Practical Methods of Financial Engineering and Risk Management

Risk control and derivative pricing are major concerns for financial institutions and individual traders alike. Events from the collapse of Lehman Brothers to the implosion of the Cyprus banking sector demonstrate the urgent and abiding need for statistical tools adequate to measure and anticipate the amplitude of potential swings in the financial markets from ordinary stock price and interest rate moves to defaults to those increasingly frequent rare events called black swans. Yet many on Wall Street continue to rely on standard models based on artificially simplified assumptions that can lead to systematic (and sometimes catastrophic) underestimation of real risks. In Modern Methods of Financial Engineering and Risk Management,the director of the multi-asset quantitative research group at Citigroup introduces finance professionals and advanced students to the latest concepts and tools to model and analyze more faithfully the real behavior of financial markets and better constrain asset allocation, derivative pricing and hedging, and risk control.§For the first time between the covers of a single book, Modern Methods of Financial Engineering and Risk Management presents the whole assemblage of predictive techniques and analytic measures that have been devised and deployed to control and hedge risk in the cold light of post-2007 financial realities. Rupak Chatterjee is fiercely pragmatic in his exposition of financial instruments, which he unfolds with continual graphical reference to the Bloomberg screens with which Wall Street practitioners continually interface. Methodically throughout the book, Dr. Chatterjee teases out and explains the functional interdependence of successful risk management and robust valuation on all operational scales from day trading to institutional strategy. The book assumes a working knowledge of stochastic processes, statistical analysis, and Excel sufficient to calibrate the probability distributions that are needed by Wall Street practitioners to valuate various financial instruments correctly and to model the risk dimensions of various trading strategies realistically.