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Risk Frameworks & Applications - 2nd Edition - The text book for Risk, Treasury & Derivative pricing courses.

Risk Frameworks & Applications - 2nd Edition - The text book for Risk, Treasury & Derivative pricing courses.



Risk Frameworks & Applications is a text book that I wrote for myself. I had so much fun putting together Reboot (the book we use for teaching Entrepreneurship) that writing a second book on Risk and Derivatives pricing didn’t feel like a mission that would ultimately require Tom Cruise, Agnes Paul, Uzma or Nabil’s help (in that order).

Why did I feel the need to write yet another text book on risk management and pricing when book stores are filled with shelves on related topics? Lets count the reasons.

I think the biggest issue was that Mark Broadie, the Columbia Professor who turned our lives upside down by teaching us Security Pricing in Fall of 1999, never really found the time to convert his teaching notes into a universal textbook. Given Mark’s teaching style the book would have been a guide, a roadmap and a bible for lost Quants and I still wish and pray that he will sit down and pen it.

The second reason was this new Financial Derivatives & Risk Management (FDRM) course I had agreed to teach to Executive MBA students in Dubai and Singapore. The challenge with teaching Executive MBA courses today is the rising bar of teacher effectiveness. When you walk in front of 30 Finance specialist, who have paid good money to come see you at the end of their working day (and weekends) there are many expectations that have to be met. You are teaching the last course in their specialization and mediocrity or superficial coverage is simply not acceptable. Try doing justice to what would effectively be a two term sequential combination of courses on risk and derivative pricing in 18 instructional hours spread over six nights in one week in a foreign land. Teaching materials, after teaching style are your best defence and go a long way in creating lasting impressions as well reducing the pain associated with taking a derivative pricing course at 10:30 pm at night.

The third problem was bridging the gap between risk practice and risk education. 12 years in the field as an advisor, consultant & vendor had brought out so many loop holes in academic teaching of this subject that a conventional text book would fall flat on its face. Even if students failed to decipher why what you were teaching was wrong, you couldn’t bring yourself to stand behind something you knew wouldn’t work in the real world.

Nassim Taleb, the standard bearer of bringing practice and academia together in our field, was out. The only text book that Nassim wrote (Dynamic Hedging) would land a 40 year old EMBA student in a state of cardiac arrest. It’s a great read but it will burn your circuits if you are not as smart as Nassim and dare to open it (I know because I had to get everything rewired the last time I touched it). John C. Hull, signature text book, (Options, Futures & Other Derivatives) I used for the first few years but Hull doesn’t cover everything that Mark did at Columbia. He also misses out on a number of interesting topics dealing with risk practice, with trading, pricing and modeling.

In the end the simplest choice was just to go ahead and write the damn thing yourself. And so I did. Four years, two editions and we have already started working on the third. It wouldn’t be possible without the questions my students and clients ask which lead me to dig out answers and write them down. Over the years the book has helped me better understand many topics that I thought I had mastered but hadn’t. Teaching, training and writing will do that to you sometimes.

Enough with the context. What is the book about. In short the following five themes:

a) The theory of Risk. How should you think about it. How do practitioners think about it.

b) Products & Pricing. The universe out there and approaches for marking it to market.

c) Treasury Operations. The investment management function and process.

d) Commodities. An orientation to commodity markets and some challenges.

e) Risk Metrics. Common risk metrics in use in the world today.

The chapters on Risk, Treasury, Commodities & Metrics are driven directly from our own consulting practice and our experience as a vendor of solutions to risk and treasury teams. The Products & pricing part owes itself to Mark’s patience with us as students and his generosity in sharing his knowledge of pricing models and their shortfalls. For a more detailed look, download the Risk Frameworks – 2nd Ed – TOC.

If you read it and like it, please drop me a note. Writing a third edition is a thankless task filled with self pity, misery and doubt. A small note of appreciation from a reader is the best currency when faced with such demons. Don’t be shy, drop me a line. If we hit the best sellers list, I will send you a free review copy.


Jawwad Farid