THE THIRD EDITION

The third edition of this book adds major and voluminous extensions to the previous edition.

The very first chapter deals with the financial crisis, which could not be a better introduction to the challenges of risk management in financial firms. The overview of risk management and risk models has been extended. The financial products section is also a full addition to the previous edition. The valuation section is entirely changed and expanded. The dependency section has been fully expanded to cover all approaches to dependencies, from the traditional techniques and up to the modern, more involved, techniques. The regulations section comprehensively covers the Basel 2 regulations using, as building blocks, the various approaches and sub-approaches. It now includes some essential features of accounting standards. Excerpts of Basel 2 are scattered in different chapters, notably in presenting cash products. Some of the analytics underlying the Basel 2 formulas are expanded in the credit sections.

Note that regulations are not the starting point of this text because these rely on risk management topics and issues. Risk management topics are introduced gradually without distortions between rule-based regulations and risk economics. Regulations are addressed in a dedicated section as they should, as regulatory application of risk models and risk processes.

As it is, the text sticks to the principle that sound models and sound implementation of risk management techniques remain the reference, and that the crisis is a massive evidence of absence of compliance with otherwise sound practices, governance and models. Therefore, the text has no negative view of risk models and practices, which tend to expand today, as expected in times of a major crisis.