P2.T6. Credit Risk (25%)

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1. Sticky

Errors Found in Study Notes P2.T6. Credit Risk

Hi Team, Hope you're doing well. Found one error on the CVA formula when aggregating for n counterparties in R46.P2.T6, page 12. The formula given is missing the summation of the LGD components. Thanks, -Roberto
Hi Team, Hope you're doing well. Found one error on the CVA formula when aggregating for n counterparties in R46.P2.T6, page 12. The formula given is missing the summation of the LGD components. Thanks, -Roberto
Hi Team, Hope you're doing well. Found one error on the CVA formula when aggregating for n counterparties in R46.P2.T6, page 12. The formula given is missing the summation of the LGD components. Thanks, -Roberto
Hi Team, Hope you're doing well. Found one error on the CVA formula when aggregating for n counterparties in R46.P2.T6, page 12. The formula given is missing the summation of the LGD...
Replies:
16
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1,183
2. Settled vs actual recovery rates

It's very clear as usual, thanks a lot David.
It's very clear as usual, thanks a lot David.
It's very clear as usual, thanks a lot David.
It's very clear as usual, thanks a lot David.
Replies:
4
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76
3. Netting vs closeout netting

@saurabhpal49 But I do not think payment netting is triggered by counterparty default. The difference is between payment netting and close-out netting. The classic example of payment netting is an interest rate swap where, at each (eg) six-month settlement (aka, exchange), the fixed "coupon" payment is exchanged for the floating "coupon" payment, but they are netted (as in payment netting). If...
@saurabhpal49 But I do not think payment netting is triggered by counterparty default. The difference is between payment netting and close-out netting. The classic example of payment netting is an interest rate swap where, at each (eg) six-month settlement (aka, exchange), the fixed "coupon" payment is exchanged for the floating "coupon" payment, but they are netted (as in payment netting). If...
@saurabhpal49 But I do not think payment netting is triggered by counterparty default. The difference is between payment netting and close-out netting. The classic example of payment netting is an interest rate swap where, at each (eg) six-month settlement (aka, exchange), the fixed "coupon"...
@saurabhpal49 But I do not think payment netting is triggered by counterparty default. The difference is between payment netting and close-out netting. The classic example of payment netting is an...
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4
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64
4. Malz single factor model

Hi @saurabhpal49 Malz single-factor model is intermediate/advanced, I just want to "warn" you so that you do not expect to immediately grok it, as it's proven to be challenging . I copied below the latest version of my rendering of his example Malz 8.4. To grok the specific sentence you cite, IMO, is difficult without understanding the broader model (if you already get it, great!). Below I...
Hi @saurabhpal49 Malz single-factor model is intermediate/advanced, I just want to "warn" you so that you do not expect to immediately grok it, as it's proven to be challenging . I copied below the latest version of my rendering of his example Malz 8.4. To grok the specific sentence you cite, IMO, is difficult without understanding the broader model (if you already get it, great!). Below I...
Hi @saurabhpal49 Malz single-factor model is intermediate/advanced, I just want to "warn" you so that you do not expect to immediately grok it, as it's proven to be challenging . I copied below the latest version of my rendering of his example Malz 8.4. To grok the specific sentence you cite,...
Hi @saurabhpal49 Malz single-factor model is intermediate/advanced, I just want to "warn" you so that you do not expect to immediately grok it, as it's proven to be challenging . I copied below...
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1
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67
5. Interest rates (Stultz)

Thanks David for the clarification
Thanks David for the clarification
Thanks David for the clarification
Thanks David for the clarification
Replies:
2
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66
6. LDA Coefficient Estimation

Hello, I want to verify if the min arg function used to assign a new variable into a particular group. I tried with 2 groups (Male/Female) with 2 variables (height and weight). is this correct? Secondly, when we move from Euclidean distance to geometric distance, the authors request us to consider the covariance matrix (to control for variable dependence) by further multiplying the transposed...
Hello, I want to verify if the min arg function used to assign a new variable into a particular group. I tried with 2 groups (Male/Female) with 2 variables (height and weight). is this correct? Secondly, when we move from Euclidean distance to geometric distance, the authors request us to consider the covariance matrix (to control for variable dependence) by further multiplying the transposed...
Hello, I want to verify if the min arg function used to assign a new variable into a particular group. I tried with 2 groups (Male/Female) with 2 variables (height and weight). is this correct? Secondly, when we move from Euclidean distance to geometric distance, the authors request us to...
Hello, I want to verify if the min arg function used to assign a new variable into a particular group. I tried with 2 groups (Male/Female) with 2 variables (height and weight). is this...
Replies:
0
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25
7. Risk adjusted pricing (De Laurentis)

@saurabhpal49 I forgot to share the attached presentation to GARP on RAROC by Dr. Yousef Padganeh (Head of Enterprise Risk Management, Commercial Bank International). I think he gives some useful illustrations and he has a slide on risk-based pricing. I hope that's helpful!
@saurabhpal49 I forgot to share the attached presentation to GARP on RAROC by Dr. Yousef Padganeh (Head of Enterprise Risk Management, Commercial Bank International). I think he gives some useful illustrations and he has a slide on risk-based pricing. I hope that's helpful!
@saurabhpal49 I forgot to share the attached presentation to GARP on RAROC by Dr. Yousef Padganeh (Head of Enterprise Risk Management, Commercial Bank International). I think he gives some useful illustrations and he has a slide on risk-based pricing. I hope that's helpful!
@saurabhpal49 I forgot to share the attached presentation to GARP on RAROC by Dr. Yousef Padganeh (Head of Enterprise Risk Management, Commercial Bank International). I think he gives some useful...
Replies:
2
Views:
85
8. Does selling a call option also counterparty risk free?

Thanks Eltanariel. Much appreciated.
Thanks Eltanariel. Much appreciated.
Thanks Eltanariel. Much appreciated.
Thanks Eltanariel. Much appreciated.
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9
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1,961
9. Gregory - Chapter 15 - Wrong-way Risk

thanks David, yes all i could understand is that he was referring to conditional EE while making the statement. But still the relationship he stated is still puzzling me. If you come to the terms of it sometime, please do let it come in the notes or in the forum! Thanks a lot!
thanks David, yes all i could understand is that he was referring to conditional EE while making the statement. But still the relationship he stated is still puzzling me. If you come to the terms of it sometime, please do let it come in the notes or in the forum! Thanks a lot!
thanks David, yes all i could understand is that he was referring to conditional EE while making the statement. But still the relationship he stated is still puzzling me. If you come to the terms of it sometime, please do let it come in the notes or in the forum! Thanks a lot!
thanks David, yes all i could understand is that he was referring to conditional EE while making the statement. But still the relationship he stated is still puzzling me. If you come to the terms...
Replies:
6
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838
10. Basel II-Current Exposure Method

Hi everyone, I am having a mess in my mind that when using CEM method for counterparty credit risk calculation, the add-on factor for credit derivatives is not dependent on maturity. Its concern is "qualify". if the contract is qualify so the addon-factor is 5%, vice versus addon-factor is 10%. My question is why Credit derivative is independent on maturity. Anybody helps me solve this issue,...
Hi everyone, I am having a mess in my mind that when using CEM method for counterparty credit risk calculation, the add-on factor for credit derivatives is not dependent on maturity. Its concern is "qualify". if the contract is qualify so the addon-factor is 5%, vice versus addon-factor is 10%. My question is why Credit derivative is independent on maturity. Anybody helps me solve this issue,...
Hi everyone, I am having a mess in my mind that when using CEM method for counterparty credit risk calculation, the add-on factor for credit derivatives is not dependent on maturity. Its concern is "qualify". if the contract is qualify so the addon-factor is 5%, vice versus addon-factor is 10%....
Hi everyone, I am having a mess in my mind that when using CEM method for counterparty credit risk calculation, the add-on factor for credit derivatives is not dependent on maturity. Its concern...
Replies:
0
Views:
50
11. Calculated Stress Losses for Loan/Derivatives Portfolios

Thank you so much David. I greatly appreciate the level of detail you provide in your answers.
Thank you so much David. I greatly appreciate the level of detail you provide in your answers.
Thank you so much David. I greatly appreciate the level of detail you provide in your answers.
Thank you so much David. I greatly appreciate the level of detail you provide in your answers.
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2
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178
12. Learning spreadsheet P2.T6 Malz ch7

Very helpful @David Harper CFA FRM , thank you!
Very helpful @David Harper CFA FRM , thank you!
Very helpful @David Harper CFA FRM , thank you!
Very helpful @David Harper CFA FRM , thank you!
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5
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226

Hi David - how would you value a CLN on a MTM basis. Credit risk (CDS - spread) to the protection buyer and then to the reference portfolio?
Hi David - how would you value a CLN on a MTM basis. Credit risk (CDS - spread) to the protection buyer and then to the reference portfolio?
Hi David - how would you value a CLN on a MTM basis. Credit risk (CDS - spread) to the protection buyer and then to the reference portfolio?
Hi David - how would you value a CLN on a MTM basis. Credit risk (CDS - spread) to the protection buyer and then to the reference portfolio?
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25
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24,041

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4
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15. Securitization Process

Above this undoubtedly great explanation by my friend I just wanna point towards the graphics @David Harper CFA FRM has compiled in the study materials about each respective entity in the securitisation process/chain. Best explanation I have seen so far!
Above this undoubtedly great explanation by my friend I just wanna point towards the graphics @David Harper CFA FRM has compiled in the study materials about each respective entity in the securitisation process/chain. Best explanation I have seen so far!
Above this undoubtedly great explanation by my friend I just wanna point towards the graphics @David Harper CFA FRM has compiled in the study materials about each respective entity in the securitisation process/chain. Best explanation I have seen so far!
Above this undoubtedly great explanation by my friend I just wanna point towards the graphics @David Harper CFA FRM has compiled in the study materials about each respective entity in the...
Replies:
3
Views:
111
16. KMV Distance to Default

Was trying to implement KMV model for PD estimation. One doubt, after estimating the DD (distance to default) how to map the same to Expected default frequency. For example, “For a particular company we compute and get a DD of 3. To compute EDF, 2000 companies last year has a DD of 3, and 15 of these firms defaulted after one year. The expected default frequency for the company = 15/2000...
Was trying to implement KMV model for PD estimation. One doubt, after estimating the DD (distance to default) how to map the same to Expected default frequency. For example, “For a particular company we compute and get a DD of 3. To compute EDF, 2000 companies last year has a DD of 3, and 15 of these firms defaulted after one year. The expected default frequency for the company = 15/2000...
Was trying to implement KMV model for PD estimation. One doubt, after estimating the DD (distance to default) how to map the same to Expected default frequency. For example, “For a particular company we compute and get a DD of 3. To compute EDF, 2000 companies last year has a DD of 3, and 15...
Was trying to implement KMV model for PD estimation. One doubt, after estimating the DD (distance to default) how to map the same to Expected default frequency. For example, “For a particular...
Replies:
7
Views:
3,050
17. Malz Chapter 8:Portfolio Credit Risk

Hi @kik92 Yes, you are almost certainly correct: the exam cannot realistically ask you for most of the calculations above. I remind you that, above, we re-created Malz Table 8.1 for those who want a concrete understanding (which I realize takes extra time). However, let me just quickly gin up a conceptually similar question that could be asked: A portfolio contains five bonds each with i.i.d....
Hi @kik92 Yes, you are almost certainly correct: the exam cannot realistically ask you for most of the calculations above. I remind you that, above, we re-created Malz Table 8.1 for those who want a concrete understanding (which I realize takes extra time). However, let me just quickly gin up a conceptually similar question that could be asked: A portfolio contains five bonds each with i.i.d....
Hi @kik92 Yes, you are almost certainly correct: the exam cannot realistically ask you for most of the calculations above. I remind you that, above, we re-created Malz Table 8.1 for those who want a concrete understanding (which I realize takes extra time). However, let me just quickly gin up a...
Hi @kik92 Yes, you are almost certainly correct: the exam cannot realistically ask you for most of the calculations above. I remind you that, above, we re-created Malz Table 8.1 for those who want...
Replies:
3
Views:
130
18. Describe a waterfall structure in securitzation

Thank you David
Thank you David
Thank you David
Thank you David
Replies:
2
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150
19. 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
Replies:
1
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196
20. P.2 Credit VaR

@bpdulog Yes, I agree with that solution, I feel like it's almost the only calculation you can make with that information, including (i) assume it's a 95.0% CVaR and (ii) assume CVaR = UL. RE: official guidance from GARP? I don't know what you mean, exactly, sorry. Primarily I "upload feedback" (e.g., ask for consistency in definitions). Thanks,
@bpdulog Yes, I agree with that solution, I feel like it's almost the only calculation you can make with that information, including (i) assume it's a 95.0% CVaR and (ii) assume CVaR = UL. RE: official guidance from GARP? I don't know what you mean, exactly, sorry. Primarily I "upload feedback" (e.g., ask for consistency in definitions). Thanks,
@bpdulog Yes, I agree with that solution, I feel like it's almost the only calculation you can make with that information, including (i) assume it's a 95.0% CVaR and (ii) assume CVaR = UL. RE: official guidance from GARP? I don't know what you mean, exactly, sorry. Primarily I "upload feedback"...
@bpdulog Yes, I agree with that solution, I feel like it's almost the only calculation you can make with that information, including (i) assume it's a 95.0% CVaR and (ii) assume CVaR = UL. RE:...
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7
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143
21. 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...
Replies:
0
Views:
80
22. 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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766
23. Lowest Credit Risk

Thanks David...
Thanks David...
Thanks David...
Thanks David...
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2
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130
24. Hedge Risky Bond with T-Bond futures : is there operational risk?

Thanks David. Yes it clarifies in detail (Single Factor Vs multiple buckets, Convexity, basis risk) and also needs dynamic hedging as the factors change.
Thanks David. Yes it clarifies in detail (Single Factor Vs multiple buckets, Convexity, basis risk) and also needs dynamic hedging as the factors change.
Thanks David. Yes it clarifies in detail (Single Factor Vs multiple buckets, Convexity, basis risk) and also needs dynamic hedging as the factors change.
Thanks David. Yes it clarifies in detail (Single Factor Vs multiple buckets, Convexity, basis risk) and also needs dynamic hedging as the factors change.
Replies:
4
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46

@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:
940
26. 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
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5
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222

Thanks!!
Thanks!!
Thanks!!
Thanks!!
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11
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2,896
28. 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:
4,282
29. 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:
703
30. 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:
635
31. 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:
262