Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management

Practical tools and advice for managing financial risk, updated for a post-crisis world

Advanced Financial Risk Management bridges the gap between the idealized assumptions used for risk valuation and the realities that must be reflected in management actions. It explains, in detailed yet easy-to-understand terms, the analytics of these issues from A to Z, and lays out a comprehensive strategy for risk management measurement, objectives, and hedging techniques that apply to all types of institutions. Written by experienced risk managers, the book covers everything from the basics of present value, forward rates, and interest rate compounding to the wide variety of alternative term structure models.

Revised and updated with lessons from the 2007-2010 financial crisis, Advanced Financial Risk Management outlines a framework for fully integrated risk management. Credit risk, market risk, asset and liability management, and performance measurement have historically been thought of as separate disciplines, but recent developments in financial theory and computer science now allow these views of risk to be analyzed on a more integrated basis. The book presents a performance measurement approach that goes far beyond traditional capital allocation techniques to measure risk-adjusted shareholder value creation, and supplements this strategic view of integrated risk with step-by-step tools and techniques for constructing a risk management system that achieves these objectives.

  • Practical tools for managing risk in the financial world
  • Updated to include the most recent events that have influenced risk management
  • Topics covered include the basics of present value, forward rates, and interest rate compounding; American vs. European fixed income options; default probability models; prepayment models; mortality models; and alternatives to the Vasicek model

Comprehensive and in-depth, Advanced Financial Risk Management is an essential resource for anyone working in the financial field.

"Advanced Financial Risk Management is a superb presentation of current risk management methods, including both the HJM interest rate and credit risk models. The writing is crisp and clear. The topic coverage is relevant and comprehensive. There is no doubt that his book should be on every CEO's, CFO's, and risk manager's desk."

Robert Jarrow, Ronald P. and Susan E. Lynch Professor of Investment Management Johnson Graduate School of Management, Cornell University

"The first edition of Advanced Financial Risk Management was already a valuable resource for anyone responsible for risk-based portfolios, or even just trying to understand risk analysis, in complex modern setting. With the new material that van Deventer, Imai and Mesler have added following the financial crisis, it's become essential. The sorry history of the crisis and what caused it is replete with the mistakes key decision-makers made, in private risk management and the public policy arena too. With this analysis in hand, there is no excuse for repeating them."

Benjamin M. Friedman, William Joseph Maier Professor of Political Economy, Harvard University

"Recent events have clearly demonstrated, once again, the importance of sound risk management techniques. Even the largest most sophisticated institutions have stumbled and lost billions of dollars. In this second edition of Advanced Financial Risk Management, the authors include a comprehensive review of events leading to the collapse of the 'bubble.' I found the chronological list of events leading up to the meltdown of 2008 a most effective way of demonstrating that the early warning signs were all there but ignored by the markets and most market participants.

"The authors draw on lessons from the past as well as their own practical experience in presenting a comprehensive review of risk management techniques. The authors also review and dissect previous models to determine what went wrong and use this as a basis to develop new and better models. This candid discussion was very helpfulthey didn't make excuses!

"The book is very comprehensive in that it includes an in-depth discussion across a broad cross section of asset classes. The use of case studies as well as drawing on the authors' own experience greatly enhances the value of the book. Lastly, the book strikes a good balance between quantitative, qualitative and anecdotal examples."

Edward Emmer, Retired Executive Managing Director, Standard & Poor's

"The global financial crisis has made it abundantly clear that shortcuts in risk management create the preconditions for catastrophe. This timely volume explains risk management without shortcuts: an integrated understanding of multiple risks from multiple underlying instruments, based on careful empirical analysis rather than convenient simplifications. Despite its rigorous approach, the book is a pleasure to read and should be owned by every risk manager."

John Y. Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University