Financial Risk Manager

Market Risk 56:00 - 56:45

2008-11-02T09:49:00-08:00

Hi David,
In the example @ 56:30. You mention that 98 * 100,000 is 98,000. Answer the number of contracts required is N* = 122. I think that should be 1.22 since 98 * 100,000 is 9.8 million.

Formula Sheet

2008-10-27T19:31:27-08:00

FORMULA SHEET ERRORS:

On page 18: The average, unconditional variance in GARCH(1,1) should read

Lv = alpha0/[1-(alpha1 + beta)], or equivalently
Lv = alpha0/[1 - alpha1 - beta]

Not incorrectly: alpha0/1 - alpha1 + beta

This follows from:
GARCH(1,1) = alpha0 + alpha1*(return^2) + beta*(lagged variance)
and alpha0 = Lv*gamma; i.e., gamma is the weight assigned to the long run variance (Lv)
As the weights must sum to 1.0, gamma + alpha1 + beta = 1, and therefore:
gamma = 1 - alpha1 - beta. And since Lv = alpha0/gamma, Lv must be:
Lv = alpha0/(1 - alpha1 - beta)

On page 51, the original version contained an error at the bottom
(but this was immediately fixed, version 1a does not contain this error)
Under LOSS GIVEN DEFAULT, the formula should start “LGD =” instead of “PD =”

Episode #14, Investment B, part 2 (page 74)

2008-10-18T09:15:21-08:00

Under the topic of market-neutral pair trading:

page 74 says:

“[Pair trade] Takes a long position in the ―over-valued stock (e.g., Coke) and a short position in the undervalued stock (e.g., Pepsi).” which is incorrectly reversed

The pair trade takes a long position in the undervalued stock and a short position in the overvalued stock.

Episode #11 - Ops B - page 62

2008-09-12T11:25:44-08:00

The RAROC question says “The bank‟s annual operating cost is 8%” and then uses $8 million for operating cost.

However, it should have said “The bank’s annual operating cost is 0.8%” in order for $8 million to be 0.8% of $1 billion. Thank you George!

David

Episode #7 - Credit A

2008-07-04T11:45:49-08:00

In Ong Chapter 5 on Unexpected Loss,

I mistakenly spoke/show:
UL = AE * SQRT[EDF * variance of LGD + LGD * variance of EDF]

however, the LGD is squared. Correct is:
UL = AE * SQRT[EDF * variance of LGD + LGD^2 * variance of EDF]

(This is because Ong page 113 has a typo. Formula 5.2 is incorrect, it idoes not square the LGD)
The notes and PDF are correct. This refers to just the screencast video.

Thanks, David