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more thorough introduction to market terminology should find the first nine
chapters of Hull (2012) adequate preparation for understanding the material
in this book.
My presentation of the material is based both on theory and on how
concepts are utilized in industry practice. I have tried to provide many concrete instances of either personal experience or reports I have heard from
industry colleagues to illustrate these practices. Where incidents have received sufficient previous public scrutiny or occurred long enough ago that
issues of confidentiality are not a concern, I have provided concrete details.
In other cases, I have had to preserve the anonymity of my sources by remaining vague about particulars. My preservation of anonymity extends to
a liberal degree of randomness in references to gender.
A thorough discussion of how mathematical models are used to measure
and control risks must make heavy reference to the mathematics used in creating these models. Since excellent expositions of the mathematics exist, I do
not propose to enter into extensive derivations of results that can readily be
found elsewhere. Instead, I will concentrate on how these results are used in
risk management and how the approximations to reality inevitable in any
mathematical abstraction are dealt with in practice. I will provide references
to the derivation of results. Wherever possible, I have used Hull (2012) as
a reference, since it is the one work that can be found on the shelf of nearly
every practitioner in the field of quantitative finance.
Although the material for this book was originally developed for a
course taught within a mathematics department, I believe that virtually all
of its material will be understandable to students in finance programs and
business schools, and to practitioners with a comparable educational background. A key reason for this is that whereas derivatives mathematics often
emphasizes the use of more mathematically sophisticated continuous time
models, discrete time models are usually more relevant to risk management,
since risk management is often concerned with the limits that real market
conditions place on mathematical theory.
This book is designed to be used either as a text for a course in risk management or as a resource for selfstudy or reference for people working in the
financial industry. To make the material accessible to as broad an audience
as possible, I have tried everywhere to supplement mathematical theory with
concrete examples and have supplied spreadsheets on the accompanying
website (www.wiley.com/go/frm2e) to illustrate these calculations. Spreadsheets on the website are referenced throughout the text and a summary of
all spreadsheets supplied is provided in the About the Companion Website
section at the back of the book. At the same time, I have tried to make sure
that all the mathematical theory that gets used in risk management practice
is addressed. For readers who want to pursue the theoretical developments
at greater length, a full set of references has been provided.