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Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks

Book Description

A comprehensive resource for understanding how to minimize risk and increase profits

In this accessible resource, Wall Street trader and quantitative analyst Davis W. Edwards offers a definitive guide for nonprofessionals which describes the techniques and strategies seasoned traders use when making decisions. Risk Management in Trading includes an introduction to hedge fund and proprietary trading desks and offers an in-depth exploration on the topic of risk avoidance and acceptance. Throughout the book Edwards explores the finer points of financial risk management, shows how to decipher the jargon of professional risk-managers, and reveals how non-quantitative managers avoid risk management pitfalls.

Avoiding risk is a strategic decision and the author shows how to adopt a consistent framework for risk that compares one type of risk to another. Edwards also stresses the fact that any trading decision that isn't based on the goal of maximizing profits is a decision that should be strongly scrutinized. He also explains that being familiar with all the details of a transaction is vital for making the right investment decision.

  • Offers a comprehensive resource for understanding financial risk management

  • Includes an overview of the techniques and tools professionals use to control risk

  • Shows how to transfer risk to maximize results

  • Written by Davis W. Edwards, a senior manager in Deloitte's Energy Derivatives Pricing Center

  • Risk Management in Trading gives investors a hands-on guide to the strategies and techniques professionals rely on to minimize risk and maximize profits.

    Table of Contents

    1. Preface
    2. CHAPTER 1 Trading and Hedge Funds
      1. Overview of Book
      2. Trading Desks
      3. Hedge Funds
      4. Hedge Funds Today
      5. Strategies
      6. Fund of Funds
      7. Risk Management
      8. Risk and Trading Decisions
      9. Trading
      10. Making a Trade
      11. Trades
      12. Markets
      13. Market and Limit Orders
      14. Order Lifespan
      15. Trading Positions
      16. Prices
      17. Managing Trading Risk
      18. What is Risk?
      19. Risk and Reward
      20. Monitoring Risk
      21. Managing Risk
      22. Test Your Knowledge
    3. CHAPTER 2 Financial Markets
      1. Financial Instruments
      2. Real Assets
      3. Financial Assets
      4. Derivatives
      5. Commodity Spot Market
      6. Equities (Stocks)
      7. Bonds (Fixed Income, Debt)
      8. Currencies (Foreign Exchange)
      9. Forwards and Commodity Swaps
      10. Futures
      11. Interest Rate Swaps
      12. Options
      13. Test Your Knowledge
    4. CHAPTER 3 Financial Mathematics
      1. Overview
      2. Variables and Functions
      3. Random Numbers
      4. Statistics
      5. Mean, Median, and Mode
      6. Variance and Volatility
      7. Skew and Kurtosis
      8. Random Walks (Stochastic Processes)
      9. Mean Reversion
      10. Correlation
      11. Diversification
      12. Normal Distributions
      13. Log-Normal Distributions
      14. Calculus
      15. Functions
      16. First Derivative
      17. Calculus Integration
      18. Calculus Derivatives
      19. Calculus Taylor Series
      20. Time Value of Money
      21. Test Your Knowledge
    5. CHAPTER 4 Backtesting and Trade Forensics
      1. Systematic Trading
      2. Data Validation
      3. Strategy Testing
      4. Transaction Costs and Slippage
      5. Monte Carlo Testing
      6. Model Risk
      7. Comparing Strategies
      8. Combining Strategies
      9. Trade Surveillance
      10. Test Your Knowledge
    6. CHAPTER 5 Mark to Market
      1. Profits and Losses
      2. Market Price
      3. Market Liquidity and Mark to Market
      4. MTM and Market Crashes
      5. MTM Accounting
      6. Highest and Best Use
      7. Fair Value Hierarchy
      8. Efficient Markets
      9. Dominant Traders
      10. Test Your Knowledge
    7. CHAPTER 6 Value-at-Risk
      1. Position Limits
      2. What is Value-At-Risk?
      3. Trading Limits
      4. Percent Returns
      5. Parametric VAR
      6. Estimating Volatility for Parametric VAR
      7. Calculating Portfolio VAR
      8. Variance/Covariance Matrix
      9. Non-Parametric VAR
      10. VAR Limits in Practice
      11. The Misuse of VAR
      12. Test Your Knowledge
    8. CHAPTER 7 Hedging
      1. Hedging
      2. How is Hedging Used?
      3. Hedging Costs Money
      4. Minimum Variance Hedge Ratio
      5. Mismatched Cash Flows
      6. Hedge Effectiveness Testing
      7. Hedge-Accounting Memo
      8. Regression Tests
      9. Logarithmic Returns
      10. Test Your Knowledge
    9. CHAPTER 8 Options, Greeks, and Non-Linear Risks
      1. Options
      2. Greeks
      3. The Value of Options
      4. Black Scholes Formula
      5. Delta
      6. Gamma
      7. Relationship Between Put/Call Parity and Gamma
      8. Theta
      9. Vega
      10. Rho and Phi
      11. Test Your Knowledge
    10. CHAPTER 9 Credit Value Adjustments (CVA)
      1. Trading is a Social Activity
      2. Credit Risk
      3. Exposure at Default (EAD)
      4. Loss Given Default (LGD)
      5. Probability of Default (PD)
      6. Correlation Between PD and LGD
      7. Credit Limits and Counterparty Exposure
      8. Current Exposure and Potential Future Exposure
      9. Calculating a Credit Value Adjustment
      10. Multi-Period CVA Calculation
      11. Settlement Risk
      12. Test Your Knowledge
    11. Afterword
    12. Answer Key
      1. Chapter 1
      2. Chapter 2
      3. Chapter 3
      4. Chapter 4
      5. Chapter 5
      6. Chapter 6
      7. Chapter 7
      8. Chapter 8
      9. Chapter 9
    13. About the Author
    14. Index
    15. End User License Agreement