9780470535066

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.

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.

Preface	p. ix
Introduction	p. xi
About the Authors	p. xvii
The Economic Environment	p. 1
Introduction	p. 1
Inflation and Unemployment	p. 5
Central Banks and the Money Supply	p. 6
The Business Cycle	p. 9
Predicting the Future?	p. 11
Economic Indicators	p. 11
Risk: An Introduction	p. 17
What Is Risk?	p. 17
Risks of Financial Instruments	p. 19
Operational Risk	p. 43
What Risks Are in Your Portfolio? Hidden Hazards	p. 44
Hedging Market Risks	p. 47
Asset Modeling	p. 51
Asset Value	p. 51
Financial Models	p. 55
Valuation Principles	p. 70
Discount Rates Selection	p. 74
Cash Flow Projection and Asset Valuation	p. 80
Stochastic Asset Valuation	p. 82
The Monte Carlo Method	p. 88
Stochastic Extrapolation	p. 100
Market Exposures and Factor Sensitivities	p. 103
From Valuation to Responses and Sensitivities	p. 103
Response Matrix and Scenario Grid	p. 105
Stress-Testing	p. 109
Sensitivities	p. 110
Interest Rate Sensitivities: Duration, PV01, Convexity, Key Rate Measures	p. 126
Numerical Evaluation of Sensitivities	p. 137
Performance Attribution and Completeness Test	p. 139
Quantifying Portfolio Risks	p. 145
The Nature of Risk	p. 145
Standard Risk Measures	p. 149
Optimal Hedge Sizing	p. 160
Tail-Risk Measures	p. 162
The Decision to Hedge	p. 171
To Hedge or Not to Hedge?	p. 171
The Hedging Process	p. 178
Constructing a Hedge	p. 193
An Ideal Hedge	p. 193
A Sample Hedge	p. 194
Static and Dynamic Hedging	p. 200
Proxy Hedging	p. 205
Protection versus Upside	p. 208
Basis Risk	p. 211
Unintended Consequences	p. 213
Hedging Credit Risk	p. 214
Hedging Prepayment, Redemption, and Other Human Behavior Risks	p. 221
Execution	p. 223
Basics of Probability Theory	p. 227
Elements of Statistics and Time Series Analysis	p. 247
References	p. 255
Glossary	p. 259
Index	p. 281
Table of Contents provided by Ingram. All Rights Reserved.

Hedging Market Exposures : Identifying and Managing Market Risks

0470535067

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