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  1. afterworkguinness

    Decrease in market value - Total Return Swap

    Hi David, In your topic review for credit risk, you have a practice question from the FRM Handbook where a Company buys a total return swap, the mtm value of the underlying drops, but they receive no compensation for the decrease in market value, only the standard LIBOR + spread payment. Is this...
  2. afterworkguinness

    Observation on Single Factor Model for credit risk

    (I'm not 1,000% on this, so take it with a grain of salt. To my credit, I've read the relevant pages a couple hundred times over the year) I was confused by usage of the single factor model presented in Malz (which by the way is called the Single Factor Vasicek Model - why some of the authors...
  3. afterworkguinness

    Conditional PD - GARP practice question # 10 (2015)

    Hi, I thought the conditional probability of default (the probability of default in year T given survival up to that point) was hazard*e^(- hazard * time). Putting that to the test in GARPs practice question below yields a close but incorrect value. Question: Is the problem asking for...
  4. afterworkguinness

    Square root rule in short rate models

    Hi , In the practice questions for Tuckman chapter 9, the random normal in the short rate simulation models is scaled by sqrt(dt). In Tuckman's equation 9.2 (source page 252), the volatility is annual with a monthly time step, but he doesn't scale dw at all. Should we scale dw when the time step...
  5. afterworkguinness

    Error in Meissner text?

    Hi, I think there is an error in the Meissner text and can't find an errata for this text to verify. On page 19 the foot note reads "10. Shorting the equity tranche means being short credit protection or selling credit protection, which means receiving the (high) equity tranche contract spread"...
  6. afterworkguinness

    Equity tranche spread wrt correlation

    Hi, I'm having trouble reconciling the effect of an increase in default correlation between the Meissner and Malz readings. To me they sound like they are saying the opposite of each other, so I must be missing something. Meissner figure 1.7 shows for the equity tranche as default correlation...
  7. afterworkguinness

    Mapping options to risk factors

    Hi, The study notes indicate a long option is broken down (mapped to) a long position in the underlying asset of asset price * delta and a short position in the underlying financed by the amount of long position - option cost. I'm a bit confused here, as I don't see how being both synthetically...
  8. afterworkguinness

    Great work Bionic Turtle team

    I can't find a suitable place for this, so I'll stick it here. I want to express what a great tool set you guys put together between the practice questions (which often give me a stronger understanding of the topic), spread sheets, videos (especially your free Youtube ones), notes and forum...
  9. afterworkguinness

    Relationship between risk and alpha in hedge funds

    Hi, I hate to ask such an opened ended unspecific question, but I'm rather lost by this topic (Explain the relationship between risk and alpha in hedge funds). Reading the source and the Fung, Hsieh paper didn't help clarify. #1 I thought the relationship between risk and alpha was pretty cut...
  10. afterworkguinness

    Risk Appetite Framework vs Risk Plan (Litterman)

    Hi @David Harper CFA FRM CIPM , The Senior Supervisors Group paper describes a risk appetite framework that lays out the institutions approach to risk management in a very detailed way. Litterman describes a risk plan that sounds similar to the risk appetite framework (although potentially more...
  11. afterworkguinness

    How to interpert SaR

    I'm confused at the interpretation of Surplus at Risk. Does it tell us the worst expected deficit over the holding period for a given confidence level? That understanding seems to fit with Jorion's statement "Taking the deviation between the expected surplus and VAR, we find that there is a 1...
  12. afterworkguinness

    Normal deviate for Operational risk VaR?

    Hi @David Harper CFA FRM CIPM , The loss distribution for operational risk is not normal, it has a very heavy right tail for high severity low probability losses. In the topic review for operational risk, we see that when calculating a VaR for operational risk, we use a normal deviate for the...
  13. afterworkguinness

    Ambigous terms - leverage ratio

    Basel III defines a leverage ration as Total Capital / Total Exposure which should be no more than 3%. Malz defines the leverage ratio of a firm as 1+(Debt/Equity). Is there a more proper name for the leverage ratio Malz defines ?
  14. afterworkguinness

    RWA under IRB

    Hi @David Harper CFA FRM CIPM , Little confused with terminology in the Hull reading on RWA. First Hull says The capital required is derived as the excess of 99.9% worst-case loss over the expected loss i.e ∑EADi∗LGDi∗(WCDRi−PDi) Then he gives us a means to calculate RWA for bank, sovereign...
  15. afterworkguinness

    Underestimating economic capital?

    When calculating economic capital, how can we underestimate risk by ignoring the diversification benefits? I can see how we can overestimate by ignoring the correlation between the risk types (credit, market, operational), but I don't see how we can underestimate. From the notes: Thanks in...
  16. afterworkguinness

    Suggested Edits - Tuckman 12 - repos

    Hi @David Harper CFA FRM CIPM , After reading the notes for Tuckman Chapter 12, I'd like to recommend a couple of edits, that I believe aid in the understanding of the content. (Apologies if you've already made these updates, my copy is from the Spring when my membership was last active). AIM...
  17. afterworkguinness

    Causes of transactions liquidity risk

    Malz lists causes of transaction liquidity risk, but I don't see how the factors he listed can affect the ability of buying or selling to move the price. He lists: Cost of trade processing Inventory management by dealers Adverse selection Differences of opinion Picking just one of these -...
  18. afterworkguinness

    Operational risk categories vs seven operational risk event types

    Hi @David Harper CFA FRM CIPM ,. I'm a bit confused as to the difference between Operational Risk Categories (ORCs) and the standard seven operational risk event types. The Basel paper “Operational Risk—Supervisory Guidelines for the Advanced Measurement Approaches says banks can come up with...
  19. afterworkguinness

    Tip - some source texts available on Google Books

    If you want to drill down into more detail on a topic, a lot of the source texts are available free on Google Books. Entire books are not available as a whole, but if you are able to find the text, using the "search inside this book", you will likely find the piece you are looking for. This is...
  20. afterworkguinness

    Why is exposure higher for a smaller PD than for a larger PD?

    Hi, I'm having trouble grasping this concept; I don't see the relevance of Gregory's explanation either. When expected exposure and probability of default are positively correlated (wrong way risk), the exposure conditional on default is higher than if the two were independent. This part makes...
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