Dealing With Financial Risk : A Guide to Financial Risk Management

by David Shirreff

This book presents the concept of financial risk and the realties of financial risk management. Understanding risk and weighing risk against reward have become central to all commercial activity in particular to the financial markets. The concept of risk management used to refer to exclusively to the insurance industry but it was hijacked by wizards in financial institutions in the 1980s, initially to make their gambling in the markets seem more respectable. Good risk management requires a constant sharpening of one's awareness to new risks and to the probabilities of different outcomes. This guide will increase the reader's risk awareness, by presenting concepts in a simple and entertaining way, and by explaining the endeavors, mistakes and successes of others, as they have tried to identify, measure and simplify risk, and make it work for them. It looks at swaps, futures, options, derivatives, hedging principles, formulas, Monte Carlo simulations, chaos theory, neural networks, Raron (or risk-adjusted rate of return on capital), stress tests, worst case scenarios and all kinds of games that are played in the cause of managing risk. With great panache, color and clarity David Shirreff does a remarkable job of throwing light on one of the most complicated aspects of business and finance.

Genres: Business, Finance

256 pages, Hardcover

First published May 27, 2004

Reviews

[Cristian Espinal · Rating 4 out of 5]

I really like Shirreff's rational skepticism on classical risk management and the rationality of financial markets. I will save these arguments:

"The math has yet to understand the cost of capital from legal risk, liquidation risk, operational risk, fraud, staff retirement, or any sequence of low-probability contingencies".

"We [regulators] are more focused on distribution tails; you [bankers] are targeting the distribution center." Page.