# P2.T6. Credit Risk (25%)

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### Errors Found in Study Notes P2.T6. Credit Risk

Ah yes I see that now. Thanks !
Ah yes I see that now. Thanks !
Ah yes I see that now. Thanks !
Ah yes I see that now. Thanks !
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2. ### Describe a waterfall structure in securitzation

Thank you David
Thank you David
Thank you David
Thank you David
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3. ### Margin stepup

Hi @David Harper CFA FRM any input into this? Margin step up is listed as a credit enhancement
Hi @David Harper CFA FRM any input into this? Margin step up is listed as a credit enhancement
Hi @David Harper CFA FRM any input into this? Margin step up is listed as a credit enhancement
Hi @David Harper CFA FRM any input into this? Margin step up is listed as a credit enhancement
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4. ### Credit Questions

Hi @David Harper CFA FRM, Do you have any insight on the below: WWR: If you are short a banks stock, and the bank value falls, so the value of your short trade goes up..Is this WWR? Say you long a call from an airline on oil, if oil goes up the value of the call goes up, and the airline which is now less able to pay due to high oil costs..is that WWR? Senior,Sub,Eq debt: If a company is in...
Hi @David Harper CFA FRM, Do you have any insight on the below: WWR: If you are short a banks stock, and the bank value falls, so the value of your short trade goes up..Is this WWR? Say you long a call from an airline on oil, if oil goes up the value of the call goes up, and the airline which is now less able to pay due to high oil costs..is that WWR? Senior,Sub,Eq debt: If a company is in...
Hi @David Harper CFA FRM, Do you have any insight on the below: WWR: If you are short a banks stock, and the bank value falls, so the value of your short trade goes up..Is this WWR? Say you long a call from an airline on oil, if oil goes up the value of the call goes up, and the airline which...
Hi @David Harper CFA FRM, Do you have any insight on the below: WWR: If you are short a banks stock, and the bank value falls, so the value of your short trade goes up..Is this WWR? Say you long...
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0
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38
5. ### Credit Risk & Credit Derivatives

In case it's helpful, I copied below a response from recent discussion here at which is a snippet of our recently updated Stulz notes. This concerns the OP question about subordinated debt in a firm: basically, it acts like debt if firm value is high and default probability is "typical" (so it's value is mostly a function of interest rates, as usual, and to a lessor extent firm volatility)....
In case it's helpful, I copied below a response from recent discussion here at which is a snippet of our recently updated Stulz notes. This concerns the OP question about subordinated debt in a firm: basically, it acts like debt if firm value is high and default probability is "typical" (so it's value is mostly a function of interest rates, as usual, and to a lessor extent firm volatility)....
In case it's helpful, I copied below a response from recent discussion here at which is a snippet of our recently updated Stulz notes. This concerns the OP question about subordinated debt in a firm: basically, it acts like debt if firm value is high and default probability is "typical" (so...
In case it's helpful, I copied below a response from recent discussion here at which is a snippet of our recently updated Stulz notes. This concerns the OP question about subordinated debt in a...
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5
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6. ### Lowest Credit Risk

Thanks David...
Thanks David...
Thanks David...
Thanks David...
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2
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7. ### Trade Compression (Gregory)

@FrmL2_Aspirant if we netted the coupons, I *think* we'd get the same result as the weighted average performed in @QuantMan2318 's calculations; i.e., -(40*200) + (25*15) + (10*325) = -8,000 + 3,750 + 3,250 = -1,000. But rather than pay a net $1,000 as the result of three cash flows, the new contract pays a net$1,000 on one contract. QuantMan probably knows more about this than me, but the...
@FrmL2_Aspirant if we netted the coupons, I *think* we'd get the same result as the weighted average performed in @QuantMan2318 's calculations; i.e., -(40*200) + (25*15) + (10*325) = -8,000 + 3,750 + 3,250 = -1,000. But rather than pay a net $1,000 as the result of three cash flows, the new contract pays a net$1,000 on one contract. QuantMan probably knows more about this than me, but the...
@FrmL2_Aspirant if we netted the coupons, I *think* we'd get the same result as the weighted average performed in @QuantMan2318 's calculations; i.e., -(40*200) + (25*15) + (10*325) = -8,000 + 3,750 + 3,250 = -1,000. But rather than pay a net $1,000 as the result of three cash flows, the new... @FrmL2_Aspirant if we netted the coupons, I *think* we'd get the same result as the weighted average performed in @QuantMan2318 's calculations; i.e., -(40*200) + (25*15) + (10*325) = -8,000 +... Replies: 4 Views: 721 8. ### Deriving PD Thanks! @Ali Ehsan Abbas tagging for reference Thanks! @Ali Ehsan Abbas tagging for reference Thanks! @Ali Ehsan Abbas tagging for reference Thanks! @Ali Ehsan Abbas tagging for reference Replies: 5 Views: 121 9. ### Hazard Rates and probability of survival Thanks!! Thanks!! Thanks!! Thanks!! Replies: 11 Views: 1,387 10. ### Credit VaR Thanks @David Harper CFA FRM ! Good to be back here and back in India again. I must say I loved the education offered in your country. The Excel is superb, I have downloaded it for my reference. Thanks @David Harper CFA FRM ! Good to be back here and back in India again. I must say I loved the education offered in your country. The Excel is superb, I have downloaded it for my reference. Thanks @David Harper CFA FRM ! Good to be back here and back in India again. I must say I loved the education offered in your country. The Excel is superb, I have downloaded it for my reference. Thanks @David Harper CFA FRM ! Good to be back here and back in India again. I must say I loved the education offered in your country. The Excel is superb, I have downloaded it for my reference. Replies: 16 Views: 3,932 11. ### GARP.FRM.PQ.P22016 GARP PQ - Question 5 - CDS (garp16-p2-5) Thank you David and Nicole! Appreciate it. Thank you David and Nicole! Appreciate it. Thank you David and Nicole! Appreciate it. Thank you David and Nicole! Appreciate it. Replies: 16 Views: 571 12. ### Spot rate Vs Swap rate.. Hi @rajeshtr I don't have current time to deconstruct Malz CDS formula, apologies (it's easier to follow Hull's discrete example which I have modeled in our CDS learning workbook). Looking at it currently, to your point, i think it's possible he has a typo such that after the summation, it should be exp(-0.045*u/4) rather than exp(0.045*u/4). Because that (yellow) term is supposed to be... Hi @rajeshtr I don't have current time to deconstruct Malz CDS formula, apologies (it's easier to follow Hull's discrete example which I have modeled in our CDS learning workbook). Looking at it currently, to your point, i think it's possible he has a typo such that after the summation, it should be exp(-0.045*u/4) rather than exp(0.045*u/4). Because that (yellow) term is supposed to be... Hi @rajeshtr I don't have current time to deconstruct Malz CDS formula, apologies (it's easier to follow Hull's discrete example which I have modeled in our CDS learning workbook). Looking at it currently, to your point, i think it's possible he has a typo such that after the summation, it... Hi @rajeshtr I don't have current time to deconstruct Malz CDS formula, apologies (it's easier to follow Hull's discrete example which I have modeled in our CDS learning workbook). Looking at it... Replies: 1 Views: 214 13. ### Funded vs Un-Funded Hi @WhizzKidd To which chapter are you referring, sorry? (it's one of Gregory's obviously....). I think of "funding costs" as the cost of cash or the borrowing cost of cash. This can be explicit or implicit (opportunity cost of cash invested elsewhere). If you purchase a bond, you need to pay for it, or borrow cash to pay for it. Or, if you want to purchase a commodity, you need to fund the... Hi @WhizzKidd To which chapter are you referring, sorry? (it's one of Gregory's obviously....). I think of "funding costs" as the cost of cash or the borrowing cost of cash. This can be explicit or implicit (opportunity cost of cash invested elsewhere). If you purchase a bond, you need to pay for it, or borrow cash to pay for it. Or, if you want to purchase a commodity, you need to fund the... Hi @WhizzKidd To which chapter are you referring, sorry? (it's one of Gregory's obviously....). I think of "funding costs" as the cost of cash or the borrowing cost of cash. This can be explicit or implicit (opportunity cost of cash invested elsewhere). If you purchase a bond, you need to pay... Hi @WhizzKidd To which chapter are you referring, sorry? (it's one of Gregory's obviously....). I think of "funding costs" as the cost of cash or the borrowing cost of cash. This can be explicit... Replies: 1 Views: 193 14. ### Expected Exposure & Counter Party PD Thanks everyone for clarifying this Biju Thanks everyone for clarifying this Biju Thanks everyone for clarifying this Biju Thanks everyone for clarifying this Biju Replies: 9 Views: 222 15. ### CVA Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 - exp(-1*T)], is the unconditional default probability during the second year (as seen from today). I'm not sure how to connect these to CVA, except that unconditional PD is an input into CVA which is a... Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 - exp(-1*T)], is the unconditional default probability during the second year (as seen from today). I'm not sure how to connect these to CVA, except that unconditional PD is an input into CVA which is a... Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 - exp(-1*T)], is the unconditional default probability during the second year (as seen from today). I'm... Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 -... Replies: 13 Views: 523 16. ### Credit Exposure Profiles Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is zero to both counterparties (why would either buyer/seller enter into the derivative contract if it had negative PV?). So, if you enter a contract with zero PV and, in the early years, you are paying... Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is zero to both counterparties (why would either buyer/seller enter into the derivative contract if it had negative PV?). So, if you enter a contract with zero PV and, in the early years, you are paying... Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is zero to both counterparties (why would either buyer/seller enter into the derivative contract if it had... Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is... Replies: 1 Views: 90 17. ### Stulz Ch 18 - Total Return Swap @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): Replies: 4 Views: 156 18. ### Merton Value of Equity Formula Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays$1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt discounted to the present value as a risk-free price. More broadly, this formula is the essence of the first step in Merton (see my long note here for explication on both steps ): equity is treated as a...
Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays $1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt discounted to the present value as a risk-free price. More broadly, this formula is the essence of the first step in Merton (see my long note here for explication on both steps ): equity is treated as a... Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays$1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt discounted to the present value as a risk-free price. More broadly, this formula is the essence of the...
Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays $1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt... Replies: 1 Views: 69 19. ### credit linked note Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the$15 million equity piece as opposed to the entire portfolio of the bonds
Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the $15 million equity piece as opposed to the entire portfolio of the bonds Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the$15 million equity piece as opposed to the entire portfolio of the bonds
Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the \$15 million equity piece as opposed to the...
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20. ### Understanding Credit-Linked Notes

Clear... as always, thanks David.
Clear... as always, thanks David.
Clear... as always, thanks David.
Clear... as always, thanks David.
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21. ### threshold in Credit Support Annex

Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition, I am confused about the following section: "In the zero-threshold case, there are many scenarios...
Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition, I am confused about the following section: "In the zero-threshold case, there are many scenarios...
Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition,...
Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be...
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22. ### Impact of Netting on Exposure

Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
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23. ### PFE of CDS and Cross Currency SWAP

Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't the gain depend on what the FX rates are at the end of the transaction?" but there is always the premise that at initiation the swap is a fair deal with initial market value of zero to both...
Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't the gain depend on what the FX rates are at the end of the transaction?" but there is always the premise that at initiation the swap is a fair deal with initial market value of zero to both...
Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't the gain depend on what the FX rates are at the end of the transaction?" but there is always the...
Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't...
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24. ### Credit Exposure

Thanks Shakti. So when we say for Forward Rate Agreements the EE profile is increasing function of time( sqrt(t)) ..The underlying factors that influence final netted payment excluding the time value of money is a function of time. Because when we say EE profile ..we are talking on the term structure of PV of EE? Is my understanding correct on this Thanks in Advance Biju
Thanks Shakti. So when we say for Forward Rate Agreements the EE profile is increasing function of time( sqrt(t)) ..The underlying factors that influence final netted payment excluding the time value of money is a function of time. Because when we say EE profile ..we are talking on the term structure of PV of EE? Is my understanding correct on this Thanks in Advance Biju
Thanks Shakti. So when we say for Forward Rate Agreements the EE profile is increasing function of time( sqrt(t)) ..The underlying factors that influence final netted payment excluding the time value of money is a function of time. Because when we say EE profile ..we are talking on the term...
Thanks Shakti. So when we say for Forward Rate Agreements the EE profile is increasing function of time( sqrt(t)) ..The underlying factors that influence final netted payment excluding the time...
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25. ### How does CLN issuer make money?

Is the funding motivation due to the fact that the bank uses the funding to originate more loans and issue more CLNs? Funding is great and all, but absent some kind of liquidity crisis what is driving the funding need?
Is the funding motivation due to the fact that the bank uses the funding to originate more loans and issue more CLNs? Funding is great and all, but absent some kind of liquidity crisis what is driving the funding need?
Is the funding motivation due to the fact that the bank uses the funding to originate more loans and issue more CLNs? Funding is great and all, but absent some kind of liquidity crisis what is driving the funding need?
Is the funding motivation due to the fact that the bank uses the funding to originate more loans and issue more CLNs? Funding is great and all, but absent some kind of liquidity crisis what is...
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26. ### delaurentis - chapter 2 - recovery

I think the key takeaway here is that, assuming this is a large bank with millions of transactions, you won't be able to figure out a specific positin's recovery rate because that data gets lost. The reason why, I think, is that if a bank has 1000s of exposures with a single client, then they will just take the average LGD for that client as opposed to calculating each individually
I think the key takeaway here is that, assuming this is a large bank with millions of transactions, you won't be able to figure out a specific positin's recovery rate because that data gets lost. The reason why, I think, is that if a bank has 1000s of exposures with a single client, then they will just take the average LGD for that client as opposed to calculating each individually
I think the key takeaway here is that, assuming this is a large bank with millions of transactions, you won't be able to figure out a specific positin's recovery rate because that data gets lost. The reason why, I think, is that if a bank has 1000s of exposures with a single client, then they...
I think the key takeaway here is that, assuming this is a large bank with millions of transactions, you won't be able to figure out a specific positin's recovery rate because that data gets lost. ...
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27. ### CDS - Bond basis factors : confusing impact

@rajeshtr Can I refer you to my absolutely favorite book on this topic: The Credit Default Swap Basis by Moorad Choudhry Below I copied the key section on the factors. I think it's more helpful than Gregory's section on CDS-Bond basis precisely because of your point: Choudry does give a framework. He starts at the very beginning which is to distinguish the unfunded CDS from the funded asset...
@rajeshtr Can I refer you to my absolutely favorite book on this topic: The Credit Default Swap Basis by Moorad Choudhry Below I copied the key section on the factors. I think it's more helpful than Gregory's section on CDS-Bond basis precisely because of your point: Choudry does give a framework. He starts at the very beginning which is to distinguish the unfunded CDS from the funded asset...
@rajeshtr Can I refer you to my absolutely favorite book on this topic: The Credit Default Swap Basis by Moorad Choudhry Below I copied the key section on the factors. I think it's more helpful than Gregory's section on CDS-Bond basis precisely because of your point: Choudry does give a...
@rajeshtr Can I refer you to my absolutely favorite book on this topic: The Credit Default Swap Basis by Moorad Choudhry Below I copied the key section on the factors. I think it's more helpful...
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28. ### Dividing CVA by Duration --> gives Credit Spread

Hi @rajeshtr I haven't looked at that closely but it actually does offer a bit of intuition because I see that earlier Gregory suggests we can also (additionally? alternatively?) divide by the "risky annuity" the following (emphasis mine): I don't see the calculation for the "risky duration" but at least directionally it makes sense to me given the reference to risky annuity (which connotes...
Hi @rajeshtr I haven't looked at that closely but it actually does offer a bit of intuition because I see that earlier Gregory suggests we can also (additionally? alternatively?) divide by the "risky annuity" the following (emphasis mine): I don't see the calculation for the "risky duration" but at least directionally it makes sense to me given the reference to risky annuity (which connotes...
Hi @rajeshtr I haven't looked at that closely but it actually does offer a bit of intuition because I see that earlier Gregory suggests we can also (additionally? alternatively?) divide by the "risky annuity" the following (emphasis mine): I don't see the calculation for the "risky duration"...
Hi @rajeshtr I haven't looked at that closely but it actually does offer a bit of intuition because I see that earlier Gregory suggests we can also (additionally? alternatively?) divide by the...
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1
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121
29. ### Retail vs. corporate credit default (time of default)

Thank you @berrymucho those are good sources!
Thank you @berrymucho those are good sources!
Thank you @berrymucho those are good sources!
Thank you @berrymucho those are good sources!
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Thanks
Thanks
Thanks
Thanks
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31. ### CVA Questions

To make it as simple as possible and to give you another practical example where is no upfront payment like in a long option position: 1) Suppose you are a Swap Dealer at a Banks Swap Desk. We assume there is no DVA. A client with lets say a BB rating wants to enter into a fixed rate payer swap. There is no CSA in place. To make the deal favorable for your desk you have to consider CVA. CVA...
To make it as simple as possible and to give you another practical example where is no upfront payment like in a long option position: 1) Suppose you are a Swap Dealer at a Banks Swap Desk. We assume there is no DVA. A client with lets say a BB rating wants to enter into a fixed rate payer swap. There is no CSA in place. To make the deal favorable for your desk you have to consider CVA. CVA...
To make it as simple as possible and to give you another practical example where is no upfront payment like in a long option position: 1) Suppose you are a Swap Dealer at a Banks Swap Desk. We assume there is no DVA. A client with lets say a BB rating wants to enter into a fixed rate payer...
To make it as simple as possible and to give you another practical example where is no upfront payment like in a long option position: 1) Suppose you are a Swap Dealer at a Banks Swap Desk. We...
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13
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643