Risk Management and Financial Institutions, 6th Edition

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Risk Management and Financial Institutions, 6th Edition

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The gold standard in financial risk management textbooks

In the newly revised sixth edition of Risk Management and Financial Institutions, celebrated risk and derivatives expert John C. Hull delivers an incisive and comprehensive discussion of financial risk and financial institution regulation. In the book, you’ll learn to understand the financial markets, the risks they pose to various kinds of financial institutions, and how those risks are affected by common regulatory structures.

This book blends discussion of best practices in risk management with holistic treatments of how financial institutions are regulated. It explores market, credit, liquidity, model, climate, cyber, and operational risk.

This latest edition also offers:
- Updated ancillary and digital materials covering all the latest content, including software, practice questions, and teaching supplements
- Access to an updated website that reflects the new content
- Fulsome coverage of the most important financial market developments since the publication of the fifth edition, including regulatory changes, the growing importance of climate risk, the use of machine learning models, and the disappearance of LIBOR
A must-have resource for undergraduate and graduate students of business and finance, Risk Management and Financial Institutions, Sixth Edition, cements this celebrated text as the gold standard in risk management resources.
Business Snapshots xxiii

Preface xxv

Chapter 1 Introduction: Risk-Return Trade-offs 1

Part 1: Financial Institutions 23

Chapter 2 Banks 25

Chapter 3 Insurance Companies and Pension Plans 47

Chapter 4 Fund Managers 75

Part 2: Financial Markets 97

Chapter 5 Financial Instruments 99

Chapter 6 The OTC Derivatives Market 129

Chapter 7 Securitization and the Global Financial Crisis 145

Chapter 8 Volatility 163

Chapter 9 Correlations and Copulas 193

Chapter 10 Valuation and Scenario Analysis 217

Part 3: Market Risk 231

Chapter 11 Value at Risk and Expected Shortfall 233

Chapter 12 Historical Simulation and Extreme Value Theory 257

Chapter 13 Model-Building Approach 279

Chapter 14 Interest Rate Risk 293

Chapter 15 Derivatives Risk 319

Chapter 16 Scenario Analysis and Stress Testing 347

Part 4: Credit Risk 365

Chapter 17 Estimating Default Probabilities 367

Chapter 18 xVAs 393

Chapter 19 Credit Value at Risk 413

Part 5: Other Risks 429

Chapter 20 Operational Risk 431

Chapter 21 Liquidity Risk 449

Chapter 22 Model Risk Management 477

Chapter 23 Climate Risk, ESG, and Sustainability 497

Chapter 24 Enterprise Risk Management 513

Part 6: Regulation 531

Chapter 25 Basel I, Basel II, and Solvency II 533

Chapter 26 Basel II.5, Basel III, and Other Post-Crisis Changes 563

Chapter 27 Fundamental Review of the Trading Book 585

Chapter 28 Economic Capital and RAROC 599

Part 7: Other Topics 617

Chapter 29 Financial Innovation 619

Chapter 30 Risk Management Mistakes to Avoid 641

Part 8: Appendices 653

Appendix A Compounding Frequencies for Interest Rates 655

Appendix B Zero Rates, Forward Rates, and Zero-Coupon Yield Curves 659

Appendix C Valuing Forward and Futures Contracts 663

Appendix D Valuing Swaps 665

Appendix E Valuing European Options 669

Appendix F Valuing American Options 673

Appendix G Taylor Series Expansions 677

Appendix H Eigenvectors and Eigenvalues 681

Appendix I Principal Components Analysis 685

Appendix J Manipulation of Credit Transition Matrices 687

Appendix K Valuation of Credit Default Swaps 689

Appendix L Synthetic CDOs and Their Valuation 693

Appendix M SIMM 697

Answers to Questions and Problems 701

Glossary 743

RMFI Software 771

Table for N(x) When x ≥ 0 775

Table for N(x) When x ≤ 0 777

Index 779
JOHN C. HULLis the Maple Financial Professor of Derivatives and Risk Management at the Joseph L. Rotman School of Management, University of Toronto, and codirector of Rotman's Master of Finance program. He has been a consultant to many North American, Japanese, and European fi nancial institutions, and is the author of three books, which are widely used by both practitioners and academics, and an associate editor of eight academic journals.