Mr. Gleason explains, without using "Greek letters and mathematical formulas, how risk management works" and shows why it has becomeimperative for financial services firms to establish global risk managementprocesses, which "allow firms to know, control, and accurately chargefor the financial risks they are taking."
After a brief overview ofthe full spectrum of financial and nonfinancial risks, two major sectionsof the book are dedicated to market and credit risk, how they differ andwhat they share. Market risk management is examined along product lines,commodities, currencies, fixed-income markets, equities, by describing thedrivers of price and volatility as well as available hedging tools. Thediscussion of credit risk outlines, at first, the challenges of findingmeasurement tools to accurately assess credit risk, and then describescredit risk management techniques in the trading and traditional lendingmarkets.In trading, the trend has been towards managing credit risk assettlement and pre-settlement risk. The advantages and disadvantages ofusing Monte Carlo simulations to measure pre-settlement exposure on aglobal basis are examined. Mr. Gleason then suggests to replace the currentpractice of trading limits with charging traders for credit. This requiresanalytical tools to quantify the credit cost of a deal. The section ontraditional lending describes how this business is being revolutionized bynew analytical tools that measure default probabilities and defaultcorrelations, loan securitization and the swapping of credit exposure, andthe shift, for banks, from being credit investors to becoming creditintermediaries.
Mr. Gleason then describes the various portfolio measuresof risk that have emerged in the 1990s and points out the work that remainsto be done: to develop tools to "measure risk from extreme marketmoves and illiquid markets." Finally, the author describes howoperational and organizational issues, with data being the biggest problem,will make the transformation to global risk management processeschallenging. The discussion ends with an overview of prerequisites forsuccess and pitfalls to avoid.
The book provides a concise and clearlywritten overview of and/or introduction to global financial risk managementchallenges and solution options. As such, it will be particularly useful tothose non-risk management professionals who are being asked to participatein the establishment of global risk management processes Mr. Gleason'sexperience as a risk management consultant can be sensed throughout thebook, his enthusiasm for the subject becomes particularly palpable andcontagious in the final sections.
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We used this case book in our MBA course for corporate finance. The realcases are exciting. The topics are very broad and ranging from cashbudgeting to financial risk management. Most of the cases are supportedwith good background material like charts and income statements. The bookis excellent for class discussions, but not for the ambituous reader whowants to teach himself corporate finance. There are simply no right orwrong answers why there's no solution provided. It's a great book to workwith, but deadly boring if you want to read it page by page.
