Bionic Turtle’s Week in Risk (ending September 30th)

Welcome to our Week in Risk blog! This week, we posted new FRM practice questions discussing futures delta and dynamic delta hedging, as well as, risks related to money laundering and financing of terrorism. We post 6 new FRM practice questions each week! Our newest YouTube videos explain the valuation of a plain-vanilla interest rate swap and fixed for fixed currency swaps. Our FRM forum has some really great discussions too! Stop by to get your questions answered or just to learn more in-depth concepts! Have a great week 🙂

New Practice Questions

• P1.T4.818. Futures delta and dynamic delta hedging (Hull Ch.19) https://trtl.bz/2OdBmx1

• P2.T7.812. Risks related to money laundering and financing of terrorism https://trtl.bz/2NGMKlr

New YouTube

• Valuation of plain-vanilla interest rate swap (T3-32) https://trtl.bz/2QmRud6

• Fixed for fixed currency swap: mechanics and valuation (T3-33) https://trtl.bz/2NRtj9Y

In the Forum

• Congratulations to forum member, rnavarro on completing the ARPM certificate https://trtl.bz/2Q5YvyN. Advanced Risk management and Portfolio Management (ARPM) offers a Certificate (requiring three tests that cover four modules: Financial Engineering for Investment; Data Science for Finance; Quantitative Risk Management; and Quantitative Portfolio Management. See https://www.arpm.co/certificate/
• [P1.T2*] What is the role of long-run average volatility in the volatility models? https://trtl.bz/2zDrPar
• [P1.T3] Thank you Chris (@Cjdubs12) for identifying the flaw in my question concerning Hull’s distinction between hedgers, speculators, and arbitrageurs https://trtl.bz/2Q466Os

• [P1.T3] If the foreign currency forward term structure is upward-sloping, which currency is appreciating?  https://trtl.bz/2Q4Wd2N
• [P1.T3] Can an FX swap be split into a FX spot plus FX forward? https://www.bionicturtle.com/forum/threads/fx-swap-vs-fx-spot-fx-forward.20417/
• [P1.T3] The logic of reducing a fixed-income portfolio’s net duration to a target level using Treasury bond futures contracts https://trtl.bz/2zzA0V6
• [P1.T3] A hedge requires two positions and a “short hedge” simply means that the hedge is a short position  https://trtl.bz/2OXLmI3
• [P1.T3] More on the popular issue of the dividend’s role in option valuation (or put-call parity)  https://trtl.bz/2zDvXqX

• [P1.T3] Interest rate parity (IRP) implies that the currency with the higher interest rate will depreciate (the currency will the lower interest rate, in order to compete, appreciates) https://trtl.bz/2Q4Wd2N
• [P1.T3] Can a bond issuer repay premium at maturity? https://trtl.bz/2zF6o9b
• [P1.T3] When can we use the single-cash-flow shortcut for valuing an interest rate swap? https://trtl.bz/2zGYcoD

• [P1.T3] What is the relationship between interest rate volatility and callable convertible bond  https://trtl.bz/2zIh6eL
• [P1.T3] Thank you to forum member, Sharma for interesting approach to converting compound frequencies  https://trtl.bz/2zGZD6I
• [P1.T4] The delta of an option on a futures contract https://trtl.bz/2Q4cK7e
• [P1.T4] In volatility, we are primarily concerned with two different types of mean reversion: reversion in returns (aka, negative autocorrelation) and reversion in volatility (i.e., toward a long-run or unconditional volatility)  https://trtl.bz/2zDyCAU
• [P1.T4] Do we need to use modified duration for the fixed income VaR calculation? https://trtl.bz/2OYsbOl
• [P1.T4] What is “adjusted” exposure? https://trtl.bz/2N9Ymsl
• [P1.T4] Among 100 sorted losses, is the 98% HS VaR the 2nd or 3rd worst loss?  https://www.bionicturtle.com/forum/threads/value-at-risk-var.20985/
• [P2.T5] What is the difference between filtered and volatility-weighted historical simulation?  https://trtl.bz/2Nevf78

• [P2.T6] Stulz simple example of credit exposure (is not bilateral CVA) https://trtl.bz/2OPyuDA
• [P2.T6] Calculation of the overcollateralization (O/C) account in Malz three-tier securitization structure example  https://trtl.bz/2OUguYE
• [P2.T6] Isn’t the threshold the same as the uncollateralized exposure? https://trtl.bz/2zzdpIf
• [P2.T6] Malz’s derivation of conditional probability in continuous time https://trtl.bz/2OWxiyo
• [P2.T6] Thank you forum member, David1973 for the detailed illustration of multilateral netting  https://trtl.bz/2OSP85b
• [P2.T7] The standardized measurement approach (SMA) may be simpler than the AMA, but it remains a non-trivial calculation https://trtl.bz/2zF2Cwm

Quantitative

• The Complete Guide to Statistics for the Saas Executive (pdf) https://trtl.bz/2zEBWvy

• Interpretability vs. Accuracy: The Friction that Defines Deep Learning https://trtl.bz/2N5e481 Linear regression is highly interpretable but not very accurate
• Linear Algebra 101 — Part 4 https://medium.com/sho-jp/linear-algebra-101-part-4-6864630842b
• A Multivariate Time Series Guide to Forecasting and Modeling (with Python codes) https://trtl.bz/2zG8wgG
• Why Rejection Sampling Is Useful in Cat Modeling http://www.air-worldwide.com/Blog/Why-Rejection-Sampling-Is-Useful-in-Cat-Modeling/

Risk

• How Loss Aversion Dominates Your Life https://trtl.bz/2zGdyKd
• Culture, Tone at the Top Lead to Boardroom Resilience https://blog.nacdonline.org/posts/culture-tone-top-resilience Interesting quadrant framework: exogenous versus industry/firm, and top-down versus bottom-up (Material Improbabilities: https://trtl.bz/2OliBI4)

• How Risk Selection in California Can Be Affected by Earthquake Source Modeling Assumptions: A Spatial Loss Correlation Perspective https://trtl.bz/2zFC7qN
• The basics of risk management https://normanmarks.wordpress.com/2018/09/29/the-basics-of-risk-management/ He refers to this excellent video https://trtl.bz/2NRAZsD
• Why You Don’t Know the Price Until You Sell https://ofdollarsanddata.com/why-you-dont-know-the-price-until-you-sell/ “LTCM had assumed far more liquidity and ease of exit from their positions than what they eventually realized during the 1998 crisis. They had no idea the buyers would disappear and the stable prices would go with them. As you know, if there are no buyers and you need to sell, you only have one option—lower your price.“
• Just When Should We Start Worrying About Deficits? https://trtl.bz/2zF3XDm

Banking and Investing

• Jes Staley Stakes Barclays’s Future on Investment Banking https://trtl.bz/2zFNFdp “Staley says he’s quite comfortable with the risks of carrying £238 billion in derivatives liabilities on his balance sheet. Brandishing that credit card of his, he says the bank’s risk committee is far more focused on the £50 billion in unsecured consumer debt on its balance sheet.“

• What Is FRAML? And Why Is It Important? https://www.fico.com/blogs/fraud-security/what-is-framl/
• America’s Libor Alternative [Secured Overnight Financing Rate, SOFR] Is Gaining Traction on Wall Street  https://trtl.bz/2zGgwyp  Also: Derivatives and debt markets face race to end links with Libor (ft.com, pdf)  https://trtl.bz/2zHx3Ce

• The Banks That Helped Danske Bank Estonia Launder Russian Money https://trtl.bz/2zI0x2R
• Illustrating the Value of Retirement Accounts https://alphaarchitect.com/2018/09/19/illustrating-the-value-of-retirement-accounts/

Case Studies (including GFC)

• Not Too Big To Fail: Why Lehman Had to Go Bankrupt http://knowledge.wharton.upenn.edu/article/the-good-reasons-why-lehman-failed/ … part of their series on the “Great Recession:”  http://knowledge.wharton.upenn.edu/tags/great-recession/
• Facebook Finds Security Flaw Affecting Almost 50 Million Accounts https://trtl.bz/2zGgaaZ
• Abacus CDO Bites Goldman Back https://www.bloomberg.com/view/articles/2018-09-26/abacus-cdo-bites-goldman-back
• Legacy of Lehman Brothers is a global pensions mess (ft.com, pdf) https://trtl.bz/2RchUzy

• Iceland Found Another Way to Clean Up a Financial Crisis by Barry Ritholtz https://trtl.bz/2Nb5GUo

Environment (Climate)

• Environmental, Social, and Governance (ESG) Integration in the United States (CFA Institute)  https://trtl.bz/2zFf92U “ESG integration in the US is not as advanced as ESG integration in other developed markets … ESG has a definitional problem: about 25% to 33% of survey and workshop participants equate ESG integration with negative screening.“
• A 5-minute Primer on Factoring ERM into credit ratings for insurance companies  https://www.erminsightsbycarol.com/credit-ratings-erm-insurance/

• Prepare for 10 Feet of Sea Level Rise, California Commission Tells Coastal Cities https://trtl.bz/2zFrtA5
• The Big Melt https://www.nybooks.com/articles/2018/08/16/arctic-big-melt/
• Task Force report shows momentum building for climate-related financial disclosures https://trtl.bz/2zGY3l0

Technology (including Data Science)

• FSB and IMF publish the 2018 progress report on G20 Data Gaps Initiative https://trtl.bz/2zGZEr5
• How Dirty Money Disappears Into the Black Hole of Cryptocurrency https://trtl.bz/2zGgZk5

• Uncertainty in Data Science (Transcript) https://www.datacamp.com/community/blog/uncertainty-data-science
• These Police Drones are Watching You https://www.pogo.org/analysis/2018/09/these-police-drones-are-watching-you/ “Aerial surveillance can be incredibly invasive … is cheap … is widespread“
• Insider threat: The human element of cyber risk (McKinsey) https://trtl.bz/2zGafTe

• Getting Started With Machine Learning https://trtl.bz/2zHuyQb
• [BIS] Fintech credit markets around the world: size, drivers and policy issues  https://www.bis.org/publ/qtrpdf/r_qt1809e.htm