Bionic Turtle’s Week in Risk (ending October 21st)

Welcome to our Week in Risk blog! This week, we added two new YouTube videos discussing Simple Option Trading Strategies and Vertical Option Spread Trades. Subscribe to our YouTube channel to make sure you don’t miss our newest videos each week! The forum is getting very busy with the November FRM exam coming up! If you have any FRM content questions, our forum is the best place to find answers! We hope you have a great week!

New YouTube

  • T1-1: What is financial risk? This is the first post in our new forum section that is devoted to a comprehensive review, in sequence, of our FRM video library in YouTube. The videos were previously posted, but the forum contains a new summary note that aims to maximize what we’ve learned about the concept along the way; for example, links to related issues and/or representative practice questions. We hope you enjoy this new resource!

new forum board

In the forum

  • [P1.T1] FRM candidates should be able to break-down CAPM beta with cold confidence
  • [P1.T2] Given a scenario that can be represented by a probability matrix, every possible Bayes Theorem should work; Bayes simply explicates the tautology that Pr(Unconditional)*Pr(Conditional) = Pr(Joint)
  • [P1.T2] A confidence interval is a “random interval” around the sample mean
  • [P1.T2] Thank you emilioalzamora1 for your answer to the question: what renders a matrix no longer positive semidefinite?


  • [P1.T3] The key to understanding the mortality table is understanding the definitions of conditional probability of death and cumulative (versus unconditional) probabilities of survival
  • [P1.T3] In bond default problems, unconditional default probability is a synonym for joint probability; i.e., joint probability of survival for T-years followed by default in the subsequent year
  • [P1.T3] Do Saunders’ FX hedge scenarios hold up to the CFA’s FX translation rule of thumb (triangular arbitrage)?
  • [P1.T3] This FX futures contract question (inspired by Hull’s EOC P! 5.14) is not as difficult as it seems; as is often the case, the hard part is understanding the setup
  • [P1.T3] Why does an increase in the provision for loan losses decrease book equity?
  • [P1.T4] You cannot solve fixed income hedging problems with (modified) duration alone because this measure does not account for the relative size(s) of the underlying and hedge positions; we solve with dollar duration, or its re-scaled equivalent, DV01
  • [P1.T4] What is “Markovian independence” and why is it an assumption (even if implicitly) in credit rating transition (aka, migration) matrix problems?
  • [P1.T4] The relationship between volatility and delta
  • [P1.T4] Dissecting the delta-hedge of a forex position (my question 821.1 this is inspired by Hull’s EOC PQ 19.22)

  • [P1.T4] When do we include or exclude the sample mean in our estimation of volatility?
  • [P1.T4] Understanding the particulars of the probability that a stock price will breach the exercise when the price exhibits a lognormal property
  • [P1.T4] An FRM candidate should be a master of using duration to estimate the bond price change implied by a yield shock
  • [P2.T5] A good follow-up question to a SIMPLE expected shortfall (ES) exercise, all FRM candidates should be able to retrieve ES at various confidence levels for a single bond
  • [P2.T5] A key, classic contrast between exotic and standard options is the trade-off between liquidity and basis risk
  • [P2.T5] What does Meissner mean by “buying correlation” in a trade that is long index call options plus short the individual components
  • [P2.T5] Why does Jorion pre- and post-multiply the vector of cash flows in fixed income VaR mapping?

jorion var mapping

  • [P2.T5] More on implied volatility and the challenge of interpretations in comparison to the flat volatility smile that is natural to the BSM
  • [P2.T5] The inverse of the true statement “if independent → ρ(.) = 0” is false but the contrapositive is true
  • [P2.T5*] Seeking clarity on when, if ever, to use a normal two-sided deviate of 1.96 rather than the standard one-sided 1.645 for value at risk (VaR) calculations
  • [P2.T6] Are EAD and especially loss given default (LGD) truly time-dependent?
  • [P2.T6] Fundamental skill: VaR backtest is (just) an application of the binomial distribution

backtesting var

  • [P2.T6*] How can we use credit derivatives to hedge counterparty risk, considered that the exposure will fluctuate through time? And what are the feedback effects?
  • [P2.T6] Elaborating on the moral hazard and asymmetric information problems inherent to a central counterparty (CCP)
  • [P2.T6] In regard to the credit exposure profile of a CDS, there is a difference between a FLAT credit curve and a CONSTANT credit spread; i.e., Gregory’s example assumes a volatile spread but a flat credit curve
  • [P2.T6] Thank you Marco.Musci for your keen observation that my term “expected future MTM” is mistaken
  • [P2.T6] Thank you again emilioalzamora1 for your answer to the question, Why does deleveraging increase the cost of funds?

credit ratings

  • [P2.T6] What is the impact of an increase in demand from CDS protection buyers on the CDS-bond basis
  • [P2.T8] Surplus value at risk (SVaR) in GARP’s practice papers
  • [P2.T6] The three classic zones in the Altman’s Z model
  • [P2.T7] Is there a difference between our Adjusted RAROC = (RAROC – Rf)/β and another provider’s Adjusted RAROC=RAROC β*(E(Rm)-Rf)?


Basel III

  • Dangerous non-banks “The most likely cause of a future financial crisis isn’t the banks, it’s the non-banks. They’re enormous, they’re much less regulated than banks are, and they tend to have much greater leverage.
  • Bank-Intermediated Arbitrage “The law of one price—that a replicating portfolio producing the same payoff as an underlying asset be priced the same as the underlying asset—is one of the fundamental tenets of finance.


  • Risk of Bank-Like Regulation Fades for Big Financial Firms (The federal council overseeing financial stability rescinded oversight of Prudential Financial)
  • The Student Loan Debt Crisis Is About to Get Worse

student loan debt

Technology including FinTech


artificial intelligence

Climate and Natural

carbon budget

Career and Education



Investing and Personal Finance

weighted average cost

cash flow

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