If a risk consultant doesn’t come
from a trading background or is not
exposed to risk practices and ends
up working with a client who is
just as unfamiliar, together they can
do a lot of damage.
But, at the same time, he is not trying to impress readers with his technical
acumen. Ma W is instead a matter-of-fact
guidebook to building and using models
for all these applications. It contains formulas, but also full discussion of how to
execute the analyses with a spreadsheet.
He starts out walking us through an
analysis of the possible considerations
of an airline that decides not to hedge
its fuel price risk. In that example, he
explains the importance of four basic
questions for a risk analyst:
1. What is the exposure?
2. What is the trend of the exposure?
3. What is the impact of the risk factors
on an exposure?
4. What is our risk appetite?
That list of questions very much re-
minds me of my study notes for the
actuarial exams. It’s a general list that
can be applied to any risk situation, even
when you have no prior knowledge of the
particulars of that risk.
Over and over again, through more
than 600 pages, Farid demystifies the
modeling process for each risk. And
while Ma W provides step-by-step direc-
tions for a novice to perform the analysis
and risk management for a variety of
risks, it is also peppered with commen-
tary and advice that reads almost like the
best cookbooks or travel books.
A derivative instrument is very
similar to bottled water in the Gobi
Desert. Its value is completely
determined not by itself but by an
external factor. The environment.
Most of the analysis is pretty standard
fare, presented in a thorough fashion. For
example, there is a list of market risk limits for a money market product:
■ ■ Stop-loss limits
■ ■ VaR limits
■ ■ Regulatory limits
■ ■ Inventory age limits
■ ■ Concentration limits