P2.T6. Credit Risk (25%)

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  1. Nicole Seaman
    Sticky

    Errors Found in Study Notes P2.T6. Credit Risk

    Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new materials and working on many other tasks so he may have missed this post. Please continue to post anything that you feel is an error, and I will fix them as soon as they are reviewed by David. Thank...
    Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new materials and working on many other tasks so he may have missed this post. Please continue to post anything that you feel is an error, and I will fix them as soon as they are reviewed by David. Thank...
    Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new materials and working on many other tasks so he may have missed this post. Please continue to post...
    Hello @MBK This is the correct place to post any issues that you have found in the study notes. I know David has been extremely busy answering detailed questions in the forum, preparing new...
    Replies:
    6
    Views:
    685
  2. no_ming

    GARP.FRM.PQ.P2 2016 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:
    51
  3. mh2452

    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:
    43
  4. no_ming

    Excess 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:
    73
  5. no_ming

    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
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    102
  6. no_ming

    CVA & 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:
    69
  7. afterworkguinness

    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. ...
    Replies:
    8
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    1,211
  8. 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:
    69
  9. 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:
    55
  10. Stuti

    Credit Exposure

    Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the credit risk factor are independent. Further, this is the simplest possible credit exposure profile; i.e., a single i.i.d. credit risk factor. For example, in a swap, sqrt(ΔT) tends to characterize...
    Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the credit risk factor are independent. Further, this is the simplest possible credit exposure profile; i.e., a single i.i.d. credit risk factor. For example, in a swap, sqrt(ΔT) tends to characterize...
    Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the credit risk factor are independent. Further, this is the simplest possible credit exposure...
    Hi @Stuti It's the same square root rule that let's us scale volatility/VaR per sqrt(ΔT) but therefore importantly it is conditional on the same i.i.d. assumption, namely that the returns of the...
    Replies:
    1
    Views:
    31
  11. 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
    Views:
    240
  12. 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:
    121
  13. 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:
    240
  14. 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
    Views:
    360
  15. arkabose

    Delivery squeeze

    Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example from Hull: Let's take a situation where the asset swap spread on a particular bond = 150 bps. There are three likely scenarios: 1) Bond Price = Par value of $100. The swap involves Company A paying...
    Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example from Hull: Let's take a situation where the asset swap spread on a particular bond = 150 bps. There are three likely scenarios: 1) Bond Price = Par value of $100. The swap involves Company A paying...
    Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example from Hull: Let's take a situation where the asset swap spread on a particular bond = 150 bps....
    Hi @ami44, Just adding a little more to the CDS-bond basis = CDS spread - Asset swap spread An asset swap exchanges the coupon of a corporate bond for LIBOR plus a spread. Reproducing an example...
    Replies:
    16
    Views:
    158
  16. 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
    Views:
    306
  17. 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:
    113
  18. 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:
    473
  19. 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
    Views:
    91
  20. 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
    Views:
    511
  21. 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:
    289

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