GARP Digital Library


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Quantitative Level:
Topics Covered:
Sensitivity analysis (for bonds, equities, foreign exchange, forwards, futures and options), stress testing, scenario testing, Capital Asset Pricing Model (CAPM), beta, alpha, Sharpe ratio, Treynor ratio, value at risk (for bonds, equities, and options)
Reading Abstract:
This chapter outlines five common approaches to measuring market risk: sensitivity analysis, stress testing, scenario testing, Capital Asset Pricing Model (CAPM) and value at risk. Technical explanations are kept simple and intuitive. The chapter is geared toward readers with a general understanding of financial markets who are looking for a conceptual understanding of risk measurement and management.
Reading Contents:
5.1 Sensitivity analysis
5.1.1 Sensitivity analysis for bonds
5.1.2 Sensitivity analysis for equities
5.1.3 Sensitivity analysis for foreign exchange
5.1.4 Sensitivity analysis for forwards and futures
5.1.5 Sensitivity analysis for options
5.2 Stress testing
5.3 Scenario testing
5.4 The Capital Asset Pricing Model (CAPM)
5.4.1 The Sharpe ratio
5.4.2 The Treynor ratio
5.5 Value at Risk
5.5.1 VaR for bonds
5.5.2 VaR for equities
5.5.3 VaR for options
5.5.4 General considerations in using VaR
5.6 Summary
Book Review:
*** From the publisher ***

In The Fundamentals of Risk Measurement, financial industry veteran Chris Marrison examines what banks must do to succeed in the business of making money by taking risk. Encompassing the three primary areas of banking risk—market, credit, and operational—and doing so in a uniquely intuitive, step-by-step format, Marrison provides hands-on details on the primary tools for financial risk measurement and management, including:

* Plain-English evaluation of specific risk measurement tools and techniques
* Use of Value at Risk for assessment of market risk
* Asset/liability management techniques, transfer pricing, and managing market and liquidity risk
* Methods for analyzing portfolio credit risks
* Using RAROC to compare the risk-adjusted profitability of businesses and price transactions

Woven throughout The Fundamentals of Risk Measurement are principles underlying the regulatory capital requirements of the Basel Committee on Banking Supervision. The resulting thumbnail sketch of the Basel Committee is valuable as a ready reference and a foundation for further study.

The Fundamentals of Risk Management provides risk managers with an approach to risk-taking that is informed and prudent, one that shows managers how to control risk exposures and to direct resources to opportunities expected to create maximum return with minimum risk. The result is today’s most complete introduction to the business of risk.

GARP Digital Library