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Models at Work

Books Models at Work


Models at Work

Posted By uzma

The book is based on ten years of teaching notes and Q&A sessions from training workshops I have run in the Middle East, Far East & Pakistan. With 650 pages and over 500 illustrations it owes its existence to probing questions from my students in Dubai, Abu Dhabi, Singapore, Bangkok, Kuala Lumpur, Riyadh & Karachi. The teaching notes are based on two decades of practice in the region working with back office, treasury, risk & regulatory reporting platforms in the MENA region. Rather than taking a purely academic approach the book focuses on ground realities. There are no silver bullets in risk managements, only crude approximations.

I wrote the book because as a teacher and trainer I couldn’t find a self contained text that did a good job of bringing risk, models, pricing, simulating & reporting themes in one book. Maybe that is too much to ask but when tasked with teaching both risk and derivative pricing in one short week to Executive MBA students, an instructor has to get creative. As students requested more background reading materials I started sharing my teaching notes with them on the FinanceTrainingCourse.com site. Six years later we ended up with eight hands on chapters that mixed usage and practice with models and Excel, another 12 chapters of supporting and supplementary materials including cases, data sets and a crash course in elementary derivative pricing.

What is this book about?

The book uses four sections to present frameworks, tools, cases and context around risk assessment and management. Here is a quick review of each section:

Section I – What is Risk assessment?

A framework for thinking about risk assessment begins with a desire to evaluate complexity in analysis versus complexity in models. The chapters in this section start with an introduction to dealing with volatility, measuring risk using Value at Risk, managing risk using target accounts and with two short chapters on risk policy and risk regulation.

Section II – Monte Carlo Simulation

A multi-chapter crash course in Monte Carlo Simulation using a simplified approach in EXCEL. We begin with simple simulation models for generating prices for equities, currencies and commodities. The simple models are then used to build a second layer that evaluates the impact of changes in simulated prices on business and performance metrics. You can’t assess risk, if you can’t measure it.

Building up on the complexity in analysis themes, while the models used are simple, the objective is to understand relationships that drive the risk distribution. While results are always qualified, model builders who don’t fall in love with their models, end up with a better understanding of the risk they are trying to manage.

Section III – Dissecting Commodity Models

Armed with frameworks and simple tools, the third section presents an opportunity to apply them. Rather than build models we focus on identifying relationships, drivers and data across commodity markets. Four cases are presented from the point of view of a research analyst. They include:

  • Rolling volatility & correlations in commodity markets
  • Drivers of crude oil & gold pricing
  • The relationship between crude oil price shocks & inflation rates in emerging markets
  • Real interest rates in India and Pakistan

To get the most out of the frameworks and tools presented in the first two sections, each case can be used as the foundation of a more detailed modeling exercise. For example in the two cases that cover drivers behind crude oil and gold price changes we identify price drivers that are left as black boxes in the case. If you are interested, there is enough data in the book for you to replace the black boxes with your own models.

Section IV – Basics of Derivative Pricing

A text on risk management cannot be complete without a review of the product universe, pricing and valuation models. While a more detailed treatment is available in Hull, Wilmott, Tuckman & Fabozzi, we attempt a short introduction to the product and pricing world to ensure the book remains self contained for our audience. The decision to add the section was taken once we included the section on Monte Carlo Simulation, since many of the simulations exercises would remain incomplete without product and pricing context

Who is this book for?

If you are looking for detailed mathematical derivations, differential equations or easy answers, you will be disappointed.

The book is about building intuition around risk and using simple tools in EXCEL to test that intuition against the real world and occasionally with economic drivers. Taleb calls it “playing with the generator function”. My mentors in the field have called it the “Build, Test, Dissect, Decode” mode of learning. Till you figure out how to break it, you won’t really learn how it works.

The book shows you how to build some models, shares the framework that you can use to test and stretch the same and in some instances gives you the data to extend them. But it stops short of putting it all together. It will show you the way and partially unlock the door, but you have to make the effort to open it and walk inside.

This book is for you if you ever wondered about risk, risk assessment and risk management and their usage in the real world; if you wanted to model risk but felt awed by the terminology; if you like to question assumptions and test them in EXCEL; if your board is a “What if” board and you want to put a better process around that one troubling question; and if you wanted to be a quant, but like me, are not.

Order your copy now on Amazon.com

Written by uzma