Welcome to our Week in Risk blog! It’s exam week and we hope that everyone feels prepared for Saturday. Remember that our forum provides a great deal of information on the FRM concepts so make sure to stop by with any last-minute questions that you may have. We want to wish everyone good luck on the exam and say thank you to all of our valued subscribers who have made it possible for Bionic Turtle to continue providing candidates with the highest quality study materials for the FRM exam. Have a great week!
1. Valuation & Risk Models: P1.T4.918. Internal versus external credit ratings (de Servigny Ch.2) https://trtl.bz/2vQQWE1
2. Credit Risk Measurement & Management: P2.T6.909. Credit exposure metrics continued (expected positive exposure and effective exposure) (Gregory Ch.7) https://trtl.bz/2vZj4ER This set of questions continues a fresh review of the Gregory reading in Topic 6 of the FRM curriculum. David reviews expected positive exposure and effective exposure. He also discusses the characterization of credit exposure to VaR methods.
1. Valuation & Risk Models: Fixed income: Carry roll down (FRM T4-31) https://trtl.bz/2JAHWuP The Carry-Roll-Down is the price change in the bond due exclusively to the passage of time. It is only one component of a bond’s total profit and loss (P&L). The bond’s total P&L equals Price Appreciation plus Cash Carry (i.e., coupon). Price Appreciation equals Carry-Roll-Down plus Price Change due to Shift in Rates (market risk) plus Price Change due to spread narrowing/widening (credit risk).
2. Valuation & Risk Models: Fixed income: Bond DV01 (aka, price value of basis point, FRM T4-32) https://trtl.bz/2Viyy1g The DV01 stands for “dollar value of a .01% (one basis point).” It is also called the Price Value of a Basis Point (PVBP). It is the bond’s or fixed income portfolio’s dollar change given a one basis point decline in the yield.
1. Correlation versus dependence: A few of us had a good discussion about correlation and dependence here https://trtl.bz/2PZ0JRH. In the FRM, it’s important to know (per Dowd and Meissner) that correlation typically refers to linear (aka, Pearson’s) correlation, but dependence is a much broader set of associations. Make sure you know the test for statistical independence.
2. Potential future exposure is a long-dated value at risk (VaR) but for unrealized gains: RushilChulani asks a good question about potential future exposure (PFE) here https://trtl.bz/2PZ1pXf and I just want to remind you that PFE is only different from value at risk (VaR) in its application and context. Both PFE and VaR are merely statistical quantiles.
3. Instructive practice paper errors (subadditivity and implied volatility): As I mentioned last week, GARP’s prior practice papers have errors so we don’t recommend using them prior to the current 2019. They continue to be instructive only if you are willing to learn from mistakes. This week’s discussion includes an interesting fallacy with respect to VaR’s lack of subadditivity https://trtl.bz/2Q2KkeX and a misinterpretation of the implied volatility skew for in/out of the money options https://trtl.bz/2Q13EZW.
1. Cyber risk grows in prominence, but necessary skills are short and non-traditional: Cybersecurity Jobs Abound. No Experience Required (WSJ) https://trtl.bz/2PZp2Pu “It’s really difficult to determine just by someone’s academic track record if they could be great at the kind of problem-solving we do, but it’s relatively easy in a simulation game,” [IBM’s head of offensive-security services] said.
2. Chief Risk Officer (CRO): An Increasingly Vital Role in Effective Risk Oversight (by Carol Williams) https://www.erminsightsbycarol.com/chief-risk-officer-vital-role/ who points to the 2019 “The State of Risk Oversight: An Overview of Enterprise Risk Management Practices (10th Edition)” https://trtl.bz/2Q2t4q6.
3. Other (Risk literacy, Experts, and the Tidyverse): 3.1. Risk Literacy And Interpreting The Probabilistic Risks Of Investing And Retirement Planning https://trtl.bz/2Q9ycsV. 3.2. The Peculiar Blindness of Experts https://trtl.bz/2PZz7vL. 3.3. A Beginner’s Guide to Tidyverse (The Most Powerful Collection of R Packages for Data Science) https://trtl.bz/2Q1yjGw