John C. Hull - Risk Management and Financial Institutions

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Copyright 2018 by John C. Hull. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The Third Edition was published by John Wiley & Sons, Inc., in 2012. The first and second editions of this book were published by Prentice Hall in 2006 and 2009, respectively.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Hull, John, 1946

Risk management and financial institutions / John C. Hull. Fifth Edition.

pages cm. (Wiley finance series)

Includes index.

ISBN 978-1-119-44811-2 (cloth); ISBN 978-1-119-44816-7 (ePDF);

ISBN 978-1-119-44809-9 (ePUB)

1. Risk management. 2. Financial institutionsManagement. I. Title.

HD61.H83 2015

332.10681dc23

2014037477

To Michelle, Peter, and David

1.1The Hidden Costs of Bankruptcy

2.1Googles IPO

2.2PeopleSofts Poison Pill

2.3How to Avoid Loan Losses

3.1Equitable Life

3.2A Perfect Storm

4.1Mutual Fund Returns Can Be Misleading

5.1The Unanticipated Delivery of a Futures Contract

5.2A Software Error?

5.3Microsofts Hedging

5.4Procter and Gambles Bizarre Deal

5.5SocGens Big Loss in 2008

6.1All BBBs Are Not the Same

6.2A Trading Opportunity?

8.1Hedging by Gold Mining Companies

8.2Dynamic Hedging in Practice

8.3Is Delta Hedging Easier or More Difficult for Exotics?

10.1What Causes Volatility?

10.2Making Money from Foreign Currency Options

12.1Historical Perspectives on VaR

15.1Systemic Risk

16.1Credit Suisses CoCo Bond Issues

17.1Rehypothecation

19.1The CDS Market

19.2Is a CDS a Flawed Contract?

19.3Contagion

22.1Long-Term Capital Managements Big Loss

22.2Traffic Light Options

23.1The Hammersmith and Fulham Story

23.2Rogue Trader Insurance

24.1Northern Rock

24.2Ashanti Goldfields

24.3Metallgesellschaft

24.4The Crash of 1987

25.1The London Whale

25.2Kidder Peabodys Embarrassing Mistake

25.3Exploiting the Weaknesses of a Competitors Model

26.1The EGT Fund

27.1Cross-Selling at Wells Fargo

27.2The Santander Rail Deal

27.3ABACUS

28.1Mt. Gox

28.2Eastman Kodak and the Digitization of Photography

29.1Big Losses

Risk management practices and the regulation of financial institutions have continued to evolve in the past three years. Risk Management and Financial Institutions has been expanded and updated to reflect this. Like my other popular text Options, Futures, and Other Derivatives, the book is designed to be suitable for practicing managers as well as university students. Those studying for FMA and PRM qualifications will also find the book useful.

The book is appropriate for university courses in either risk management or financial institutions. It is not necessary for students to take a course on options and futures markets prior to taking a course based on this book. But if they have taken such a course, some of the material in the first nine chapters does not need to be covered.

The level of mathematical sophistication and the way material is presented have been managed carefully so that the book is accessible to as wide an audience as possible. For example, when covering copulas in Chapter 11, I present the intuition followed by a detailed numerical example; when covering maximum likelihood methods in Chapter 10 and extreme value theory in Chapter 13, I provide numerical examples and enough details for readers to develop their own spreadsheets. I have also provided Excel spreadsheets for many applications on my website:

www-2.rotman.utoronto.ca/~hull

This is a book about risk management, so there is very little material on the valuation of derivatives.(That is the main focus of my other two books, Options, Futures, and Other Derivatives and Fundamentals of Futures and Options Markets.) The appendices at the end of the book include material that summarizes valuation and other results that are important in risk management. The RMFI Software (version 1.00) is designed for this book and can be downloaded from my website.

The fifth edition has been fully updated and contains much new material. In particular:

1. A new chapter on financial innovation has been included (Chapter 28).
2. A new chapter on the regulation of OTC derivatives markets has been included (Chapter 17). This covers both cleared and uncleared transactions and explains the Standard Initial Margin Model (SIMM).