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The Essentials of Risk Management: The Definitive Guide for the Non-risk Professional Hardcover – 4 January 2006

by Michel Crouhy (Author), Dan Galai (Author), Robert Mark (Author)
4.4 out of 5 stars 40
Edition: 1st
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Learn what risk management is and how you can effectively implement it in your organisation

Essentials of Risk Management eliminates the complex mathematics and minutiae surrounding corporate risk management. It describes key risk concepts and controls in language that you can understand. Topics include organisational issues and regulatory aspects, along with detailed descriptions of tools for controlling key types of market, credit, and operational risk.

Key features

  • Vital information from the bestselling Risk Management is made accessible to a wider professional audience
  • For ease of readability, complicated mathematical equations are located in appendixes instead of chapter text
  • The authors are prize-winning researchers and practitioners; each is a prominent and influential figure in the international risk management field
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  1. ISBN-10
    0071429662
  2. ISBN-13
    978-0071429665
  3. Edition
    1st
  4. Publisher
    McGraw-Hill Education
  5. Publication date
    4 January 2006
  6. Language
    English
  7. Dimensions
    16.51 x 4.45 x 24.13 cm
  8. Print length
    432 pages
  9. See all details
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About the Author

Dr. Michel Crouhy is Senior Vice President, Global Analytics, Market Risk Management Division at Canadian Imperial Bank of Commerce (CIBC). Prior to this he was a Professor of Finance at HEC. He has been a visiting professor at Wharton School where he received his Ph.D. He has extensively published in academic journals and is also the associate editor of the Journal of Derivatives, the Journal of Banking and Finance. He is also on the editorial board of the new Journal of Risk.

Dr. Dan Galai is the Abe Gray Professor of Finance and Business Administration at Hebrew University. He has been a visiting professor of Finance at INSEAD, and also has taught at UCLA and the University of Chicago where he received his Ph.D. He has consulted for the Chicago Board of Exchange and the American Stock Exchange. He has published numerous articles in leading business and finance journals and was the winner of the First Annual Pomeranze Prize for excellence in options research presented by the CBOE.

Product details

  • Publisher ‏ : ‎ McGraw-Hill Education; 1st edition (4 January 2006)
  • Language ‏ : ‎ English
  • Hardcover ‏ : ‎ 432 pages
  • ISBN-10 ‏ : ‎ 0071429662
  • ISBN-13 ‏ : ‎ 978-0071429665
  • Dimensions ‏ : ‎ 16.51 x 4.45 x 24.13 cm
  • Customer Reviews:
    4.4 out of 5 stars 40

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  1. Michel Crouhy

    Michel Crouhy

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    Dr. Michel Crouhy – Head of Research and Development at NATIXIS, Member of the Research Advisory Council of the Global Risk Institute in Financial Services & Member of the Scientific Executive Board, Institut Louis Bachelier

    Dr. Michel Crouhy is Head of Research and Development at NATIXIS Corporate and Investment Bank, a subsidiary of Groupe BPCE. He has the bankwide oversight on all quantitative research and the development of new products and applications supporting the trading and structuring businesses. He is also the founder and president of the NATIXIS Foundation for Quantitative Research, which promotes and supports academic research and world-class events in the area of mathematical finance.

    Formerly, Dr. Crouhy was senior vice president, business analytic solutions, in the Risk Management Division, at the Canadian Imperial Bank of Commerce.

    Prior to his career in the industry, Dr. Crouhy was a professor of finance at the HEC School of Management in Paris, where he was also the founder and director of the M.S. HEC in international finance, the first MS program in financial engineering. He has been a visiting professor at the Wharton School of the University of Pennsylvania and at the University of California, Los Angeles.

    Dr. Crouhy is a founding member of PRMIA (the Professional Risk Managers’ International Association) and a member of the PRMIA Blue Ribbon Panel, and a member of the Credit Risk Committee of the International Association of Financial Engineers (IAFE). He is the author and co-author of several books, the most recent ones being Risk Management (McGraw-Hill - 2001), The Essentials of Risk Management (second edition, McGraw-Hill - 2014); and he has published extensively in academic journals in the areas of banking, options, risk management and financial markets. He is also associate editor of several academic journals.

    Dr. Crouhy holds a PhD from the Wharton School of the University of Pennsylvania and has a Doctoris Honoris Causa from the University of Montreal.

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  2. Dan Galai

    Dan Galai

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  3. Robert Mark

    Robert Mark

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Roxie
5.0 out of 5 stars good book to have
Reviewed in Germany on 25 May 2013
Verified Purchase
if one wants to know much more about risk management, this book will help in getting a good idea on how risk should be handled
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Dr. Lee D. Carlson
5.0 out of 5 stars An excellent introduction
Reviewed in the United States on 11 July 2006
Verified Purchase
This book provides an introduction to the field of risk management for readers who do not yet want to get deeply involved in the mathematical formalism that is typically used. The authors wrote the book so that it is "accessible to everyone", and they have done a fine job. Those readers who need a more quantitative treatment will have to consult another book or the vast research literature on the subject. Risk management, as they see it, is an attempt to estimate both the `expected' losses and the `unexpected' losses, and being able to differentiate between these two concepts goes to the core of the subject. Thus the book emphasizes the "intuition" behind risk management, and not the formalism. However, one must not conclude from this that "intuition" and "formalism" are distinct, and the belief that they are has resulted in a lot of confusion (and financial losses) in recent years. The authors clearly do not believe that they are, but have merely emphasized "intuition" from a pedagogical point of view.

The authors classify risk into eight categories, namely market, credit, liquidity, operational, legal and regulatory, business, strategic, and reputation risk. Financial risk, as they see it, is composed of two of these, namely market and credit risk. Their discussion of corporate risk management is very interesting, in that it begins with the observation first made almost forty years ago that the value of a firm is not altered solely by financial transactions. This is due to their assumption of the perfect market hypothesis, which effectively suppresses the ability of the firm to gain significant advantages over an individual investor. Therefore with this assumption a firm should not concern itself with risks outside of the ones that all other firms face. This is an interesting conclusion, particularly in the context of using hedging via derivatives, as it implies that it cannot compete with ordinary self-insurance, due to the presence of transaction costs. The authors discuss in fair detail why the perfect market assumption is faulty, and therefore why managing risk with hedging is a viable strategy.

The regulatory environment, particularly in the banking industry, has enormous ramifications for risk management, as the authors discuss in the book. This is due in part to the Basel Accords of 1988 and 1996, and Basel II which is due to be in place at the end of 2007. The Basel accords are essentially a standardization for capital reserves, defining a `assets-to-capital' multiple and a `risk-based capital' ratio. The authors review the 1988 Accord and discuss the elementary relationships involved, including the `Cooke ratio' and how to obtain the credit equivalent for the off-balance-sheet exposures. They also discuss the reasons for the 1996 amendment, which essentially were the result of the new trading activities that banks were indulging themselves in. It would have been interesting if the authors had included a (historical) discussion on the efficacy of the Basel Accords in suppressing banking failures. They do mention the fiasco with Barings Bank, claiming that its demise would have been adverted if it were prohibited from racking up huge exchange-traded futures positions. This is certainly true, but any regulation needs to be validated by historical data, to the extent that this is possible, and this requires of course tracking of the financial institutions that are under the umbrella of the regulation. In this regard though, the authors do view bank regulation as a `research lab' for risk management, implying that they are aware of the need for validation of any regulations that are actually put in place. It will be fascinating therefore to see the impact of the new Basel II accords when they become active, and indeed observe, if possible, any `regulatory arbitrage' that occurs. This also brings up the question of how to assess the quality of the risk management strategies of a particular financial institution. The authors spend a little time discussing this, with one of them referring to a method analogous to credit scoring.

No book on risk management could be complete without discussion of academic research on the topic, for the reason that much of this research has found practical application and has greatly influenced portfolio management and risk valuation. The authors review four theoretical models, namely modern portfolio theory, the capital asset pricing model, the Black-Scholes option-pricing model, and the Modigliani-Miller theory of corporate finance. Even though the discussions are very short, one has to admire the authors' ability to avoid complicated mathematics in discussing all of these theories without sacrificing clarity. The more mathematically-mature reader may perhaps be annoyed with the omission of mathematical formalism, but a natural question that might arise for such a reader is whether or not risk can indeed be put in a general axiomatic framework that will encompass all of its different manifestations, such as credit risk, operational risk, etc. Such a framework would allow a complete mathematical characterization of risk, and would allow various general and quantitative statements to be made about it.

Due to the extent of mortgage portfolios in the United States at the present time, and due to the sensitive dependence of their values on interest rates, the authors spend a fair amount of time discussing interest-rate risk and how to hedge it with derivatives. Thus they speak of the `sensitivity' of financial instruments to certain risk factors, and study the case of fixed-income products via the `DV01' risk measure, which is the change in value of a security after a change in interest rate of 1 basis point. This measure gives a `first-order' approximation to the change in yield, but the authors show how to obtain a `second-order' approximation using the `convexity' adjustment.

For complex portfolios, the most popular method for risk management has been the value-at-risk or VAR, and so it is not surprising that the authors devote an entire chapter to it in the book. The authors view it as a more sophisticated method because of its ability to deal with volatilities and correlations. However, they point out that its efficacy is restricted to relatively short time scales and under `normal' market conditions. The fiasco at LTCM (Long Term Capital Management) is discussed as an example of the failure of VAR to measure risk over long time scales and under abnormal market conditions. They do not however give any detailed evidence for this claim, but a perusal of the research literature (surprisingly rather slim) reveals that LTCM made "major" errors in terms of their risk management, if viewed from the standpoint of VAR. This still leaves open the question as to whether it made "major" errors from the standpoint of some other method for measuring and evaluating risk that is possibly radically different from VAR.
61 people found this helpful
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D. A. Millar
5.0 out of 5 stars Good introduction to Risk Management
Reviewed in the United Kingdom on 2 June 2009
Verified Purchase
I bought this book to evaluate it as syllabus material for PRMIA's Associate Professional Risk Manager certification - it passed that test. The book is concise and well written and covers all the necessary topics for a good understanding of financial risk management without being over theoretical or going into detailed mathematics. Despite being written by three authors this is not apparant in style. The book is also very useful as a reference book to help with general risk management knowledge.
17 people found this helpful
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Amazon Customer
5.0 out of 5 stars Excellent Fundamentals
Reviewed in the United States on 20 September 2010
Verified Purchase
I ran across mention of this book on a website discussing Risk Manaagement in general. This book is fanatastic in its decription of Market, Credit and Operational Risk. Market and Credit Risk specically discuss derivatives and how they are leveraged to lesson exposure to volatility. This is more a decriptive and non-mathematical view in the inner workings of financial offsetting positioning. It is a great first look at the complexities of risk management and derivatives.

Recommended for all who have an interest risk management.
2 people found this helpful
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Lenster
4.0 out of 5 stars Book Review
Reviewed in the United States on 1 June 2012
Verified Purchase
This book provides a fairly good overview of enterprise and market risk related principles. The authors are primarily based in Europe and the majority of examples are from European based organizations. This book unfortunately was last updated in 2006 and some of the principles and examples cited are somewhat dated from a 2012 perspective. In light of how risks are looked at in today's world, I would reccomend that the author's update this book for 2012 and include more examples from Asia and the Americas.
2 people found this helpful
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