Risk and Financial Management

Topics: Risk, Insurance, Mathematical finance Pages: 426 (130507 words) Published: June 22, 2013
Risk and Financial Management

Risk and Financial Management: Mathematical and Computational Methods. C 2004 John Wiley & Sons, Ltd ISBN: 0-470-84908-8

C. Tapiero

Risk and Financial Management
Mathematical and Computational Methods

ESSEC Business School, Paris, France




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Email (for orders and customer service enquiries): cs-books@wiley.co.uk Visit our Home Page on www.wileyeurope.com or www.wiley.com All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailed to permreq@wiley.co.uk, or faxed to (+44) 1243 770571. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the Publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Other Wiley Editorial Offices John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA Wiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, Germany John Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1 Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Tapiero, Charles S. Risk and financial management : mathematical and computational methods / Charles Tapiero. p. cm. Includes bibliographical references. ISBN 0-470-84908-8 1. Finance–Mathematical models. 2. Risk management. I. Title. HG106 .T365 2004 658.15 5 015192–dc22 2003025311

British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0-470-84908-8 Typeset in 10/12 pt Times by TechBooks, New Delhi, India Printed and bound in Great Britain by Biddles Ltd, Guildford, Surrey This book is printed on acid-free paper responsibly manufactured from sustainable forestry in which at least two trees are planted for each one used for paper production.

This book is dedicated to:

Daniel Dafna Oren Oscar and Bettina

Preface xiii

Part I: Finance and Risk Management Chapter 1 Potpourri 1.1 Introduction 1.2 Theoretical finance and decision making 1.3 Insurance and actuarial science 1.4 Uncertainty and risk in finance 1.4.1 Foreign exchange risk 1.4.2 Currency risk 1.4.3 Credit risk 1.4.4 Other risks 1.5 Financial physics Selected introductory reading Making Economic Decisions under Uncertainty 2.1 Decision makers and rationality 2.1.1 The principles of rationality and bounded rationality 2.2 Bayes decision making 2.2.1 Risk management 2.3 Decision criteria 2.3.1 The expected value (or Bayes) criterion 2.3.2 Principle of (Laplace) insufficient reason 2.3.3 The minimax (maximin) criterion 2.3.4 The maximax (minimin) criterion 2.3.5 The minimax regret or Savage’s regret criterion 2.4 Decision tables and scenario analysis 2.4.1 The opportunity loss table 2.5 EMV, EOL, EPPI, EVPI 2.5.1 The...

References: 2 ˆ2 σt2 = Rt−1 + θ σt−1 ˆ
Extensions were suggested by Engle (1987, 1995) (ARCH models) and Bollerslev (GARCH models)
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