P2.T6. Credit Risk (25%)

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  1. Nicole Manley
    Sticky

    Errors Found in Study Notes P2.T6. Credit Risk

    Hi, Reading: 45 Page Number: 18 Error: Formula for P [ At < D ] Shouldn't there be a negative sign in front of the ratio that we're applying the standard normal CDF on?
    Hi, Reading: 45 Page Number: 18 Error: Formula for P [ At < D ] Shouldn't there be a negative sign in front of the ratio that we're applying the standard normal CDF on?
    Hi, Reading: 45 Page Number: 18 Error: Formula for P [ At < D ] Shouldn't there be a negative sign in front of the ratio that we're applying the standard normal CDF on?
    Hi, Reading: 45 Page Number: 18 Error: Formula for P [ At < D ] Shouldn't there be a negative sign in front of the ratio that we're applying the standard normal CDF on?
    Replies:
    4
    Views:
    609
  2. nwalker

    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 ...
    Replies:
    1
    Views:
    22
  3. Tradespotting

    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...
    Replies:
    0
    Views:
    31
  4. no_ming

    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...
    Replies:
    8
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    195
  5. cAse113

    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...
    Replies:
    0
    Views:
    74
  6. arkabose

    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 :eek:. 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 :eek:. 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 :eek:. 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 :eek:. Thanks for correcting!
    Replies:
    7
    Views:
    196
  7. Kavita.bhangdia

    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...
    Replies:
    9
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    312
  8. Kavita.bhangdia

    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.
    Replies:
    9
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    266
  9. arkabose

    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!
    Replies:
    2
    Views:
    93
  10. allenpee85

    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....
    Replies:
    17
    Views:
    381
  11. Delo

    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...
    Replies:
    0
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    70
  12. Kavita.bhangdia

    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...
    Replies:
    17
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    460
  13. Kashif Khalid

    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,...
    Replies:
    6
    Views:
    228
  14. kevinyuen

    Marginal CVA vs Incremental

    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component VaR (which is a direct function of marginal VaR): just as component VaRs sum to portfolio VaR, marginal CVAs sum to total CVA and do not depend on the trade sequence. Incremental CVAs, however, do...
    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component VaR (which is a direct function of marginal VaR): just as component VaRs sum to portfolio VaR, marginal CVAs sum to total CVA and do not depend on the trade sequence. Incremental CVAs, however, do...
    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component VaR (which is a direct function of marginal VaR): just as component VaRs sum to portfolio VaR,...
    Hi @nicoloco Gregory (assigned in T6) uses examples to illustrate the difference between marginal CVA and incremental CVA. There is a valid analogy to incremental (portfolio) VaR versus component...
    Replies:
    5
    Views:
    660
  15. NNath

    Weighted average life (WAL), Choudhary Chapter 12

    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Thanks @David Harper CFA FRM , Thanks for clarifying and thanks for all the help. Gotta go check into the hotel where the exam is being offered. Good luck for the exam today (India) @Delo
    Replies:
    10
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    396
  16. Kashif Khalid

    Credit Derivatives, Correlations & Impact on Credit Exposure

    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation have on CVA if any? does it impact the Probability of Default in our CVA calculation? Thanks
    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation have on CVA if any? does it impact the Probability of Default in our CVA calculation? Thanks
    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation have on CVA if any? does it impact the Probability of Default in our CVA calculation? Thanks
    Hi there My understanding is that credit derivatives can provide protection against a credit event but does it impact the credit exposure or CVA calculation? Also what impact does correlation...
    Replies:
    0
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    85
  17. Delo

    Spread Risk Factor

    Wow.. That was a teaser.. Thanks kavita
    Wow.. That was a teaser.. Thanks kavita
    Wow.. That was a teaser.. Thanks kavita
    Wow.. That was a teaser.. Thanks kavita
    Replies:
    3
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    100
  18. Kavita.bhangdia

    Gregory: CVA

    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit spread of the counterparty in Table 12.1. The increase in credit spread [dh: credit curve = plot of credit spread versus maturity] clearly increases the CVA, but this effect is not linear since default...
    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit spread of the counterparty in Table 12.1. The increase in credit spread [dh: credit curve = plot of credit spread versus maturity] clearly increases the CVA, but this effect is not linear since default...
    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit spread of the counterparty in Table 12.1. The increase in credit spread [dh: credit curve = plot of...
    Hi I agree with you, I am similarly confused by this Gregory argument. (I will email him). First, he writes something very intuitive: "Let us first review the impact of increasing the credit...
    Replies:
    1
    Views:
    145
  19. Kavita.bhangdia

    CVAR: another problem

    I would appreciate a schematic in this too to clear things up a bit.
    I would appreciate a schematic in this too to clear things up a bit.
    I would appreciate a schematic in this too to clear things up a bit.
    I would appreciate a schematic in this too to clear things up a bit.
    Replies:
    1
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    89
  20. Kavita.bhangdia

    gregory chapter 7: winners curse

    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    HI David, Gregory says that CCP may suffer from winner curse where the lost cost CCP provider ends up with more risky products and less credit worth members.. How is that? Thanks Kavita
    Replies:
    0
    Views:
    99
  21. Maged

    Credit VaR vs CVA

    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed out, I would hazard that CVA is more of an Accounting Measure that tries to incorporate the Expected Losses in the Statement of P/L (Income Statement). There are currently discussions going on in the...
    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed out, I would hazard that CVA is more of an Accounting Measure that tries to incorporate the Expected Losses in the Statement of P/L (Income Statement). There are currently discussions going on in the...
    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed out, I would hazard that CVA is more of an Accounting Measure that tries to incorporate the...
    Hi @Maged, I think you can calculate both the CVA and the CVaR for Corporate/Retail Loans as well as any security based Counterparty exposure. In line with what @David Harper CFA FRM has pointed...
    malz-fig-6-5.png
    Replies:
    3
    Views:
    412

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