Risk Management and Financial Institutions (Wiley Finance) 5th Edition

Book Preface

Risk management practices and the regulation of financial institutions have con-tinued to evolve in the past three years. Risk Management and Financial Institu-tions has been expanded and updated to reflect this. Like my other popular text

Options, Futures, and Other Derivatives, the book is designed to be suitable for practicing managers as well as university students. Those studying for FMA and PRM qualifications will also find the book useful.
The book is appropriate for university courses in either risk management or financial institutions.It is not necessary for students to take a course on options and futures markets prior to taking a course based on this book. But if they have taken such a course, some of the material in the first nine chapters does not need to be covered.
The level of mathematical sophistication and the way material is presented have been managed carefully so that the book is accessible to as wide an audience as possible. For example, when covering copulas in Chapter 11, I present the intuition followed by a detailed numerical example; when covering maximum likelihood methods in Chapter 10 and extreme value theory in Chapter 13, I provide numerical examples and enough details for readers to develop their own spreadsheets. I have also provided Excel spread-sheets for many applications on my website:
www-2.rotman.utoronto.ca/∼hull
This is a book about risk management, so there is very little material on the valuation of derivatives. (That is the main focus of my other two books, Options, Futures, and Other Derivatives and Fundamentals of Futures and Options Markets.) The appendices at the end of the book include material that summarizes valuation and other results that are important in risk management. The RMFI Software (version 1.00) is designed for this book and can be downloaded from my website.
New Material
The fifth edition has been fully updated and contains much new material. In particular:

1. A new chapter on financial innovation has been included (Chapter 28).
2. A new chapter on the regulation of OTC derivatives markets has been included (Chapter 17). This covers both cleared and uncleared transactions and explains the Standard Initial Margin Model (SIMM).
3. The chapter on the Fundamental Review of the Trading Book (FRTB) has been rewritten to provide a fuller description and reflect recent changes (Chapter 18).
4. The chapter on the model-building approach to estimating value at risk and expected shortfall (Chapter 14) has been rewritten to better reflect the way the market handles interest rates and the way the model-building approach is used for SIMM and FRTB.
5. The chapter on operational risk (Chapter 23) has been rewritten to reflect regulatory developments in this area.
6. The chapter on model risk management (Chapter 25) has been rewritten to cover more than just valuation models and to reflect regulatory requirements such as SR
11- 7.
7. At various points in the book, recent developments such as IFRS 9 and SA-CCR are covered.

Slides
Several hundred PowerPoint slides can be downloaded from my website or from the Wiley Higher Education website. Adopting instructors are welcome to adapt the slides to meet their own needs.
Questions and Problems
End-of-chapter problems are divided into two groups: “Practice Questions and Prob-lems” and “Further Questions.” Solutions to the former are at the end of the book. Solutions to the latter and accompanying worksheets are available to adopting instruc-tors from the Wiley Higher Education website.
Instructor Material
The instructor’s manual is made available to adopting instructors on the Wiley Higher Education website. It contains solutions to “Further Questions” (with Excel worksheets), notes on the teaching of each chapter, and some suggestions on course organization.

Acknowledgments
Many people have played a part in the production of this book. I have benefited from interactions with many academics and practicing risk managers. I would like to thank the students in my MBA, Master of Finance, and Master of Financial Risk Management courses at the University of Toronto, many of whom have made suggestions as to how the material could be improved.
Alan White, a colleague at the University of Toronto, deserves a special acknowl-edgment. Alan and I have been carrying out joint research and consulting in the area of derivatives and risk management for about 30 years. During that time we have spent countless hours discussing key issues. Many of the new ideas in this book, and many of the new ways used to explain old ideas, are as much Alan’s as mine. Alan has done most of the development work on the RMFI software.
Special thanks are due to many people at Wiley, particularly Bill Falloon, Mike Hen-ton, Kimberly Monroe-Hill, Judy Howarth, and Steven Kyritz, for their enthusiasm, advice, and encouragement.

I welcome comments on the book from readers. My e-mail address is: