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Table Of Contents

Risk, Finance, Corporate Management, and Society
OVERVIEW
RISKS EVERYWHERE—A CONSEQUENCE OF UNCERTAINTY
RISK AND FINANCE: BASIC CONCEPTS
Finance and Risks
FINANCIAL INSTRUMENTS
Securities or Stocks
EXAMPLE: AN IBM DAY-TRADES RECORD
Bonds
Portfolios
EXAMPLE: CONSTRUCTING A PORTFOLIO
Derivatives and Options
Real and Financial Assets
Financial Markets
OPTION CONTRACTS
PROBLEM 1.1: OPTIONS AND THEIR PRICES
Options and Specific Needs
EXAMPLE: OPTIONS AND THE PRICE OF EQUITY
EXAMPLE: MANAGEMENT STOCK OPTIONS
OPTIONS AND TRADING IN SPECIALIZED MARKETS
Trading the CO2 Index
Trading on Commodities (Metal, Gold, Silver, Corn, Oil)
Trading the Weather and Insurance
Securitization, Mortgage-Backed Securities, and Credit Derivatives
REAL-LIFE CRISES AND FINANCE
The ARS Crisis
The Banking–Money System Crisis
THE 2008 MELTDOWN AND FINANCIAL THEORY
FINANCE AND ETHICS
Crime and Punishment
SUMMARY
Applied Finance
FINANCE AND PRACTICE
Risk Finance and Insurance
Infrastructure Finance
Finance, the Environment, and Exchange-Traded Funds Indexes
Finance and Your Pension
Contract Pricing and Franchises
Catastrophic Risks, Insurance, and Finance
The Price of Safety
The Price of Inventories
Pricing Reliability and Warranties
The Price of Quality Claims
FINANCIAL RISK PRICING: A HISTORICAL PERSPECTIVE
ESSENTIALS OF FINANCIAL RISK MANAGEMENT
Comprehensive Financial Risk Management
TECHNOLOGY AND COMPLEXITY
Retailing and Finance
Finance, Cyber Risks, and Terrorism
IT and Madoff
Virtual Markets
Virtual Products
Virtual Markets Participants
Virtual Economic Universes
MARKET MAKING AND PRICING PRACTICE
Market Makers, Market Liquidity, and Bid-Ask Spreads
Alternative Market Structures
Risk Measurement and Volatility
RISK, VOLATILITY, AND MEASUREMENT
MOMENTS AND MEASURES OF VOLATILITY
EXAMPLE: IBM RETURNS STATISTICS
EXAMPLE: MOMENTS AND THE CAPM
PROBLEM 3.1: CALCULATING THE BETA OF A SECURITY
Modeling Rates of Return
Models of Rate of Returns
STATISTICAL ESTIMATIONS
Least Squares Estimation
Maximum Likelihood
ARCH and GARCH Estimators
EXAMPLE: THE AR(1)-ARCH(1) MODEL
EXAMPLE: A GARCH (1,1) MODEL
HIGH-LOW ESTIMATORS OF VOLATILITY
EXTREME MEASURES, VOLUME, AND INTRADAY PRICES
Statistical Orders, Volume, and Prices
PROBLEM 3.2: THE PROBABILITY OF THE RANGE
Intraday Prices and Extreme Distributions
DATA TRANSFORMATION
EXAMPLE: TAYLOR SERIES
VALUE AT RISK AND RISK EXPOSURE
VaR and Its Application
EXAMPLE: VaR AND SHORTFALL
EXAMPLE*: VaR, NORMAL ROR, AND PORTFOLIO DESIGN
The Estimation of Gains and Losses
Risk Finance Modeling and Dependence
INTRODUCTION
Dependence and Probability Models
STATISTICAL DEPENDENCE
Dependence and Quantitative Statistical Probability Models
EXAMPLE: RISK FACTORS AGGREGATION
EXAMPLE: PRINCIPAL COMPONENT ANALYSIS (PCA)
EXAMPLE: A BIVARIATE DATA MATRIX AND PCA
EXAMPLE: A MARKET INDEX AND PCA
DEPENDENCE AND COPULAS
EXAMPLE: THE GUMBEL COPULA, THE HIGHS AND THE LOWS
EXAMPLE: COPULAS AND CONDITIONAL DEPENDENCE
EXAMPLE: COPULAS AND THE CONDITIONAL DISTRIBUTION
FINANCIAL MODELING AND INTERTEMPORAL MODELS
Time, Memory, and Causal Dependence
Quantitative Time and Change
Persistence and Short-term Memory
THE R/S INDEX
Risk, Value, and Financial Prices
VALUE AND PRICE
UTILITY, RISK, AND MONEY
Utility’s Normative Principles: A Historical Perspective
Prelude to Utility and Expected Utility
LOTTERIES AND UTILITY FUNCTIONS
EXAMPLE: THE UTILITY OF A LOTTERY
Quadratic Utility and Portfolio Pricing
Utility and an Insurance Exchange
EXAMPLE: THE POWER UTILITY FUNCTION
EXAMPLE: VALUATION AND THE PRICING OF CASH FLOWS
EXAMPLE: RISK AND THE FINANCIAL MELTDOWN
UTILITY RATIONAL FOUNDATIONS
The Risk Premium
Utility and Its Behavioral Derivatives
EXAMPLES: SPECIFIC UTILITY FUNCTIONS
THE PRICE AND THE UTILITY OF CONSUMPTION
EXAMPLE: KERNEL PRICING AND THE EXPONENTIAL UTILITY FUNCTION
EXAMPLE: THE PRICING KERNEL AND THE CAPM
EXAMPLE: KERNEL PRICING AND THE HARA UTILITY FUNCTION
The Price and Demand for Insurance
Applied Utility Finance
RISK AND THE UTILITY OF TIME
Expected Utility and the Time Utility Price of Money
Risk, Safety, and Reliability
ASSET ALLOCATION AND INVESTMENTS
EXAMPLE: A TWO-SECURITIES PROBLEM
EXAMPLE: A TWO-STOCKS PORTFOLIO
PROBLEM 6.1: THE EFFICIENCY FRONTIER
PROBLEM 6.2: A TWO-SECURITIES PORTFOLIO
CONDITIONAL KERNEL PRICING AND THE PRICE OF INFRASTRUCTURE INVESTMENTS
CONDITIONAL KERNEL PRICING AND THE PRICING OF INVENTORIES
AGENCY AND UTILITY
EXAMPLE: A LINEAR RISK-SHARING RULE
INFORMATION ASYMMETRY: MORAL HAZARD AND ADVERSE SELECTION
ADVERSE SELECTION
THE MORAL HAZARD PROBLEM
SIGNALING AND SCREENING
Derivative Finance and Complete Markets
THE ARROW-DEBREU FUNDAMENTAL APPROACH TO ASSET PRICING
EXAMPLE: GENERALIZATION TO n STATES
EXAMPLE: BINOMIAL OPTION PRICING
PROBLEM 7.1: THE IMPLIED RISK-NEUTRAL PROBABILITY
EXAMPLE: THE PRICE OF A CALL OPTION
EXAMPLE: A GENERALIZATION TO MULTIPLE PERIODS
Risk-Neutral Pricing and Market Completeness
OPTIONS GALORE
Packaged and Binary Options
EXAMPLE: LOOK-BACK OPTIONS
EXAMPLE: ASIAN OPTIONS
EXAMPLE: EXCHANGE OPTIONS
EXAMPLE: CHOOSER OPTIONS
EXAMPLE: BARRIER AND OTHER OPTIONS
EXAMPLE: PASSPORT OPTIONS
OPTIONS AND THEIR REAL USES
FIXED-INCOME PROBLEMS
EXAMPLE: PRICING A FORWARD
EXAMPLE: PRICING A FIXED-RATE BOND
Pricing a Term Structure of Interest Rates
EXAMPLE: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM 7.5: ANNUITIES AND OBLIGATIONS
OPTIONS TRADING, SPECULATION, AND RISK MANAGEMENT
Option Trading Strategies
PROBLEM 7.6: PORTFOLIO STRATEGIES
APPENDIX A: MARTINGALES
Essentials of Martingales
The Change of Measures and Martingales
EXAMPLE: CHANGE OF MEASURE IN A BINOMIAL MODEL
Options Applied
OPTION APPLICATIONS
Risk-Free Portfolios and Immunization
Selling Short
Future Prices
PROBLEM 8.1: PRICING A MULTIPERIOD FORWARD
Pricing and New Insurance Business
EXAMPLE: OPTIONS IMPLIED INSURANCE PRICING
Option Pricing in a Trinomial Random Walk
Pricing and Spread Options
Self-Financing Strategy
RANDOM VOLATILITY AND OPTIONS PRICING
REAL ASSETS AND REAL OPTIONS
The Option to Acquire the License for a New Technology
THE BLACK-SCHOLES VANILLA OPTION∗
The Binomial Process as a Discrete Time Approximation
The Black-Scholes Model Option Price and Portfolio Replication∗
Risk-Neutral Pricing and the Pricing Martingale∗
THE GREEKS AND THEIR APPLICATIONS
CREDIT AND CREDIT RISK
PRICING CREDIT RISK: PRINCIPLES
CREDIT SCORING AND GRANTING
What Is an Individual Credit Score?
Bonds Rating or Scoring Business Enterprises
Scoring/Rating Financial Enterprises and Financial Products
CREDIT SCORING: REAL APPROACHES
The Statistical Estimation of Default
EXAMPLE: A SEPARATRIX
EXAMPLE: THE SEPARATRIX AND BAYESIAN PROBABILITIES
PROBABILITY DEFAULT MODELS
EXAMPLE: A BIVARIATE DEPENDENT DEFAULT DISTRIBUTION
EXAMPLE: A PORTFOLIO OF DEFAULT LOANS
EXAMPLE: A PORTFOLIO OF DEPENDENT DEFAULT LOANS
PROBLEM 9.1: THE JOINT BERNOULLI DEFAULT DISTRIBUTION
CREDIT GRANTING
EXAMPLE: CREDIT GRANTING AND CREDITOR’S RISKS
EXAMPLE: A BAYESIAN DEFAULT MODEL
EXAMPLE: A FINANCIAL APPROACH
EXAMPLE: AN APPROXIMATE SOLUTION
CREDIT RISK AND COLLATERAL PRICING
EXAMPLE: HEDGE FUNDS RATES OF RETURN
EXAMPLE: EQUITY-LINKED LIFE INSURANCE
EXAMPLE: DEFAULT AND THE PRICE OF HOMES
EXAMPLE: A BANK’S PROFIT FROM A LOAN
RISK MANAGEMENT AND LEVERAGE
Multi-Name and Structured Credit Risk Portfolios
CREDIT DEFAULT SWAPS
EXAMPLE: TOTAL RETURN SWAPS
Pricing Credit Default Swaps—The Implied Market Approach
EXAMPLE: THE CDS PRICE SPREAD
EXAMPLE: PRICING A PROJECT LAUNCH
CREDIT DERIVATIVES: A HISTORICAL PERSPECTIVE
Credit Derivatives: Historical Modeling
Credit Derivatives and Product Innovation
CDO EXAMPLE: COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
EXAMPLE: THE CDO AND SPV
Modeling Credit Derivatives
CDO: Quantitative Models
EXAMPLE: A CDO WITH NUMBERS
EXAMPLE: A CDO OF ZERO COUPON BONDS
EXAMPLE: A CDO OF DEFAULT COUPON-PAYING BONDS
EXAMPLE: A CDO OF RATED BONDS
EXAMPLES: DEFAULT MODELS FOR BONDS
CDO Models and Price Applications
EXAMPLE: THE KMV LOSS MODEL
CDOs of Baskets of Various Assets
CREDIT RISK VERSUS INSURANCE
Engineered Implied Volatility and Implied Risk-Neutral Distributions
THE IMPLIED VOLATILITY
EXAMPLE: THE IMPLIED VOLATILITY IN A LOGNORMAL PROCESS
The Dupire Model
THE IMPLIED RISK-NEUTRAL DISTRIBUTION
EXAMPLE: AN IMPLIED BINOMIAL DISTRIBUTION
EXAMPLE: CALCULATING THE IMPLIED RISK-NEUTRAL PROBABILITY
IMPLIED DISTRIBUTIONS: PARAMETRIC MODELS
EXAMPLE: THE GENERALIZED BETA OF THE SECOND KIND
THE A-PARAMETRIC APPROACH AND THE BLACK-SCHOLES MODEL
EXAMPLE: THE SHIMKO TECHNIQUE
THE IMPLIED RISK-NEUTRAL DISTRIBUTION AND ENTROPY
EXAMPLES AND APPLICATIONS
RISK ATTITUDE, IMPLIED RISK-NEUTRAL DISTRIBUTION AND ENTROPY
APPENDIX: THE IMPLIED VOLATILITY— THE DUPIRE MODEL*
Acknowledgments
About the Author
Index
P. 1
Risk Finance and Asset Pricing: Value, Measurements, and Markets

Risk Finance and Asset Pricing: Value, Measurements, and Markets

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Published by Wiley
A comprehensive guide to financial engineering that stressesreal-world applications

Financial engineering expert Charles S. Tapiero has his fingeron the pulse of shifts coming to financial engineering and itsapplications. With an eye toward the future, he has crafted acomprehensive and accessible book for practitioners and students ofFinancial Engineering that emphasizes an intuitive approach tofinancial and quantitative foundations in financial and riskengineering. The book covers the theory from a practitionerperspective and applies it to a variety of real-world problems.

Examines the cornerstone of the explosive growth in marketsworldwide Presents important financial engineering techniques to price,hedge, and manage risks in general Author heads the largest financial engineering program in theworld
Author Charles Tapiero wrote the seminal work Risk and FinancialManagement.
A comprehensive guide to financial engineering that stressesreal-world applications

Financial engineering expert Charles S. Tapiero has his fingeron the pulse of shifts coming to financial engineering and itsapplications. With an eye toward the future, he has crafted acomprehensive and accessible book for practitioners and students ofFinancial Engineering that emphasizes an intuitive approach tofinancial and quantitative foundations in financial and riskengineering. The book covers the theory from a practitionerperspective and applies it to a variety of real-world problems.

Examines the cornerstone of the explosive growth in marketsworldwide Presents important financial engineering techniques to price,hedge, and manage risks in general Author heads the largest financial engineering program in theworld
Author Charles Tapiero wrote the seminal work Risk and FinancialManagement.

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Publish date: Sep 2, 2010
Added to Scribd: Sep 09, 2010
Copyright:Traditional Copyright: All rights reservedISBN:9780470892367
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