P2.T6. Credit Risk (25%)

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  1. Nicole Manley
    Sticky

    Errors Found in Study Notes P2.T6. Credit Risk

    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This will keep our forum much more organized. We appreciate your cooperation! :) PLEASE NOTE: Our Practice Question sets already have links to their specific forum threads where you can post about any...
    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This will keep our forum much more organized. We appreciate your cooperation! :) PLEASE NOTE: Our Practice Question sets already have links to their specific forum threads where you can post about any...
    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This will keep our forum much more organized. We appreciate your cooperation! :) PLEASE NOTE: Our Practice...
    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This...
    Replies:
    0
    Views:
    532
  2. Kavita.bhangdia

    Marginal CVA

    Hi @ami44 In regard to to Gregory's Table 12.6 above, I would just add: On the total line, there is only a summation of standalone CVAs (392,973) which is maybe not so useful except as as unrealistic, undiversified CVA (but diversification here, just exactly as @ami44 says, is a dynamic really due to the netting agreement in the netting set) versus the "actual" (i.e., diversified at the...
    Hi @ami44 In regard to to Gregory's Table 12.6 above, I would just add: On the total line, there is only a summation of standalone CVAs (392,973) which is maybe not so useful except as as unrealistic, undiversified CVA (but diversification here, just exactly as @ami44 says, is a dynamic really due to the netting agreement in the netting set) versus the "actual" (i.e., diversified at the...
    Hi @ami44 In regard to to Gregory's Table 12.6 above, I would just add: On the total line, there is only a summation of standalone CVAs (392,973) which is maybe not so useful except as as unrealistic, undiversified CVA (but diversification here, just exactly as @ami44 says, is a dynamic really...
    Hi @ami44 In regard to to Gregory's Table 12.6 above, I would just add: On the total line, there is only a summation of standalone CVAs (392,973) which is maybe not so useful except as as...
    Replies:
    9
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    270
  3. Kavita.bhangdia

    CVA

    Thank you, so it is kind of sensitivity analysis rather than the actual mechanism which i was confused about.
    Thank you, so it is kind of sensitivity analysis rather than the actual mechanism which i was confused about.
    Thank you, so it is kind of sensitivity analysis rather than the actual mechanism which i was confused about.
    Thank you, so it is kind of sensitivity analysis rather than the actual mechanism which i was confused about.
    Replies:
    9
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    235
  4. arkabose

    Credit curve and CVA

    Glad I could help. It's possible David will provide more info. later as well.
    Glad I could help. It's possible David will provide more info. later as well.
    Glad I could help. It's possible David will provide more info. later as well.
    Glad I could help. It's possible David will provide more info. later as well.
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    5
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    94
  5. arkabose

    Funding liquidity risk

    Thanks @QuantMan2318 was getting it but still it was cloudy. Your explanation cleared it!
    Thanks @QuantMan2318 was getting it but still it was cloudy. Your explanation cleared it!
    Thanks @QuantMan2318 was getting it but still it was cloudy. Your explanation cleared it!
    Thanks @QuantMan2318 was getting it but still it was cloudy. Your explanation cleared it!
    Replies:
    2
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    69
  6. allenpee85

    Potential Future Exposure (PFE)

    Hi @QuantMan2318, I did something similar to yours and also got integral of a cum.normal variable Hi Brian, The classic example of integration by parts - tried that....
    Hi @QuantMan2318, I did something similar to yours and also got integral of a cum.normal variable Hi Brian, The classic example of integration by parts - tried that....
    Hi @QuantMan2318, I did something similar to yours and also got integral of a cum.normal variable Hi Brian, The classic example of integration by parts - tried that....
    Hi @QuantMan2318, I did something similar to yours and also got integral of a cum.normal variable Hi Brian, The classic example of integration by parts - tried that....
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    17
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    308
  7. Delo

    Dodd Frank, Std Approach in US

    Since Dodd Frank Act prohibits banks to use credit ratings for calculation of regulatory capital, is it fair to say that no US bank uses standardized approach (since std. app. was largely based on external credit ratings? Also, I am reading a recent "Revisions to the Standardised Approach for credit risk", December 2015 Basel publication. The paper has different provisions for...
    Since Dodd Frank Act prohibits banks to use credit ratings for calculation of regulatory capital, is it fair to say that no US bank uses standardized approach (since std. app. was largely based on external credit ratings? Also, I am reading a recent "Revisions to the Standardised Approach for credit risk", December 2015 Basel publication. The paper has different provisions for...
    Since Dodd Frank Act prohibits banks to use credit ratings for calculation of regulatory capital, is it fair to say that no US bank uses standardized approach (since std. app. was largely based on external credit ratings? Also, I am reading a recent "Revisions to the Standardised Approach...
    Since Dodd Frank Act prohibits banks to use credit ratings for calculation of regulatory capital, is it fair to say that no US bank uses standardized approach (since std. app. was largely based...
    Replies:
    0
    Views:
    48
  8. Kavita.bhangdia

    Risk free debt, merton model

    Hi @Stuti It would be helpful if you started a new thread (or attached to a relevant thread) when changing the topic. @Mkaim is symbolically correct about roll-down, but Tuckman gives a very technical (i.e., specific) definition. In chapter 3, he parses a bond's total price change (appreciation) into three components: (i) carry-roll-down, (ii) rate change and (iii) spread change....
    Hi @Stuti It would be helpful if you started a new thread (or attached to a relevant thread) when changing the topic. @Mkaim is symbolically correct about roll-down, but Tuckman gives a very technical (i.e., specific) definition. In chapter 3, he parses a bond's total price change (appreciation) into three components: (i) carry-roll-down, (ii) rate change and (iii) spread change....
    Hi @Stuti It would be helpful if you started a new thread (or attached to a relevant thread) when changing the topic. @Mkaim is symbolically correct about roll-down, but Tuckman gives a very technical (i.e., specific) definition. In chapter 3, he parses a bond's total price change (appreciation)...
    Hi @Stuti It would be helpful if you started a new thread (or attached to a relevant thread) when changing the topic. @Mkaim is symbolically correct about roll-down, but Tuckman gives a very...
    Replies:
    17
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    389
  9. Kashif Khalid

    Hazard Rates and probability of survival

    Hi there @Stuti Those are excellent questions, however, they involve some mathematical properties and I shall endeavor to explain based on some mathematical knowledge that I had to delve into, though not as deep as needed by a STEM person, for an FRM. More advanced practitioners over here will be able to explain in greater detail. Lambda or Hazard rate is the parameter which determines how...
    Hi there @Stuti Those are excellent questions, however, they involve some mathematical properties and I shall endeavor to explain based on some mathematical knowledge that I had to delve into, though not as deep as needed by a STEM person, for an FRM. More advanced practitioners over here will be able to explain in greater detail. Lambda or Hazard rate is the parameter which determines how...
    Hi there @Stuti Those are excellent questions, however, they involve some mathematical properties and I shall endeavor to explain based on some mathematical knowledge that I had to delve into, though not as deep as needed by a STEM person, for an FRM. More advanced practitioners over here will...
    Hi there @Stuti Those are excellent questions, however, they involve some mathematical properties and I shall endeavor to explain based on some mathematical knowledge that I had to delve into,...
    Replies:
    6
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    176
  10. kevinyuen

    Marginal CVA vs Incremental

    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component VaR (which is a direct function of marginal VaR): just as component VaRs sum to portfolio VaR, marginal CVAs sum to total CVA and do not depend on the trade sequence. Incremental CVAs, however, do...
    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component VaR (which is a direct function of marginal VaR): just as component VaRs sum to portfolio VaR, marginal CVAs sum to total CVA and do not depend on the trade sequence. Incremental CVAs, however, do...
    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component VaR (which is a direct function of marginal VaR): just as component VaRs sum to portfolio VaR,...
    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component...
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    5
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    593
  11. NNath

    Weighted average life (WAL), Choudhary Chapter 12

    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
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  12. Kashif Khalid

    Credit Derivatives, Correlations & Impact on Credit Exposure

    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation have on CVA if any? does it impact the Probability of Default in our CVA calculation? Thanks
    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation have on CVA if any? does it impact the Probability of Default in our CVA calculation? Thanks
    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation have on CVA if any? does it impact the Probability of Default in our CVA calculation? Thanks
    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation...
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  13. Delo

    Spread Risk Factor

    Wow.. That was a teaser.. Thanks kavita
    Wow.. That was a teaser.. Thanks kavita
    Wow.. That was a teaser.. Thanks kavita
    Wow.. That was a teaser.. Thanks kavita
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    3
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    87
  14. Kavita.bhangdia

    Gregory: CVA

    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit spread of the counterparty in Table 12.1. The increase in credit spread [dh: credit curve = plot of credit spread versus maturity] clearly increases the CVA, but this effect is not linear since default...
    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit spread of the counterparty in Table 12.1. The increase in credit spread [dh: credit curve = plot of credit spread versus maturity] clearly increases the CVA, but this effect is not linear since default...
    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit spread of the counterparty in Table 12.1. The increase in credit spread [dh: credit curve = plot of...
    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit...
    Replies:
    1
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    127
  15. Kavita.bhangdia

    CVAR: another problem

    I would appreciate a schematic in this too to clear things up a bit.
    I would appreciate a schematic in this too to clear things up a bit.
    I would appreciate a schematic in this too to clear things up a bit.
    I would appreciate a schematic in this too to clear things up a bit.
    Replies:
    1
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    76
  16. Kavita.bhangdia

    gregory chapter 7: winners curse

    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
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    0
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    78
  17. Maged

    Credit VaR vs CVA

    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed out, I would hazard that CVA is more of an Accounting Measure that tries to incorporate the Expected Losses in the Statement of P/L (Income Statement). There are currently discussions going on in the...
    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed out, I would hazard that CVA is more of an Accounting Measure that tries to incorporate the Expected Losses in the Statement of P/L (Income Statement). There are currently discussions going on in the...
    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed out, I would hazard that CVA is more of an Accounting Measure that tries to incorporate the...
    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed...
    malz-fig-6-5.png
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  18. NNath

    Repo, Collateral, Re-use and Legal ownership

    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to counterparties posting collateral in (private) bilateral derivatives trades. In general, a repo is considered transfer of ownership (i.e., sale). On the other hand, in bilateral derivatives contracts, the...
    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to counterparties posting collateral in (private) bilateral derivatives trades. In general, a repo is considered transfer of ownership (i.e., sale). On the other hand, in bilateral derivatives contracts, the...
    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to counterparties posting collateral in (private) bilateral derivatives trades. In general, a repo is considered...
    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to...
    Replies:
    1
    Views:
    93
  19. Delo

    Trade Compression (Gregory)

    Perfect. Thanks a lot .. @QuantMan2318 !
    Perfect. Thanks a lot .. @QuantMan2318 !
    Perfect. Thanks a lot .. @QuantMan2318 !
    Perfect. Thanks a lot .. @QuantMan2318 !
    Replies:
    2
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    187
  20. Kavita.bhangdia

    CVAR calculation doubt

    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up, you get 94.92% (nCr p^r*q^(n-r)) which means, the number of defaults is more than 4, 5 in our case. Note: This is just for your understanding, don't try this in the exam, you won't get any time:D And as...
    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up, you get 94.92% (nCr p^r*q^(n-r)) which means, the number of defaults is more than 4, 5 in our case. Note: This is just for your understanding, don't try this in the exam, you won't get any time:D And as...
    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up, you get 94.92% (nCr p^r*q^(n-r)) which means, the number of defaults is more than 4, 5 in our...
    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up,...
    Replies:
    7
    Views:
    244
  21. southeuro

    effect of default probability on equity and mezzanine

    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    malz.jpg upload_2016-3-6_12-28-43.png upload_2016-5-1_8-36-46.png
    Replies:
    8
    Views:
    746

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