Angelo Corelli - Understanding Financial Risk Management

Understanding Financial Risk Management

Financial risk management is a topic of primary importance in financial markets and, more generally, in life. Risk can be seen as an opportunity if related to the concept of compensative return. It is therefore important to learn how to measure and control risk, in order to get exposure to as much risk as is necessary to achieve some level of compensation, without further useless exposure.

This book analyses the various types of financial risk a financial institution faces in everyday operations. Each type of risk is dealt with using a rigorous mix of analytical and theoretical approaches, describing all the major models available in the literature, with an innovative look at the topic.

This book covers the following aspects of risk and provides introductory overviews of the most relevant statistical and mathematical tools:

market risk

interest rate risk

credit risk

liquidity risk

operational risk

currency risk

volatility risk.

Understanding Financial Risk Management offers an innovative approach to financial risk management. With a broad view of theory and the industry, it aims at being a friendly, but serious, starting point for those who encounter risk management for the first time, as well as for more advanced users.

Angelo Corelli is Assistant Professor of Finance, Bursa Orhangazi University, Turkey.

Routledge Advanced Texts in Economics and Finance

1. Financial Econometrics

Peijie Wang

2. Macroeconomics for Developing Countries Second Edition

Raghbendra Jha

3. Advanced Mathematical Economics

Rakesh Vohra

4. Advanced Econometric Theory

John S. Chipman

5. Understanding Macroeconomic Theory

John M. Barron, Bradley T. Ewing and Gerald J. Lynch

6. Regional Economics

Roberta Capello

7. Mathematical Finance: Core Theory, Problems and Statistical Algorithms

Nikolai Dokuchaev

8. Applied Health Economics

Andrew M. Jones, Nigel Rice, Teresa Bago dUva and Silvia Balia

9. Information Economics

Urs Birchler and Monika Btler

10. Financial Econometrics Second Edition

Peijie Wang

11. Development Finance Debates, Dogmas and New Directions

Stephen Spratt

12. Culture and Economics On Values, Economics and International Business

Eelke de Jong

13. Modern Public Economics Second Edition

Raghbendra Jha

14. Introduction to Estimating Economic Models

Atsushi Maki

15. Advanced Econometric Theory

John Chipman

16. Behavioral Economics

Edward Cartwright

17. Essentials of Advanced Macroeconomic Theory

Ola Olsson

18. Behavioral Economics and Finance

Michelle Baddeley

19. Applied Health Economics Second Edition

Andrew M. Jones, Nigel Rice, Teresa Bago dUva and Silvia Balia

20. Real Estate Economics A Point to Point Handbook

Nicholas G. Pirounakis

21. Finance in Asia Institutions, Regulation and Policy

Qiao Liu, Paul Lejot and Douglas Arner

22. Behavioral Economics Second Edition

Edward Cartwright

23. Understanding Financial Risk Management

Angelo Corelli

Understanding Financial Risk Management

Angelo Corelli

First published 2015

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN

and by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

2015 Angelo Corelli

The right of Angelo Corelli to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patent Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloguing in Publication data

Corelli, Angelo.

Understanding financial risk management / Angelo Corelli.

pages cm. (Routledge advanced texts in economics and finance) Includes bibliographical references and index.

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

HD61.C668 2014

658.155dc23

2014008863

ISBN: 978-0-415-74617-5 (hbk)

ISBN: 978-1-315-79753-3 (ebk)

ISBN: 978-0-415-74618-2 (pbk)

Typeset in Times New Roman

by Out of House Publishing

Alla mia famiglia
Giuseppe,
Rina,
e Mauro

Contents

A modern approach

Understanding Financial Risk Management offers an innovative approach to financial risk management. With a broad view of theory and the industry, it aims at being a friendly, but serious, starting point for those who encounter risk management for the first time, as well as for more advanced users.

The focus is no longer on the mere measurement, but on the whole package. Risk is also opportunity, and when managing it, one should reach the right balance between opportunity and loss. That is why we propose a new approach that starts from the basic knowledge of classic theory and methodologies and moves to the latest findings in measurement and hedging.

Many books are more exhaustive in covering some of the topics that are treated in this book, but most of them do not offer the wholesome coverage on the horizon of financial risk management as the present book does.

There is no doubt that a deeper analysis of many concepts is possible, but no book in the actual market is able to collect all risks and the managing of them in one single essay. This book is definitely an all-included piece or work that guides the reader from the beginning to the end without ever losing focus on what is more important for good risk management knowledge.

An innovative pedagogy

The foundations of the book rely on three main blocks: theory, analytics and computational. They all merge in a way that makes it easy for students to understand the exact meaning of the concepts and their representation and applicability in real-world contexts. Examples are given throughout the chapters in order to clarify the most intricate aspects; where needed, there are appendices at the end of chapters that give more mathematical insights about specific topics.

Learning comes from the correct combination of the three pillar elements, none of which should be excluded. The trinity stands as the foundation of the whole project.

Preferably, students have a solid background in financial mathematics, statistics and basic econometrics. Indeed, students facing financial topics for the first time may benefit from using the book as a medium-level introduction to some aspects of financial theory and practice.