Practical Methods of Financial Engineering and Risk Management: Tools for Modern Financial Professionals

Risk control, capital allocation, and realistic derivative pricing and hedging are critical concerns for major financial institutions and individual traders alike. Events from the collapse of Lehman Brothers to the Greek sovereign debt crisis 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" fashionably called black swan events. 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 Practical Methods of Financial Engineering and Risk Management, Dr. Rupak Chatterjee— former director of the multi-asset quantitative research group at Citi—introduces finance professionals and advanced students to the latest concepts, tools, valuation techniques, and analytic measures being deployed by the more discerning and responsive Wall Street practitioners, on all operational scales from day trading to institutional strategy, to model and analyze more faithfully the real behavior and risk exposure of financial markets in the cold light of the post-2008 realities. Until one masters this modern skill set, one cannot allocate risk capital properly, price and hedge derivative securities realistically, or risk-manage positions from the multiple perspectives of market risk, credit risk, counterparty risk, and systemic risk.

The book assumes a working knowledge of calculus, statistics, and Excel, but it teaches techniques from statistical analysis, probability, and stochastic processes sufficient to enable the reader to calibrate probability distributions and create the simulations that are used on Wall Street to valuate various financial instruments correctly, model the risk dimensions of trading strategies, and perform the numerically intensive analysis of risk measures required by various regulatory agencies.

What you’ll learn

Practical Methods lays out the core financial engineering and risk management concepts and techniques that real-world practitioners use on a daily basis, including:

• Bloomberg analysis of financial instruments
• Statistical analysis of financial data
• Simulation of stochastic processes
• Statistical modeling of trading strategies
• Optimal hedging Monte Carlo (OHMC) methods
• Credit derivatives valuation
• Counterparty credit risk (CCR) and credit valuation adjustment (CVA)
• Basel II and III risk measures
• Power laws and extreme value theory (EVT)
• Hedge fund replication

Who this book is for

Practical Methods of Financial Engineering and Risk Management is for Wall Street professionals and advanced students training to be risk managers, quantitative analysts, portfolio managers, and traders.

About the Author

Rupak Chatterjee, Ph.D., is an Industry Professor and the Deputy Director of the Financial Engineering Division at the Stevens Institute of Technology. He is also the Program Manager for the Accenture-Stevens Financial Services Analytics graduate program. Dr. Chatterjee has over fifteen years of experience as a quantitative analyst working for various Wall Street firms. His last role before returning to academia was as the Director of the Multi-Asset Hybrid Derivatives Quantitative Research group at Citi in New York. He was also the global Basel III coordinator for all the modeling efforts needed to satisfy the new regulatory risk requirements. Previously, he was a quantitative analyst at Barclays Capital, a vice president at Credit Suisse, and a senior vice president at HSBC. His educational background is in theoretical physics, which he studied at the University of Waterloo, Stony Brook University, and the University of Chicago. His research interests have included discrete time hedging problems using the Optimal Hedging Monte Carlo (OHMC) method and the design and execution of systematic trading strategies that embody the hallmarks of capital preservation and measured risk-taking.