Financial Market Risk Management
by Dr. Jeffrey C. K. Lim

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Table of Contents

Chapter 0: Introduction       Chapter 1: Bond Mathematics 1.1 Interest Calculation Methods   1.1.1 Simple Interest 1.1.2 Compound Interest 1.1.3 Discount 1.2 Bond Price and Yields   1.2.1 Bond Prices and Yields          - Coupon Bonds          - Zero-Coupon Bonds 1.3 Duration and Convexity 1.3.1 Bond Duration          - Modified Duration          - Macaulay Duration 1.3.2 Bond Convexity 1.3.3 Portfolio Duration and Convexity     Chapter 2: Probability Distributions 2.1 Random Variables and their Moments 2.1.1 Random Variables 2.1.2 Key Moments of Random Variables          - Expectation          - Variance          - Skewness          - Kurtosis 2.1.3 Probability Generating Functions of Random Variables 2.2 Function of Random Variables 2.2.1 Definition 2.2.2 Sum of Functions of Random Variables 2.2.3 Product of Functions of Random Variables 2.3 Some Key Probability Distributions 2.3.1 Uniform Distribution 2.3.2 Bernoulli Distribution 2.3.3 Binomial Distribution 2.3.4 Negative Binomiall Distribution          - Geometric Distribution 2.3.5 Poisson Distribution 2.3.6 Normal Distribution          - Standard Normal Distribution 2.3.7 Log-Normal Distribution 2.3.8 Chi-square Distribution 2.3.9 Student-t Distribution 2.4 Central Limit Theorem 2.5 Estimation of Parameters         Chapter 3: Introduction To Financial Market Risk 3.1 Value-at-Risk (VaR) Introduction 3.2 VaR Confidence Levels and Horizons 3.2.1 VaR Confidence Levels 3.2.2 VaR Horizons 3.3 Back Testing 3.4 Stress Testing To Complement VaR 3.5 Conditional Value-at-Risk (C-VaR)         Chapter 4: Types of Financial Market Risk 4.1 Systematic Risk 4.1.1 General Market Risk          - Directional Risk          - Non-Directional Risk 4.2 Non-systematic Risk 4.2.1 Credit Risk 4.2.2 Event Risk 4.2.3 Liquidity Risk 4.3 Risk Interaction         Chapter 5: Sources of Financial Risk 5.1 Interest Rate Instruments 5.2 Foreign Exchange Instruments 5.3 Equity Instruments - Single-Index Model - Multi-Index Model 5.4 Commodity Instruments 5.5 Summary         Chapter 6: VaR Calculation Methodologies 6.1 Using Historicals (Full and Approximate) 6.1.1 Full Valuation 6.1.2 Delta-Gamma Approach 6.1.3 Delta-Normal Approach 6.2 Using Monte Carlo Methods

Author

Dr. Jeffrey C. K. Lim,  Ph.D., C.Sci., C.Math., FIMA, FRM, PRM Dr. Jeffrey C. K. Lim, certified Financial Risk Manager (FRM1) and certified Professional Risk Manager (PRM2), is currently the Managing Director of PI ETA Consulting Company, a Treasury and Financial Risk Management Consulting Company. A Chartered Scientist (C.Sci.3), a Chartered Mathematician (C.Math.4) and an elected Fellow of the Institute of Mathematics and Its Applications, U.K. (FIMA), Jeff earned his Ph.D. in Stochastic Financial Modeling from the University of Cambridge in England. Jeff’s research interest at Cambridge was in the area of Arbitrage Opportunities occurring in the Mispricing of Financial Options, and his original research culminated in the publication of his doctoral dissertation entitled: “Multi-period Mean-Variance Option Portfolio Strategies”. Jeff was an authorized Securities & Financial Derivatives Representative in London, having been certified by The Securities and Futures Authority (SFA) in England, where he started his career as a Derivatives Analyst with Nomura International in London, England. He subsequently joined NatWest Markets from London, England to become its Head of Currency Structured Products for South and South-East Asia. Jeff then moved to American Express Bank to become its Director of Structured Products, prior to assuming his current position. Jeff has also contributed to the development and enhancement of talent and infrastructure for Singapore's financial center as a guest Professor at the National University of Singapore’s Center for Financial Engineering, where he was responsible for the curriculum of its Master of Science degree program’s core modules in Financial Derivatives and Treasury Management. In addition, Jeff has also been invited by the Nanyang Technological University and the Singapore Management University to share his expertise in a similar capacity. In recognition of Jeff’s expertise and experience in the field of Treasury and Financial Risk Management, the University of New South Wales Asia appointed Jeff to be its first Adjunct Professor with the university’s Division of Business and Humanities. At PI ETA Consulting Company, Jeff was principal Inventor in two of the Patents that the company currently holds - one in Treasury and Financial Risk Management Systems, and the other in Knowledge Management Systems. Professionally, Jeff is a Fellow of both The Global Association of Risk Professionals (GARP), U.S.A. and The Professional Risk Managers International Association (PRMIA), U.S.A. He is also a Fellow of the Cambridge Philosophical Society, U.K. and a Life-time Member of The Cambridge Society, U.K. Jeff is also honoured to be a Fellow of The Cambridge Commonwealth Society, U.K., having been previously awarded the Cambridge Commonwealth Trust and the Shell Group of Companies Doctoral Research Scholarship. 1 The Financial Risk Manager (FRM) designation is awarded by The Global Association of Risk Professionals (GARP), U.S.A. 2The Professional Risk Manager (PRM) designation is awarded by The Professional Risk Managers International Association (PRMIA), U.S.A. 3The Chartered Scientist (C.Sci.) designation is awarded by The Science Council, U.K. 4The Chartered Mathematician (C.Math.) designation is awarded by The Institute of Mathematics and Its Applications, U.K.

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