Week in Financial Education (April 5, 2021)

This week we had a interesting question about the definition of duration due to an apparent difference between GARP's new material and Tuckman. It's a good chance to understand the math that underlies this fundamental bond risk measure. In external news, Archegos is a dominant story (and likely future FRM case study). Finally, David mentions... Read More
FRM week in risk

Week in Financial Education (March 29, 2021)

Hello valued visitors! We're bringing back Week in Risk but calling it Our Week in Financial Education until we find a better title. Maybe you noticed our exciting news? We recently joined CeriFi and look forward to broadening this forum's reach. The idea is to share a brief blog-like update from the week including selected forum threads that highlight interesting... Read More

Bionic Turtle Has Been Acquired by CeriFi

We wanted to share some exciting news: Bionic Turtle has been acquired by CeriFi. You can read the press release here David started BT over 15 years ago (yikes!). His original vision was to build an entire online school. He started with the FRM because he loves finance and the FRM seemed to be... 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

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