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Risk Finance and Asset Pricing: Value, Measurements, and Markets

Book Description

A comprehensive guide to financial engineering that stresses real-world applications

Financial engineering expert Charles S. Tapiero has his finger on the pulse of shifts coming to financial engineering and its applications. With an eye toward the future, he has crafted a comprehensive and accessible book for practitioners and students of Financial Engineering that emphasizes an intuitive approach to financial and quantitative foundations in financial and risk engineering. The book covers the theory from a practitioner perspective and applies it to a variety of real-world problems.

  • Examines the cornerstone of the explosive growth in markets worldwide

  • Presents important financial engineering techniques to price, hedge, and manage risks in general

  • Author heads the largest financial engineering program in the world

Author Charles Tapiero wrote the seminal work Risk and Financial Management.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Introduction
    1. WHO THIS BOOK IS FOR
    2. HOW THIS BOOK IS STRUCTURED
    3. WHAT’S ON THE COMPANION WEB SITE
  5. CHAPTER 1 - Risk, Finance, Corporate Management, and Society
    1. EXAMPLE: AN IBM DAY-TRADES RECORD
    2. EXAMPLE: CONSTRUCTING A PORTFOLIO
    3. PROBLEM 1.1: OPTIONS AND THEIR PRICES
    4. EXAMPLE: OPTIONS AND THE PRICE OF EQUITY
    5. EXAMPLE: MANAGEMENT STOCK OPTIONS
  6. CHAPTER 2 - Applied Finance
  7. CHAPTER 3 - Risk Measurement and Volatility
    1. EXAMPLE: IBM RETURNS STATISTICS
    2. EXAMPLE: MOMENTS AND THE CAPM
    3. PROBLEM 3.1: CALCULATING THE BETA OF A SECURITY
    4. EXAMPLE: THE AR(1)-ARCH(1) MODEL
    5. EXAMPLE: A GARCH (1,1) MODEL
    6. PROBLEM 3.2: THE PROBABILITY OF THE RANGE
    7. EXAMPLE: TAYLOR SERIES
    8. EXAMPLE: VaR AND SHORTFALL
    9. EXAMPLE*: VaR, NORMAL ROR, AND PORTFOLIO DESIGN
  8. CHAPTER 4 - Risk Finance Modeling and Dependence
    1. EXAMPLE: RISK FACTORS AGGREGATION
    2. EXAMPLE: PRINCIPAL COMPONENT ANALYSIS (PCA)
    3. EXAMPLE: A BIVARIATE DATA MATRIX AND PCA
    4. EXAMPLE: A MARKET INDEX AND PCA
    5. EXAMPLE: THE GUMBEL COPULA, THE HIGHS AND THE LOWS
    6. EXAMPLE: COPULAS AND CONDITIONAL DEPENDENCE
    7. EXAMPLE: COPULAS AND THE CONDITIONAL DISTRIBUTION
  9. CHAPTER 5 - Risk, Value, and Financial Prices
    1. EXAMPLE: THE UTILITY OF A LOTTERY
    2. EXAMPLE: THE POWER UTILITY FUNCTION
    3. EXAMPLE: VALUATION AND THE PRICING OF CASH FLOWS
    4. EXAMPLE: RISK AND THE FINANCIAL MELTDOWN
    5. EXAMPLES: SPECIFIC UTILITY FUNCTIONS
    6. EXAMPLE: KERNEL PRICING AND THE EXPONENTIAL UTILITY FUNCTION
    7. EXAMPLE: THE PRICING KERNEL AND THE CAPM
    8. EXAMPLE: KERNEL PRICING AND THE HARA UTILITY FUNCTION
  10. CHAPTER 6 - Applied Utility Finance
    1. EXAMPLE: A TWO-SECURITIES PROBLEM
    2. EXAMPLE: A TWO-STOCKS PORTFOLIO
    3. PROBLEM 6.1: THE EFFICIENCY FRONTIER
    4. PROBLEM 6.2: A TWO - SECURITIES PORTFOLIO
    5. EXAMPLE: A LINEAR RISK-SHARING RULE
  11. CHAPTER 7 - Derivative Finance and Complete Markets
    1. EXAMPLE: GENERALIZATION TO n STATES
    2. EXAMPLE: BINOMIAL OPTION PRICING
    3. PROBLEM 7.1: THE IMPLIED RISK-NEUTRAL PROBABILITY
    4. EXAMPLE: THE PRICE OF A CALL OPTION
    5. EXAMPLE: A GENERALIZATION TO MULTIPLE PERIODS
    6. PROBLEM 7.2 : OPTIONS AND THEIR PRICES
    7. PROBLEM 7.3: PROVING THE PUT-CALL PARITY
    8. EXAMPLE: PUT-CALL PARITY AND DIVIDEND PAYMENTS
    9. PROBLEM 7.4: OPTIONS PUT-CALL PARITY
    10. EXAMPLE: LOOK-BACK OPTIONS
    11. EXAMPLE: ASIAN OPTIONS
    12. EXAMPLE: EXCHANGE OPTIONS
    13. EXAMPLE: CHOOSER OPTIONS
    14. EXAMPLE: BARRIER AND OTHER OPTIONS
    15. EXAMPLE: PASSPORT OPTIONS
    16. EXAMPLE: PRICING A FORWARD
    17. EXAMPLE: PRICING A FIXED-RATE BOND
    18. EXAMPLE: THE TERM STRUCTURE OF INTEREST RATES
    19. PROBLEM 7.5: ANNUITIES AND OBLIGATIONS
    20. PROBLEM 7.6: PORTFOLIO STRATEGIES
    21. EXAMPLE: CHANGE OF MEASURE IN A BINOMIAL MODEL
    22. EXAMPLE: A TWO-STAGE RANDOM WALK AND THE RADON NIKODYM DERIVATIVE
  12. CHAPTER 8 - Options Applied
    1. PROBLEM 8.1 : PRICING A MULTIPERIOD FORWARD
    2. EXAMPLE: OPTIONS IMPLIED INSURANCE PRICING
  13. CHAPTER 9 - Credit Scoring and the Price of Credit Risk
    1. CREDIT AND CREDIT RISK
    2. EXAMPLE: A SEPARATRIX
    3. EXAMPLE: THE SEPARATRIX AND BAYESIAN PROBABILITIES
    4. EXAMPLE: A BIVARIATE DEPENDENT DEFAULT DISTRIBUTION
    5. EXAMPLE: A PORTFOLIO OF DEFAULT LOANS
    6. EXAMPLE: A PORTFOLIO OF DEPENDENT DEFAULT LOANS
    7. PROBLEM 9.1: THE JOINT BERNOULLI DEFAULT DISTRIBUTION
    8. EXAMPLE: CREDIT GRANTING AND CREDITOR’S RISKS
    9. EXAMPLE: A BAYESIAN DEFAULT MODEL
    10. EXAMPLE: A FINANCIAL APPROACH
    11. EXAMPLE: AN APPROXIMATE SOLUTION
    12. PROBLEM 9.2: THE RATE OF RETURN OF LOANS
    13. EXAMPLE: CALCULATING THE SPREAD OF A DEFAULT BOND
    14. EXAMPLE: THE LOAN MODEL AGAIN
    15. EXAMPLE: PRICING DEFAULT BONDS
    16. EXAMPLE: PRICING DEFAULT BONDS AND THE HAZARD RATE
    17. EXAMPLE: THE BANK INTEREST RATE ON A HOUSE LOAN
    18. EXAMPLE: BUY INSURANCE TO PROTECT THE PORTFOLIO FROM LOAN DEFAULTS
    19. PROBLEM 9.3: USE THE PORTFOLIO AS AN UNDERLYING AND BUY OR SELL DERIVATIVES ON ...
    20. PROBLEM 9.4: LENDING RATES OF RETURN
    21. EXAMPLE: HEDGE FUNDS RATES OF RETURN
    22. EXAMPLE: EQUITY-LINKED LIFE INSURANCE
    23. EXAMPLE: DEFAULT AND THE PRICE OF HOMES
    24. EXAMPLE: A BANK’S PROFIT FROM A LOAN
  14. CHAPTER 10 - Multi-Name and Structured Credit Risk Portfolios
    1. EXAMPLE: TOTAL RETURN SWAPS
    2. EXAMPLE: THE CDS PRICE SPREAD
    3. EXAMPLE: PRICING A PROJECT LAUNCH
    4. CDO EXAMPLE: COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
    5. EXAMPLE: THE CDO AND SPV
    6. EXAMPLE: A CDO WITH NUMBERS
    7. EXAMPLE: A CDO OF ZERO COUPON BONDS
    8. EXAMPLE: A CDO OF DEFAULT COUPON-PAYING BONDS
    9. EXAMPLE: A CDO OF RATED BONDS
    10. EXAMPLES: DEFAULT MODELS FOR BONDS
    11. EXAMPLE: THE KMV LOSS MODEL
  15. CHAPTER 11 - Engineered Implied Volatility and Implied Risk-Neutral Distributions
    1. EXAMPLE: THE IMPLIED VOLATILITY IN A LOGNORMAL PROCESS
    2. EXAMPLE: AN IMPLIED BINOMIAL DISTRIBUTION
    3. EXAMPLE: CALCULATING THE IMPLIED RISK-NEUTRAL PROBABILITY
    4. EXAMPLE: THE GENERALIZED BETA F THE SECOND KIND
    5. EXAMPLE: THE SHIMKO TECHNIQUE
    6. EXAMPLES AND APPLICATIONS
  16. Acknowledgments
  17. About the Author
  18. Index