Bionic Turtle’s Week in Risk (ending September 17th)

We have been very busy here at Bionic Turtle since the May exam, but we are so happy to be bringing back the Week in Risk for all of you! David has found some very interesting articles this week, so we hope that you enjoy! 🙂

New Practice Questions

• P1.T3.725. Properties of stock options, including lower bounds (Hull Chapter 11) https://www.bionicturtle.com/forum/threads/p1-t3-725-properties-of-stock-options-including-lower-bounds-hull-chapter-11.10698/
• P1.T3.726. More properties of stock options, including put-call parity (Hull Ch 11 cont) https://www.bionicturtle.com/forum/threads/p1-t3-726-more-properties-of-stock-options-including-put-call-parity-hull-ch-11-cont.10706/
• P2.T7.704. Loss distribution approach (LDA), external loss data, & Basel’s Standardized Measurement  https://www.bionicturtle.com/forum/threads/p2-t7-704-loss-distribution-approach-lda-external-loss-data-basels-standardized-measurement.10703/
• P1.T7.705. Extreme value theory (EVT) https://www.bionicturtle.com/forum/threads/p1-t7-705-extreme-value-theory-evt.10710/

In the forum this week (selected only)

• [P1.T1] Bodie’s factor model parses expected return but it’s the same multi-factor SML http://trtl.bz/2j8W2bb
• [P1.T2] Miller’s probability matrix https://www.bionicturtle.com/forum/threads/probability-matrix.10644/
• [P1.T2] For a sample mean, when can you use normal and when should you use student’s t https://www.bionicturtle.com/forum/threads/confidence-intervals-p1-t2-miller-chpt-7.10669/

• [P1.T3] Hull’s EOC pension problem illustrated in XLS http://trtl.bz/2gQPM76
• [P1.T3] On the importance of proper foreign exchange (FX) quote convention https://www.bionicturtle.com/forum/threads/garp-2017-p2-73-garp17-p2-73.10694/
• [P1.T3] Choice of futures delivery and the subtle differences between contango, normal contango and trading cheap/rich  https://www.bionicturtle.com/forum/threads/fin_prods_futures_trading_cheap_vs_delivery_time.10654/
• [P1.T3] Lower bounds on dividend-paying options, illustrated https://www.bionicturtle.com/forum/threads/lower-bounds-on-dividend-paying-options.10667/
• [P1.T3] Does Hull’s interest rate swap confer comparative advantage if the rate differentials are switched? https://www.bionicturtle.com/forum/threads/comparative-advantage.7406/#post-52090

• [P1.T3] Member, akcfa447, convinces me that this is an exception to the general rule that roll return is positive (for the long position) in backwardation https://www.bionicturtle.com/forum/threads/l1-t3-147-normal-versus-inverted-futures-market-hull.4396/#post-52326
• [P1.T3] Currency appreciation can also be modeled as the currency pair’s depreciation https://www.bionicturtle.com/forum/threads/p1-t3-501-foreign-exchange-fx-gain-and-loss-saunders.8795/#post-52225
• [P1.T4] Value at risk (VaR) for linear derivatives, key relationships: https://www.bionicturtle.com/forum/threads/r25-p1-t4-allen_ch-2-3-topic-var_linear_derivatives.10576/
• [P1.T4] Why would theta ever be positive for a put? https://www.bionicturtle.com/forum/threads/theta-of-itm-put-option.10665/
• [P1.T4] Forward rate agreement valuation illustrated https://www.bionicturtle.com/forum/threads/forward-rate-agreement.7063/
• [P1.T4] Can option gamma exceed 1.0? https://www.bionicturtle.com/forum/threads/can-gamma-of-an-option-be-greater-than-1.10650/

• [P2.T5] Is historical simulation a non-parametric approach? https://www.bionicturtle.com/forum/threads/historical-simulation-parametric-or-nonparametric-appoach.10716/
• [P2.T5] On the intuition of concordant versus discordant pairs http://trtl.bz/2eQXTQx
• [P2.T5] Member, QuantMan2318, with epic explainer of Jorion’s VaR under cash flow mapping https://www.bionicturtle.com/forum/threads/p2-t5-703-var-backtest-and-var-mapping.10549/#post-51954
• [P2.T5] On the intuition of getting from traded option prices to implied distribution tails http://trtl.bz/2wNBIiT

• [P2.T6] Settled versus actual recovery rates and their impact on the credit valuation adjustment (CVA) https://www.bionicturtle.com/forum/threads/settled-vs-actual-recovery-rates.10704/
• [P2.T6] Payment versus close-out netting https://www.bionicturtle.com/forum/threads/netting-vs-closeout-netting.10696/
• [P2.T6] Gregory’s challenging idea that “wrong way risk increases as the credit quality of the counterparty increases” http://trtl.bz/2wMYDxg
• [P2.T6] Malz single-factor default model illustrated https://www.bionicturtle.com/forum/threads/malz-single-factor-model.10692/
• [P2.T6] The impact of interest rates in Stulz’ credit risk reading is multi-faceted https://www.bionicturtle.com/forum/threads/interest-rates-stultz.10689/
• [P2.T7] Hull’s EOC Basel capital calculation interest rate swap https://www.bionicturtle.com/forum/threads/rwa.10668/
• [P2.T7] Member, QuantMan2318, helpfully clarifies Basel’s stressed VaR calculation with an XLS example http://trtl.bz/2vRCQot
• [P2.T8] Risk contribution (marginal volatility) https://www.bionicturtle.com/forum/threads/risk-budgeting-risk-contribution-of-assets-to-the-portfolio.10641/

• [P2.T8] Three suspected typos in Ang’s excellent (don’t get me wrong!) book http://trtl.bz/2vRSwrz
• [P2.T9] Does Bitcoin effectively automate monetary policy? http://www.bionicturtle.com/forum/threads/p2-t9-701-bitcoin-risks-and-regulation-b%C3%B6hme.10285/#post-52217

Bank and Banking

• How Bank of America Ditched 1,597 Branches Across the U.S. http://trtl.bz/2xa3KW1

• [BIS] Basel III Monitoring Report https://www.bis.org/bcbs/publ/d416.htm
• BIS Quarterly Review, September 2017 https://www.bis.org/publ/qtrpdf/r_qt1709.htm

Natural Science, including Climate and Energy

• Hurricane Irma: A Practically Impossible Storm https://www.wired.com/story/hurricane-irma-a-practically-impossible-storm/
• Hurricanes Highlight Failure to Enforce Flood Insurance Rules http://trtl.bz/2xekPQ6
• Are Catastrophic Disasters Striking More Often? https://futurism.com/are-catastrophic-disasters-striking-more-often/
• Catastrophe Bonds Avoid Direct Hit From Hurricane Irma https://www.wsj.com/articles/catastrophe-bonds-avoid-direct-hit-from-hurricane-irma-1505165379 “In simplest terms, a catastrophe bond works like this: An investor buys the bond, taking into account a calculation by an independent risk-modeling firm of the odds of a specified disaster occurring. The principal and interest are held in escrow and typically invested in Treasurys. These bonds are typically sold in tranches, each with a different trigger. Triggers vary across the bonds.”
• Three Reasons Why Irma’s Florida Strike Wasn’t as Bad as Forecast http://trtl.bz/2wncRoT

Technology, including FinTech and Cybersecurity

• Equifax Announces [Major] Cybersecurity Incident https://www.equifaxsecurity2017.com/ Bloomberg says it ranks among the largest cybersecurity breaches in history http://trtl.bz/2eLL4Ua
• Reddit has the best information that I’ve seen on the Equifax breach https://www.reddit.com/r/personalfinance/comments/6yv4gb/official_mega_thread_recent_equifax_security/
• The Equifax hack and how to protect your family — all explained in 5 minutes http://trtl.bz/2xc8ETV “On March 7, the developers of Apache Struts — a Java web development framework popular with big finance companies — released a critical security patch. For more than two months, Equifax failed to apply that patch. Then in May, attackers discovered that Equifax was vulnerable. They started siphoning data out of Equifax’s massive databases.”

Data science (primarily R), including Alternative Data

• A Gentler Introduction to Programming https://medium.freecodecamp.org/a-gentler-introduction-to-programming-707453a79ee8

• Data Visualization for Social Science (A practical introduction with R and ggplot2) http://socviz.co/
• Datacamp new courses: Foundations of Probability in R  https://www.datacamp.com/courses/foundations-of-probability-in-r and Multiple and Logistic Regression https://www.datacamp.com/courses/multiple-and-logistic-regression

Quantitative Analysis (FRM P1.T2)

• From Theory To Practice: Representing Graphs https://medium.com/basecs/from-theory-to-practice-representing-graphs-cfd782c5be38

• Negative correlation introduced by success https://www.johndcook.com/blog/2017/09/10/negative-correlation-introduced-by-success/ “Suppose beauty and acting ability were uncorrelated. Knowing how attractive someone is would give you no advantage in guessing their acting ability, and vice versa. Suppose further that successful actors have a combination of beauty and acting ability. Then among successful actors, the beautiful would tend to be poor actors, and the unattractive would tend to be good actors.”

Financial Markets and Products, including Interest Rates, Commodity Risk, and Foreign Exchange (FX)(FRM P1.T3)

• Methods for pricing options in the 19th century http://voxeu.org/article/methods-pricing-options-19th-century
• Special report by XL Catlin: Why closing the protection gap is critical to the industry’s future  http://xlcatlin.com/fast-fast-forward/articles/xl-catlin-protection-gap-special-report

Operational risk, including Legal risk (FRM P1.T7)

• Inherent Risk vs. Residual Risk Explained in 90 Seconds http://www.fairinstitute.org/blog/inherent-risk-vs.-residual-risk-explained-in-90-seconds

Investment risk, including Pensions (FRM P1.T8)

• Swedroe: Embracing The Downside http://www.etf.com/sections/index-investor-corner/swedroe-embracing-downside I think this is wholly consistent with Ang’s factor theory; e.g., “The factor risks constitute different flavors of bad times and the investors who bear these factor risks need to be compensated in equilibrium by earning factor risk premiums.”