Risk Finance and Asset Pricing Value, Measurements, and Markets

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ISBN: 9780470549469 | 0470549467
Cover: Hardcover
Copyright: 10/5/2010

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Charles Tapiero, as the head of the biggest financial engineering program in the world and business consultant, has his finger on the pulse of the shift that is coming in financial engineering applications and study. With an eye toward the future, he has crafted a comprehensive and practical book that emphasizes an intuitive approach to the financial and quantitative foundations of financial and risk engineering and its many applications to asset pricing and risk management. Covering the theory from a practitioner perspective, he then applies it to a variety of real world problems. The book presents important techniques to price, hedge, and manage risks in general while acknowledging the high degree of uncertainty in the real world.

Introduction
Who This Book is For
How This Book is Structured
What's on the Companion Website
Risk, Finance, Corporate Management and Society
Overview
Risks Everywhere-A Consequence of Uncertainty
Risks and Finance: Basic Concepts
Example: An IBM day-trades record
Example: Constructing a portfolio
Option Contracts
Options and their Price
Example: Options and the Price of Equity
Example: Management Stock Options
Options and Trading in Specialized Markets
Real Life Crises and Finance
The 2008 Meltdown and Financial Theory
Finance and Ethics
Summary
Test Yourself
References
Applied Finance
Overview
Finance and Practice
Financial Risk Pricing: A Historical Perspective
Essential of Financial Risk Management
Technology and Complexity
Market Making and Pricing Practice
Summary
Test Yourself
References
Risk Measurement and Volatility
Overview
Risk, Volatility and Measurement
Moments and Measures of Volatility
Example: IBM Returns Statistics
Example: Moments and the CAPM
Calculating the Beta of a Security
Statistical Estimations
Example: The AR(1) ARCH(1) Model
Example: A Garch (1,1) Model
High-Low Estimators of Volatility
Extreme Measures, Volume, and Intraday Prices
The Probability of the Range
Data Transformation
Example: Taylor Series
Value at Risk and Risk Exposure
Example: VaR and Shortfall
Example*: VaR, Normal ROR and Portfolio Design
Summary
Test Yourself
References
Risk Finance Modeling and Dependence
Overview
Introduction
Statistical Dependence
Example: Risk Factors Aggregation
Example: Principal Components Analysis (PCA)
Example: A Bi-Variate Data Matrix and PCA
Example: A Market Index and PCA
Dependence and Copulas
Example: The Gumbel Copula, the Highs and the Lows
Example: Copulas and Conditional Dependence
Example: Copula and the Conditional Distribution
Financial Modeling and Inter-Temporal Models
The R/S Index
Summary
Test Yourself
References
Risk, Value, and Financial Prices
Overview
Value and Price
Utility, Risk and Money
Lotteries and Utility Functions
Example: The utility of a lottery
Example: The power utility function
Example: Valuation and the Pricing of Cash Flows
Example: Risk and the Financial Meltdown
Utility Rational Foundations
Examples: Specific Utility Functions
The Price and the Utility of Consumption
Example: Kernel Pricing and the exponential utility function
Example: The Pricing Kernel and the CAPM
Example: Kernel Pricing and the HARA utility function
Summary
Test Yourself
References
Applied Utility Finance
Overview
Risk and the Utility of Time
Assets Allocation and Investments
Example: A Two securities problem
Example: A 2 stocks portfolio
The Efficiency Frontier
A Two Securities Portfolio
Conditional Kernel Pricing and the Price of Infrastructure Investments
Conditional Kernel Pricing and the Pricing of Inventories
Agency and Utility
Example: A linear risk sharing rule
Information Asymmetry: Moral Hazard and Adverse Selection
Adverse Selection
The Moral Hazard Problem
Signaling and Screening
Summary
Test Yourself
References
Derivative Finance and Complete Markets
Discrete States
Overview
The Arrow-Debreu Fundamental Approach to Asset Pricing
Example: Generalization to n states
Example: Binomial Option Pricing
The Implied Risk Neutral Probability
Example: The Price of a Call option
Example: A generalization to multiple periods
Options and their Prices
Put Call Parity
Proving the Put-Call Parity
Example: Put Call Parity and Dividend Payments
Options PUT-CALL Parity
The Price deflator and the Pricing Martingale
Pricing and Complete Markets
Options Galore
Example: Look-Back Options
Example: Asiatic Options
Example: Exchange options
Example: Chooser Options
Example: Barrier and Other Options
Example: Passport Options
Options and Their "Real Uses"
Example: Pricing a Forward
Example: Pricing a floating rate bond
Example: Pricing fixed rate bond
Example: The Term Structure of Interest Rate
Annuities and Obligations
Pricing and Franchises with a Binomial Process
Pricing a Pricing Policy
Options Trading, Speculation, and Risk Management
Example: Options and Trading Practice
Example: Insuring and derivative hedges
Portfolio Strategies
Summary
Martingales
Example: Change of Measure in a Binomial Model
Example: A Two Stages Random Walk and the Radon Nikodym Derivative
Formal Notations, Key terms and Definitions
Test Yourself
References
Options Applied
Overview
Introduction
Optional Applications
Pricing a Multi Period Forward
Example: Options Implied insurance pricing
Random volatility and options pricing
Real Assets and Real Options
The Black Scholes Vanilla Option and the Greeks
The Greeks and Their Applications
Summary
Test Yourself
References
Credit Scoring and the Price of Credit Risk
Overview
Credit and Money
Credit and Credit Risk
Pricing Credit Risk: Principles
Credit Scoring and Granting
Credit Scoring: Real- Approaches
Example: A Separatrix
Example: The Separatrix and Bayesian Probabilities
Probability Default Models
Example: A Bivariate Dependent Default Distribution
Example: A Portfolio of default loans
Example: A Portfolio of dependent default loans
The joint Bernoulli default distribution
Credit Granting
Example: Credit Granting and Creditor's Risks
Example: A Bayesian default model
Example: A Financial Approach
Example: An Approximate Solution
The rate of return of loans
The Reduced Form (Financial) Model
Example: Calculating the spread of a default bond
Example: The Loan Model Again
Example: Pricing default bonds
Example: Pricing default bonds and the hazard rate
Examples
Example: The bank interest rate on a house loan
Example: Buy insurance to protect the portfolio from loan defaults
Example: Use the portfolio as an underlying and buy or sell derivatives on this underlying
Problem: Lending rates of returns
Credit Risk and Collaterals Pricing
Example: Hedge funds rates of returns
Example: Equity Linked Life Insurance
Example: Default and the price of homes
Example: A banks profit from a loan
Risk Management and Leverage
Summary
Test Yourself
References
Multi-Names and Credit Risk Portfolios
Overview
Introduction
Credit Default Swaps
Example: Total Returns Swaps
Example: Pricing a project launch
Credit Derivatives: A Historical Perspectives^1.
CDOs: Examples and Models
Example: Collateralized Mortgage Obligations (CMOs)
Example: Insurance and Risk Layering
Example: A CDO with numbers
Example: The CDO and SPV
Example: A Synthetics CDO
Example: A Portfolio of Loans, VaR and the Normal Approximation
Example: Insurance and Reinsurance and Stop/Excess Loss Valuation
Constructing a Credit Risk Portfolio and CDOs
Example: A Simple Portfolio of Loans
Example: Random and Dependent Default
Example: The KMV Loss Model
Summary
Test Yourself
References
Engineered Implied Volatility and Implied Risk Neutral Distributions
Overview
Introduction
The Implied Risk Neutral Distribution
Example: An Implied Binomial Distribution
Example: Calculating the implied risk neutral probability
The Implied Volatility
Example: The implied volatility in a lognormal process
Implied Distributions: Parametric Models
Example: The Generalized Beta of the second kind
A-parametric Approach and the Black-Scholes Model
Example: The Shimko technique
The Implied Risk Neutral Distribution and Information Discrimination
Example: Entropy in discrete states
Example: Discrimination Information and the Binomial Distribution
The Lognormal model and discrimination information
The Implied Risk Neutral Distribution and its Implied Utility
Example: Discrimination Information as a utility objective
Summary
The Implied Volatility-The Dupire Model
Test Yourself
References
Acknowledgments
About the Author
Index
Table of Contents provided by Publisher. All Rights Reserved.

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Risk Finance and Asset Pricing Value, Measurements, and Markets

Summary

Author Biography

Table of Contents

Supplemental Materials