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PRM Handbook Introduction and Contents

The Professional Risk Managers’ Handbook A Comprehensive Guide to Current Theory and Best Practices ___________________________________________________

Edited by Carol Alexander and Elizabeth Sheedy

The Official Handbook for the PRM Certification

Updated May 2011

PRM Handbook Introduction and Contents

Contents Author Biographies

Section I – for PRM Exam I FINANCE THEORY, FINANCIAL INSTRUMENTS AND MARKETS Section I, Part A From PRM Handbook Volume I: Book 1 – GUIDE TO FINANCIAL THEORY APPLICATION I.A.0 INTEREST RATES AND TIME VALUE I.A.0.1 COMPOUNDING METHODS I.A.0.2 INTEREST RATES: NOMINAL, PERIODIC, CONTINUOUS OR EFFECTIVE I.A.1 RISK AND RISK AVERSION I.A.1.1 I.A.1.2 I.A.1.3 I.A.1.4 I.A.1.5 I.A.1.6 I.A.1.7

INTRODUCTION MATHEMATICAL EXPECTATIONS: PRICES OR UTILITIES? THE AXIOM OF INDEPENDENCE OF CHOICE MAXIMISING EXPECTED UTILITY ENCODING A UTILITY FUNCTION THE MEAN–VARIANCE CRITERION RISK-ADJUSTED PERFORMANCE MEASURES

I.A.2 PORTFOLIO MATHEMATICS I.A.2.1 I.A.2.2 I.A.2.3 I.A.2.4 I.A.2.5 I.A.2.6 I.A.2.7

MEANS AND VARIANCES OF PAST RETURNS MEAN AND VARIANCE OF FUTURE RETURNS MEAN–VARIANCE TRADEOFFS MULTIPLE ASSETS A HEDGING EXAMPLE SERIAL CORRELATION NORMALLY DISTRIBUTED RETURNS

I.A.3 CAPITAL ALLOCATION I.A.3.1 I.A.3.2 I.A.3.3 I.A.3.4 I.A.3.5 I.A.3.6 I.A.3.7 I.A.3.8

AN OVERVIEW MEAN–VARIANCE CRITERION EFFICIENT FRONTIER: TWO RISKY ASSETS ASSET ALLOCATION COMBINING THE RISK-FREE ASSET WITH RISKY ASSETS THE MARKET PORTFOLIO AND THE CML THE MARKET PRICE OF RISK AND THE SHARPE RATIO SEPARATION PRINCIPLE

I.A.4 THE CAPM AND MULTIFACTOR MODELS I.A.4.1 I.A.4.2 I.A.4.3 I.A.4.4 I.A.4.5 I.A.4.6

OVERVIEW CAPITAL ASSET PRICING MODEL SECURITY MARKET LINE PERFORMANCE MEASURES THE SINGLE-INDEX MODEL MULTIFACTOR MODELS AND THE APT

I.A.5 BASICS OF CAPITAL STRUCTURE I.A.5.1 I.A.5.2 I.A.5.3 I.A.5.4 I.A.5.5

INTRODUCTION MAXIMISING SHAREHOLDER VALUE, INCENTIVES AND AGENCY COSTS CHARACTERISTICS OF DEBT AND EQUITY CHOICE OF CAPITAL STRUCTURE MAKING THE CAPITAL STRUCTURE DECISION

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I.A.6 THE TERM STRUCTURE OF INTEREST RATES I.A.6.1 I.A.6.2 I.A.6.3 I.A.6.4

INTRODUCTION TO THE TERM STRUCTURE OF INTEREST RATES THEORIES OF THE TERM STRUCTURE TERM STRUCTURE MODELS USING TERM STRUCTURE MODELS TO EVALUATE BONDS

I.A.7 VALUING FORWARD CONTRACTS I.A.7.1 I.A.7.2 I.A.7.3 I.A.7.4

THE DIFFERENCE BETWEEN PRICING AND VALUATION FOR FORWARD CONTRACTS PRINCIPLES OF PRICING AND VALUATION FOR FORWARD CONTRACTS ON ASSETS PRINCIPLES OF PRICING AND VALUATION FOR FORWARD CONTRACTS ON INTEREST RATES THE RELATIONSHIP BETWEEN FORWARD AND FUTURES PRICES

I.A.8 BASIC PRINCIPLES OF OPTION PRICING I.A.8.1 I.A.8.2 I.A.8.3 I.A.8.4 I.A.8.5 I.A.8.6 I.A.8.7 I.A.8.8 I.A.8.9 I.A.8.10

FACTORS AFFECTING OPTION PRICES PUT–CALL PARITY ONE-STEP BINOMIAL MODEL AND THE RISKLESS PORTFOLIO DELTA NEUTRALITY AND SIMPLE DELTA HEDGING RISK-NEUTRAL VALUATION REAL VERSUS RISK-NEUTRAL THE BLACK–SCHOLES–MERTON PRICING FORMULA THE GREEKS IMPLIED VOLATILITY INTRINSIC VERSUS TIME VALUE

Section I, Part B From PRM Handbook - Volume I: Book 2 – GUIDE TO FINANCIAL INSTRUMENTS I.B.1 GENERAL CHARACTERISTICS OF BONDS I.B.1.1 I.B.1.2 I.B.1.3 I.B.1.4

DEFINITION OF A BULLET BOND TERMINOLOGY AND CONVENTION MARKET QUOTES NON-BULLET BONDS

I.B.2 THE ANALYSIS OF BONDS I.B.2.1 I.B.2.2 I.B.2.3 I.B.2.4 I.B.2.5 I.B.2.6 I.B.2.7 I.B.2.8 I.B.2.9

FEATURES OF BONDS NON-CONVENTIONAL BONDS PRICING A CONVENTIONAL BOND MARKET YIELD RELATIONSHIP BETWEEN BOND YIELD AND BOND PRICE DURATION HEDGING BOND POSITIONS CONVEXITY SUMMARY OF MARKET RISK ASSOCIATED WITH BONDS

I.B.3 FUTURES AND FORWARDS I.B.3.1 I.B.3.2. I.B.3.3 I.B.3.4 I.B.3.5 I.B.3.6 I.B.3.7 I.B.3.8

INTRODUCTION STOCK INDEX FUTURES CURRENCY FORWARDS AND FUTURES COMMODITY FUTURES FORWARD RATE AGREEMENTS SHORT-TERM INTEREST-RATE FUTURES T-BOND FUTURES STACK AND STRIP HEDGES

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I.B.4 SWAPS I.B.4.1 I.B.4.2 I.B.4.3 I.B.4.4 I.B.4.5 I.B.4.6 I.B.4.7

WHAT IS A SWAP? TYPES OF SWAPS ENGINEERING INTEREST RATE SWAPS RISKS OF SWAPS OTHER SWAPS USES OF SWAPS SWAP CONVENTIONS

I.B.5 VANILLA OPTIONS I.B.5.1 I.B.5.2 I.B.5.3 I.B.5.4 I.B.5.5

STOCK OPTIONS – CHARACTERISTICS AND PAYOFF DIAGRAMS AMERICAN VERSUS EUROPEAN OPTIONS STRATEGIES INVOLVING A SINGLE OPTION AND A STOCK SPREAD STRATEGIES OTHER STRATEGIES

I.B.6 CREDIT DERIVATIVES I.B.6.1 I.B.6.2 I.B.6.3 I.B.6.4 I.B.6.5 I.B.6.6 I.B.6.7 I.B.6.8

INTRODUCTION CREDIT DEFAULT SWAPS CREDIT-LINKED NOTES TOTAL RETURN SWAPS CREDIT OPTIONS AND NEW INVESTMENT INSTRUMENTS SYNTHETIC COLLATERALISED DEBT OBLIGATIONS GENERAL APPLICATIONS OF CREDIT DERIVATIVES UNINTENDED RISKS IN CREDIT DERIVATIVES

I.B.7 CAPS, FLOORS AND SWAPTIONS I.B.7.1 I.B.7.2 I.B.7.3 I.B.7.4 I.B.7.5 I.B.7.6

CAPS, FLOORS AND COLLARS: DEFINITION AND TERMINOLOGY PRICING CAPS, FLOORS AND COLLARS USES OF CAPS, FLOORS AND COLLARS SWAPTIONS: DEFINITION AND TERMINOLOGY PRICING SWAPTIONS USES OF SWAPTIONS

I.B.8 CONVERTIBLE BONDS I.B.8.1 I.B.8.2 I.B.8.3 I.B.8.4 I.B.8.5

INTRODUCTION CHARACTERISTICS OF CONVERTIBLES CAPITAL STRUCTURE IMPLICATIONS FOR BANKS MANDATORY CONVERTIBLES VALUATION AND RISK ASSESSMENT

I.B.9 SIMPLE EXOTICS I.B.9.1 I.B.9.2 I.B.9.3 I.B.9.4 I.B.9.5 I.B.9.6 I.B.9.7 I.B.9.8 I.B.9.9 I.B.9.10 I.B.9.11 I.B.9.12 I.B.9.13 I.B.9.14

INTRODUCTION A SHORT HISTORY CLASSIFYING EXOTICS NOTATION DIGITAL OPTIONS TWO ASSET OPTIONS QUANTOS SECOND-ORDER CONTRACTS DECISION OPTIONS AVERAGE OPTIONS OPTIONS ON BASKETS OF ASSETS BARRIER AND RELATED OPTIONS OTHER PATH-DEPENDENT OPTIONS RESOLUTION METHODS

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Section 1, Part C From PRM Handbook Volume I: Book 3 – GUIDE TO FINANCIAL MARKETS I.C.1 THE STRUCTURE OF FINANCIAL MARKETS I.C.1.1 I.C.1.2 I.C.1.3 I.C.1.4 I.C.1.5 I.C.1.6 I.C.1.7 I.C.1.8 I.C.1.9

INTRODUCTION GLOBAL MARKETS AND THEIR TERMINOLOGY DRIVERS OF LIQUIDITY LIQUIDITY AND FINANCIAL RISK MANAGEMENT EXCHANGES VERSUS OTC MARKETS TECHNOLOGICAL CHANGE POST-TRADE PROCESSING RETAIL AND WHOLESALE BROKERAGE NEW FINANCIAL MARKETS

I.C.2 THE MONEY MARKETS I.C.2.1 I.C.2.2 I.C.2.3 I.C.2.4

INTRODUCTION CHARACTERISTICS OF MONEY MARKET INSTRUMENTS DEPOSITS AND LOANS MONEY MARKET SECURITIES

I.C.3 BOND MARKETS I.C.3.1 I.C.3.2 I.C.3.3 I.C.3.4 I.C.3.5

INTRODUCTION THE PLAYERS BONDS BY ISSUERS THE MARKETS CREDIT RISK

I.C.4 THE FOREIGN EXCHANGE MARKET I.C.4.1 I.C.4.2 I.C.4.3 I.C.4.4 I.C.4.5 I.C.4.6

INTRODUCTION THE INTERBANK MARKET EXCHANGE-RATE QUOTATIONS DETERMINANTS OF FOREIGN EXCHANGE RATES SPOT AND FORWARD MARKETS STRUCTURE OF A FOREIGN EXCHANGE OPERATION

I.C.5 THE STOCK MARKET I.C.5.1 I.C.5.2 I.C.5.3 I.C.5.4 I.C.5.5 I.C.5.6 I.C.5.7 I.C.5.8 I.C.5.9

INTRODUCTION THE CHARACTERISTICS OF COMMON STOCK STOCK MARKETS AND THEIR PARTICIPANTS THE PRIMARY MARKET – IPOS AND PRIVATE PLACEMENTS THE SECONDARY MARKET – THE EXCHANGE VERSUS OTC MARKET TRADING COSTS BUYING ON MARGIN SHORT SALES AND STOCK BORROWING COSTS EXCHANGE-TRADED DERIVATIVES ON STOCKS

I.C.6 THE FUTURES MARKETS I.C.6.1 I.C.6.2 I.C.6.3 I.C.6.4 I.C.6.5 I.C.6.6 I.C.6.7 I.C.6.8

INTRODUCTION HISTORY OF FORWARD-BASED DERIVATIVES AND FUTURES MARKETS FUTURES CONTRACTS AND MARKETS OPTIONS ON FUTURES FUTURES EXCHANGES AND CLEARING HOUSES MARKET PARTICIPANTS – HEDGERS MARKET PARTICIPANTS – SPECULATORS MARKET PARTICIPANTS – MANAGED FUTURES INVESTORS

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I.C.7. THE STRUCTURE OF COMMODITIES MARKETS I.C.7.1 I.C.7.2 I.C.7.3 I.C.7.4 I.C.7.5 I.C.7.6

INTRODUCTION THE COMMODITY UNIVERSE AND ANATOMY OF MARKETS SPOT–FORWARD PRICING RELATIONSHIPS SHORT SQUEEZES, CORNERS AND REGULATION RISK MANAGEMENT AT THE COMMODITY TRADING DESK THE DISTRIBUTION OF COMMODITY RETURNS

I.C.8 THE ENERGY MARKETS I.C.8.1 I.C.8.2 I.C.8.3 I.C.8.4 I.C.8.5 I.C.8.6

INTRODUCTION MARKET OVERVIEW ENERGY FUTURES MARKETS OTC ENERGY DERIVATIVE MARKETS EMERGING ENERGY MARKETS THE FUTURE OF ENERGY TRADING

Section II – for PRM Exam II MATHEMATICAL FOUNDATIONS OF RISK MEASUREMENTS From PRM Handbook Volume II: Mathematical Foundations of Risk Measurements II.A FOUNDATIONS II.A.1 II.A.2 II.A.3 II.A.4 II.A.5 II.A.6

SYMBOLS AND RULES SEQUENCES AND SERIES EXPONENTS AND LOGARITHMS EQUATIONS AND INEQUALITIES FUNCTIONS AND GRAPHS CASE STUDY − CONTINUOUS COMPOUNDING

II.B DESCRIPTIVE STATISTI CS II.B.1 II.B.2 II.B.3 II.B.4 II.B.5 II.B.6

INTRODUCTION DATA THE MOMENTS OF A DISTRIBUTION MEASURES OF LOCATION OR CENTRAL TENDENCY – AVERAGES MEASURES OF DISPERSION BIVARIATE DATA

II.C CALCULUS II.C.1 II.C.2 II.C.3 II.C.4 II.C.5 II.C.6 II.C.7

DIFFERENTIAL CALCULUS CASE STUDY: MODIFIED DURATION OF A BOND HIGHER-ORDER DERIVATIVES FINANCIAL APPLICATIONS OF SECOND DERIVATIVES DIFFERENTIATING A FUNCTION OF MORE THAN ONE VARIABLE INTEGRAL CALCULUS OPTIMISATION

II.D LINEAR MATHEMATICS AND MATRIX ALGEBRA II.D.1 II.D.2 II.D.3 II.D.4 II.D.5

MATRIX ALGEBRA APPLICATION – MATRIX ALGEBRA AND SIMULTANEOUS LINEAR EQUATIONS QUADRATIC FORMS CHOLESKY DECOMPOSITION EIGENVALUES AND EIGENVECTORS

II.E PROBABILITY THEORY IN FINANCE II.E.1

DEFINITIONS AND RULES

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II.E.2 II.E.3 II.E.4

PROBABILITY DISTRIBUTIONS JOINT DISTRIBUTIONS SPECIFIC PROBABILITY DISTRIBUTIONS

II.F REGRESSION ANALYSIS IN FINANCE II.F.1 II.F.2 II.F.3 II.F.4 II.F.5 II.F.6 II.F.7 II.F.8 II.F.9

SIMPLE LINEAR REGRESSION MULTIPLE LINEAR REGRESSION EVALUATING THE REGRESSION MODEL CONFIDENCE INTERVALS HYPOTHESIS TESTING PREDICTION BREAKDOWN OF THE OLS ASSUMPTIONS RANDOM WALKS AND MEAN REVERSION MAXIMUM LIKELIHOOD ESTIMATION

II.G NUMERICAL METHODS II.G.1 II.G.2 II.G.3

SOLVING (NON-DIFFERENTIAL) EQUATIONS NUMERICAL OPTIMISATION NUMERICAL METHODS FOR VALUING OPTIONS

Section III – for PRM Exam III RISK MANAGEMENT PRACTICES From PRM Handbook Volume III: Risk Management Practices Additionally, three publically available readings for Exam III can be found on the PRMIA website at http://prmia.org/index.php?page=exam&option=trainingWebBasedResource and, for those who have purchased PRM Handbook Volume III: Risk Management Practices, four supplemental papers can be found in your PRMIA "My Library". III.0 CAPITAL ALLOCATION AND RAPM III.0.1 III.0.2 III.0.3 III.0.4 III.0.5

INTRODUCTION ECONOMIC CAPITAL REGULATORY CAPITAL CAPITAL ALLOCATION AND RISK CONTRIBUTIONS RAROC AND RISK-ADJUSTED PERFORMANCE

III.A.1 MARKET RISK MANAGEMENT III.A.1.1 III.A.1.2 III.A.1.3 III.A.1.4 III.A.1.5 III.A.1.6 III.A.1.7

INTRODUCTION MARKET RISK MARKET RISK MANAGEMENT TASKS THE ORGANISATION OF MARKET RISK MANAGEMENT MARKET RISK MANAGEMENT IN FUND MANAGEMENT MARKET RISK MANAGEMENT IN BANKING MARKET RISK MANAGEMENT IN NON-FINANCIAL FIRMS

III.A.2 INTRODUCTION TO VALUE AT RISK MODELS III.A.2.1 III.A.2.2 III.A.2.3 III.A.2.4 III.A.2.5 III.A.2.6 III.A.2.7 III.A.2.8

INTRODUCTION DEFINITION OF VAR INTERNAL MODELS FOR MARKET RISK CAPITAL ANALYTICAL VAR MODELS MONTE CARLO SIMULATION VAR HISTORICAL SIMULATION VAR MAPPING POSITIONS TO RISK FACTORS BACKTESTING VAR MODELS

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III.A.2.9 WHY FINANCIAL MARKETS ARE NOT ‘NORMAL’ III.A.3: ADVANCED VALUE AT RISK MODELS III.A.3.1 III.A.3.2 III.A.3.3 III.A.3.4 III.A.3.5 III.A.3.6 III.A.3.7

INTRODUCTION STANDARD DISTRIBUTIONAL ASSUMPTIONS MODELS OF VOLATILITY CLUSTERING VOLATILITY CLUSTERING AND VAR ALTERNATIVE SOLUTIONS TO NON-NORMALITY DECOMPOSITION OF VAR PRINCIPAL COMPONENT ANALYSIS

III.A.4 STRESS TESTING III.A.4.1 INTRODUCTION III.A.4.2 HISTORICAL CONTEXT III.A.4.3 CONCEPTUAL CONTEXT III.A.4.4 STRESS TESTING IN PRACTICE III.A.4.5 APPROACHES TO STRESS TESTING: AN OVERVIEW III.A.4.6 HISTORICAL SCENARIOS III.A.4.7 HYPOTHETICAL SCENARIOS III.A.4.8 ALGORITHMIC APPROACHES TO STRESS TESTING III.A.4.9 EXTREME-VALUE THEORY AS A STRESS-TESTING METHOD III.A.4.10 SUMMARY AND CONCLUSIONS III LIQUIDITY RISK MANAGEMENT FUNDING LIQUIDITY: RISK ANALYSIS AND MANAGEMENT (SEE “MY LIBRARY”) by Selwyn Blair-Ford and Ioannis Akkizidis III STRESS AND SCENARIO TESTING This section is focused on 3 papers from financial authorities and regulators. These papers are publically available on the PRMIA website at http://prmia.org/index.php?page=exam&option=trainingWebBasedResource  Principles for sound stress testing practices and supervision Basel Committee on Banking Supervision (BCBS)  Stress and Scenario Testing Financial Services Authority (FSA)  The Supervisory Capital Assessment Program: Overview of Results Board of Governors of the Federal Reserve System. III.B.1 CREDIT RISK MANAGEMENT III.B.1.1 INTRODUCTION III.B.1.2 A CREDIT TO-DO LIST III.B.1.3 OTHER TASKS III.B.2 FOUNDATIONS OF CREDIT RISK MODELLING III.B.2.1 III.B.2.2 III.B.2.3 III.B.2.4 III.B.2.5 III.B.2.6

INTRODUCTION WHAT IS DEFAULT RISK? EXPOSURE, DEFAULT AND RECOVERY PROCESSES THE CREDIT LOSS DISTRIBUTION EXPECTED AND UNEXPECTED LOSS RECOVERY RATES

III.B.3 CREDIT EXPOSURE III.B.3.1 III.B.3.2 III.B.3.3 III.B.3.4

INTRODUCTION PRE-SETTLEMENT VERSUS SETTLEMENT RISK EXPOSURE PROFILES MITIGATION OF EXPOSURES

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III.B.4 DEFAULT AND CREDIT MIGRATION III.B.4.1 III.B.4.2 III.B.4.3 III.B.4.4 III.B.4.5 III.B.4.6

DEFAULT PROBABILITIES AND TERM STRUCTURES OF DEFAULT RATES CREDIT RATINGS AGENCY RATINGS CREDIT SCORING AND INTERNAL RATING MODELS MARKET-IMPLIED DEFAULT PROBABILITIES CREDIT RATING AND CREDIT SPREADS

III.B.5 PORTFOLIO MODELS OF CREDIT LOSS III.B.5.1 III.B.5.2 III.B.5.3 III.B.5.4 III.B.5.5 III.B.5.6 III.B.5.7

INTRODUCTION WHAT ACTUALLY DRIVES CREDIT RISK AT THE PORTFOLIO LEVEL? CREDIT MIGRATION FRAMEWORK CONDITIONAL TRANSITION PROBABILITIES– CREDITPORTFOLIOVIEW THE CONTINGENT CLAIM APPROACH TO MEASURING CREDIT RISK THE KMV APPROACH THE ACTUARIAL APPROACH

III.B.6 CREDIT RISK CAPITAL CALCULATION III.B.6.1 III.B.6.2 III.B.6.3 III.B.6.4 III.B.6.5 III.B.6.6 III.B.6.7

INTRODUCTION ECONOMIC CREDIT CAPITAL CALCULATION REGULATORY CREDIT CAPITAL: BASEL I REGULATORY CREDIT CAPITAL: BASEL II BASEL II: CREDIT MODEL ESTIMATION AND VALIDATION BASEL II: SECURITISATION ADVANCED TOPICS ON ECONOMIC CREDIT CAPITAL

III.C.1 THE OPERATIONAL RISK MANAGEMENT FRAMEWORK III.C.1.1 INTRODUCTION III.C.1.2 EVIDENCE OF OPERATIONAL FAILURES III.C.1.3 DEFINING OPERATIONAL RISK III.C.1.4 TYPES OF OPERATIONAL RISK III.C.1.5 AIMS AND SCOPE OF OPERATIONAL RISK MANAGEMENT III.C.1.6 KEY COMPONENTS OF OPERATIONAL RISK III.C.1.7 SUPERVISORY GUIDANCE ON OPERATIONAL RISK III.C.1.8 IDENTIFYING OPERATIONAL RISK – THE RISK CATALOGUE III.C.1.9 THE OPERATIONAL RISK ASSESSMENT PROCESS III.C.1.10 THE OPERATIONAL RISK CONTROL PROCESS III.C.1.11 SOME FINAL THOUGHTS III.C.2 OPERATIONAL RISK PROCESS MODELS III.C.2.1 III.C.2.2 III.C.2.3 III.C.2.4 III.C.2.5 III.C.2.6 III.C.2.7 III.C.2.8 III.C.2.9

INTRODUCTION THE OVERALL PROCESS SPECIFIC TOOLS ADVANCED MODELS KEY ATTRIBUTES OF THE ORM FRAMEWORK INTEGRATED ECONOMIC CAPITAL MODEL MANAGEMENT ACTIONS RISK TRANSFER IT OUTSOURCING

III.C.3 OPERATIONAL VALUE-AT-RISK III.C.3.1 III.C.3.2 III.C.3.3 III.C.3.4 III.C.3.5 III.C.3.6

THE ‘LOSS MODEL’ APPROACH THE FREQUENCY DISTRIBUTION THE SEVERITY DISTRIBUTION THE INTERNAL MEASUREMENT APPROACH THE LOSS DISTRIBUTION APPROACH AGGREGATING ORC

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III ENTERPRISE INFORMATION RISK ENTERPRISE RISK INFORMATION MANAGEMENT (SEE “MY LIBRARY” ON THE PRMIA WEBSITE) by Dilip Krishna and Robert Mark III SYSTEMIC RISK WHY BANKS FAILED THE STRESS TESTS (SEE “MY LIBRARY” ON THE PRMIA WEBSITE) by Andrew G. Haldane VIEWING THE FINANCIAL CRISIS FROM 20,000 FEET UP (SEE “MY LIBRARY” ON THE PRMIA WEBSITE) by Stephen Figlewski

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Introduction If you're reading this, you are seeking to attain a higher standard. Congratulations! Those who have been a part of financial risk management for the past twenty years, have seen it change from an on-the-fly profession, with improvisation as a rule, to one with substantially higher standards, many of which are now documented and expected to be followed. It’s no longer enough to say you know. Now, you and your team need to prove it. As its title implies, this book is the Handbook for the Professional Risk Manager. It is for those professionals who seek to demonstrate their skills through certification as a Professional Risk Manager (PRM) in the field of financial risk management. And it is for those looking simply to develop their skills through an excellent reference source. With contributions from nearly 40 leading authors, the Handbook is designed to provide you with the materials needed to gain the knowledge and understanding of the building blocks of professional financial risk management. Financial risk management is not about avoiding risk. Rather, it is about understanding and communicating risk, so that risk can be taken more confidently and in a better way. Whether your specialism is in insurance, banking, energy, asset management, weather, or one of myriad other industries, this Handbook is your guide. In Volume II, we take you through the mathematical foundations of risk assessment. While there are many nuances to the practice of risk management that go beyond the quantitative, it is essential today for every risk manager to be able to assess risks. The chapters in this section are accessible to all PRM members, including those without any quantitative skills. The Excel spreadsheets that accompany the examples are an invaluable aid to understanding the mathematical and statistical concepts that form the basis of risk assessment. After studying all these chapters, you will have read the materials necessary for passage of Exam II of the PRM Certification program. Those preparing for the PRM certification will also be preparing for Exam I on Finance Theory, Financial Instruments and Markets, covered in Volume I of the PRM Handbook, Exam III on Risk Management Practices, covered in Volume III of the PRM Handbook and Exam IV - Case Studies, Standards of Best Practice Conduct and Ethics and PRMIA Governance. Exam IV is where we study some failed practices, standards for the performance of the duties of a Professional Risk Manager, and the governance structure of our association, the Professional Risk Managers’ International Association. The materials for Exam IV are freely available on our website (see http://prmia.org/index.php?page=exam&option=trainingWebBasedResource ) and

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