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The Fundamentals of Risk Measurement (Professional Finance & Investment) 1st Edition
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From the Back Cover
Today’s Most Detailed, Step-by-Step Guidebook for Understanding―and Implementing―Integrated Financial Risk Measurement and Management
Banks take financial risks, with their overall profits based on maximizing the returns from those risks. Losses―or in the case of Britain’s Barings Bank, utter devastation―can occur when assumed risks are unregulated internally and become too large, either in relation to potential returns or in the bank’s ability to cover the risks.
Between the two lies the effective measurement and management of financial risk.
The Fundamentals of Risk Measurement introduces the state-of-the-art tools and practices necessary for planning, executing, and maintaining risk management in today’s volatile financial environment. This comprehensive book provides description and analysis of topics including:
- Economic capital
- Risk adjusted return on capital (RAROC)
- Shareholder Value Added (SVA)
- Value at Risk (VaR)
- Asset/liability management (ALM)
- Credit risk for a single facility
- Credit risk for portfolios
- Operating risk
- Inter-risk diversification
- The Basel Committee Capital Accords
The banking world is driven by risk. The Fundamentals of Risk Measurement shows you how to quantify that risk, outlining an integrated framework for risk measurement and management that is straightforward, practical for implementation, and based on the realities of today’s tumultuous global marketplace.
“Banks make money in one of two ways: providing services to customers and taking risks. In this book, we address the business of making money by taking risk.…”―From the Introduction
In The Fundamentals of Risk Measurement, financial industry veteran Chris Marrison examines what banks must do to succeed in the business of making money by taking risk. Encompassing the three primary areas of banking risk―market, credit, and operational―and doing so in a uniquely intuitive, step-by-step format, Marrison provides hands-on details on the primary tools for financial risk measurement and management, including:
- Plain-English evaluation of specific risk measurement tools and techniques
- Use of Value at Risk (VaR) for assessment of market risk for trading operations
- Asset/liability management (ALM) techniques, transfer pricing, and managing market and liquidity risk
- The many available methods for analyzing portfolios of credit risks
- Using RAROC to compare the risk-adjusted profitability of businesses and price transactions
In addition, woven throughout The Fundamentals of Risk Measurement are principles underlying the regulatory capital requirements of the Basel Committee on Banking Supervision, and what banks must do to understand and implement them. The requirements are defined, implications of the New Capital Accord are presented, and the major steps that a bank must take to implement the New Accord are discussed. The resulting thumbnail sketch of the Basel Committee, and specifically the New Capital Accord, is valuable as both a ready reference and a foundation for further study of this important initiative.
Risk is unavoidable in the financial industry. It can, however, be measured and managed to provide the greatest risk-adjusted return, and limit the negative impacts of risk to a bank’s shareholders as well as potential borrowers and lenders. The Fundamentals of Risk Management provides risk managers with an approach to risk-taking that is both informed and prudent, one that shows operations managers how to control risk exposures as it allows decision-making executives to direct resources to opportunities that are expected to create maximum return with minimum risk. The result is today’s most complete introduction to the business of risk, and a valuable reference for anyone from the floor trader to the officer in charge of overseeing the entire risk management operation.
About the Author
Chris Marrison, Ph.D., is a veteran risk management consultant with experience in trading risk, credit risk, business control, asset/liability management, emerging markets, and project finance. A former managing principal with The Capital Markets Company and senior engagement officer with Oliver Wyman & Co., Dr. Marrison has been a Royal Air Force officer and a technical consultant on major engineering projects in the United States, Bulgaria, and Brazil, and has given risk management advice to banks and governments throughout North America, Europe, Asia, and Africa.
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Top Customer Reviews
This is not a thesis, it is a text book. The purpose of a thesis is to record original ideas and demonstrate the cleverness of the author. The purpose of a text book is to bring together an existing body of knowledge so that it can be easily understood and used by the reader.
The book was written to be as clear as possible so as to remove the unnecessary mystery from risk management. It was written because most, if not all, other books on risk assume that you already have a good knowledge of the industry and its methodologies. Furthermore, most books deal with only one aspect of risk, rather than taking an integrated view.
I suggest that this book does three things well:
* It gathers information together, so that in one place you can get a good picture of the whole framework of risk measurement. If you want to delve into details later, then of course you should buy books that specialize in those corners.
* For beginners, it gives foundation chapters on banking and statistics so that everyone will be able to understand the later chapters. For example if you have a science PhD you will first want to know how banks work, the meaning of capital and the difference between a credit risk derivative and credit risk for a derivative. If you are an MBA who has not recently done matrix math and statistics, you will probably appreciate the review in Chapter 3.
* The book gives many specific examples so that you can quickly make your own risk calculations. In this respect it is more detailed than many other risk books. It minimizes the discussion of philosophy and history, to give the tools that the reader needs as quickly as possible.
I believe that this book is a good way to quickly get to the heart of risk measurement. In 400 pages it is not possible (or even desirable) to cover every aspect of risk, but you can certainly give a solid introduction and overview. As such, I suggest that The Fundamentals of Risk Measurement does a good job both for the beginner and for those who already know one area of risk, but wish to have an integrated view of risk measurement for the whole bank. Even with several years in the industry, an open minded reader should still enjoy seeing everything brought together in this book.
Two previous reviews that suggest Marrison is too basic or merely repeats other authors are, in my humble opinion, dishonest. Marrison is a sophisticated book for sophisticated readers who are new to risk management. This includes MBA students taking courses on the capital markets or risk management. It also includes professionals working in their first risk management position. Marrison did not invent VaR or ALM, but authors of other books did not invent these concepts either. An author's task is to describe established concepts in a manner that is accessible to and useful for his audience. In this respect, Marrison's book is a dramatic step forward. His choice of topics, organization and writing are superb.
One of those previous reviews recommended that you read books by certain other authors instead of Marrison. Of those books, the only one that Marrison competes with is Jorion's Value-at-Risk. Marrison is an order of magnitude better than that book. The other books cover unrelated topics or are more advanced treatises on specific topics. You might graduate to such books from Marrison, but they are not alternatives to Marrison.
Finally, you can't beat the price on this book. Marrison simultaneously offers a bargain AND one of the best books available on risk management.