# P2.T6. Credit Risk (25%)

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

Hi @olgenue Yes, exactly. I actually did notice this too, along with several other errors in the new Giacomo (e.g., the Merton model is wrong too). We have emailed the authors and the publisher to request/input on an errata, but we have not received any replies. Because it's a new reading, I didn't want to risk making my own edits. The source is below, hopefully you'll agree our note does...
Hi @olgenue Yes, exactly. I actually did notice this too, along with several other errors in the new Giacomo (e.g., the Merton model is wrong too). We have emailed the authors and the publisher to request/input on an errata, but we have not received any replies. Because it's a new reading, I didn't want to risk making my own edits. The source is below, hopefully you'll agree our note does...
Hi @olgenue Yes, exactly. I actually did notice this too, along with several other errors in the new Giacomo (e.g., the Merton model is wrong too). We have emailed the authors and the publisher to request/input on an errata, but we have not received any replies. Because it's a new reading, I...
Hi @olgenue Yes, exactly. I actually did notice this too, along with several other errors in the new Giacomo (e.g., the Merton model is wrong too). We have emailed the authors and the publisher to...
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2. ### GARP.FRM.PQ.P22016 GARP PQ - Question 5 - CDS (garp16-p2-5)

If so, I'd like to know how the PV of the premium leg above relates to this formula:
If so, I'd like to know how the PV of the premium leg above relates to this formula:
If so, I'd like to know how the PV of the premium leg above relates to this formula:
If so, I'd like to know how the PV of the premium leg above relates to this formula:
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3. ### Credit Risk in 2014

12. A trader observes a quote for Stock ZZZ, and the midpoint of its current best bid and best ask prices is CAD 35. ZZZ has an estimated daily return volatility of 0.25% and average bid-ask spread of CAD 0.1. Assuming the returns of ZZZ are normally distributed, what is closest to the estimated liquidity-adjusted, 1-day 95% VaR, using the constant spread approach on a 10,000 share...
12. A trader observes a quote for Stock ZZZ, and the midpoint of its current best bid and best ask prices is CAD 35. ZZZ has an estimated daily return volatility of 0.25% and average bid-ask spread of CAD 0.1. Assuming the returns of ZZZ are normally distributed, what is closest to the estimated liquidity-adjusted, 1-day 95% VaR, using the constant spread approach on a 10,000 share...
12. A trader observes a quote for Stock ZZZ, and the midpoint of its current best bid and best ask prices is CAD 35. ZZZ has an estimated daily return volatility of 0.25% and average bid-ask spread of CAD 0.1. Assuming the returns of ZZZ are normally distributed, what is closest to the estimated...
12. A trader observes a quote for Stock ZZZ, and the midpoint of its current best bid and best ask prices is CAD 35. ZZZ has an estimated daily return volatility of 0.25% and average bid-ask...
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4. ### Stulz Ch 18 - Total Return Swap

Hi all, Can someone explain why the bank gets paid whether or not the bank defaults or not? They receive $20 million, which is the difference between the value at maturity and the value of the debt at t=0. If the debt defaults, they get$30 million which is the difference betweeen the value at the time of credit event and the value at t=0. I understand why the bank gets paid if there is a...
Hi all, Can someone explain why the bank gets paid whether or not the bank defaults or not? They receive $20 million, which is the difference between the value at maturity and the value of the debt at t=0. If the debt defaults, they get$30 million which is the difference betweeen the value at the time of credit event and the value at t=0. I understand why the bank gets paid if there is a...
Hi all, Can someone explain why the bank gets paid whether or not the bank defaults or not? They receive $20 million, which is the difference between the value at maturity and the value of the debt at t=0. If the debt defaults, they get$30 million which is the difference betweeen the value...
Hi @Arnaudc Okay, right, as I actually look at Malz currently, you are correct about his assumption in the first step (page 219). Sorry to misrepresent him on that, thank you for pushing back, I learned something here! (fwiw, my key influence is ) Malz page 219: "Example 6.3 (Merton Model): We apply the model to a firm that has an asset value of $140. We’ll assume the firm’s sole debt issue... Hi @Arnaudc Okay, right, as I actually look at Malz currently, you are correct about his assumption in the first step (page 219). Sorry to misrepresent him on that, thank you for pushing back, I learned something here! (fwiw, my key influence is ) Malz page 219: "Example 6.3 (Merton Model): We... Hi @Arnaudc Okay, right, as I actually look at Malz currently, you are correct about his assumption in the first step (page 219). Sorry to misrepresent him on that, thank you for pushing back, I... Replies: 10 Views: 1,482 20. ### P2.T6.309. Default correlation, Malz sections 8.1 and 8.2 I am sorry. I goofed up. I had this question no. 74 in mind when I raised the query. I am sorry. I goofed up. I had this question no. 74 in mind when I raised the query. I am sorry. I goofed up. I had this question no. 74 in mind when I raised the query. I am sorry. I goofed up. I had this question no. 74 in mind when I raised the query. Replies: 2 Views: 101 21. ### GARP.FRM.PQ.P2hazard rate (garp16-p2-33) Hi @frmqiu Yes, the language in question 2016.P2.Q33 was reported earlier in the year as imprecise. I recall that GARP agreed with our feedback. @Deepak Chitnis is correct that the solution implicitly is the discrete conditional PD, but the phrasing suggests it wants a joint probability. Please see here for more detail Hi @frmqiu Yes, the language in question 2016.P2.Q33 was reported earlier in the year as imprecise. I recall that GARP agreed with our feedback. @Deepak Chitnis is correct that the solution implicitly is the discrete conditional PD, but the phrasing suggests it wants a joint probability. Please see here for more detail Hi @frmqiu Yes, the language in question 2016.P2.Q33 was reported earlier in the year as imprecise. I recall that GARP agreed with our feedback. @Deepak Chitnis is correct that the solution implicitly is the discrete conditional PD, but the phrasing suggests it wants a joint probability.... Hi @frmqiu Yes, the language in question 2016.P2.Q33 was reported earlier in the year as imprecise. I recall that GARP agreed with our feedback. @Deepak Chitnis is correct that the solution... Replies: 3 Views: 115 22. ### Merton drift in DD Hi All, P2.T6.R43 I am trying to conceptually understand how the DD value is calculated statistically. The numerator is the expected value of the price, and the denominator is the standard deviation. My question relates to the numerator. Assume T-t=1 ln(Vo/K) is the current log "return" at T=0. We then add what I assume is the expected drift until maturity (r-(sig^2)/2). How am I supposed... Hi All, P2.T6.R43 I am trying to conceptually understand how the DD value is calculated statistically. The numerator is the expected value of the price, and the denominator is the standard deviation. My question relates to the numerator. Assume T-t=1 ln(Vo/K) is the current log "return" at T=0. We then add what I assume is the expected drift until maturity (r-(sig^2)/2). How am I supposed... Hi All, P2.T6.R43 I am trying to conceptually understand how the DD value is calculated statistically. The numerator is the expected value of the price, and the denominator is the standard deviation. My question relates to the numerator. Assume T-t=1 ln(Vo/K) is the current log "return" at... Hi All, P2.T6.R43 I am trying to conceptually understand how the DD value is calculated statistically. The numerator is the expected value of the price, and the denominator is the standard... Replies: 0 Views: 113 23. ### Total Return Swap (Crouhy) - Figure 12-7 - mistake? many thanks, David! Apologies,I was referring to Crouhy's first edition in my question (there it is Figure 12-7). Now it makes good sense. many thanks, David! Apologies,I was referring to Crouhy's first edition in my question (there it is Figure 12-7). Now it makes good sense. many thanks, David! Apologies,I was referring to Crouhy's first edition in my question (there it is Figure 12-7). Now it makes good sense. many thanks, David! Apologies,I was referring to Crouhy's first edition in my question (there it is Figure 12-7). Now it makes good sense. Replies: 3 Views: 143 24. ### MtM and Exposure for Netting Hi @arkabose Yes, agreed. Your circled item is from the source (Gregory) and it's not listed in his errata that I can see (). However, I agree with you. This looks like a mistake to me (sorry). Your second paragraph, of course, is CORRECT: in a fixed cross-currency swap, the counterparty who pays the higher interest rate has a positive expected future M2M; i.e., the higher relative rate, per... Hi @arkabose Yes, agreed. Your circled item is from the source (Gregory) and it's not listed in his errata that I can see (). However, I agree with you. This looks like a mistake to me (sorry). Your second paragraph, of course, is CORRECT: in a fixed cross-currency swap, the counterparty who pays the higher interest rate has a positive expected future M2M; i.e., the higher relative rate, per... Hi @arkabose Yes, agreed. Your circled item is from the source (Gregory) and it's not listed in his errata that I can see (). However, I agree with you. This looks like a mistake to me (sorry). Your second paragraph, of course, is CORRECT: in a fixed cross-currency swap, the counterparty who... Hi @arkabose Yes, agreed. Your circled item is from the source (Gregory) and it's not listed in his errata that I can see (). However, I agree with you. This looks like a mistake to me (sorry).... Replies: 1 Views: 195 25. ### Netting factor Thanks vm for the confirmation David. Makes sense with this lower bound. Rgds, Thanks vm for the confirmation David. Makes sense with this lower bound. Rgds, Thanks vm for the confirmation David. Makes sense with this lower bound. Rgds, Thanks vm for the confirmation David. Makes sense with this lower bound. Rgds, Replies: 2 Views: 213 26. ### GARP.FRM.PQ.P22016 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... Replies: 1 Views: 185 27. ### 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... Replies: 1 Views: 118 28. ### PQ-externalExcess 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... Replies: 3 Views: 185 29. ### 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... Replies: 8 Views: 234 30. ### PQ-externalCVA & 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. Replies: 3 Views: 197 31. ### 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. ...
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