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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Risk Capital Attribution and Risk-Adjusted Performance Measurement

The objective of this chapter is to define, compare and contrast risk capital, economic capital, and regulatory capital and to give an explanation of the models and motivation allocating risk capital through the use of economic capital models. The Risk-Adjusted…

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VaR and Risk Budgeting in Investment Management

After completing this reading, you should be able to: Define risk budgeting. Describe the impact of horizon, turnover, and leverage on the risk management process in the investment management industry. Describe the investment process of large investors, such as pension…

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Rating Assignment Methodologies

After completing this reading you should be able to: Explain the key features of a good rating system. Describe the experts-based approaches, statistical-based models and numerical approaches to predicting default. Describe a rating migration matrix and calculate the probability of…

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The Science of Term Structure Models

After completing this reading you should be able to: Calculate the expected discounted value of a zero-coupon security using a binomial tree. Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios….

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Alpha (and the Low-Risk Anatomy)

After completing this reading, you should be able to: Describe and evaluate the low-risk anomaly of asset returns. Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio. Explain the impact of benchmark choice on alpha, and…

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Wrong-Way Risk

After completing this reading you should be able to: Describe wrong-way risk and contrast it with right-way risk. Identify examples of wrong-way risk and examples of right-way risk. Discuss the impact of collateral on wrong-way risk. Discuss the impact of…

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Swaps

After completing this reading, you should be able to: Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows. Describe the role of the confirmation in a swap transaction. Explain how a plain vanilla interest…

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The Art of Term Structure Models: Volatility and Distribution

After completing this reading you should be able to: Describe the short-term rate process under a model with time-dependent volatility. Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model…

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Non-Parametric Approaches

After completing this reading you should be able to: Apply the bootstrap historical simulation approach to estimate coherent risk measures. Describe historical simulation using non-parametric density estimation. Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical…

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