Bionic Turtle’s Week in Risk (ending October 7th)

Welcome to our Week in Risk! We’ve included new practice questions from Hull, Chapter 19 in Topic 4 and managing money laundering and financing of terrorism in Topic 7 of the FRM curriculum. David recorded new YouTube videos discussing Put-call parity and Lower bounds for European stock option prices. We’ve also included many discussions from our FRM forum! We hope you have a great week!

New Practice Questions

• P1.T4.819. Theta, gamma and vega for option positions (Hull Ch.19) https://trtl.bz/2zJwCaj

• P2.T7.813. Managing money laundering and financing of terrorism (ML/FT) risks when outsourcing or engaging in correspondent banking https://trtl.bz/2zPHuDC

New YouTube Videos

• Put-call parity (T3-34) https://trtl.bz/2xPtMzl

• Lower bounds for European stock option prices (FRM T3-35) https://trtl.bz/2RxfRGk

In the Forum

• [GARP P1] Geometric Brownian motion https://trtl.bz/2yaB9BJ
• [GARP P1] The convexity adjustment (is different than bond convexity and) handles the difference between a forward rate agreement (FRA) and a daily-settled Eurodollar futures rate https://trtl.bz/2y6qnMB
• [GARP P2*] Are candidates expected to rremember the ASF factors? https://trtl.bz/2zVVZ9f
• [GARP P1] An example of a bad question about the effect of dividends on call versus put options  https://www.bionicturtle.com/forum/threads/garp-2017-p1-q90.21005/

• [P1.T1] Derivation of minimum variance portfolio and covariance (portfolio, market)  https://www.bionicturtle.com/forum/threads/derivation-of-minimum-variance-portfolio.20990/
• [P1.T1] Thank you emilioalzamora1 for a phenomenal answer(s) to the question: What is the conceptual difference between an efficient versus inefficient portfolio? https://www.bionicturtle.com/forum/threads/p1-t1-61-capital-market-line-elton-gruber.5273/post-70183
• [P1.T2] Elaborating on Miller’s EOC Questions 3 and 4 https://www.bionicturtle.com/forum/threads/miller-chapter-7-end-of-chapter-questions.20989/
• [P1.T2] Simulation concepts https://www.bionicturtle.com/forum/threads/miller-chapter-7-end-of-chapter-questions.20989/
• [P1.T3] Terrific answer by emilioalzamora1 to question about interest rate volatility’s impact on callable convertible bond https://trtl.bz/2zJNTjU

• [P1.T3*] Why does Hull use a September futures contract to hedge a June exposure (Hull 6.7)?  https://www.bionicturtle.com/forum/threads/hull-06-07.3773/
• [P1.T4] Key idea: normal linear VaR equals a risk factor (e.g., yield, asset price) multiplied by a sensitivity (e.g., duration, delta) https://trtl.bz/2y2Ym8O
• [P1.T4] How is option gamma calculated? https://trtl.bz/2zJogj4
• [P1.T4] Can we eyeball the hybrid value at risk (VaR) approach? https://trtl.bz/2zOW4eE
• [P1.T4] Absolute VaR under P/L versus L/P format https://trtl.bz/2zVGvC9

• [P1.T4] Relationship between yield volatility, duration and convexity https://trtl.bz/2zOBaMP
• [P2.T5*] Value at risk (VaR) and expected shortfall (ES) when the distribution is continuous  https://trtl.bz/2P8H6FL
• [P1.T5] Excellent nuanced argument by Maiyaa with respect to trading a straddle versus strangle based on distributional assumptions https://trtl.bz/2xXSkWX

• [P2.T6*] Marginal versus incremental credit value adjustment (CVA) https://trtl.bz/2y6sAYp
• [P2.T6] More discussion on Merton model for credit risk https://trtl.bz/2C1GAp1
• [P2.T7] Thank you mattias@ledunger.com for an excellent contribution: earnings retained is not the same as retained earnings! https://trtl.bz/2y1HRd7
• [P2.T7] How do we calculate constant spread liquidity adjustment? https://trtl.bz/2zPKq3n
• [P2.T7] Basel 2 BIA excludes a negative income year, but SA counts it as a zero https://trtl.bz/2C1jxec
• [P2.T7] The liquidity adjustment equals LVaR/VaR and is given by Dowd’s formula 14.4 https://trtl.bz/2zX77mh

• [P2.T8] Is component VaR necessarily less than individual VaR? https://trtl.bz/2zOzR07

Banking and Regulatory

• [IMF Global Financial Stability Report October 2018] Regulatory Reform 10 Years after the Global Financial Crisis  https://trtl.bz/2zXR1sn “new standards have contributed to a more resilient financial system—less leveraged, more liquid, and better and more intensively supervised, especially at large banks … But a new risk has emerged: reform fatigue.“
• Research lays bare the banking issue https://thefinanser.com/2018/10/research-lays-bare-banking-issue.html/

• The $500 Million Central Bank Heist—and How It Was Foiled https://trtl.bz/2xXWBtt
• The Untold Tale Behind Modi’s Shock Takeover of a Risky Lender https://trtl.bz/2y3PmA1
• [ML/FT] Banks Are Getting Squeezed by the Fight Against Dirty Money https://trtl.bz/2zWleIg “Governments have made banks the front-line defense against a range of crimes. Combined with the weight of post-financial crisis regulations, the pressure to spot wrongdoing among clients adds costs and acts as a brake on the entrepreneurial spirits of business-winning bankers.“
• Banks Brace for the Downside of Higher Rates https://www.wsj.com/articles/banks-brace-for-the-downside-of-higher-rates-1538823600
• Institute of Risk Management (IRM) launches new Digital Risk Management Certificate  https://enterpriseriskmag.com/irm-launches-new-digital-risk-certificate/
• Fed Rethinks How to Define a Big Bank https://trtl.bz/2zWM7vV
• The Cost of Regulatory Capital http://libertystreeteconomics.newyorkfed.org/2018/10/the-cost-of-regulatory-capital.html
• [BIS] Basel III Monitoring Report https://www.bis.org/bcbs/publ/d449.htm

• [BIS] Basel III monitoring results published by the Basel Committee https://www.bis.org/press/p181004.htm

Economic and International

• The Tyranny of the U.S. Dollar https://www.bloomberg.com/news/articles/2018-10-03/the-tyranny-of-the-u-s-dollar “Oil and gold are priced in dollars, not euros or yen. When Somali pirates hold up ships at sea, it’s dollars they demand. And threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia.“
• The 8 Major Forces Shaping the Future of the Global Economy https://trtl.bz/2zYHIZn

Risk

• [ML/FT] Inside Danske’s €200bn dirty money scandal (ft.com, pdf) https://trtl.bz/2RwppRT
• [ML/FT] Estonia says over $1 trillion flowed through the country in 2008-2017 https://trtl.bz/2BY0mSt
• [ML/FT] Moorad Choudhry’s recent talk (at ALM Partners’ recent conference) on Strategic Asset-Liability Management: The Future of Bank Risk Management https://trtl.bz/2zVuywf
• Value and resilience through better risk management (McKinsey) https://trtl.bz/2zWlG9z

• The Biggest Risk That Markets Ignore (The odds of an accidental clash with China are not zero)  https://trtl.bz/2y5kGhS
• Risk Management https://www.collaborativefund.com/blog/risk-management/
• Changing Risk-Return Profiles http://libertystreeteconomics.newyorkfed.org/2018/10/changing-risk-return-profiles.html
• A Value-at-Risk Model for Cyber? https://trtl.bz/2C0j100
• How we [Russell Investments] built a risk management system https://trtl.bz/2zWQMhi 10-page pdf here  https://trtl.bz/2RyG5s8

• [GARP] Transforming Third-Party Risk through Industry Collaboration https://trtl.bz/2zWd6HD
• [GARP] Risks Are Brewing in Debt, Asset Prices, Ex-Regulators Say https://trtl.bz/2zWdBBv
• [GARP] The OCC Capital Plan and Risk in the Options Market https://trtl.bz/2zWo5Ru

Technology

• The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies https://trtl.bz/2y1CeM3
• Machine Learning for Cybersecurity 101 https://towardsdatascience.com/machine-learning-for-cybersecurity-101-7822b802790b
• What can we learn from 42.5 million mortgage loan applications? https://trtl.bz/2PjM2aU

• The First Bank of Starbucks https://trtl.bz/2zWELZ4

Climate and Natural

• The much-anticipated report by the Intergovernmental Panel on Climate Change (IPCC), Global Warming of 1.5 ºC, has been released https://www.ipcc.ch/report/sr15/ (reporting by NYT https://trtl.bz/2C0S8ZO, Guardian  https://trtl.bz/2zX5k08)

• Climate Change Is Forcing the Insurance Industry to Recalculate https://www.wsj.com/graphics/climate-change-forcing-insurance-industry-recalculate/
• Harvey, Florence, and the climate change connection https://trtl.bz/2PjMmGE
• The $38 Million Earthquake Alert System Can Buy the West Coast Precious Seconds  https://trtl.bz/2NarNdL ShakeAlert at https://www.shakealert.org/

Career and Education

• M.B.A. Applications Decline at Harvard, Wharton, Other Elite Schools as Degree Loses Luster  https://trtl.bz/2zXsBPT “The M.B.A. was once considered a prerequisite … But as students have sought out shorter and more specialized degrees, applications have been scattered across a wider array of schools and types of business degrees“

• The First Rule of Microsoft Excel—Don’t Tell Anyone You’re Good at It https://trtl.bz/2zW2EQq

Investing and Personal Finance

• A New Unstoppable Predictions Marketplace — Introducing Erasure https://trtl.bz/2zVMmHe

• Quant Investor Cliff Asness Hasn’t Smashed His Screen This Year—Yet https://trtl.bz/2zVLimP
• A Retirement Wealth Gap Adds a New Indignity to Old Age https://trtl.bz/2y0HRtO

Other

• Twilight of the Terminal: The Disruption Of Bloomberg L.P.  https://www.cbinsights.com/research/report/bloomberg-terminal-disruption/
• The simple genius of a good graphic (6 min TED talk) https://trtl.bz/2BZZCMA