Details

Risk Finance and Asset Pricing

Value, Measurements, and Markets
Wiley Finance, Band 563 1. Aufl.

von: Charles S. Tapiero
60,99 €
Verlag:	Wiley
Format:	EPUB
Veröffentl.:	24.09.2010
ISBN/EAN:	9780470892381
Sprache:	englisch
Anzahl Seiten:	478

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Beschreibungen

Titelbeschreibung

A comprehensive guide to financial engineering that stresses real-world applications Financial engineering expert Charles S. Tapiero has his finger on the pulse of shifts coming to financial engineering and its applications. With an eye toward the future, he has crafted a comprehensive and accessible book for practitioners and students of Financial Engineering that emphasizes an intuitive approach to financial and quantitative foundations in financial and risk engineering. The book covers the theory from a practitioner perspective and applies it to a variety of real-world problems. <ul> <li>Examines the cornerstone of the explosive growth in markets worldwide</li> <li>Presents important financial engineering techniques to price, hedge, and manage risks in general</li> <li>Author heads the largest financial engineering program in the world Author Charles Tapiero wrote the seminal work Risk and Financial Management.</li> </ul>

Inhaltsverzeichnis

Introduction xv Who This Book Is For xvi How This Book Is Structured xvii What's on the Companion Web Site xix CHAPTER 1 Risk, Finance, Corporate Management, and Society 1 Overview 1 Risks Everywhere—A Consequence of Uncertainty 1 Risk and Finance: Basic Concepts 4 Finance and Risks 6 Financial Instruments 7 Securities or Stocks 7 Example: An IBM Day-Trades Record 7 Bonds 9 Portfolios 10 Example: Constructing a Portfolio 11 Derivatives and Options 12 Real and Financial Assets 15 Financial Markets 16 Option Contracts 16 Problem 1.1: Options and Their Prices 17 Options and Specific Needs 18 Example: Options and The Price of Equity 19 Example: Management Stock Options 19 Options and Trading in Specialized Markets 20 Trading the CO2 Index 20 Trading on Commodities (Metal, Gold, Silver, Corn, Oil) 20 Trading the Weather and Insurance 21 Securitization, Mortgage-Backed Securities, and Credit Derivatives 21 Real-Life Crises and Finance 22 The ARS Crisis 22 The Banking–Money System Crisis 23 The 2008 Meltdown and Financial Theory 24 Finance and Ethics 27 Crime and Punishment 29 Summary 30 CHAPTER 2 Applied Finance 35 Overview 35 Finance and Practice 35 Risk Finance and Insurance 35 Infrastructure Finance 36 Finance, the Environment, and Exchange-Traded Funds Indexes 37 Finance and Your Pension 38 Contract Pricing and Franchises 39 Catastrophic Risks, Insurance and Finance 40 The Price of Safety 41 The Price of Inventories 42 Pricing Reliability and Warranties 42 The Price of Quality Claims 43 Financial Risk Pricing: A Historical Perspective 44 Essentials of Financial Risk Management 47 Comprehensive Financial Risk Management 49 Technology and Complexity 49 Retailing and Finance 51 Finance, Cyber Risks, and Terrorism 52 IT and Madoff 52 Virtual Markets 52 Virtual Products 52 Virtual Markets Participants 53 Virtual Economic Universes 53 Market Making and Pricing Practice 53 Market Makers, Market Liquidity, and Bid-Ask Spreads 55 Alternative Market Structures 56 Summary 57 CHAPTER 3 Risk Measurement and Volatility 63 Overview 63 Risk, Volatility, and Measurement 63 Moments and Measures of Volatility 66 Expectations, Volatility, Skewness, Kurtosis, and the Range 67 Example: IBM Returns Statistics 69 Example: Moments and the CAPM 70 Problem 3.1: Calculating the Beta of a Security 72 Modeling Rates of Return 72 Models of Rate of Returns 73 Statistical Estimations 77 Least Squares Estimation 77 Maximum Likelihood 79 ARCH and GARCH Estimators 80 Example: The AR(1)-ARCH(1) Model 81 Example: A GARCH (1,1) Model 83 High-Low Estimators of Volatility 83 Extreme Measures, Volume, and Intraday Prices 84 Statistical Orders, Volume, and Prices 85 Problem 3.2: The Probability of the Range 87 Intraday Prices and Extreme Distributions 87 Data Transformation 88 Example: Taylor Series 89 Value at Risk and Risk Exposure 90 VaR and Its Application 92 Example: VaR and Shortfall 94 Example: VaR, Normal ROR, and Portfolio Design 95 The Estimation of Gains and Losses 97 Summary 99 CHAPTER 4 Risk Finance Modeling and Dependence 109 Overview 109 Introduction 109 Dependence and Probability Models 111 Statistical Dependence 111 Dependence and Quantitative Statistical Probability Models 113 Many Sources of Normal Risk: Aggregation and Risk Factors Reduction 114 Example: Risk Factors Aggregation 115 Example: Principal Component Analysis (PCA) 116 Example: A Bivariate Data Matrix and PCA 117 Example: A Market Index and PCA 119 Dependence and Copulas 120 Example: The Gumbel Copula, the Highs and the Lows 123 Example: Copulas and Conditional Dependence 124 Example: Copulas and the Conditional Distribution 125 Financial Modeling and Intertemporal Models 126 Time, Memory, and Causal Dependence 127 Quantitative Time and Change 129 Persistence and Short-term Memory 130 The R/S Index 133 Summary 135 CHAPTER 5 Risk, Value, and Financial Prices 141 Overview 141 Value and Price 141 Utility, Risk, and Money 143 Utility’s Normative Principles: A Historical Perspective 144 Prelude to Utility and Expected Utility 145 Lotteries and Utility Functions 147 Example: The Utility of a Lottery 148 Quadratic Utility and Portfolio Pricing 149 Utility and an Insurance Exchange 150 Example: The Power Utility Function 151 Example: Valuation and the Pricing of Cash Flows 152 Example: Risk and the Financial Meltdown 153 Utility Rational Foundations 155 The Risk Premium 155 Utility and Its Behavioral Derivatives 156 Examples: Specific Utility Functions 159 The Price and the Utility of Consumption 161 Example: Kernel Pricing and the Exponential Utility Function 164 Example: The Pricing Kernel and the CAPM 165 Example: Kernel Pricing and the HARA Utility Function 166 The Price and Demand for Insurance 167 Summary 170 CHAPTER 6 Applied Utility Finance 177 Overview 177 Risk and the Utility of Time 177 Expected Utility and the Time Utility Price of Money 177 Risk, Safety, and Reliability 178 Asset Allocation and Investments 180 Example: A Two-Securities Problem 182 Example: A Two-Stocks Portfolio 184 Problem 6.1: The Efficiency Frontier 185 Problem 6.2: A Two-Securities Portfolio 187 Conditional Kernel Pricing and the Price of Infrastructure Investments 188 Conditional Kernel Pricing and the Pricing of Inventories 191 Agency and Utility 193 Example: A Linear Risk-Sharing Rule 194 Information Asymmetry: Moral Hazard and Adverse Selection 195 Adverse Selection 196 The Moral Hazard Problem 197 Signaling and Screening 199 Summary 200 CHAPTER 7 Derivative Finance and Complete Markets 205 Overview 205 The Arrow-Debreu Fundamental Approach to Asset Pricing 206 Example: Generalization to n States 210 Example: Binomial Option Pricing 212 Problem 7.1: The Implied Risk-Neutral Probability 213 Example: The Price of a Call Option 213 Example: A Generalization to Multiple Periods 215 Problem 7.2: Options and Their Prices 218 Put-Call Parity 218 Problem 7.3: Proving the Put-Call Parity 219 Example: Put-Call Parity and Dividend Payments 219 Problem 7.4: Options Put-Call Parity 220 The Price Deflator and the Pricing Martingale 220 Pricing and Complete Markets 222 Risk-Neutral Pricing and Market Completeness 224 Options Galore 226 Packaged and Binary Options 227 Example: Look-Back Options 227 Example: Asian Options 227 Example: Exchange Options 228 Example: Chooser Options 228 Example: Barrier and Other Options 228 Example: Passport Options 229 Options and Their Real Uses 229 Fixed-Income Problems 231 Example: Pricing a Forward 231 Example: Pricing a Fixed-Rate Bond 232 Pricing a Term Structure of Interest Rates 232 Example: The Term Structure of Interest Rates 234 Problem 7.5: Annuities and Obligations 235 Options Trading, Speculation, and Risk Management 235 Option Trading Strategies 237 Problem 7.6: Portfolio Strategies 240 Summary 245 Appendix A: Martingales 246 Essentials of Martingales 246 The Change of Measures and Martingales 248 Example: Change of Measure in a Binomial Model 249 Example: A Two-Stage Random Walk and the Radon Nikodym Derivative 251 Appendix B: Formal Notations, Key Terms, and Definitions 253 CHAPTER 8 Options Applied 259 Overview 259 Option Applications 259 Risk-Free Portfolios and Immunization 260 Selling Short 261 Future Prices 262 Problem 8.1: Pricing a Multiperiod Forward 264 Pricing and New Insurance Business 264 Example: Options Implied Insurance Pricing 266 Option Pricing in a Trinomial Random Walk 267 Pricing and Spread Options 269 Self-Financing Strategy 270 Random Volatility and Options Pricing 271 Real Assets and Real Options 273 The Option to Acquire the License for a New Technology 275 The Black-Scholes Vanilla Option 276 The Binomial Process as a Discrete Time Approximation 277 The Black-Scholes Model Option Price and Portfolio Replication 278 Risk-Neutral Pricing and the Pricing Martingale 281 The Greeks and Their Applications 284 Summary 287 CHAPTER 9 Credit Scoring and the Price of Credit Risk 291 Overview 291 Credit and Money 291 Credit and Credit Risk 294 Pricing Credit Risk: Principles 296 Credit Scoring and Granting 299 What Is an Individual Credit Score? 299 Bonds Rating or Scoring Business Enterprises 300 Scoring/Rating Financial Enterprises and Financial Products 301 Credit Scoring: Real Approaches 304 The Statistical Estimation of Default 305 Example: A Separatrix 310 Example: The Separatrix and Bayesian Probabilities 311 Probability Default Models 312 Example: A Bivariate Dependent Default Distribution 314 Example: A Portfolio of Default Loans 315 Example: A Portfolio of Dependent Default Loans 316 Problem 9.1: The Joint Bernoulli Default Distribution 317 Credit Granting 317 Example: Credit Granting and Creditor’s Risks 319 Example: A Bayesian Default Model 322 Example: A Financial Approach 323 Example: An Approximate Solution 326 Problem 9.2: The Rate of Return of Loans 327 The Reduced Form (Financial) Model 327 Example: Calculating the Spread of a Default Bond 328 Example: The Loan Model Again 329 Example: Pricing Default Bonds 330 Example: Pricing Default Bonds and the Hazard Rate 331 Examples 332 Example: The Bank Interest Rate on a House Loan 333 Example: Buy Insurance to Protect the Portfolio from Loan Defaults 333 Problem 9.3: Use the Portfolio as an Underlying and Buy or Sell Derivatives on This Underlying 334 Problem 9.4: Lending Rates of Return 334 Credit Risk and Collateral Pricing 334 Example: Hedge Funds Rates of Return 337 Example: Equity-Linked Life Insurance 338 Example: Default and the Price of Homes 339 Example: A Bank’s Profit from a Loan 341 Risk Management and Leverage 342 Summary 344 CHAPTER 10 Multi-Name and Structured Credit Risk Portfolios 353 Overview 353 Introduction 353 Credit Default Swaps 357 Example: Total Return Swaps 359 Pricing Credit Default Swaps—The Implied Market Approach 359 Example: The CDS Price Spread 360 Example: An OTC (Swap) Contract under Risk-Neutral Pricing and Collateral Prices 362 Example: Pricing a Project Launch 364 Credit Derivatives: A Historical Perspective 368 Credit Derivatives: Historical Modeling 369 Credit Derivatives and Product Innovation 372 CDO Example: Collateralized Mortgage Obligations (CMOs) 376 Example: The CDO and SPV 377 Modeling Credit Derivatives 379 CDO: Quantitative Models 380 Example: A CDO with Numbers 380 Example: A CDO of Zero Coupon Bonds 382 Example: A CDO of Default Coupon-Paying bonds 385 Example: A CDO of Rated Bonds 387 Examples: Default Models for Bonds 391 CDO Models and Price Applications 395 Example: The KMV Loss Model 396 CDOs of Baskets of Various Assets 397 Credit Risk versus Insurance 398 Summary 399 CHAPTER 11 Engineered Implied Volatility and Implied Risk-Neutral Distributions 407 Overview 407 Introduction 407 The Implied Volatility 409 Example: The Implied Volatility in a Lognormal Process 410 The Dupire Model 411 The Implied Risk-Neutral Distribution 412 Example: An Implied Binomial Distribution 413 Example: Calculating the Implied Risk-Neutral Probability 414 Implied Distributions: Parametric Models 417 Example: The Generalized Beta of the Second Kind 418 The A-parametric Approach and the Black-Scholes Model 420 Example: The Shimko Technique 421 The Implied Risk Neutral Distribution and Entropy 423 Examples and Applications 426 Risk Attitude, Implied Risk-Neutral Distribution and Entropy 431 Summary 432 Appendix: The Implied Volatility—The Dupire Model 433 Acknowledgments 439 About the Author 441 Index 443

Autorenportrait

CHARLES S. TAPIERO is the Topfer Distinguished Professor of Financial Engineering and Technology Management at the New York University Polytechnic Institute. He is also Chair and founder of the Department of Finance and Risk Engineering, as well as cofounder and co–Editor in Chief of Risk and Decision Analysis. An active researcher and consultant, Professor Tapiero has published over 350 papers and thirteen books on a broad range of issues spanning risk analysis, actuarial and financial risk engineering, and management, including Risk and Financial Management: Mathematical and Computational Methods, also by Wiley.

Back cover copy

Over the past two decades, financial firms, companies, and governments have shifted greater attention to financial manipulations in which they capitalized on leverage and short-term returns. These actually resulted in an explosive and global growth in financial activity. A financial Pandora's box had been opened, and countries and blue chip corporations believing in perpetual growth and once thought too big to fail, found themselves strangled with a debt they were not able to bear. The recent market melt-down and credit liquidity crisis created full realization that complex financial products—when misunderstood and misused—can have devastating effects. Risk Finance and Asset Pricing: Value, Measurements, and Markets is a comprehensive introduction to financial engineering that presents the foundations of asset pricing and risk management, while stressing real-world applications. Written for both beginning and practicing financial engineers, author Charles Tapiero—the Topfer Distinguished Professor of Financial Engineering and Technology Management at the NYU Polytechnic Institute—provides: <ul> <li>A non-quantitative introduction to the business of finance, risk, and their many applications</li> <li>An overview of the statistical approaches for measuring risk</li> <li>An introduction to the concept of utility and financial risk management</li> <li>An outline of the Arrow-Debreu framework in discrete states and time for assets and derivatives (options) pricing</li> <li>An outline of credit risk, scoring, and complex structured financial products such as credit derivatives, their models, their demystification, pricing, and finally, a cursory view of technical approaches to implied pricing</li> </ul> Each chapter includes a summary of the techniques described, and concludes with a series of problems so readers can test what they've learned. Financial engineering, despite its challenges and opportunities, when misunderstood, has the potential to wreak havoc on world economies and individual portfolios. Risk Finance and Asset Pricing presents a new direction in financial engineering education that combines reality and theory so that risk finance might again work as intended.