Hedging Market Exposures : Identifying and Managing Market Risks

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  • Format: Hardcover
  • Copyright: 2011-08-02
  • Publisher: Wiley
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Identify and understand the risks facing your portfolio, learn how to quantify them, and how to choose the best tools to hedge these risksWritten for the non-risk specialist, this book explains how to identify risks facing a portfolio, how to understand and quantify them, and how to choose the best tools to hedge the risks optimally. Explains various risks that confront a portfolio and how to choose the appropriate tools to hedge them Provides a clear exposition of the risks facing managers with equity, fixed income, commodity, credit and foreign exchange exposures Elucidates hidden risks such as counterparty, operational, human behavior and model risks, and expounds the importance and instability of model assumptions such as market correlations Explains the language of quantitative finance and enables a non-quantitative investment professional to communicate effectively with professional risk managers, "quants," clients and others Reveals how to identify and quantify risk exposures and how to select an optimal hedge, when there is not a "perfect" one; accentuates the dangers of basis risk Provides a comprehensive series of worked examples that illustrate how to hedge real-life exposures, both statically and dynamically, including delta hedgingWith thorough coverage of asset modeling, hedging principles, hedging instruments, and practical portfolio management, Hedging Market Exposures helps you understand the risks you face and the ways to control them.

Author Biography

OLEG V. BYCHUK has eleven years of capital markets experience. This includes roles as head of Risk Management at Julius Baer Investment Management and head of Risk Management and Quantitative Research at Alternative Asset Managers. He has also held various positions at Citigroup Global Markets, OppenheimerFunds, and Deutsche Bank. Dr. Bychuk holds degrees from Columbia University (PhD) and Lomonosov Moscow State University and has published numerous articles.

BRIAN J. HAUGHEY is an Assistant Professor of Finance and Director of the Investment Center at Marist College. Previously, he headed the Mutual Fund Fee business in the Global Special Situations Group at Citigroup Global Markets. Prior to joining Citigroup, he was with Fitch Ratings.

Table of Contents

Prefacep. ix
Introductionp. xi
About the Authorsp. xvii
The Economic Environmentp. 1
Introductionp. 1
Inflation and Unemploymentp. 5
Central Banks and the Money Supplyp. 6
The Business Cyclep. 9
Predicting the Future?p. 11
Economic Indicatorsp. 11
Risk: An Introductionp. 17
What Is Risk?p. 17
Risks of Financial Instrumentsp. 19
Operational Riskp. 43
What Risks Are in Your Portfolio? Hidden Hazardsp. 44
Hedging Market Risksp. 47
Asset Modelingp. 51
Asset Valuep. 51
Financial Modelsp. 55
Valuation Principlesp. 70
Discount Rates Selectionp. 74
Cash Flow Projection and Asset Valuationp. 80
Stochastic Asset Valuationp. 82
The Monte Carlo Methodp. 88
Stochastic Extrapolationp. 100
Market Exposures and Factor Sensitivitiesp. 103
From Valuation to Responses and Sensitivitiesp. 103
Response Matrix and Scenario Gridp. 105
Stress-Testingp. 109
Sensitivitiesp. 110
Interest Rate Sensitivities: Duration, PV01, Convexity, Key Rate Measuresp. 126
Numerical Evaluation of Sensitivitiesp. 137
Performance Attribution and Completeness Testp. 139
Quantifying Portfolio Risksp. 145
The Nature of Riskp. 145
Standard Risk Measuresp. 149
Optimal Hedge Sizingp. 160
Tail-Risk Measuresp. 162
The Decision to Hedgep. 171
To Hedge or Not to Hedge?p. 171
The Hedging Processp. 178
Constructing a Hedgep. 193
An Ideal Hedgep. 193
A Sample Hedgep. 194
Static and Dynamic Hedgingp. 200
Proxy Hedgingp. 205
Protection versus Upsidep. 208
Basis Riskp. 211
Unintended Consequencesp. 213
Hedging Credit Riskp. 214
Hedging Prepayment, Redemption, and Other Human Behavior Risksp. 221
Executionp. 223
Basics of Probability Theoryp. 227
Elements of Statistics and Time Series Analysisp. 247
Referencesp. 255
Glossaryp. 259
Indexp. 281
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