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- Wiley
More About This Title Hedging Market Exposures: Identifying and Managing Market Risks
English
This book scrutinizes the various risks confronting a portfolio, equips the reader with the tools necessary to identify and understand these risks, and discusses the best ways to hedge them.
The book does not require a specialized mathematical foundation, and so will appeal to both the generalist and specialist alike. For the generalist, who may not have a deep knowledge of mathematics, the book illustrates, through the copious use of examples, how to identify risks that can sometimes be hidden, and provides practical examples of quantifying and hedging exposures. For the specialist, the authors provide a detailed discussion of the mathematical foundations of risk management, and draw on their experience of hedging complex multi-asset class portfolios, providing practical advice and insights.
Provides a clear description of the risks faced by managers with equity, fixed income, commodity, credit and foreign exchange exposuresElaborates methods of quantifying these risksDiscusses the various tools available for hedging, and how to choose optimal hedging instrumentsIlluminates hidden risks such as counterparty, operational, human behavior and model risks, and expounds the importance and instability of model assumptions, such as market correlations, and their attendant dangersExplains in clear yet effective terms the language of quantitative finance and enables a non-quantitative investment professional to communicate effectively with professional risk managers, "quants", clients and othersProviding thorough coverage of asset modeling, hedging principles, hedging instruments, and practical portfolio management, Hedging Market Exposures helps portfolio managers, bankers, transactors and finance and accounting executives understand the risks their business faces and the ways to quantify and control them.
English
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.
English
Introduction xi
About the Authors xvii
CHAPTER 1
The Economic Environment 1
1.1 Introduction 1
1.2 Inflation and Unemployment 5
1.3 Central Banks and the Money Supply 6
1.4 The Business Cycle 9
1.5 Predicting the Future? 11
1.6 Economic Indicators 11
CHAPTER 2
Risk: An Introduction 17
2.1 What Is Risk? 17
2.2 Risks of Financial Instruments 19
2.3 Operational Risk 43
2.4 What Risks Are in Your Portfolio? Hidden Hazards 44
2.5 Hedging Market Risks 47
CHAPTER 3
Asset Modeling 51
3.1 Asset Value 51
3.2 Financial Models 55
3.3 Valuation Principles 70
3.4 Discount Rates Selection 74
3.5 Cash Flow Projection and Asset Valuation 80
3.6 Stochastic Asset Valuation 82
3.7 The Monte Carlo Method 88
3.8 Stochastic Extrapolation 100
CHAPTER 4
Market Exposures and Factor Sensitivities 103
4.1 From Valuation to Responses and Sensitivities 103
4.2 Response Matrix and Scenario Grid 105
4.3 Stress-Testing 109
4.4 Sensitivities 110
4.5 Interest Rate Sensitivities: Duration, PV01, Convexity, Key Rate Measures 126
4.6 Numerical Evaluation of Sensitivities 137
4.7 Performance Attribution and Completeness Test 139
CHAPTER 5
Quantifying Portfolio Risks 145
5.1 The Nature of Risk 145
5.2 Standard Risk Measures 149
5.3 Optimal Hedge Sizing 160
5.4 Tail-Risk Measures 162
CHAPTER 6
The Decision to Hedge 171
6.1 To Hedge or Not to Hedge? 171
6.2 The Hedging Process 178
CHAPTER 7
Constructing a Hedge 193
7.1 An Ideal Hedge 193
7.2 A Sample Hedge 194
7.3 Static and Dynamic Hedging 200
7.4 Proxy Hedging 205
7.5 Protection versus Upside 208
7.6 Basis Risk 211
7.7 Unintended Consequences 213
7.8 Hedging Credit Risk 214
7.9 Hedging Prepayment, Redemption, and Other Human Behavior Risks 221
7.10 Execution 223
APPENDIX A
Basics of Probability Theory 227
APPENDIX B
Elements of Statistics and Time Series Analysis 247
References 255
Glossary 259
Index 281
