Product Description

Associate PRM Certificate Exam Registration

The Associate Professional Risk Manager (PRM) is a new PRMIA certificate program intended for staff entering the risk management profession, or those who interface with risk management disciplines on a regular basis, such as auditing, accounting, legal, and systems development personnel who want to understand fundamental risk management methods and practices. Designed to be mathematically and theoretically less detailed than the Professional Risk Manager (PRM(tm)) certification, the new program will cover the core concepts allowing non-specialists to interpret risk management information and reports, make critical assessments and evaluate the implications and the limitations of such results.

Product Details

• Amazon Sales Rank: #40489 in Books
• Published on: 2005-12-14
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 416 pages

Features

• ISBN13: 9780071429665
• Condition: NEW
• Notes: Brand New from Publisher. No Remainder Mark.
• Click here to view our Condition Guide and Shipping Prices

From the Back Cover

Learn powerful corporate governance and risk strategies to control both financial and non financial risks

Risk is an integral component of every forward looking transaction. Now more than ever before, it is essential to understand the multiple dimensions of risk as well as how to best manage risk to gain a competitive advantage. The Essentials of Risk Management offers a strikingly clear picture of how to construct a superior risk management program.

The Essentials of Risk Management provides you with a practical, non-ivory tower approach that is necessary to effectively implement a superior risk management program. Written by three of the leading figures with extensive practical and theoretical experience in the global risk management and corporate governance arena, this straightforward guidebook features such topics as:

• Corporate governance, compliance and risk management
• How to implement integrated risk management
• Measuring, managing and hedging market, credit (retail and corporate), operational and model risk
• The roles of board members and senior management in managing risk

As corporate scandals continue to make headlines and erode shareholder confidence, risk becomes everyone's responsibility. The Essentials of Risk Management will empower both the technical and non technical reader with the essential knowledge necessary to understand and manage risks in any corporate or economic environment.

About the Author

Michel Crouhy, Ph.D., is the head of research and development and financial engineering at IXIS Corporate and Investment Bank (Groupe Caisse d'Epargne). He has the bankwide oversight on all quantitative research and the development of new products and applications supporting the trading and structuring businesses.

Dan Galai, Ph.D., is the Abe Gray Professor of Banking and Finance at The Hebrew University. He is a co-CEO of Sigma PCM, an investment banking firm. Galai has consulted for the Chicago Board Options Exchange and the American Stock Exchange, and for many major banks and corporations.

Robert M. Mark Ph.D., is the Chief Executive Officer of Black Diamond, which provides corporate governance, risk management consulting, and transaction services. He is the chairperson of The Professional Risk Managers' International Association's (PRMIA) Blue Ribbon Panel. He was awarded the Financial Risk Manager of the Year by the Global Association of Risk Professionals (GARP).

Customer Reviews

An excellent introduction
This book provides an introduction to the field of risk management for readers who do not yet want to get deeply involved in the mathematical formalism that is typically used. The authors wrote the book so that it is "accessible to everyone", and they have done a fine job. Those readers who need a more quantitative treatment will have to consult another book or the vast research literature on the subject. Risk management, as they see it, is an attempt to estimate both the `expected' losses and the `unexpected' losses, and being able to differentiate between these two concepts goes to the core of the subject. Thus the book emphasizes the "intuition" behind risk management, and not the formalism. However, one must not conclude from this that "intuition" and "formalism" are distinct, and the belief that they are has resulted in a lot of confusion (and financial losses) in recent years. The authors clearly do not believe that they are, but have merely emphasized "intuition" from a pedagogical point of view.

The authors classify risk into eight categories, namely market, credit, liquidity, operational, legal and regulatory, business, strategic, and reputation risk. Financial risk, as they see it, is composed of two of these, namely market and credit risk. Their discussion of corporate risk management is very interesting, in that it begins with the observation first made almost forty years ago that the value of a firm is not altered solely by financial transactions. This is due to their assumption of the perfect market hypothesis, which effectively suppresses the ability of the firm to gain significant advantages over an individual investor. Therefore with this assumption a firm should not concern itself with risks outside of the ones that all other firms face. This is an interesting conclusion, particularly in the context of using hedging via derivatives, as it implies that it cannot compete with ordinary self-insurance, due to the presence of transaction costs. The authors discuss in fair detail why the perfect market assumption is faulty, and therefore why managing risk with hedging is a viable strategy.

The regulatory environment, particularly in the banking industry, has enormous ramifications for risk management, as the authors discuss in the book. This is due in part to the Basel Accords of 1988 and 1996, and Basel II which is due to be in place at the end of 2007. The Basel accords are essentially a standardization for capital reserves, defining a `assets-to-capital' multiple and a `risk-based capital' ratio. The authors review the 1988 Accord and discuss the elementary relationships involved, including the `Cooke ratio' and how to obtain the credit equivalent for the off-balance-sheet exposures. They also discuss the reasons for the 1996 amendment, which essentially were the result of the new trading activities that banks were indulging themselves in. It would have been interesting if the authors had included a (historical) discussion on the efficacy of the Basel Accords in suppressing banking failures. They do mention the fiasco with Barings Bank, claiming that its demise would have been adverted if it were prohibited from racking up huge exchange-traded futures positions. This is certainly true, but any regulation needs to be validated by historical data, to the extent that this is possible, and this requires of course tracking of the financial institutions that are under the umbrella of the regulation. In this regard though, the authors do view bank regulation as a `research lab' for risk management, implying that they are aware of the need for validation of any regulations that are actually put in place. It will be fascinating therefore to see the impact of the new Basel II accords when they become active, and indeed observe, if possible, any `regulatory arbitrage' that occurs. This also brings up the question of how to assess the quality of the risk management strategies of a particular financial institution. The authors spend a little time discussing this, with one of them referring to a method analogous to credit scoring.

No book on risk management could be complete without discussion of academic research on the topic, for the reason that much of this research has found practical application and has greatly influenced portfolio management and risk valuation. The authors review four theoretical models, namely modern portfolio theory, the capital asset pricing model, the Black-Scholes option-pricing model, and the Modigliani-Miller theory of corporate finance. Even though the discussions are very short, one has to admire the authors' ability to avoid complicated mathematics in discussing all of these theories without sacrificing clarity. The more mathematically-mature reader may perhaps be annoyed with the omission of mathematical formalism, but a natural question that might arise for such a reader is whether or not risk can indeed be put in a general axiomatic framework that will encompass all of its different manifestations, such as credit risk, operational risk, etc. Such a framework would allow a complete mathematical characterization of risk, and would allow various general and quantitative statements to be made about it.

Due to the extent of mortgage portfolios in the United States at the present time, and due to the sensitive dependence of their values on interest rates, the authors spend a fair amount of time discussing interest-rate risk and how to hedge it with derivatives. Thus they speak of the `sensitivity' of financial instruments to certain risk factors, and study the case of fixed-income products via the `DV01' risk measure, which is the change in value of a security after a change in interest rate of 1 basis point. This measure gives a `first-order' approximation to the change in yield, but the authors show how to obtain a `second-order' approximation using the `convexity' adjustment.

For complex portfolios, the most popular method for risk management has been the value-at-risk or VAR, and so it is not surprising that the authors devote an entire chapter to it in the book. The authors view it as a more sophisticated method because of its ability to deal with volatilities and correlations. However, they point out that its efficacy is restricted to relatively short time scales and under `normal' market conditions. The fiasco at LTCM (Long Term Capital Management) is discussed as an example of the failure of VAR to measure risk over long time scales and under abnormal market conditions. They do not however give any detailed evidence for this claim, but a perusal of the research literature (surprisingly rather slim) reveals that LTCM made "major" errors in terms of their risk management, if viewed from the standpoint of VAR. This still leaves open the question as to whether it made "major" errors from the standpoint of some other method for measuring and evaluating risk that is possibly radically different from VAR.

A Non-Mathematical Approach
The essense of investing is that increased risk should be compensated for by increased return. The problem lies in measuring and thus managing risk. Measuring risk is in the same category as predicting the future. The future is uncertain, the best guesses fail as bad weather, oil embargoes, or any of a whole list of other incidents change the situation.

Risk management isn't simply a matter of avoiding risk. It is instead a matter of identifying it, measuring it, appreciating its consequences and then taking actions accordingly. Insurance is perhaps the best example.

If a hundred sailing ships go out and 90 return, spreading the risk among all hundred ships compensates for the loss of the ten. And Lloyds is born.

During recent years several techniques have been developed to measure risk. This book discusses them in a non-mathematical way that can be used by both risk and non-risk professionals. In essence it brings sophisticated techniques to be accessible to a wide audience.

Accessible introduction, sometimes imprecise
This is a broad, gentle introduction to risk. As it means to be non-technical, it is stronger as a discussion of qualitative issues like governance and weaker as an introduction to deep topics like Basel II and value at risk (VaR).

What I like about this book

It succeeds in putting risk measurement in perspective, from 10,000 feet. Chapter 1 nicely summarizes why risk measures are helpful and "dangerous." In this respect, the authors actually go further than Taleb's Black Swan by hinting at solutions. Taleb basically says we necessarily abuse models (my paraphrase of his entire book). We can all stipulate to that. The relevant question is, knowing our risk models do not describe natural phenomena, what do we do about it: how do we improve them and, a different question, what is their proper use (e.g., support, situation, context)? It's hard to find good study on model risk but this book touches on it quite a bit. In a way, i think the book's strength is as a primer on model risk.

Chapter 4 is helpful on risk governance, including roles (risk advisory director). The credit crisis, like some before, has re-surfaced the importance of governance.

It is a very accessible scan of various risk topics. The authors boiled down their formidable research on risk adjusted return on capital (RAROC) into a quick review. Great intro to economic capital and OpRisk VaR. Basel II is summarized into the smallest space I've seen.

What I don't like

Bending over backwards to be non-technical can lead to confusion. The central limit theorem (CLT), being slightly misstated, is given too much application (i.e., it speaks to properties of a sample mean under unrealistic assumptions, generally not an obsession of the risk manager who is concerned with tail outcomes).

Value at risk (VaR) is divided into three approaches. That's typical, but the review of the "analytic approach" propagates a common misunderstanding: it implies that the distributional assumption must be normal (e.g., a drawback of analytic approach is "assumes normality"). But of course extensions to parametric (linear) VaR models, that address skew and/or heavy-tails, are available.