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Convexity adjustment & AR Scaling Factor Formulae
Hi Murehwa, Good catches. In regard to the convexity measure, I am not exactly consistent, but please note: the convexity adjustment is the same because, where the "measure" omits the 2 in the denominator in the presentation, then the 1/2 is multiplied in the adjustment (the adjustment is the useful metric, I am pretty sure Fabozzi--who is not assigned but i used here b/c i thought is was...
Hi Murehwa, Good catches. In regard to the convexity measure, I am not exactly consistent, but please note: the convexity adjustment is the same because, where the "measure" omits the 2 in the denominator in the presentation, then the 1/2 is multiplied in the adjustment (the adjustment is the useful metric, I am pretty sure Fabozzi--who is not assigned but i used here b/c i thought is was...
Hi Murehwa, Good catches. In regard to the convexity measure, I am not exactly consistent, but please note: the convexity adjustment is the same because, where the "measure" omits the 2 in the denominator in the presentation, then the 1/2 is multiplied in the adjustment (the adjustment is the...
Hi Murehwa, Good catches. In regard to the convexity measure, I am not exactly consistent, but please note: the convexity adjustment is the same because, where the "measure" omits the 2 in the...
murehwa
,
Apr 26, 2011
Replies:
1
Views:
44
David Harper CFA FRM
Apr 26, 2011
SSR clarification
Hi Theresa, Okay, I got your original email. I totally understand the apparent confusion. I would have preferred to keep the terminology from Gujarati: ESS (explained sum) + RSS (residual sum) = TSS (total sum) but GARP switched to Stock & Watson ESS (explained sum) + SSR (sum of squared residual) = TSS (total sum) Thanks, David
Hi Theresa, Okay, I got your original email. I totally understand the apparent confusion. I would have preferred to keep the terminology from Gujarati: ESS (explained sum) + RSS (residual sum) = TSS (total sum) but GARP switched to Stock & Watson ESS (explained sum) + SSR (sum of squared residual) = TSS (total sum) Thanks, David
Hi Theresa, Okay, I got your original email. I totally understand the apparent confusion. I would have preferred to keep the terminology from Gujarati: ESS (explained sum) + RSS (residual sum) = TSS (total sum) but GARP switched to Stock & Watson ESS (explained sum) + SSR (sum of...
Hi Theresa, Okay, I got your original email. I totally understand the apparent confusion. I would have preferred to keep the terminology from Gujarati: ESS (explained sum) + RSS (residual...
Tplbch@hotmail.com
,
Apr 24, 2011
Replies:
1
Views:
61
David Harper CFA FRM
Apr 25, 2011
Regaridng the 2011 practice paper of GARP level II
Hi suraj, They intend the answer to be (a), $0 million, on the theory that during the entire lockout (and therefore true at 14 months) none of those liability tranches have been paid down to any extent; i.e., $0 principal paid to all of the five tranches, or put another way, assuming no defaults (not indicated in the question), the principal values would be unchanged at the 14 month. ......
Hi suraj, They intend the answer to be (a), $0 million, on the theory that during the entire lockout (and therefore true at 14 months) none of those liability tranches have been paid down to any extent; i.e., $0 principal paid to all of the five tranches, or put another way, assuming no defaults (not indicated in the question), the principal values would be unchanged at the 14 month. ......
Hi suraj, They intend the answer to be (a), $0 million, on the theory that during the entire lockout (and therefore true at 14 months) none of those liability tranches have been paid down to any extent; i.e., $0 principal paid to all of the five tranches, or put another way, assuming no...
Hi suraj, They intend the answer to be (a), $0 million, on the theory that during the entire lockout (and therefore true at 14 months) none of those liability tranches have been paid down to...
surajthepair
,
Apr 20, 2011
Replies:
1
Views:
40
David Harper CFA FRM
Apr 20, 2011
Handbook question -- 15.8 -- FRM EXAM 2004
Herve, That's very helpful, thank you!
Herve, That's very helpful, thank you!
Herve, That's very helpful, thank you!
Herve, That's very helpful, thank you!
shi@post.harvard.edu
,
Nov 19, 2010
Replies:
3
Views:
7
shi@post.harvard.edu
Nov 19, 2010
Navigating the FRM Handbook section on Bionic
Hi Eva, We didn't collect handbook questions to PDF (I don't think we have annotation to warrant any improvement, frankly). In regard to PDFs, aside from the my account study planner, they can be found: L1 http://www.bionicturtle.com/how-to/questions/category/risk-frm/?product=level-1 L2 http://www.bionicturtle.com/how-to/questions/category/risk-frm/?product=level-2 i.e., practice...
Hi Eva, We didn't collect handbook questions to PDF (I don't think we have annotation to warrant any improvement, frankly). In regard to PDFs, aside from the my account study planner, they can be found: L1 http://www.bionicturtle.com/how-to/questions/category/risk-frm/?product=level-1 L2 http://www.bionicturtle.com/how-to/questions/category/risk-frm/?product=level-2 i.e., practice...
Hi Eva, We didn't collect handbook questions to PDF (I don't think we have annotation to warrant any improvement, frankly). In regard to PDFs, aside from the my account study planner, they can be found: L1 http://www.bionicturtle.com/how-to/questions/category/risk-frm/?product=level-1 ...
Hi Eva, We didn't collect handbook questions to PDF (I don't think we have annotation to warrant any improvement, frankly). In regard to PDFs, aside from the my account study planner, they...
shi@post.harvard.edu
,
Nov 17, 2010
Replies:
1
Views:
36
David Harper CFA FRM
Nov 17, 2010
Implied Probability of Default
In the FRM Handbook, Jorion writes that if yields and default probabilities are "small" then we could simply the probability of default equation to : P = 1/(LGD)*(1-(1+Y)/(1+Y*)) to P = (Y*-Y)/LGD Where LGD is loss given default or (1 - recovery rate) and Y is the risk free rate and Y* is the yield for your risky bond. Probability of default questions and solving for...
In the FRM Handbook, Jorion writes that if yields and default probabilities are "small" then we could simply the probability of default equation to : P = 1/(LGD)*(1-(1+Y)/(1+Y*)) to P = (Y*-Y)/LGD Where LGD is loss given default or (1 - recovery rate) and Y is the risk free rate and Y* is the yield for your risky bond. Probability of default questions and solving for...
In the FRM Handbook, Jorion writes that if yields and default probabilities are "small" then we could simply the probability of default equation to : P = 1/(LGD)*(1-(1+Y)/(1+Y*)) to P = (Y*-Y)/LGD Where LGD is loss given default or (1 - recovery rate) and Y is the risk free rate ...
In the FRM Handbook, Jorion writes that if yields and default probabilities are "small" then we could simply the probability of default equation to : P = 1/(LGD)*(1-(1+Y)/(1+Y*)) to P =...
intuit2k2
,
Nov 6, 2010
Replies:
0
Views:
13
intuit2k2
Nov 6, 2010
Recommended chapters
Hi saray, Sure thing. Opinions vary, but mine is that the questions are the weakest aspect of the 4th or 5th FRM handbook (4th or 5th edition; i see there is a 6th edition scheduled for Dec 28 release....). Jorion wrote the text (he is sincerely good author and very precise) but he did not write the questions. In general, my view is: i would only use RECENT questions (e.g., 2009,...
Hi saray, Sure thing. Opinions vary, but mine is that the questions are the weakest aspect of the 4th or 5th FRM handbook (4th or 5th edition; i see there is a 6th edition scheduled for Dec 28 release....). Jorion wrote the text (he is sincerely good author and very precise) but he did not write the questions. In general, my view is: i would only use RECENT questions (e.g., 2009,...
Hi saray, Sure thing. Opinions vary, but mine is that the questions are the weakest aspect of the 4th or 5th FRM handbook (4th or 5th edition; i see there is a 6th edition scheduled for Dec 28 release....). Jorion wrote the text (he is sincerely good author and very precise) but he did...
Hi saray, Sure thing. Opinions vary, but mine is that the questions are the weakest aspect of the 4th or 5th FRM handbook (4th or 5th edition; i see there is a 6th edition scheduled for Dec...
sarita
,
Sep 7, 2010
Replies:
4
Views:
22
David Harper CFA FRM
Oct 25, 2010
EXAMPLE 19.9: FRM EXAM 2003—QUESTION 80
Dear David, Thanks a lot. This helps clarify things. Regards, Niko
Dear David, Thanks a lot. This helps clarify things. Regards, Niko
Dear David, Thanks a lot. This helps clarify things. Regards, Niko
Dear David, Thanks a lot. This helps clarify things. Regards, Niko
Suzanne Evans
,
Feb 19, 2010
Replies:
3
Views:
26
nikogeorgiev
Sep 1, 2010
EXAMPLE 19.4: FRM EXAM 2002—QUESTION 110
Dear David, Doe the fact that S&P measures PD and Moody's measures PD*LGD, have any impact on the answer (cf footnote 1 of Chapter 19)? I would say that PD*LGD is lower than PD. Kind regards, Marc
Dear David, Doe the fact that S&P measures PD and Moody's measures PD*LGD, have any impact on the answer (cf footnote 1 of Chapter 19)? I would say that PD*LGD is lower than PD. Kind regards, Marc
Dear David, Doe the fact that S&P measures PD and Moody's measures PD*LGD, have any impact on the answer (cf footnote 1 of Chapter 19)? I would say that PD*LGD is lower than PD. Kind regards, Marc
Dear David, Doe the fact that S&P measures PD and Moody's measures PD*LGD, have any impact on the answer (cf footnote 1 of Chapter 19)? I would say that PD*LGD is lower than PD. Kind...
Suzanne Evans
,
Feb 19, 2010
Replies:
1
Views:
12
uiterdijk
Feb 24, 2010
EXAMPLE 31.14: FRM EXAM 2003—QUESTION 66
Question: Which of the following correctly describe the similarities between operational VAR and market VAR? I. Both VARs, when used for regulatory capital measurement, need to be validated against actual loss experience. II. Both are built on data (market prices for market VAR and operational loss data for operational VAR) that are readily available. III. Both are modeled based on a...
Question: Which of the following correctly describe the similarities between operational VAR and market VAR? I. Both VARs, when used for regulatory capital measurement, need to be validated against actual loss experience. II. Both are built on data (market prices for market VAR and operational loss data for operational VAR) that are readily available. III. Both are modeled based on a...
Question: Which of the following correctly describe the similarities between operational VAR and market VAR? I. Both VARs, when used for regulatory capital measurement, need to be validated against actual loss experience. II. Both are built on data (market prices for market VAR and...
Question: Which of the following correctly describe the similarities between operational VAR and market VAR? I. Both VARs, when used for regulatory capital measurement, need to be validated...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
9
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.13: FRM EXAM 2002—QUESTION 23
Question: Backtesting routinely compares daily profits and losses with model-generated risk measures to gauge the quality and accuracy of their risk measurement systems. The 1996 market risk amendment describes the backtesting framework that is to accompany the internal models capital requirement. This backtesting framework involves I. The size of outliers II. The use of risk measure...
Question: Backtesting routinely compares daily profits and losses with model-generated risk measures to gauge the quality and accuracy of their risk measurement systems. The 1996 market risk amendment describes the backtesting framework that is to accompany the internal models capital requirement. This backtesting framework involves I. The size of outliers II. The use of risk measure...
Question: Backtesting routinely compares daily profits and losses with model-generated risk measures to gauge the quality and accuracy of their risk measurement systems. The 1996 market risk amendment describes the backtesting framework that is to accompany the internal models capital...
Question: Backtesting routinely compares daily profits and losses with model-generated risk measures to gauge the quality and accuracy of their risk measurement systems. The 1996 market risk...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
8
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.12: FRM EXAM 1999—QUESTION 191
Question: For purposes of backtesting a VAR internal model, the amendment to the Capital Accord requires a. Comparing one year of daily P&L to a 99% one-tail confidence one-day VAR with an exception produced whenever P&L −VAR b. Comparing one year of daily P&L to a 98% two-tail confidence one-day VAR with an exception produced whenever P&L is outside the interval (−VAR,+VAR) c....
Question: For purposes of backtesting a VAR internal model, the amendment to the Capital Accord requires a. Comparing one year of daily P&L to a 99% one-tail confidence one-day VAR with an exception produced whenever P&L −VAR b. Comparing one year of daily P&L to a 98% two-tail confidence one-day VAR with an exception produced whenever P&L is outside the interval (−VAR,+VAR) c....
Question: For purposes of backtesting a VAR internal model, the amendment to the Capital Accord requires a. Comparing one year of daily P&L to a 99% one-tail confidence one-day VAR with an exception produced whenever P&L −VAR b. Comparing one year of daily P&L to a 98% two-tail confidence...
Question: For purposes of backtesting a VAR internal model, the amendment to the Capital Accord requires a. Comparing one year of daily P&L to a 99% one-tail confidence one-day VAR with an...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
5
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.11: FRM EXAM 1999—QUESTION 193
Question: The amendment to the Capital Accord defines the “yellow zone” as the following range of exceptions out of 250 observations; a. 3 to 7 b. 5 to 9 c. 6 to 9 d. 6 to 10 Answer: b) See Table 31.1.
Question: The amendment to the Capital Accord defines the “yellow zone” as the following range of exceptions out of 250 observations; a. 3 to 7 b. 5 to 9 c. 6 to 9 d. 6 to 10 Answer: b) See Table 31.1.
Question: The amendment to the Capital Accord defines the “yellow zone” as the following range of exceptions out of 250 observations; a. 3 to 7 b. 5 to 9 c. 6 to 9 d. 6 to 10 Answer: b) See Table 31.1.
Question: The amendment to the Capital Accord defines the “yellow zone” as the following range of exceptions out of 250 observations; a. 3 to 7 b. 5 to 9 c. 6 to 9 d. 6 to 10 Answer: b)...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
8
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.10: FRM EXAM 1999—QUESTION 192
Question: The amendment to the Capital Accord recommends that backtesting compares VAR to a. Actual P&L b. Hypothetical P&L, i.e., P&L based on end-of-day positions c. Both actual and hypothetical P&L d. Does not specify a choice Answer: c) Both measures are informative.
Question: The amendment to the Capital Accord recommends that backtesting compares VAR to a. Actual P&L b. Hypothetical P&L, i.e., P&L based on end-of-day positions c. Both actual and hypothetical P&L d. Does not specify a choice Answer: c) Both measures are informative.
Question: The amendment to the Capital Accord recommends that backtesting compares VAR to a. Actual P&L b. Hypothetical P&L, i.e., P&L based on end-of-day positions c. Both actual and hypothetical P&L d. Does not specify a choice Answer: c) Both measures are informative.
Question: The amendment to the Capital Accord recommends that backtesting compares VAR to a. Actual P&L b. Hypothetical P&L, i.e., P&L based on end-of-day positions c. Both actual and...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
9
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.9: FRM EXAM 2002—QUESTION 20
Question: Which of the following procedures is essential in validating the VAR estimates? a. Stress testing b. Scenario analysis c. Backtesting d. Once approved by regulators, no further validation is required. Answer: c) VAR estimates need to be compared to actual P&L results to be validated, which is called backtesting.
Question: Which of the following procedures is essential in validating the VAR estimates? a. Stress testing b. Scenario analysis c. Backtesting d. Once approved by regulators, no further validation is required. Answer: c) VAR estimates need to be compared to actual P&L results to be validated, which is called backtesting.
Question: Which of the following procedures is essential in validating the VAR estimates? a. Stress testing b. Scenario analysis c. Backtesting d. Once approved by regulators, no further validation is required. Answer: c) VAR estimates need to be compared to actual P&L results to be...
Question: Which of the following procedures is essential in validating the VAR estimates? a. Stress testing b. Scenario analysis c. Backtesting d. Once approved by regulators, no further...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
5
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.8: FRM EXAM 1999—QUESTION 195
Question: According to the current version of the amendment to the Capital Accord to incorporate market risks in relation to stress testing, which of the following statements is true? I. Stress testing results should be communicated to traders. II. Stress testing results should be communicated to senior management. III. Stress testing results should be communicated to the board of...
Question: According to the current version of the amendment to the Capital Accord to incorporate market risks in relation to stress testing, which of the following statements is true? I. Stress testing results should be communicated to traders. II. Stress testing results should be communicated to senior management. III. Stress testing results should be communicated to the board of...
Question: According to the current version of the amendment to the Capital Accord to incorporate market risks in relation to stress testing, which of the following statements is true? I. Stress testing results should be communicated to traders. II. Stress testing results should be...
Question: According to the current version of the amendment to the Capital Accord to incorporate market risks in relation to stress testing, which of the following statements is true? I....
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
15
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.7: FRM EXAM 1998—QUESTION 19
Question: Which one of the following statements is false regarding the calculation of the specific risk charge for the market risk capital rule? a. If the bank can demonstrate that its specific risk modeling captures all aspects of specific risk, a surcharge will not be required. b. If a bank’s model captures the idiosyncratic variation in its debt and equity portfolios, but does not...
Question: Which one of the following statements is false regarding the calculation of the specific risk charge for the market risk capital rule? a. If the bank can demonstrate that its specific risk modeling captures all aspects of specific risk, a surcharge will not be required. b. If a bank’s model captures the idiosyncratic variation in its debt and equity portfolios, but does not...
Question: Which one of the following statements is false regarding the calculation of the specific risk charge for the market risk capital rule? a. If the bank can demonstrate that its specific risk modeling captures all aspects of specific risk, a surcharge will not be required. b. If a...
Question: Which one of the following statements is false regarding the calculation of the specific risk charge for the market risk capital rule? a. If the bank can demonstrate that its...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
4
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.6: FRM EXAM 1998—QUESTION 18
Question: What would be the market risk capital requirement for a bank with an average one-day VAR of $100 and a specific risk surcharge of $30, based on the current BIS minimum capital requirements? a. $300 b. $316 c. $949 d. $979 Answer: d) The total MRC is 3 × $100 × √10 + $30 = $949 + $30 = $979.
Question: What would be the market risk capital requirement for a bank with an average one-day VAR of $100 and a specific risk surcharge of $30, based on the current BIS minimum capital requirements? a. $300 b. $316 c. $949 d. $979 Answer: d) The total MRC is 3 × $100 × √10 + $30 = $949 + $30 = $979.
Question: What would be the market risk capital requirement for a bank with an average one-day VAR of $100 and a specific risk surcharge of $30, based on the current BIS minimum capital requirements? a. $300 b. $316 c. $949 d. $979 Answer: d) The total MRC is 3 × $100 × √10 + $30 =...
Question: What would be the market risk capital requirement for a bank with an average one-day VAR of $100 and a specific risk surcharge of $30, based on the current BIS minimum capital...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
3
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.5: FRM EXAM 1999—QUESTION 184
Question: You are given that the RiskMetrics VAR for a portfolio is $1,000,000. What is the approximate Basel Committee VAR? a. $4,450,000 b. $225,000 c. $1,000,000 d. $1,412,121 Answer: a) Assuming normally and independently distributed returns, the RM VAR needs to be adjusted from 95% to 99% confidence and from 1 day to 10 days. This gives $1,000,000 × (2.326/1.645) × √10 = $4.5...
Question: You are given that the RiskMetrics VAR for a portfolio is $1,000,000. What is the approximate Basel Committee VAR? a. $4,450,000 b. $225,000 c. $1,000,000 d. $1,412,121 Answer: a) Assuming normally and independently distributed returns, the RM VAR needs to be adjusted from 95% to 99% confidence and from 1 day to 10 days. This gives $1,000,000 × (2.326/1.645) × √10 = $4.5...
Question: You are given that the RiskMetrics VAR for a portfolio is $1,000,000. What is the approximate Basel Committee VAR? a. $4,450,000 b. $225,000 c. $1,000,000 d. $1,412,121 Answer: a) Assuming normally and independently distributed returns, the RM VAR needs to be adjusted from...
Question: You are given that the RiskMetrics VAR for a portfolio is $1,000,000. What is the approximate Basel Committee VAR? a. $4,450,000 b. $225,000 c. $1,000,000 d. $1,412,121 Answer:...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
3
Suzanne Evans
Feb 19, 2010
EXAMPLE 31.4: FRM EXAM 2001—QUESTION 42
Question: Which of the following best describes the quantitative parameters of the internal models approach? a. 10-day trading horizon, 99% confidence interval, minimum one years of data, minimum quarterly updates b. 1-day trading horizon, 95% confidence interval, five years of data, updated weekly c. 1-day trading horizon, 99% confidence interval, minimum one years of data, updated...
Question: Which of the following best describes the quantitative parameters of the internal models approach? a. 10-day trading horizon, 99% confidence interval, minimum one years of data, minimum quarterly updates b. 1-day trading horizon, 95% confidence interval, five years of data, updated weekly c. 1-day trading horizon, 99% confidence interval, minimum one years of data, updated...
Question: Which of the following best describes the quantitative parameters of the internal models approach? a. 10-day trading horizon, 99% confidence interval, minimum one years of data, minimum quarterly updates b. 1-day trading horizon, 95% confidence interval, five years of data,...
Question: Which of the following best describes the quantitative parameters of the internal models approach? a. 10-day trading horizon, 99% confidence interval, minimum one years of data,...
Suzanne Evans
,
Feb 19, 2010
Replies:
0
Views:
1
Suzanne Evans
Feb 19, 2010
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