  4. The principles and practices of verifying derivative prices, Emmanuel Derman, Goldman Sachs & Co.
  5. Refresher in Option Pricing, Howard Corb, J.P.Morgan
  6. Options, Futures and Other Derivatives, John C. Hull, 7th Edition, Prentice Hall, 2009
  7. Case Problems in Finance, Kester, Fruhan, Piper, Ruback, 11th Edition, Irwin/ McGraw-Hill, 1997
  8. The Handbook of Fixed Income Securities, Frank J. Fabozzi, 7th Edition, McGraw-Hill, 2005
  9. Risk Management and Financial Institutions, John C. Hull, Low Price Edition, Pearson Education, Inc., 2007
  10. Exotic Equity Derivatives Manual, Salomon Smith Barney, August 1998
  11. Understanding Market, Credit and Operational Risk- The Value at Risk Approach, Linda Allen, Jacob Boudoukh and Anthony Saunders,Blackwell Publishing, 2004
  12. Mind on Statistics, Utts and Heckard, Duxbury 2002
  13. Beyond Value at Risk, The New Science of Risk Management, Kevin Dowd, John Wiley & Sons, 1998
  14. Higher-Order Simulations: Strategic Investment Under Model-Induced Price Patterns, Gilbert Peffer and Bàrbara Llacay, Journal of Artificial Societies and Social Simulation vol. 10, no. 2, 6 <http://jasss.soc.surrey.ac.uk/10/2/6.html>, 2007
  15. Oil Prices and Inflation: Learning the Arithmetic Anew, Dr Benjarong Suwankiri and Dr Sutapa Amornvivat, Bangkok Post Business, February 2010
  16. Commodities: 2010 Outlook, Goldman Sachs, 18 December 2009
  17. Weekly Comment: Things To Ponder Over The Christmas Break, Economics, Goldman Sachs, 18 December 2009
  18. Global Oil & Gas Daily, J. P Morgan, 24 December 2009
  19. Global Metals & Mining Weekly Wrap-Up, J. P Morgan, 18 December 2009
  20. Gold & Precious Metals, J. P Morgan, 18 December 2009
  21. Precious metals as alternative FX reserve diversifiers, Global Metals Weekly, Bank of America Merrill Lynch, 18 December 2009
  22. 8 Reasons To Own Gold, Tony Daltorio
  23. A Forex Trader’s View Of The Aussie/Gold Relationship, Richard Lee
  24. Commodity Prices And Currency Movements, Kathy Lien
  25. Oil Price Patterns Portend Shrinking Of Excess Stockpiles, Brian Baskin of Dow Jones Newswires, Wall Street Journal, 30 September 2009
  26. Energy outlook: Crude correlations and what comes next, Christine Birkner, Futures Mag.Com, October 2009
  27. Monthly Review on Price Indices, Statistics Division, Federal Bureau of Statistics, Government of Pakistan, December 2009 & January 2010
  28. VaR Applications: Setting VaR-based Limits, Carlos Blanco and Sally Blomstrom, Financial Engineering Associates, Inc., May 1999
  29. Commonly Used Market Risk Limits, Guidelines on Risk Management of Derivatives and other traded instruments, Annex D
  30. Establishing exposure limits for a credit Portfolio, James V. Lentino, The RMA Journal, July-August 2005
  31. Quantitative Finance, Second Edition, Paul Wilmott, John Wiley&Sons, Ltd., 2006
  32. Investments, 4th Edition, Zvi Bodie, Alex Kane, Alan J. Marcus, Irwin McGraw-Hill, 1999.
  33. Risk Management and Capital Allocation, Reto Gallati, McGraw Hill, 2003
  34. Integrating Corporate Risk Management, Prakash A. Shimpi, Texere, 1999,2001
  35. Modern Portfolio Theory and Investment Analysis, 5th Edition, Edwin J. Elton, Martin J. Gruber, John Wiley & Sons, Inc.
  36. The Black Swan, the impact of the highly improbable, Nassim Nicholas Taleb, Random House, 2007
  37. Dynamic Hedging, Managing Vanilla and Exotic Options, Nassim Taleb, John Wiley & Sons, Inc.,1997
  38. Currency Derivatives, Edited by David F DeRosa, John Wiley & Sons, Inc.,1998
  39. Interest Rate Modelling, Jessica James and Nick Webber, Jonh Wiley & sons Ltd 2000.
  40. Fixed Income Securities, Second Edition, Bruce Tuckman, John Wiley & Sons, Inc 2002.
  41. Modeling Fixed-Income Securities and Interest Rate Options, Second Edition, Robert A. Jarrow, Stanford Economics and Finance, 2002
  42. Liquidity Risk Management, Leonard M. Martz, 2007
  43. The Handbook of Mortgage Backed Securities, 6th Edition, Frank J Fabozzi (Editor), McGraw-Hill, 2006
  44. Anatomy of Prepayments: The Salomon Brothers Prepayment Model, Salomon Brothers, Lakhbir Hayre and Arvind Rajan, June 1995
  45. Back Office and Beyond- A guide to procedures, settlements and risk in financial markets, Mervin J. King, Harriman House Ltd., 1999
  46. Understanding Commodities Risk, First Edition, Jawwad A. Farid, Alchemy Publications, March 2010
  47. Pakistan Risk Review, Volume 01, January 2010, Jawwad A. Farid, Alchemy Publications
  48. Pakistan Risk Review, Volume 04, September 2009, Jawwad A. Farid, Alchemy Publications
  49. Pakistan Risk Review, Volume 03, July 2009, Jawwad A. Farid, Alchemy Publications
  50. Pakistan Risk Review, Volume 02, May 2009, Jawwad A. Farid, Alchemy Publications
  51. Pakistan Risk Review, Volume 01, April 2009, Jawwad A. Farid, Alchemy Publications