The Professional Risk Managers' Guide to Finance Theory and Application

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2007-12-21
  • Publisher: McGraw-Hill

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Supplemental Materials

What is included with this book?


This comprehensive reference brings together ten of the world's leading scholars and practitioners, who provide invaluable perspectives on all aspects of finance theory and how they are applied to the process of risk management.The book begins with an overview of risk and risk aversion, introducing utility functions and the mean-variance criterion. It then delivers a thorough introduction to portfolio mathematics, including discussion of the efficient frontier, portfolio theory, and portfolio diversification.Written to help you fortify your defenses against extreme, unanticipated outcomes, and to ensure that returns are an adequate reward for risks taken,The Professional Risk Managers' Guide to Finance Theory and Applicationcovers key issues such as: The theory of capital allocation Capital structure, that is, debt versus equity financing The CAPM and multifactor models Interest rate models The term structure of interest rates No-arbitrage pricing of futures and forwards Risk-neutral valuation of optionsOffering a global view not found elsewhere,The Professional Risk Managers' Guide to Finance Theory and Applicationarms institutional investors, professional financial analysts and traders, auditors, corporate treasurers, regulators and actuaries with the practical tools to master any financial field.

Author Biography

The Professional Risk Managers' International Association (PRMIA) is one of the world's leading risk management associations, with over 40,000 members in 179 countries. A non-profit, PRMIA is dedicated to the development of new techniques and best practices for managing financial and investment risks, and offers the only globally endorsed Professional Risk Manager certification program.

Carol Alexander is Professor of Risk Management and Director of Research at the ICMA Centre, UK and Chair of the Academic Advisory Council of PRMIA.

Elizabeth Sheedy is an Associate Professor at the Macquarie Applied Finance Centre in Sydney, Australia.

Table of Contents

About the Contributorsp. ix
Introduction: Interest Rates and Time Valuep. 1
Compounding Methodsp. 1
Interest Rates: Nominal, Periodic, Continuous, or Effectivep. 4
Risk and Risk Aversionp. 7
Introductionp. 7
Mathematical Expectations: Prices or Utilities?p. 9
The Axiom of Independence of Choicep. 10
Maximizing Expected Utilityp. 12
Encoding a Utility Functionp. 16
The Mean-Variance Criterionp. 23
Risk-Adjusted Performance Measuresp. 26
Conclusionsp. 39
Referencesp. 41
Terminologyp. 42
Utility Functionsp. 44
Notesp. 50
Portfolio Mathematicsp. 55
Means and Variances of Past Returnsp. 55
Mean and Variance of Future Returnsp. 65
Mean-Variance Tradeoffsp. 72
Multiple Assetsp. 80
A Hedging Examplep. 84
Serial Correlationp. 93
Normally Distributed Returnsp. 95
Referencep. 102
Notep. 102
Capital Allocationp. 103
An Overviewp. 103
Mean-Variance Criterionp. 109
Efficient Frontier: Two Risky Assetsp. 110
Asset Allocationp. 114
Combining the Risk-Free Asset with Risky Assetsp. 116
The Market Portfolio and the Capital Market Linep. 120
The Market Price of Risk and the Sharpe Ratiop. 122
Separation Principlep. 122
Conclusionsp. 123
Mathematics of the Mean-Variance Modelp. 125
The CAPM and Multifactor Modelsp. 129
Overviewp. 130
Capital Asset Pricing Modelp. 131
Performance Measuresp. 136
The Single-Index Modelp. 139
Multifactor Models and the APTp. 141
Conclusionsp. 143
Referencesp. 144
Notesp. 144
Basics of Capital Structurep. 147
Introductionp. 147
Maximizing Shareholder Value, Incentives, and Agency Costsp. 151
Characteristics of Debt and Equityp. 155
Choice of Capital Structurep. 157
Making the Capital Structure Decisionp. 169
Conclusionsp. 173
Referencesp. 174
Notesp. 174
The Term Structure of Interest Ratesp. 177
Introductionp. 177
Introduction to the Term Structure of Interest Ratesp. 177
Theories of the Term Structurep. 182
Term Structure Modelsp. 185
Conclusionsp. 203
Referencesp. 204
Notesp. 204
Valuing Forward Contractsp. 207
The Difference between Pricing and Valuation for Forward Contractsp. 207
Principles of Pricing and Valuation for Forward Contracts on Assetsp. 209
Principles of Pricing and Valuation for Forward Contracts on Interest Ratesp. 219
The Relationship between Forward and Futures Pricesp. 225
Referencesp. 226
Notesp. 226
Basic Principles of Option Pricingp. 229
Factors Affecting Option Pricesp. 229
Put-Call Parityp. 230
One-Step Binomial Model and The Riskless Portfoliop. 233
Delta Neutrality and Simple Delta Hedgingp. 235
Risk-Neutral Valuationp. 241
Real versus Risk-Neutralp. 242
The Black-Scholes-Merton Pricing Formulap. 243
The Greeksp. 248
Implied Volatilityp. 250
Intrinsic versus Time Valuep. 252
Referencesp. 252
Notesp. 252
Indexp. 255
Table of Contents provided by Ingram. All Rights Reserved.

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