P2.T6. Credit Risk (25%)

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Errors Found in Study Notes P2.T6. Credit Risk

Ah yes I see that now. Thanks !
Ah yes I see that now. Thanks !
Ah yes I see that now. Thanks !
Ah yes I see that now. Thanks !
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2. Learning spreadsheet P2.T6 Malz ch7

Hi @David Harper CFA FRM , wanted to clarify (this is a dumb question). Are we expected to calculate the z-spread w/ our calculator on the Part II exam?
Hi @David Harper CFA FRM , wanted to clarify (this is a dumb question). Are we expected to calculate the z-spread w/ our calculator on the Part II exam?
Hi @David Harper CFA FRM , wanted to clarify (this is a dumb question). Are we expected to calculate the z-spread w/ our calculator on the Part II exam?
Hi @David Harper CFA FRM , wanted to clarify (this is a dumb question). Are we expected to calculate the z-spread w/ our calculator on the Part II exam?
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3
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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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5. 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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6. 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. 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...
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3
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8. Describe a waterfall structure in securitzation

Thank you David
Thank you David
Thank you David
Thank you David
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9. 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
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10. 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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11. 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...
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0
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12. 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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13. Lowest Credit Risk

Thanks David...
Thanks David...
Thanks David...
Thanks David...
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14. 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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@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: 813 16. 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 Replies: 5 Views: 168 17. Hazard Rates and probability of survival Thanks!! Thanks!! Thanks!! Thanks!! Replies: 11 Views: 2,024 18. 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: 4,081 19. 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: 626 20. 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: 364 21. 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: 227 22. Expected Exposure & Counter Party PD Thanks everyone for clarifying this Biju Thanks everyone for clarifying this Biju Thanks everyone for clarifying this Biju Thanks everyone for clarifying this Biju Replies: 9 Views: 294 23. Effect of time to maturity on sub bonds Hi @irwinchung Yes, I think yours is a great simplifying frame. Two key drivers of the subordinated debt value are "optionality" (or I might say "net volatility effect" and the present value effect of discounting debt. The "optionality" is subtle/complex because in the model subordinated debt = [call option on firm's assets with K = senior debt] - [call option on firm assets K = total... Hi @irwinchung Yes, I think yours is a great simplifying frame. Two key drivers of the subordinated debt value are "optionality" (or I might say "net volatility effect" and the present value effect of discounting debt. The "optionality" is subtle/complex because in the model subordinated debt = [call option on firm's assets with K = senior debt] - [call option on firm assets K = total... Hi @irwinchung Yes, I think yours is a great simplifying frame. Two key drivers of the subordinated debt value are "optionality" (or I might say "net volatility effect" and the present value effect of discounting debt. The "optionality" is subtle/complex because in the model subordinated... Hi @irwinchung Yes, I think yours is a great simplifying frame. Two key drivers of the subordinated debt value are "optionality" (or I might say "net volatility effect" and the present value... Replies: 1 Views: 27 24. CVA Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 - exp(-1*T)], is the unconditional default probability during the second year (as seen from today). I'm not sure how to connect these to CVA, except that unconditional PD is an input into CVA which is a... Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 - exp(-1*T)], is the unconditional default probability during the second year (as seen from today). I'm not sure how to connect these to CVA, except that unconditional PD is an input into CVA which is a... Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 - exp(-1*T)], is the unconditional default probability during the second year (as seen from today). I'm... Hi @FrmL2_Aspirant If lambda, λ, is the hazard rate then 1 - exp(-λ*T) is the cumulative default probability and the difference between the 1- and 2-year cumulative PDs, [1 - exp(-2*T)] - [1 -... Replies: 13 Views: 564 25. Credit Exposure Profiles Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is zero to both counterparties (why would either buyer/seller enter into the derivative contract if it had negative PV?). So, if you enter a contract with zero PV and, in the early years, you are paying... Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is zero to both counterparties (why would either buyer/seller enter into the derivative contract if it had negative PV?). So, if you enter a contract with zero PV and, in the early years, you are paying... Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is zero to both counterparties (why would either buyer/seller enter into the derivative contract if it had... Hi @WhizzKidd I think you mean Gregory Chapter 8? (Oh, I notice it is also CR-13 in the FRM syllabus). Both of your examples (IRS and CDS) have in common that we presume their initial value is... Replies: 1 Views: 142 26. Stulz Ch 18 - Total Return Swap @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): @bpdulog and @irwinchung So we are going to replace the two paragraphs relating to Stulz total return swap with the following (cc @Nicole Seaman): Replies: 4 Views: 183 27. Merton Value of Equity Formula Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays$1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt discounted to the present value as a risk-free price. More broadly, this formula is the essence of the first step in Merton (see my long note here for explication on both steps ): equity is treated as a...
Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays $1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt discounted to the present value as a risk-free price. More broadly, this formula is the essence of the first step in Merton (see my long note here for explication on both steps ): equity is treated as a... Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays$1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt discounted to the present value as a risk-free price. More broadly, this formula is the essence of the...
Hi @bpdulog Above the formula in the text is "Pt(T) the price at t of a zero-coupon bond that pays $1 at T." So we followed Stulz here with P(T) = F*exp(-rT); i.e., the face value of the debt... Replies: 1 Views: 109 28. credit linked note Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the$15 million equity piece as opposed to the entire portfolio of the bonds
Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the $15 million equity piece as opposed to the entire portfolio of the bonds Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the$15 million equity piece as opposed to the entire portfolio of the bonds
Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the \$15 million equity piece as opposed to the...
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1,789
29. threshold in Credit Support Annex

Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition, I am confused about the following section: "In the zero-threshold case, there are many scenarios...
Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition, I am confused about the following section: "In the zero-threshold case, there are many scenarios...
Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition,...
Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be...
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5
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8,992
30. Impact of Netting on Exposure

Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much
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31. PFE of CDS and Cross Currency SWAP

Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't the gain depend on what the FX rates are at the end of the transaction?" but there is always the premise that at initiation the swap is a fair deal with initial market value of zero to both...
Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't the gain depend on what the FX rates are at the end of the transaction?" but there is always the premise that at initiation the swap is a fair deal with initial market value of zero to both...
Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't the gain depend on what the FX rates are at the end of the transaction?" but there is always the...
Hi @bpdulog Yes, it is true that "Aren't they [i.e., the counterparty in a cross currency swap who is paying the higher interest rate] just receiving back the initial currency exchange and doesn't...
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6
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931