Bionic Turtle’s Week in Risk (ending September 23rd)

Welcome to our Week in Risk blog! Our new practice questions this week cover the FRM learning objectives in Topic 4, Hull Chapter 19 and Topic 7, Outsourcing. David has posted new YouTube videos discussing plain vanilla interest rate swaps and comparative advantage in an interest rate swap. We’ve also included many FRM forum discussions this week, and other risk articles that we hope you will find interesting. Have a great week!

New Practice Questions

• P1.T4.817. Option delta (Hull Ch.19) https://trtl.bz/2xhIBds

• P2.T7.811. The risks that arise from outsourcing to third-party service providers   https://trtl.bz/2PLS4Rh

New YouTube

• Plain vanilla interest rate swap (T3-30) https://trtl.bz/2D5oODr

• Comparative advantage in an interest rate swap (FRM T3-31) https://trtl.bz/2ODBTWa

In the Forum

• [GARP P2] Liquidity at risk (LaR) https://trtl.bz/2xhvuJE
• [P1.T2] Forum member, agattik makes a good point: there are two possible correlations implied by the coefficient of determination (R^2) in a univariate regression https://trtl.bz/2xhvRUy
• [P1.T2] Properties of an internally consistent (aka, positive semi-definite) variance-covariance matrix  https://trtl.bz/2xmUHCj

• [P1.T3] Why is the American put’s lower bound different than (asymmetric to) the call’s lower bound?  https://trtl.bz/2NZm6DS
• [P1.T3] Why is LIBID less than LIBOR? https://trtl.bz/2xoIr4d
• [P1.T3] Why does liquidity preference imply that the expected future spot interest rate is less than the observed forward rate, E[S(2.0, 2.5)] < F(2.0, 2.5)? https://trtl.bz/2xkTIT8
• [P1.T3] To my knowledge, the calculator’s TVM keystrokes do not accommodate continuous yields  https://trtl.bz/2PR94pm
• [P1.T3] The dividend’s role in put-call parity https://trtl.bz/2PPJ2mq
• [P1.T3] Understanding the US T-bond futures conversion factor (CF) calculation  https://trtl.bz/2OGfDe1

• [P1.T3] How do we know which day count conventions and compound frequencies to assume?  https://trtl.bz/2PZNOxw
• [P1.T3] Knock versus knock-in barrier options https://trtl.bz/2PYOVxC
• [P2.T5] Recursive specification of interest rate trees https://trtl.bz/2xqDfNt
• [P2.T5] Is there an easy way to know which units (i.e., percentage, decimal, basis points) apply in each of the interest rate model parameters? https://trtl.bz/2xmby88
• [P2.T5] A common fixed-income mapping motif is government bonds (market risk) plus credit spreads  https://trtl.bz/2O3l4Xi
• [P2.T5] The equity (implied volatility) skew and its relationship to Hull’s capital structure leverage argument  https://trtl.bz/2Q2ht9z
• [P2.T5] Is Vasicek an equilibrium or no-arbitrage model? https://trtl.bz/2Q1gFSe
• [P2.T6] Counting the number of possible paths in a credit rating migration matrix  https://trtl.bz/2xkMKNN

• [P2.T6] The signs (+/-) in Gregory’s CVA and DVA https://www.bionicturtle.com/forum/threads/cva-and-dva.20242
• [P2.T6] Jorion’s EOC PQ (Chapter 6, Question 10) https://trtl.bz/2PNIrkS
• [P2.T6] De Laurentis’ default rate terminology differs from the others https://trtl.bz/2PQjB3R
• [P2.T6] Typical credit spread calculation https://trtl.bz/2OF8QkP

Financial Crisis Anniversary

• BIS Quarterly Review, September 2018 https://www.bis.org/publ/qtrpdf/r_qt1809.htm
• [Larry Summers] The financial crisis and the foundations for macroeconomics  http://larrysummers.com/2018/09/13/the-financial-crisis-and-the-foundations-for-macroeconomics/ Refers to book: A Crisis of Beliefs: Investor Psychology and Financial Fragility https://amzn.to/2D6ZX2g
• Reflections on the Lehman collapse, 10 years later https://www.bis.org/speeches/sp180917.htm

• Unprecedented amount of fraud: Decade after Great Recession, Denver attorney still cleaning up Lehman mortgage mess. https://www.denverpost.com/2018/09/15/denver-attorney-still-cleaning-up-lehman-mortgage-mess/

Risk and Banking

• Danske Bank money laundering ‘is biggest scandal in Europe’ https://trtl.bz/2Oa7CRw
• A 6-Part Tool for Ranking and Assessing Risks (aka, CARVER) https://hbr.org/2018/09/a-6-part-tool-for-ranking-and-assessing-risks
• Moody’s Pegs Florence’s Economic Cost at $38 Billion to $50 Billion https://trtl.bz/2O1R5PP

• Libor Replacement Carries Risk for States and Cities, Group Says https://trtl.bz/2O5s463
• Analysis: How data breaches affect stock market share prices (2018 update)  https://www.comparitech.com/blog/information-security/data-breach-share-price-2018/
• Mapping 500 Trillion Dollars of Insured Exposure http://www.rms.com/blog/2018/09/19/mapping-500-trillion-dollars-of-insured-exposure/ “RMS has just completed a two-year exercise documenting all the different types of insurance that are available in the market and a classification system for all the assets that they protect. This is published as a data definitions document v1.0 as a standardized schema for insurance companies to have a consistent method of evaluating their exposure.“

• The Risk of Derivatives Isn’t Gone. It’s Merely Morphed (Satyajit Das) https://trtl.bz/2xiz1am For FRM candidates, this is an excellent summary of CCP waterfall and its risks: “If a counterparty fails to meet a margin call, its positions are closed out, with the pool of already-provided deposits applied to its losses. If the amount held is insufficient, the clearing house covers losses from three possible sources, in a prescribed order: its own capital; contributions from non-defaulting members; or assessments against clearing members to inject additional funds. The hierarchy of risk-bearing resembles the loss-absorbing capital layers in a collateralized debt obligation, the problem child of 2008.“

Quantitative

• Probability and Statistics for computer vision 101 — Part 2 https://trtl.bz/2Q22wV3
• Understanding Cryptography (From Math to Physics) https://trtl.bz/2O3UUE8

• Mosaic Plot and Chi-Square Test https://trtl.bz/2O4eC2h
• One simple way for CFOs to manage forecast uncertainties (using Monte Carlo and R)  https://trtl.bz/2PZztRI

New Books

• [book] Agricultural Risk Transfer: From Insurance to Reinsurance to Capital Markets  https://amzn.to/2DoL0Zn

• [book] Credit-Risk Modelling: Theoretical Foundations, Diagnostic Tools, Practical Examples, and Numerical Recipes in Python https://amzn.to/2xNY7O2

Other

• CFA Institute Writes the Book on Corporate Governance Analysis  https://blogs.cfainstitute.org/marketintegrity/2018/09/20/cfa-institute-writes-the-book-on-corporate-governance-analysis/
• Genius after the fact by McKinsey (Did you know it all along? Then you may be a victim of hindsight bias)  https://trtl.bz/2OaK7bm

• Accelerated Share Repurchases (ASRs): Managing EPS?  https://blogs.cfainstitute.org/investor/2018/09/21/accelerated-share-repurchases-asrs-managing-eps/
• Mental Models: Look At Your Decision-Making Process, Not The Outcome https://trtl.bz/2O5nS6j