# P2.T6. Credit Risk (25%)

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

@RaDi7 Yes agreed on both, thank you! The source PD is mistaken (doesn't distribute the T) but ours then omits the N(.) Sorry, thank you! @Nicole Seaman RaDi7 is correct about both of these mistakes. This doesn't require Deeepa, I can correct myself (added to wrike)
@RaDi7 Yes agreed on both, thank you! The source PD is mistaken (doesn't distribute the T) but ours then omits the N(.) Sorry, thank you! @Nicole Seaman RaDi7 is correct about both of these mistakes. This doesn't require Deeepa, I can correct myself (added to wrike)
@RaDi7 Yes agreed on both, thank you! The source PD is mistaken (doesn't distribute the T) but ours then omits the N(.) Sorry, thank you! @Nicole Seaman RaDi7 is correct about both of these mistakes. This doesn't require Deeepa, I can correct myself (added to wrike)
@RaDi7 Yes agreed on both, thank you! The source PD is mistaken (doesn't distribute the T) but ours then omits the N(.) Sorry, thank you! @Nicole Seaman RaDi7 is correct about both of these...
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19
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1,272
2. ### Benefits of Securitisation

Thank you @David Harper CFA FRM ..This is crystal clear now! Thanks, Vinay
Thank you @David Harper CFA FRM ..This is crystal clear now! Thanks, Vinay
Thank you @David Harper CFA FRM ..This is crystal clear now! Thanks, Vinay
Thank you @David Harper CFA FRM ..This is crystal clear now! Thanks, Vinay
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2
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24

Hi @uness_o7 Apologies but I haven't examined carefully his Cost of Classification; it's not technically in the LO syllabus, right? We didn't include in our notes .... That looks interesting, I will take a closer look what I get a chance ... thanks,
Hi @uness_o7 Apologies but I haven't examined carefully his Cost of Classification; it's not technically in the LO syllabus, right? We didn't include in our notes .... That looks interesting, I will take a closer look what I get a chance ... thanks,
Hi @uness_o7 Apologies but I haven't examined carefully his Cost of Classification; it's not technically in the LO syllabus, right? We didn't include in our notes .... That looks interesting, I will take a closer look what I get a chance ... thanks,
Hi @uness_o7 Apologies but I haven't examined carefully his Cost of Classification; it's not technically in the LO syllabus, right? We didn't include in our notes .... That looks interesting, I...
Replies:
1
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24
4. ### Impact of Default Correlations on EL

Thank you @David Harper CFA FRM , appreciate the confirmation!
Thank you @David Harper CFA FRM , appreciate the confirmation!
Thank you @David Harper CFA FRM , appreciate the confirmation!
Thank you @David Harper CFA FRM , appreciate the confirmation!
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7
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174
5. ### CVA, independent amount & margin period of risk

Hi there, I am puzzled with the graph below; isn't the independent amount posted as collateral, either way, whatever happens? Does the margin period of risk then still have an impact?
Hi there, I am puzzled with the graph below; isn't the independent amount posted as collateral, either way, whatever happens? Does the margin period of risk then still have an impact?
Hi there, I am puzzled with the graph below; isn't the independent amount posted as collateral, either way, whatever happens? Does the margin period of risk then still have an impact?
Hi there, I am puzzled with the graph below; isn't the independent amount posted as collateral, either way, whatever happens? Does the margin period of risk then still have an impact?
Gdb
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0
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61
6. ### FRM Handbook Example 23.9: FRM Exam 2008 Q 3-31

Hello @dbansal, We have not updated the focus review videos recently (they are on our update list for 2018), but this post is already tagged for revision so we will make sure that the new video is correct. Videos take a great deal of time, especially when there is so much material to cover with study notes, writing in-depth PQs, creating new instructional videos, preparing detailed XLS and...
Hello @dbansal, We have not updated the focus review videos recently (they are on our update list for 2018), but this post is already tagged for revision so we will make sure that the new video is correct. Videos take a great deal of time, especially when there is so much material to cover with study notes, writing in-depth PQs, creating new instructional videos, preparing detailed XLS and...
Hello @dbansal, We have not updated the focus review videos recently (they are on our update list for 2018), but this post is already tagged for revision so we will make sure that the new video is correct. Videos take a great deal of time, especially when there is so much material to cover with...
Hello @dbansal, We have not updated the focus review videos recently (they are on our update list for 2018), but this post is already tagged for revision so we will make sure that the new video...
RM1
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8
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2,414
7. ### Margin stepup

Hi @saurabhpal49 I assume that Choudhry is referring to a coupon with an increasing step function. If the bond/tranche is based on an index, then the margin would be added to determine the floating coupon rate; e.g., maybe the floating rate for a senior tranche = LIBOR + 50 basis point margin = coupon rate, where 50 basis points is the margin. Note the text that I located below (from...
Hi @saurabhpal49 I assume that Choudhry is referring to a coupon with an increasing step function. If the bond/tranche is based on an index, then the margin would be added to determine the floating coupon rate; e.g., maybe the floating rate for a senior tranche = LIBOR + 50 basis point margin = coupon rate, where 50 basis points is the margin. Note the text that I located below (from...
Hi @saurabhpal49 I assume that Choudhry is referring to a coupon with an increasing step function. If the bond/tranche is based on an index, then the margin would be added to determine the floating coupon rate; e.g., maybe the floating rate for a senior tranche = LIBOR + 50 basis point margin =...
Hi @saurabhpal49 I assume that Choudhry is referring to a coupon with an increasing step function. If the bond/tranche is based on an index, then the margin would be added to determine the...
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3
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631
8. ### P2.T6.309. Default correlation, Malz sections 8.1 and 8.2

Yes David....that surely helped.....thanks so much...hopefully the question in exam shall provide the number of defaults
Yes David....that surely helped.....thanks so much...hopefully the question in exam shall provide the number of defaults
Yes David....that surely helped.....thanks so much...hopefully the question in exam shall provide the number of defaults
Yes David....that surely helped.....thanks so much...hopefully the question in exam shall provide the number of defaults
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5
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364
9. ### Malz Chapter 8:Portfolio Credit Risk

Excellent David, it's just what I was asking you. Million thanks!
Excellent David, it's just what I was asking you. Million thanks!
Excellent David, it's just what I was asking you. Million thanks!
Excellent David, it's just what I was asking you. Million thanks!
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8
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253
10. ### First to default put ( crouhy)

Hi @saurabhpal49 I'd explain with a simple illustration. Imagine the basket contains only two credits, each with (unconditional) default probability of, respectively say, 10.0% and 7.0%. Also, let's simplify and approximate spread by S = PD*LGD but assume LGD = 100%, so that spread approximated default probability. Now compare: If these credits are uncorrelated, what is the approximate...
Hi @saurabhpal49 I'd explain with a simple illustration. Imagine the basket contains only two credits, each with (unconditional) default probability of, respectively say, 10.0% and 7.0%. Also, let's simplify and approximate spread by S = PD*LGD but assume LGD = 100%, so that spread approximated default probability. Now compare: If these credits are uncorrelated, what is the approximate...
Hi @saurabhpal49 I'd explain with a simple illustration. Imagine the basket contains only two credits, each with (unconditional) default probability of, respectively say, 10.0% and 7.0%. Also, let's simplify and approximate spread by S = PD*LGD but assume LGD = 100%, so that spread approximated...
Hi @saurabhpal49 I'd explain with a simple illustration. Imagine the basket contains only two credits, each with (unconditional) default probability of, respectively say, 10.0% and 7.0%. Also,...
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1
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133
11. ### 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.
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12. ### 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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13. ### 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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115
14. ### Interest rates (Stultz)

Thanks David for the clarification
Thanks David for the clarification
Thanks David for the clarification
Thanks David for the clarification
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2
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15. ### 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...
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0
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45
16. ### 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...
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2
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143
17. ### 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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2,194
18. ### 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...
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6
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959
19. ### 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:
134
20. ### 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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207
21. ### 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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272

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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23. ### 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...
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3
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149
24. ### 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...
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7
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3,230
25. ### Describe a waterfall structure in securitzation

Thank you David
Thank you David
Thank you David
Thank you David
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2
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26. ### 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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27. ### 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
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98
28. ### 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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808
29. ### Lowest Credit Risk

Thanks David...
Thanks David...
Thanks David...
Thanks David...
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2
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149
30. ### 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.
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76
@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...