Risk Pricing

Figures

Acknowledgements

Introduction

Prologue: Physics, Quantum Theory, QED, QCD and Risk

1. Theories in physics

2. The forces of nature

3. Quantum electrodynamics

4. Space-time

5. Entropy

Part One: Risks of the 21st Century

Chapter 1: Risk in Finance

1. Risk defined

2. Effects of volatility

3. The risk's long tail

4. Risk and quantum logic

5. The complexity of modern risks

6. Risk appetite

7. Black swans

Appendix: VIX, the measurement of volatility

Chapter 2: Virtual Economy and Risk Management

1. Real and virtual economy

2. Market liquidity and funding liquidity

3. CDOs, CDSs and systemic risk

4. Structured finance is different to classical banking

5. Advanced statistical methods and tolerances in the virtual economy 81

6. A bird's-eye view of charts for quality assurance and risk control

7. Know yourself and your institution

Appendix: derivative financial instruments 96

Chapter 3: Product Pricing in the Virtual Economy

1. Why the old pricing theory does not apply

2. Price discovery through credit spreads

3. Discounted cash flow and intrinsic value

4. Price discovery through auctions

5. PPIP: example of an imperfect auction

6. From marking to market, to marking to myth

7. Conflicts of interest in opposing marking to market

Part Two: Using Quantum Electrodynamics for Risk Control

Chapter 4: Not Everything that Counts Gets Counted

1. Basel Committee's proposed revision of the 1996 Market Risk Amendment

2. Underrating risk is bad management

3. Lessons from the credit and banking crisis can help in risk control

4. Incremental risk charge and stress tests

5. The contribution of scenarios to realistic estimates of exposure

6. The scenarios' flexibility

7. The Delphi method

8. Refining judgmental opinions through Delphi

Appendix: why the value at risk model is irrelevant

Chapter 5: Applying Feynman Diagrams in Risk Management

1. The probability of an event

2. Feynman diagrams

3. A broad field of QED implementation

4. Are we planning for failure?

5. Promoting contrarian opinion

6. Quantum electrodynamics and compound events

7. A space-time graph

8. The risk control structure beyond QED

9. Risk fever blues

Appendix: vectors, linear vector spaces and polygons

Part Three: Three Themes for Quantum Chromodynamics

Chapter 6: Legal Risk and Ponzi Risk

1. Using quantum electrodynamics for legal risk

2. Legal risk is a disruptive force

3. Shareholder lawsuits at Bank of America

4. The twilight between legal and illegal practices

5. Transborder legal risk

6. Creative accounting distorts risk pricing

7. Legal risk, political risk and fraudulent conveyance

Chapter 7: Overleveraging Risk

1. Leverage defined

2. The aftermath of gearing is entropy

3. Leveraging with financial instruments

4. The fate of leveraged persons, companies and states

5. Exercising due diligence in leverage

6. Leverage, solvency, liquidity and transparency

7. Cash flow management

8. Deleveraging Appendix: the basic notion of entropy

Chapter 8: Risk of Poor Supervision

1. The hypotheses regulators have to make

2. Capital inadequacy is condoned by regulators

3. Basel II should undergo a major overhaul

4. Stress tests of default risks

5. The 2009 stress tests mandated by the US Treasury

6. Bad banks, bad assets and the experience of China's AMCs

7. Assessment of toxic after-effects in central banks' vaults

8. Thinking out of the box, when confronted with insolvent banks

Conclusion

Bibliography