P2.T6. Credit Risk (25%)

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  1. Nicole Manley
    Sticky

    Errors Found in Study Notes P2.T6. Credit Risk

    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This will keep our forum much more organized. We appreciate your cooperation! :) PLEASE NOTE: Our Practice Question sets already have links to their specific forum threads where you can post about any...
    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This will keep our forum much more organized. We appreciate your cooperation! :) PLEASE NOTE: Our Practice Question sets already have links to their specific forum threads where you can post about any...
    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This will keep our forum much more organized. We appreciate your cooperation! :) PLEASE NOTE: Our Practice...
    Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T6. Credit Risk. This...
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    0
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    506
  2. allenpee85

    Potential Future Exposure (PFE)

    Hi Guys, Does anyone know what's the formula and advice available to calculate derivatives "PFE" exposures? E.g. Monte Carlo...... Thanks!
    Hi Guys, Does anyone know what's the formula and advice available to calculate derivatives "PFE" exposures? E.g. Monte Carlo...... Thanks!
    Hi Guys, Does anyone know what's the formula and advice available to calculate derivatives "PFE" exposures? E.g. Monte Carlo...... Thanks!
    Hi Guys, Does anyone know what's the formula and advice available to calculate derivatives "PFE" exposures? E.g. Monte Carlo...... Thanks!
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  3. 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
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  4. 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...
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  5. sleepybird

    Understanding the relationship between Merton Probability of Default (PD) and the Black-Scholes Mode

    Hi @David Harper CFA FRM , Can't believe I'm questioning this now, but does the probability of default for a corporate become 1-N(d2)? Never mind this - I found the answer in the thread you had created before.
    Hi @David Harper CFA FRM , Can't believe I'm questioning this now, but does the probability of default for a corporate become 1-N(d2)? Never mind this - I found the answer in the thread you had created before.
    Hi @David Harper CFA FRM , Can't believe I'm questioning this now, but does the probability of default for a corporate become 1-N(d2)? Never mind this - I found the answer in the thread you had created before.
    Hi @David Harper CFA FRM , Can't believe I'm questioning this now, but does the probability of default for a corporate become 1-N(d2)? Never mind this - I found the answer in the thread you had...
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    5,110
  6. Kashif Khalid

    Hazard Rates and probability of survival

    Hi @Kashif Khalid , @Mkaim and @Chris22 We just discussed this question at
    Hi @Kashif Khalid , @Mkaim and @Chris22 We just discussed this question at
    Hi @Kashif Khalid , @Mkaim and @Chris22 We just discussed this question at
    Hi @Kashif Khalid , @Mkaim and @Chris22 We just discussed this question at
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    3
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  7. Kavita.bhangdia

    CVA

    Hi @Delo 's link is relevant. On the one hand (above presumably, but more exactly Delo's link), Gregory's assertion is based on a narrow, mathematical application of the well-used approximation: λ = S/(1-R); i.e., if we hold the spread, S, constant, then conditional on a constant spread, if we increase recovery, R, then the hazard rate (conditional PD) increases. This is just a mathy way of...
    Hi @Delo 's link is relevant. On the one hand (above presumably, but more exactly Delo's link), Gregory's assertion is based on a narrow, mathematical application of the well-used approximation: λ = S/(1-R); i.e., if we hold the spread, S, constant, then conditional on a constant spread, if we increase recovery, R, then the hazard rate (conditional PD) increases. This is just a mathy way of...
    Hi @Delo 's link is relevant. On the one hand (above presumably, but more exactly Delo's link), Gregory's assertion is based on a narrow, mathematical application of the well-used approximation: λ = S/(1-R); i.e., if we hold the spread, S, constant, then conditional on a constant spread, if...
    Hi @Delo 's link is relevant. On the one hand (above presumably, but more exactly Delo's link), Gregory's assertion is based on a narrow, mathematical application of the well-used...
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    86
  8. 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
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    3
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    53
  9. Kavita.bhangdia

    Risk free debt, merton model

    Thanks David. This clarifies the question.
    Thanks David. This clarifies the question.
    Thanks David. This clarifies the question.
    Thanks David. This clarifies the question.
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  10. 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...
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    82
  11. 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.
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  12. 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
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  13. 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
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  14. NNath

    Repo, Collateral, Re-use and Legal ownership

    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to counterparties posting collateral in (private) bilateral derivatives trades. In general, a repo is considered transfer of ownership (i.e., sale). On the other hand, in bilateral derivatives contracts, the...
    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to counterparties posting collateral in (private) bilateral derivatives trades. In general, a repo is considered transfer of ownership (i.e., sale). On the other hand, in bilateral derivatives contracts, the...
    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to counterparties posting collateral in (private) bilateral derivatives trades. In general, a repo is considered...
    Hi @NNath That is a keen observation! These are all sourced in Gregory, but question 406.2 explicitly refers to a repurchase agreement ("repo") whereas the other two questions refer to...
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  15. Delo

    Trade Compression (Gregory)

    Perfect. Thanks a lot .. @QuantMan2318 !
    Perfect. Thanks a lot .. @QuantMan2318 !
    Perfect. Thanks a lot .. @QuantMan2318 !
    Perfect. Thanks a lot .. @QuantMan2318 !
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    2
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    103
  16. Kavita.bhangdia

    CVAR calculation doubt

    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up, you get 94.92% (nCr p^r*q^(n-r)) which means, the number of defaults is more than 4, 5 in our case. Note: This is just for your understanding, don't try this in the exam, you won't get any time:D And as...
    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up, you get 94.92% (nCr p^r*q^(n-r)) which means, the number of defaults is more than 4, 5 in our case. Note: This is just for your understanding, don't try this in the exam, you won't get any time:D And as...
    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up, you get 94.92% (nCr p^r*q^(n-r)) which means, the number of defaults is more than 4, 5 in our...
    No, the exam doesn't generally ask us to find the BINOMIAL INV. However, we can get around that using our TI BA II plus, use the Binomial PDF formula for 0,1,2,3 and 4 defaults and add them up,...
    Replies:
    7
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    154
  17. southeuro

    effect of default probability on equity and mezzanine

    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    I understand the effect of Pd and Correlation changes it causes to value of tranche. But am unable to understand the impact on CVaR. See below. Can you please help ?
    malz.jpg upload_2016-3-6_12-28-43.png upload_2016-5-1_8-36-46.png
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  18. GioKe

    CDS Premium

    Well you have to be careful. In my experience it has been worded in several ways, each one of which is equally confusing. In terms of this question, you just have to know that there is such a thing as a fixed for float CDS and David gives enough detail as to which party is receiving the fixed rate or the floating (irrespective of what he's calling them). Hope this helps.
    Well you have to be careful. In my experience it has been worded in several ways, each one of which is equally confusing. In terms of this question, you just have to know that there is such a thing as a fixed for float CDS and David gives enough detail as to which party is receiving the fixed rate or the floating (irrespective of what he's calling them). Hope this helps.
    Well you have to be careful. In my experience it has been worded in several ways, each one of which is equally confusing. In terms of this question, you just have to know that there is such a thing as a fixed for float CDS and David gives enough detail as to which party is receiving the fixed...
    Well you have to be careful. In my experience it has been worded in several ways, each one of which is equally confusing. In terms of this question, you just have to know that there is such a...
    Replies:
    5
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    112
  19. Kavita.bhangdia

    Computing default probability

    Please also refer David's
    Please also refer David's
    Please also refer David's
    Please also refer David's
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  20. brian.field

    Securitization Post Credit Crunch

    Interestingly, Let me also add that Adam Smith wrote the "Theory of Moral Sentiments" before "The Wealth of Nations" and he considered the first book to be his magnum opus seeming to imply that Capitalism should have Moral sentiments in order to succeed completely, which is related to your example of how Banks are biting the hand that feeds above. Let me also get back to FRM before David...
    Interestingly, Let me also add that Adam Smith wrote the "Theory of Moral Sentiments" before "The Wealth of Nations" and he considered the first book to be his magnum opus seeming to imply that Capitalism should have Moral sentiments in order to succeed completely, which is related to your example of how Banks are biting the hand that feeds above. Let me also get back to FRM before David...
    Interestingly, Let me also add that Adam Smith wrote the "Theory of Moral Sentiments" before "The Wealth of Nations" and he considered the first book to be his magnum opus seeming to imply that Capitalism should have Moral sentiments in order to succeed completely, which is related to your...
    Interestingly, Let me also add that Adam Smith wrote the "Theory of Moral Sentiments" before "The Wealth of Nations" and he considered the first book to be his magnum opus seeming to imply that...
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    10
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    137
  21. brian.field

    Wrong Way Risk - Gregory

    I do agree a bit - I am often intimidated by Malz's writings. Sometimes, I think he could have presented things more simply.
    I do agree a bit - I am often intimidated by Malz's writings. Sometimes, I think he could have presented things more simply.
    I do agree a bit - I am often intimidated by Malz's writings. Sometimes, I think he could have presented things more simply.
    I do agree a bit - I am often intimidated by Malz's writings. Sometimes, I think he could have presented things more simply.
    Replies:
    4
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