Bionic Turtle’s Week in Risk (ending July 29th)

Welcome to our Week in Risk blog! This week, we have some new YouTube videos to share with you, along with our newest FRM practice questions, discussions from our FRM forum, and various risk articles from around the world!

New Practice Questions

• P1.T4.813. Binomial model for options on currencies and futures https://trtl.bz/2LmwLIq

• P2.T7.806. Capital planning practices at large bank holding companies (BHC) https://trtl.bz/2LmxQzY

New YouTube

• Accrued interest depends on the bond’s day count convention (FRM T3-22) https://trtl.bz/2mOnjil

• Full versus flat bond price (aka, cash vs. quoted or dirty vs. clean price, FRM T3-23) https://trtl.bz/2JS28ol

In the forum

• [FRM] We updated the historical pass rate chart (May’s exam saw historically low pass rates)  https://trtl.bz/2OrXktg

• [PRMIA] feedback on the ORM certificate https://trtl.bz/2OopbuD
• [P1.T2] The difference between standardizing a random normal variable and CLT https://trtl.bz/2LpAq80
• [P1.T2] Thank you forum member, gprisby for spotting a typo in my Bayes Theorem exhibit https://trtl.bz/2Lu7I61

• [P1.T4] The assigned Schroeck contains known mistakes in his portfolio unexpected loss (UL)  https://trtl.bz/2LsjBcG
• [P1.T4] A question about key rate durations https://trtl.bz/2Oo9qDX
• [P1.T4] Thank you forum member, evelyn.peng for showing how to retrieve accrued interest with the TI BA II+ built-in bond worksheet function https://trtl.bz/2vdjqqN
• [P1.T4] The difficult idea of short gamma’s exposure to high realized volatility https://trtl.bz/2vekhHD
• [P2.T5] Two difficult but instructive EOC questions from Hull (on lognormal stock property and sample volatility of stock price history) https://www.bionicturtle.com/forum/threads/hull-14-26-and-14-27.14022/
• [P2.T5] The Vasicek tree does not necessarily recombine, but it makes sense to impose a recombining feature  https://www.bionicturtle.com/forum/threads/vasicek-model-recombining-tree.14042/

• [P2.T6] Does correlation affect portfolio expected loss (EL)? https://trtl.bz/2vlh5ub
• [P2.T7] Component versus Incremental value at risk (VaR) https://trtl.bz/2LqecCX

Economy

• Fed Pushing Ahead Toward Inversion https://blogs.uoregon.edu/timduyfedwatch/2018/07/16/fed-pushing-ahead-toward-inversion/ “a flat yield curve is perfectly consistent with continued expansion. The distinction between flat and inverted is actually a source of much confusion … low levels of the term spread do not predict recessions. Only inverted curves predict recession.“
• Measuring inflation: What’s changed over the past 20 years? What hasn’t? https://trtl.bz/2LryqME

Case Studies

• Facebook’s Stock Plunge Shatters Faith in Tech Companies’ Invincibility  https://www.nytimes.com/2018/07/26/business/facebook-stock-earnings-call.html

• Facebook’s 4 Sigma Event https://www.rcmalternatives.com/2018/07/facebooks-4-sigma-event/
• Transcript: John Carreyrou on Theranos http://ritholtz.com/2018/07/transcript-john-carreyrou-theranos/ Barry Ritholtz loved this book.
• Private Pension Product, Sold by Felon, Wipes Investors Out (wsj) https://trtl.bz/2vgH7yo

• Whistleblowers Detail Wells Fargo Wealth Management Woes https://trtl.bz/2vfRVgj
• Samsung Securities CEO Resigns After $105 Billion Stock Blunder https://trtl.bz/2vadYVu

Risk

• Decade After Crisis, a $600 Trillion Market Remains Murky to Regulators  https://www.nytimes.com/2018/07/22/business/derivatives-banks-regulation-dodd-frank.html
• Lemonade Insurance Review: For When Life Hands You Lemons  https://www.doughroller.net/insurance/homeonwers/lemonade-insurance-review/

• [GARP] A New Era of Disruption https://trtl.bz/2vi8kkg “Financial institutions are exposing themselves to extraordinary risk because they lack technical literacy at the top. They lack the metrics and the concepts to understand where their technical decisions – and sometimes confusion – are leading them.“
• [GARP] 36% in Survey Say Cyber Risk Blocks Innovation https://trtl.bz/2vamXGm

• [GARP] Barometers of Financial Crimes and Compliance https://trtl.bz/2vgdYUa

Finance and Investing

• How Investors Make Money When Companies Take Longer to Pay Their Bills (trade finance, aka, factoring)  https://trtl.bz/2LoHPo7

• There Is More to Behavioral Economics Than Biases and Fallacies https://trtl.bz/2LoAULX “A widespread misconception is that biases explain or even produce behavior. They don’t—they describe behavior.“
• How to Become a 401(k) Millionaire With a little planning and discipline, it’s actually not that hard  https://trtl.bz/2vf9CMW
• Can factor investing kill off the hedge fund? (ft.com, pdf) https://trtl.bz/2LUQ73y

• Share Count Confusion: Dilution, Employee Options and Multiple Share Classes!  http://aswathdamodaran.blogspot.com/2018/07/share-count-confusion-dilution-employee.html

Technology

• How (not) to use Machine Learning for time series forecasting: Avoiding the pitfalls https://trtl.bz/2vigucG
• Machine Learning, Subset Resampling, and Portfolio Optimization https://blog.thinknewfound.com/2018…subset-resampling-and-portfolio-optimization/ “Estimation risk is the risk that the inputs to the portfolio optimization process (i.e. expected returns, volatilities, correlations) are imprecisely estimated by sampling from the historical data, leading to suboptimal allocations.“
• The What, Where and How of Data Science https://trtl.bz/2vbVjZD

• The State of Artificial Intelligence in 2018: A Good Old Fashioned Report https://trtl.bz/2vhEpsD

Climate

• Here’s How Bad The Heat Has Been Around The World http://digg.com/2018/how-bad-is-the-heatwave

Drone footage shows devastating aftermath of Greece wildfires https://t.co/AkfqcybPJM pic.twitter.com/2lTgBhz1dF

— TIME (@TIME) July 25, 2018

• Is the US prepared to deal with the aftermath of increasingly severe storms? (XL Catlin) https://trtl.bz/2vhTlqz
• The California Wildfire Map http://googlemapsmania.blogspot.com/2018/07/the-california-wildfire-map.html
• The world is hot, on fire, and flooding. Climate change is here. https://grist.org/article/the-world-is-hot-on-fire-and-flooding-climate-change-is-here/

• Surrendering to Rising Seas Coastal communities struggling to adapt to climate change are beginning to do what was once unthinkable: retreat https://www.scientificamerican.com/article/surrendering-to-rising-seas/

Other

• Science-backed methods to keep in mind when you’re learning new things https://trtl.bz/2vd4usD “1. Just start, break the initial barrier. Every task has a certain Activation Energy (AE). Say you want to practice playing the guitar. You have to get up, dust the old guitar, tune it, pick the plectrum up, and start strumming. All these make up the AE of the task of playing a guitar. The higher the AE of something, the less likely are you to start doing the task. Take steps to reduce the AE of a new habit you want to start. Place the tuned guitar in your living room so you have it handy.“
• Names for extremely large numbers https://www.johndcook.com/blog/2018/07/24/names-large-numbers/

• Mean Reversion [of the “natural” interest rate] & The Placebo Effect  http://awealthofcommonsense.com/2018/07/mean-reversion-the-placebo-effect/
• From the Poker Table to Wall Street [Vanessa Selbst] https://www.nytimes.com/2018/07/27/business/vanessa-selbst-poker-bridgewater.html