Financial Risk Manager Handbook, 2nd Edition - Oil Field Trash

1 Financial Risk ManagerHandbookSecond EditionFounded in 1807, John Wiley & Sons is the oldest independent publishing companyin the United States. With offices in North America, Europe, Australia, and Asia, Wileyis globally committed to developing and marketing print and electronic products andservices for our customers professional and personal knowledge and Wiley Finance series contains books written specifically for finance and invest-ment professionals, as well as sophisticated individual investors and their financialadvisors. Book topics range from portfolio management to e-commerce, risk manage-ment, Financial engineering, valuation, and Financial instrument analysis, as well asmuch a list of available titles, please visit our Web site at Risk ManagerHandbookSecond EditionWileyJohn Wiley & Sons, JorionGARP Library of Congress Cataloging-in-Publication Data:Copyright2003 by Philippe Jorion, except for FRM sample questions, which arecopyright 1997 2001 by GARP.

2 The FRM designation is a GARP trademark. All by John Wiley & Sons, Inc., Hoboken, New JerseyPublished simultaneously in CanadaNo part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording, scanning, or otherwise, except as permitted under Section 107 or 108 ofthe 1976 United States Copyright Act, without either the prior written permission ofthe Publisher, or authorization through payment of the appropriate per-copy feeto the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,978-750-8400, fax 978-750-4470, or on the web at Requests tothe Publisher for permission should be addressed to the Permissions Department,John Wiley & Sons, Inc.

3 , 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax201-748-6008, e-mail: permcoordinator of Liability/Disclaimer of Warranty: While the publisher and author haveused their best efforts in preparing this book, they make no representationsor warranties with respect to the accuracy or completeness of the contents ofthis book and specifically disclaim any implied warranties of merchantabilityor fitness for a particular purpose. No warranty may be created or extendedby sales representatives or written sales materials. The advice and strategiescontained herein may not be suitable for your situation. You should consult witha professional where appropriate.

4 Neither the publisher nor author shall be liablefor any loss of profit or any other commercial damages, including but not limited tospecial, incidental, consequential, or other general information on our other products and services, or technical support,please contact our Customer Care Department within the United States at800-762-2974, outside the United States at 317-572-3993 or fax 0-471-43003-XPrinted in the United States of JorionGlobal Association of Risk Professionalsis Professor of Finance at the Graduate School of Management at theUniversity of California at Irvine. He has also taught at Columbia university , North-western university , the university of Chicago, and the university of British holds an and a from the university of Chicago and a degree in engi-neering from the university of Jorion has authored more than seventy publications directed to academicsand practitioners on the topics of risk management and international finance.

5 Has written a number of books, includingthe first account of the largest municipal failure in , andwhich isaimed at finance practitioners and has become an industry standard. Philippe Jorion is a frequent speaker at academic and professional is on the editorial board of a number of finance journals and is editor in chief (GARP), established in 1996, is a not-for-profit independent association of risk management practitioners and members represent banks, investment management firms, governmental bodies,academic institutions, corporations, and other Financial organizations from all overthe s mission, as adopted by its Board of Trustees in a statement issued in Febru-ary 2003, is to be the leading professional association for risk managers, managed byand for its members dedicated to the advancement of the risk profession througheducation.

6 Training and the promotion of best practices just seven years the Association s membership has grown to over 27,000 indi-viduals from around the world. In the just six years since its inception in 1997, theFRM program has become the world s most prestigious Financial risk managementcertification program. Professional risk managers having earned the FRM credentialare globally recognized as having achieved a minimum level of professional compe-tency along with a demonstrated ability to dynamically measure and manage financialrisk in a real-world setting in accord with global standards. Further information aboutGARP, the FRM Exam, and FRM readings are available Bets Gone Bad: Derivatives andBankruptcy in Orange County,Value at Risk: The New Benchmark for Managing Financial Risk,Journal of the AuthorAbout GARPC ontentsPrefacexixIntroductionxxiCh.

7 1 Bond Fundamentals3Ch. 2 Fundamentals of Probability31 Part I: Quantitative Discounting, Present, and Future Price-Yield Taylor Bond Price Interpreting Duration and Portfolio Duration and Answers to Chapter Characterizing Random Univariate Distribution Multivariate Distribution Functions of Random Linear Transformation of Random Sum of Random Portfolios of Random Product of Random Distributions of Transformations of Random Important Distribution Uniform Normal Lognormal Student s Binomial Answers to Chapter 57tCh.

8 3 Fundamentals of Statistics63Ch. 4 Monte Carlo Methods83Ch. 5 Introduction to Derivatives105 Part II: Capital Real Measuring Time Portfolio Parameter Regression Bivariate Multivariate Pitfalls with Answers to Chapter Simulations with One Random Simulating Markov The Geometric Brownian Simulating Binomial Implementing Simulation for Simulation for Multiple Sources of The Cholesky Answers to Chapter Overview of Derivatives Forward Valuing Forward Valuing an Off-Market Forward Valuing Forward Contracts with

9 Income Payments .. Futures Definitions of Valuing Futures Swap Answers to Chapter Risk Manager handbook , Second EditionCh. 6 Options123Ch. 7 Fixed-Income Securities153Ch. 8 Fixed-Income Option Basic Put-Call Combination of Valuing Option Early Exercise of Black-Scholes Market vs. Model Other Option Valuing Options by Numerical Answers to Chapter Overview of Debt Fixed-Income Instrument Methods of Analysis of Fixed-Income The NPV Spot and Forward Mortgage-Backed Prepayment Financial Engineering and Answers to Chapter Forward Eurodollar T-bond Caps and Exchange-Traded Answers to Chapter Risk Manager handbook , Second EditionCh.

10 9 Equity Markets211Ch. 10 Currencies and Commodities Markets225Ch. 11 Introduction to Market Risk Measurement243 Part III: Market Risk Equity Convertible Bonds and Equity Stock Index Single Stock Equity Equity Answers to Chapter Currency Currency Pricing of Futures and Expected Spot Answers to Chapter Introduction to Financial Market VAR as Downside VAR: VAR: Alternative Measures of VAR: Confidence Application: The Basel Elements of VAR Portfolio Risk VAR Risk Manager handbook , Second EditionCh.