Risk control capital allocation and realistic derivative pricing and hedging are critical
concerns for major financial institutions and individual traders alike. Events from the
collapse of Lehman Brothers to the Greek sovereign debt crisis demonstrate the urgent and
abiding need for statistical tools adequate to measure and anticipate the amplitude of
potential swings in the financial markets - from ordinary stock price and interest rate moves
to defaults to those increasingly frequent rare events fashionably called black swan events .
Yet many on Wall Street continue to rely on standard models based on artificially simplified
assumptions that can lead to systematic (and sometimes catastrophic) underestimation of real
risks. In Practical Methods of Financial Engineering and Risk Management Dr. Rupak Chatterjee
- former director of the multi-asset quantitative research group at Citi - introduces finance
professionals and advanced students to the latest concepts tools valuation techniques and
analytic measures being deployed by the more discerning and responsive Wall Street
practitioners on all operational scales from day trading to institutional strategy to model
and analyze more faithfully the real behavior and risk exposure of financial markets in the
cold light of the post-2008 realities. Until one masters this modern skill set one cannot
allocate risk capital properly price and hedge derivative securities realistically or
risk-manage positions from the multiple perspectives of market risk credit risk counterparty
risk and systemic risk. The book assumes a working knowledge of calculus statistics and
Excel but it teaches techniques from statistical analysis probability and stochastic
processes sufficient to enable the reader to calibrate probability distributions and create the
simulations that are used on Wall Street to valuate various financial instruments correctly
model the risk dimensions of trading strategies and perform the numerically intensive analysis
of risk measures required by various regulatory agencies.
