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P2.T6. Credit Risk (25%)
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Errors Found in Study Notes P2.T6. Credit Risk
Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new materials and working on many other tasks so he may have missed this post. Please continue to post anything that you feel is an error, and I will fix them as soon as they are reviewed by David. Thank...
Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new materials and working on many other tasks so he may have missed this post. Please continue to post anything that you feel is an error, and I will fix them as soon as they are reviewed by David. Thank...
Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new materials and working on many other tasks so he may have missed this post. Please continue to post...
Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new...
Nicole Seaman
,
Aug 5, 2015
Replies:
6
Views:
685
Nicole Seaman
Sep 26, 2016 at 12:07 PM
GARP.FRM.PQ.P2
2016 GARP PQ - Question 52 -Netting
Hi @no_ming In this question, the type of instruments don't really matter as the question is giving you the mark-to-market value ("current market value") of the positions. Credit exposure is max(value, 0). So the credit exposure here without netting is 54, but with netting it is only 21: Without netting: max(0, +21) + max(0, -33) + max(0, +33) = 54 With netting: max(0, 21 - 33 + 33) = 21
Hi @no_ming In this question, the type of instruments don't really matter as the question is giving you the mark-to-market value ("current market value") of the positions. Credit exposure is max(value, 0). So the credit exposure here without netting is 54, but with netting it is only 21: Without netting: max(0, +21) + max(0, -33) + max(0, +33) = 54 With netting: max(0, 21 - 33 + 33) = 21
Hi @no_ming In this question, the type of instruments don't really matter as the question is giving you the mark-to-market value ("current market value") of the positions. Credit exposure is max(value, 0). So the credit exposure here without netting is 54, but with netting it is only...
Hi @no_ming In this question, the type of instruments don't really matter as the question is giving you the mark-to-market value ("current market value") of the positions. Credit exposure is...
no_ming
,
Sep 28, 2016 at 10:02 AM
Replies:
1
Views:
51
David Harper CFA FRM
Sep 28, 2016 at 1:43 PM
de Servigny, Chapter 3 - Spreadsheet
Hello @mh2452 Any spreadsheets that are not published under the individual readings are published under that topic's Topic Review section in spreadsheet bundles. So if you to into Topic 6, you will find the spreadsheet bundles for that topic. I hope this helps! Nicole
Hello @mh2452 Any spreadsheets that are not published under the individual readings are published under that topic's Topic Review section in spreadsheet bundles. So if you to into Topic 6, you will find the spreadsheet bundles for that topic. I hope this helps! Nicole
Hello @mh2452 Any spreadsheets that are not published under the individual readings are published under that topic's Topic Review section in spreadsheet bundles. So if you to into Topic 6, you will find the spreadsheet bundles for that topic. I hope this helps! Nicole
Hello @mh2452 Any spreadsheets that are not published under the individual readings are published under that topic's Topic Review section in spreadsheet bundles. So if you to into Topic 6, you...
mh2452
,
Sep 24, 2016 at 6:24 PM
Replies:
1
Views:
43
Nicole Seaman
Sep 26, 2016 at 11:30 AM
Excess spreads question~
Hi @no_ming Your question is good because sometimes default is assumed to refer to only the principal (as your solution infers), however here (in my opinion) the question does specify "accumulates 6.625 mm of losses from defaults and unpaid interest." And, this is natural (yes?): losses should refer to both unpaid principal and unpaid interest. So, given the phrasing, appropriate would be...
Hi @no_ming Your question is good because sometimes default is assumed to refer to only the principal (as your solution infers), however here (in my opinion) the question does specify "accumulates 6.625 mm of losses from defaults and unpaid interest." And, this is natural (yes?): losses should refer to both unpaid principal and unpaid interest. So, given the phrasing, appropriate would be...
Hi @no_ming Your question is good because sometimes default is assumed to refer to only the principal (as your solution infers), however here (in my opinion) the question does specify "accumulates 6.625 mm of losses from defaults and unpaid interest." And, this is natural (yes?): losses should...
Hi @no_ming Your question is good because sometimes default is assumed to refer to only the principal (as your solution infers), however here (in my opinion) the question does specify "accumulates...
no_ming
,
Sep 18, 2016
Replies:
3
Views:
73
David Harper CFA FRM
Sep 23, 2016
PFE & EE Question~
@no_ming Re: In another word, not only EE, if Sigma and mean increase, PFE, EPE etc. also increase, is that right? Yes, if you increase µ or σ then you are shifting or "expanding" (dispersing) the normal distribution, so the x% PFE will increase, in the same way that higher volatility or lower return will increase (absolute) value at risk because there x% tail (quantile) is further into loss...
@no_ming Re: In another word, not only EE, if Sigma and mean increase, PFE, EPE etc. also increase, is that right? Yes, if you increase µ or σ then you are shifting or "expanding" (dispersing) the normal distribution, so the x% PFE will increase, in the same way that higher volatility or lower return will increase (absolute) value at risk because there x% tail (quantile) is further into loss...
@no_ming Re: In another word, not only EE, if Sigma and mean increase, PFE, EPE etc. also increase, is that right? Yes, if you increase µ or σ then you are shifting or "expanding" (dispersing) the normal distribution, so the x% PFE will increase, in the same way that higher volatility or lower...
@no_ming Re: In another word, not only EE, if Sigma and mean increase, PFE, EPE etc. also increase, is that right? Yes, if you increase µ or σ then you are shifting or "expanding" (dispersing) the...
no_ming
,
Sep 15, 2016
Replies:
8
Views:
102
David Harper CFA FRM
Sep 16, 2016
CVA & credit limit question:
Mr. Harper, very clear explanation , thanks a lot. Dr. Jayanthi Sankaran, also thanks for your help.
Mr. Harper, very clear explanation , thanks a lot. Dr. Jayanthi Sankaran, also thanks for your help.
Mr. Harper, very clear explanation , thanks a lot. Dr. Jayanthi Sankaran, also thanks for your help.
Mr. Harper, very clear explanation , thanks a lot. Dr. Jayanthi Sankaran, also thanks for your help.
no_ming
,
Sep 15, 2016
Replies:
3
Views:
69
no_ming
Sep 15, 2016
Equity tranche spread wrt correlation
Hello Sir, Can you please help me with the below question Question 1 Part a) Consider the following assets present in loan portfolio of IMT Bank Ltd, all the assets below are mortgage loans. Exposure 1 Exposure 2 Exposure 3 Portfolio Commitment $100,000,000 $120,000,000 ...
Hello Sir, Can you please help me with the below question Question 1 Part a) Consider the following assets present in loan portfolio of IMT Bank Ltd, all the assets below are mortgage loans. Exposure 1 Exposure 2 Exposure 3 Portfolio Commitment $100,000,000 $120,000,000 ...
Hello Sir, Can you please help me with the below question Question 1 Part a) Consider the following assets present in loan portfolio of IMT Bank Ltd, all the assets below are mortgage loans. Exposure 1 Exposure 2 Exposure 3 ...
Hello Sir, Can you please help me with the below question Question 1 Part a) Consider the following assets present in loan portfolio of IMT Bank Ltd, all the assets below are mortgage loans. ...
afterworkguinness
,
Nov 14, 2015
Replies:
8
Views:
1,211
Vishal Singh
Sep 10, 2016
GARP.FRM.PQ.P2
question in derivation process of merton model credit spread
Logarithm quotient rule logb(x / y) = logb(x) - logb(y) is the formula used for calculation its not 1/x it x/y ...
Logarithm quotient rule logb(x / y) = logb(x) - logb(y) is the formula used for calculation its not 1/x it x/y ...
Logarithm quotient rule logb(x / y) = logb(x) - logb(y) is the formula used for calculation its not 1/x it x/y ...
Logarithm quotient rule logb(x / y) = logb(x) - logb(y) is the formula used for calculation its not 1/x it x/y ...
nwalker
,
Aug 27, 2016
Replies:
1
Views:
69
desh
Aug 27, 2016
Considerations about commitment fee and EAD
Hi to all! If I understood correctly, banks apply a commitment fee (fixed percentage) on the undrawn portion of a credit line to hedge the further expected loss associated with that credit exposition. So you have to pay more if you are using a small drawn portion of the credit line. Now, given the fact that a firm with an high rating (such as AA or A) will only use a small part of the credit...
Hi to all! If I understood correctly, banks apply a commitment fee (fixed percentage) on the undrawn portion of a credit line to hedge the further expected loss associated with that credit exposition. So you have to pay more if you are using a small drawn portion of the credit line. Now, given the fact that a firm with an high rating (such as AA or A) will only use a small part of the credit...
Hi to all! If I understood correctly, banks apply a commitment fee (fixed percentage) on the undrawn portion of a credit line to hedge the further expected loss associated with that credit exposition. So you have to pay more if you are using a small drawn portion of the credit line. Now, given...
Hi to all! If I understood correctly, banks apply a commitment fee (fixed percentage) on the undrawn portion of a credit line to hedge the further expected loss associated with that credit...
Tradespotting
,
Aug 24, 2016
Replies:
0
Views:
55
Tradespotting
Aug 24, 2016
Credit Exposure
Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the credit risk factor are independent. Further, this is the simplest possible credit exposure profile; i.e., a single i.i.d. credit risk factor. For example, in a swap, sqrt(ΔT) tends to characterize...
Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the credit risk factor are independent. Further, this is the simplest possible credit exposure profile; i.e., a single i.i.d. credit risk factor. For example, in a swap, sqrt(ΔT) tends to characterize...
Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the credit risk factor are independent. Further, this is the simplest possible credit exposure...
Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the...
Stuti
,
Aug 8, 2016
Replies:
1
Views:
31
David Harper CFA FRM
Aug 18, 2016
CDS pricing question!
Hi @no_ming Yes, on one level, that's correct: the question implies an increase in price and, if we naively assume that the price determines the collateral posted (as the question implies), then the price increase implies additional collateral is posted. As discussed, most of the price movement should be fundamental (i.e., changes in the reference's credit quality) but, as is always the case,...
Hi @no_ming Yes, on one level, that's correct: the question implies an increase in price and, if we naively assume that the price determines the collateral posted (as the question implies), then the price increase implies additional collateral is posted. As discussed, most of the price movement should be fundamental (i.e., changes in the reference's credit quality) but, as is always the case,...
Hi @no_ming Yes, on one level, that's correct: the question implies an increase in price and, if we naively assume that the price determines the collateral posted (as the question implies), then the price increase implies additional collateral is posted. As discussed, most of the price movement...
Hi @no_ming Yes, on one level, that's correct: the question implies an increase in price and, if we naively assume that the price determines the collateral posted (as the question implies), then...
no_ming
,
Aug 6, 2016
Replies:
8
Views:
240
David Harper CFA FRM
Aug 16, 2016
Real world application: Deriving default probabilities from observed CDS spreads
Hi there, I have to solve a problem which is actually a real world application of Malz, Chapter 7 - Bootstrapping default probabilities given an observable CDS spread curve. Please refer to the excel attached: I have created an excel spreadsheet that should do the calculation. What it basically does is - given an observable CDS spread curve - modelling the cash flows of a hypothetical CDS...
Hi there, I have to solve a problem which is actually a real world application of Malz, Chapter 7 - Bootstrapping default probabilities given an observable CDS spread curve. Please refer to the excel attached: I have created an excel spreadsheet that should do the calculation. What it basically does is - given an observable CDS spread curve - modelling the cash flows of a hypothetical CDS...
Hi there, I have to solve a problem which is actually a real world application of Malz, Chapter 7 - Bootstrapping default probabilities given an observable CDS spread curve. Please refer to the excel attached: I have created an excel spreadsheet that should do the calculation. What it...
Hi there, I have to solve a problem which is actually a real world application of Malz, Chapter 7 - Bootstrapping default probabilities given an observable CDS spread curve. Please refer to the...
cAse113
,
Aug 4, 2016
Replies:
0
Views:
121
cAse113
Aug 4, 2016
Credit curve and CVA
Hi @taunk , Yes, typo on my end. You're right. Explanation became a little too wordy so I missed my own typo
. Thanks for correcting!
Hi @taunk , Yes, typo on my end. You're right. Explanation became a little too wordy so I missed my own typo
. Thanks for correcting!
Hi @taunk , Yes, typo on my end. You're right. Explanation became a little too wordy so I missed my own typo
. Thanks for correcting!
Hi @taunk , Yes, typo on my end. You're right. Explanation became a little too wordy so I missed my own typo
. Thanks for correcting!
arkabose
,
Jul 11, 2016
Replies:
7
Views:
240
Mkaim
Jul 29, 2016
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...
Kavita.bhangdia
,
Apr 1, 2016
Replies:
9
Views:
360
David Harper CFA FRM
Jul 18, 2016
Delivery squeeze
Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example from Hull: Let's take a situation where the asset swap spread on a particular bond = 150 bps. There are three likely scenarios: 1) Bond Price = Par value of $100. The swap involves Company A paying...
Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example from Hull: Let's take a situation where the asset swap spread on a particular bond = 150 bps. There are three likely scenarios: 1) Bond Price = Par value of $100. The swap involves Company A paying...
Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example from Hull: Let's take a situation where the asset swap spread on a particular bond = 150 bps....
Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example...
arkabose
,
Jul 10, 2016
Replies:
16
Views:
158
Dr. Jayanthi Sankaran
Jul 18, 2016
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.
Kavita.bhangdia
,
May 17, 2016
Replies:
9
Views:
306
arkabose
Jul 13, 2016
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!
arkabose
,
Jul 7, 2016
Replies:
2
Views:
113
arkabose
Jul 7, 2016
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....
allenpee85
,
May 26, 2016
Replies:
17
Views:
473
Dr. Jayanthi Sankaran
Jun 30, 2016
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...
Delo
,
Jun 30, 2016
Replies:
0
Views:
91
Delo
Jun 30, 2016
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...
Kavita.bhangdia
,
Apr 26, 2016
Replies:
17
Views:
511
David Harper CFA FRM
Jun 27, 2016
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,...
Kashif Khalid
,
May 16, 2016
Replies:
6
Views:
289
QuantMan2318
Jun 25, 2016
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