Bionic Turtle’s Week in Risk (ending February 10th)

Welcome to our newest Week in Risk blog! Take a look at our newest FRM practice questions and YouTube videos, join in on the discussions in our FRM forum, and read through some interesting risk articles. Have a great week!

New Practice Questions

  • P2.T9.904. Artificial intelligence and machine learning (AI & ML) in financial services (FSB FIN, part 1 of 2)
  • P1.T4.905. Gross versus net bond returns, bond spread and bond yield (Tuckman Ch. 3)
  • P2.T9.905. Machine learning in financial services: use cases and possible effects (FSB FIN, part 2 of 2)

New YouTube Videos

In the forum

  • [GARP FRM] Questions about work experience questions
  • [P1.T1*] Can we elaborate on the difference between an economic and accounting hedge?
  • [P1.T3] Further clarification on the tedious valuation (and the most confusing step) of a theoretical futures price for a Treasury bond futures contract

treasury bond futures contract

worst case scenerio

  • [P1.T4] Why doesn’t Tuckman’s P&L volatility of hedge position include the yield shocks and beta?
  • [P1.T4*] Derivation of duration as first derivative
  • [P2.T5*] Can we better understand the relationship between the implied volatility smile and option maturity?
  • [P2.T5] What is the decision rule for rejection in the VaR backest?
  • [P2.T5] Basel VaR test is really just a hypothesis test of the sample mean of a binomial distribution
  • [P2.T5] Another on the VaR backtest: why can’t we easily calculate the probability of a Type II error?

  • [P2.T5] Thank you gprisby for noticing: leptokurtosis is a heavy-tail, not necessarily a higher peak. This is not only mathematically proper but consistent with our focus, in risk, on extreme events
  • [P2.T5] Thank you pengfrm from explaining how portfolio Macaulay duration was calculated in T5.63 (which is the same way Jorion calculates the portfolio duration of 2.733 years in his Chapter 11 fixed income VaR mapping example)
  • [P2.T5] VaR is not coherent under any approach (despite coherence under restrictive normality assumption) but expected shortfall (ES) is always coherent. An advantage of historical simulation (HS VaR) is that it makes no distributional assumption but it therefore cannot assume normality!
  • [P2.T5] A good practice question by GARP on the interest rate term structure with a risk premium

interest rate term structure

Banking and regulation

BB&T to Buy SunTrust

Tech learning risk management

  • [FSB] FSB publishes Global Monitoring Report on Non-Bank Financial Intermediation 2018
  • Cooling Housing Market Prompts Closer Scrutiny of Some Lenders (Ginnie Mae worries about risks from nonbank lenders, whose share of home loans has ballooned)

FinTech and data science


Investing and personal finance

  • Over 60, and Crushed by Student Loan Debt “Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group
  • January 2019 Data Update 7: Debt, neither poison nor nectar! (Prof Aswath Damodaran) and Update 8: Dividends and Buybacks

S&P musings on markets

sovereign spreads in Brazil





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