Parametric Approaches (II): Extreme Value

After completing this reading, you should be able to: Explain the importance and challenges of extreme values in risk management. Describe extreme value theory (EVT) and its use in risk management. Describe the peaks-over-threshold (POT) approach. Compare and contrast generalized…

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Commodity Futures and Forwards

After completing this reading, you should be able to: Explain the key differences between commodities and financial assets. Define and apply commodity concepts such as storage costs, carry markets, lease rate and convenience yield. Identify factors that impact prices on…

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Common Univariate Random Variables

After completing this reading, you should be able to: Distinguish the key properties among the following distributions: uniform distribution, Bernoulli distribution, Binomial distribution, Poisson distribution, normal distribution, lognormal distribution, Chi-squared distribution, Student’s t, and F-distributions, and identify common occurrences of…

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Range of Practices and Issues in Economic Capital Frameworks

There are methods and practices that allow banks to assess risks effectively and to cover for the economic effects associated with risk-taking. These methods can be referred to as Economic Capital. In this chapter, the importance of understanding the relationship…

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Model Risk

The objective of this chapter is to identify and explain modeling assumption errors through which model risk can be introduced. The arising of model risk in a model’s implementation will be studied. Furthermore, in risk mitigation, risk managers can apply…

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The Evolution of Stress Testing Counterparty Exposure

In this chapter, we examine the process of developing counterparty risk by viewing the risk as a credit and market risk. With respect to credit and market risks, the procedures of stress-testing are discussed also, beginning with the simple stress-testing…

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The Art of Term Structure Models: Drift

After completing this reading you should be able to: Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, both with and without drift. Calculate the short-term rate change and standard deviation of the rate…

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An Introduction to Securitization

In this chapter, an in-depth definition of securitization is given and its process is described. The role of participants in the securitization process is explained, along with terminologies that include over-collateralization, first-loss piece, equity piece, and cash waterfall within the…

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Enterprise Risk Management: Theory and Practice

There has been an intense change in the role of risk management over the past few decades. Moreover, in the last ten years, the work of the risk management has not only been the purchase of insurance but also expanded…

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Guidance on Managing Outsourcing Risk

By the end of this chapter, the reader should be able to explain the arising of risks via outsourcing activities to third-party service providers. Also, the elements of an effective program to manage outsourcing risk should be described by the…

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