Recent Posts

Bionic Turtle’s Week in Risk – March 28th

Financial Risk Forum Discussions Estimating VaR Estimating VaR with normally distributed arithmetic returns (in contrast to normally distributed geometric returns) I think it's worth understanding Dowd on this concept. Pricing a theoretical Treasury bond futures contract Talking about the tedious exercise of pricing a theoretical Treasury bond futures contract It's just cost of carry... Read More

Bionic Turtle’s Week in Risk – March 21st

FRM Forum Discussions Forward rates on the exam Forward rates on the exam, mastery of compound frequency makes many other things much easier Basis: This seems to confuse every year. Hull’s point is that, because a hedge tends to make an assumption about the future basis (e.g., basis will converge to zero), it is... Read More

Bionic Turtle’s Week in Risk – March 14th

FRM Forum Discussions GARP 2016 Practice Exam Errors Several errors were identified in the originally published GARP 2016 Part 2 Practice Exam, see These have been corrected by GARP. I think errors are very instructive, regardless. For example, the practice exam includes the estimation of ES via VaR quantiles. Do you need to know calculus... Read More

Capital Adequacy

Capital Adequacy is a Balance Sheet Ratio Financial analysts analyze company performance with different sets of ratios; e.g., earnings per share, return on equity. As a ratio, capital adequacy is just a special solvency ratio, not greatly unlike the classic debt-to-equity ratio. But capital adequacy connotes a financial institution's capital, so it’s really a bank-specific... Read More

Binomial Tree

Introduction The Financial Risk Manager (FRM) introduces binomial trees by applying them to value derivatives for two asset classes, equities and bonds. For stock options, the text is John Hull’s Options, Futures and Derivatives; for bonds, the text is Bruce Tuckman’s Fixed Income Securities. Both are excellent and have been assigned in the syllabus for... Read More

Spot Rates

Spot prices are a basic building block in finance, but they are tricky when the commodity is money. When the commodity is money, spot prices are called spot rates (a.k.a., spot interest rate). A spot price is simply the market's current price to buy or sell a commodity for immediate delivery. Spot prices are so... Read More

FRM Study Tips

After registering for the FRM exam and purchasing study materials, many new FRM candidates find it difficult to figure out where to begin with their FRM study plan. It is very important to have a study plan because without one, you may not be able to get through the entire GARP curriculum. The GARP curriculum provides... Read More

Modified Duration

Our forum contains hundreds of questions about duration. Duration often vexes new candidates, in part because there are several types. Let's first settle a confusion: the units of all durations are years (time). So, regardless of which duration, we can typically say something like "The bond's duration is 4.52 years." I taught duration several years... Read More

What Is a Z Table?

Functions based on the normal distribution are easy to retrieve in code or excel, so we do not really need z tables anymore, in practice. But we still want to understand the z table. Why? Because the popular exam calculators (TI BA II+ and HP 12c) do not include z table functionality, so we do... Read More

Statistical Inference: Hypothesis Testing and Confidence Intervals

320.1. Recently 25 banks were surveyed. Their sample average total capital is 8.40% (i.e., Tier 1 plus Tier 2 as a percentage of risk-weighted assets, RWA) with a sample standard deviation of 1.0%. Our one-sided null hypothesis is that the population's "true" average total capital is less than or equal to 8.0%. With 95.0% confidence,... Read More

Economic Capital (Schroeck)

Learning outcomes: Evaluate a bank’s economic capital relative to its level of credit risk. Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate. Questions: 505.1. According to Schroeck, economic capital is an estimate of the overall level of capital necessary to guarantee the solvencyof... Read More