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Hedging Market Exposures: Identifying and Managing Market Risks

Book Description

Identify and understand the risks facing your portfolio, how to quantify them, and the best tools to hedge them

This book scrutinizes the various risks confronting a portfolio, equips the reader with the tools necessary to identify and understand these risks, and discusses the best ways to hedge them.

The book does not require a specialized mathematical foundation, and so will appeal to both the generalist and specialist alike. For the generalist, who may not have a deep knowledge of mathematics, the book illustrates, through the copious use of examples, how to identify risks that can sometimes be hidden, and provides practical examples of quantifying and hedging exposures. For the specialist, the authors provide a detailed discussion of the mathematical foundations of risk management, and draw on their experience of hedging complex multi-asset class portfolios, providing practical advice and insights.

  • Provides a clear description of the risks faced by managers with equity, fixed income, commodity, credit and foreign exchange exposures

  • Elaborates methods of quantifying these risks

  • Discusses the various tools available for hedging, and how to choose optimal hedging instruments

  • Illuminates hidden risks such as counterparty, operational, human behavior and model risks, and expounds the importance and instability of model assumptions, such as market correlations, and their attendant dangers

  • Explains in clear yet effective terms the language of quantitative finance and enables a non-quantitative investment professional to communicate effectively with professional risk managers, "quants", clients and others

Providing thorough coverage of asset modeling, hedging principles, hedging instruments, and practical portfolio management, Hedging Market Exposures helps portfolio managers, bankers, transactors and finance and accounting executives understand the risks their business faces and the ways to quantify and control them.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Preface
  6. Introduction
    1. PORTFOLIO RISKS
    2. RISK MANAGEMENT TRIAD
    3. RISK MANAGEMENT IN PRACTICE
    4. INTENDED AUDIENCE
    5. BOOK OUTLINE
  7. About the Authors
  8. Chapter 1: The Economic Environment
    1. 1.1. INTRODUCTION
    2. 1.2. INFLATION AND UNEMPLOYMENT
    3. 1.3. CENTRAL BANKS AND THE MONEY SUPPLY
    4. 1.4. THE BUSINESS CYCLE
    5. 1.5. PREDICTING THE FUTURE?
    6. 1.6. ECONOMIC INDICATORS
  9. Chapter 2: Risk: An Introduction
    1. 2.1. WHAT IS RISK?
    2. 2.2. RISKS OF FINANCIAL INSTRUMENTS
    3. 2.3. OPERATIONAL RISK
    4. 2.4. WHAT RISKS ARE IN YOUR PORTFOLIO? HIDDEN HAZARDS
    5. 2.5. HEDGING MARKET RISKS
  10. Chapter 3: Asset Modeling
    1. 3.1. ASSET VALUE
    2. 3.2. FINANCIAL MODELS
    3. 3.3. VALUATION PRINCIPLES
    4. 3.4. DISCOUNT RATES SELECTION
    5. 3.5. CASH FLOW PROJECTION AND ASSET VALUATION
    6. 3.6. STOCHASTIC ASSET VALUATION
    7. 3.7. THE MONTE CARLO METHOD
    8. 3.8. STOCHASTIC EXTRAPOLATION
  11. Chapter 4: Market Exposures and Factor Sensitivities
    1. 4.1. FROM VALUATION TO RESPONSES AND SENSITIVITIES
    2. 4.2. RESPONSE MATRIX AND SCENARIO GRID
    3. 4.3. STRESS-TESTING
    4. 4.4. SENSITIVITIES
    5. 4.5. INTEREST RATE SENSITIVITIES: DURATION, PV01, CONVEXITY, KEY RATE MEASURES
    6. 4.6. NUMERICAL EVALUATION OF SENSITIVITIES
    7. 4.7. PERFORMANCE ATTRIBUTION AND COMPLETENESS TEST
  12. Chapter 5: Quantifying Portfolio Risks
    1. 5.1. THE NATURE OF RISK
    2. 5.2. STANDARD RISK MEASURES
    3. 5.3. OPTIMAL HEDGE SIZING
    4. 5.4. TAIL-RISK MEASURES
  13. Chapter 6: The Decision to Hedge
    1. 6.1. TO HEDGE OR NOT TO HEDGE?
    2. 6.2. THE HEDGING PROCESS
  14. Chapter 7: Constructing a Hedge
    1. 7.1. AN IDEAL HEDGE
    2. 7.2. A SAMPLE HEDGE
    3. 7.3. STATIC AND DYNAMIC HEDGING
    4. 7.4. PROXY HEDGING
    5. 7.5. PROTECTION VERSUS UPSIDE
    6. 7.6. BASIS RISK
    7. 7.7. UNINTENDED CONSEQUENCES
    8. 7.8. HEDGING CREDIT RISK
    9. 7.9. HEDGING PREPAYMENT, REDEMPTION, AND OTHER HUMAN BEHAVIOR RISKS
    10. 7.10 EXECUTION
  15. Appendix A: Basics of Probability Theory
    1. PROBABILITY AND RANDOM PHENOMENA
    2. PROBABILITY DISTRIBUTION FUNCTION
    3. EXPECTED VALUES
    4. MOMENTS OF PROBABILITY DISTRIBUTION
    5. MEASURES OF CENTRAL TENDENCY
    6. SOME COMMONLY USED DISTRIBUTIONS
    7. MULTIVARIATE DISTRIBUTIONS
    8. CENTRAL LIMIT THEOREM
  16. Appendix B: Elements of Statistics and Time Series Analysis
  17. References
  18. Glossary
  19. Index