Risk Management's greatest failure has been its inability to simplify its factual presentation and connect with board and executive team members in a language that they can understand and relate to. By using simple well established tools, Models at Work takes readers through a journey that cuts across models, frameworks, practice, data, markets, countries and case studies.
A central theme of the book it is that we need sophistication in analysis, not complexity in modeling; that risk models don't work in isolation and for a risk function to be successful it needs to focus on presenting results that are understood by broader audiences, not just the mathematically inclined.
Models at Work addresses these challenges and will demonstrate:
β’ how to measure the impact of volatility using simple and incrementally complex tools.
β’ how to translate the impact to changes in business results under stressed conditions, looking toward the distribution of volatility and Monte Carlo simulations rather than static value at risk models.
β’ the multiple flavors of value at risk as well as additional portfolio metrics.
β’ how to link target accounts and risk policy and examine the impact of both on designing risk systems.
β’ Monte Carlo simulation in Excel for simulating commodity prices, projecting business P&L and analyzing hedge effectiveness.
β’ price swaps, vanilla and exotic options in Excel.
If you have been searching for market relevant, background material on risk that can be shared with board members and business line managers, with technology, implementation and audit teams, with new arrivals in the compliance function or even business school students, this book is for you. It fills in the missing context that kills conversations around risk management. How do you measure and manage risk? How do you link risk to business drivers? How does risk work outside the financial services industry? Why doesn't Value at Risk work?
Using lay person language and simple tools, Models at Work answers questions raised by risk management practitioners and students around the world and will become a valuable resource for both audiences.