I was recently going over chapter four of the FRM handbook when I came across the statement, "Relative to a symmetric distribution, a short option position has negative skewness, or a long left tail," on page 100. Example 4.9 also states matter of fact, that "short option positions have long...
I was wondering if you have a good resource on basic model(s) for constructing a volatility surface. Hopefully something not too complex but with real world use. I've found quite a few online articles on Volatility Surfaces/ Cap Volatility Surfaces, etc., but so far all are a bit too technical...
One more question. For the 'common shares' tier 1 capital, does this refer to any common share be it from bank xyz, corporation 123 and shareholder equity (i.e. common shares of the bank itself)?
To be more specific, imagine we work at Bank A. Which of the following would qualify as tier 1...
42 people took the Full Exam in Philadelphia. Not sure how many took the L1.
Everything people have mentioned so far is representative of the experience. I do agree that the questions asking for the 'closest to' answer are irritating. There was one that I cannot recall at the moment except...
The question does give you a hint that you want a full hedge. The answer then hints that you want to hedge:
1. Credit Spread Risk - This you can resolve by shorting a USD CDS on the Malaysian bond. HUGE red flag here, if corporate bond defaults, then you pay in case of default...
I have reviewed the FRA screencast and various posts about FRAs. I believe I understand the product well but at the moment I am struggling with an FRA question from 2002. The wording simply isn't sitting well with me. Could someone please explain why the answer is b?
A long position in a FRA...
I've searched the forum for this question using various portions of the question and some key words such as 'equity volatility' and 'asset volatility'. So far no luck. This one should be an easy one to tackle. I am missing the first part of the question, meaning, I am not getting why "We know...
The example is very clear, thank you. At the moment I still have just a few more questions. We are almost there.
1. For MRC I understand that Tier 3 cannot be more than 250% of Tier 1. Depending on how you look at it, this may imply that Tier 1 has to be necessarily applied to MRC...
At first I was going to ask about the maturity stipulations on Tier 3 (i.e. that short term subordinated debt with original maturity > 2 years) but I decided against it because the more you read this stuff the more confused you get. As asja said in one of the postings below, what is the...
You are given the following information about a call option:
• Time to maturity = 2 years
• Continuous risk-free rate = 4%
• Continuous dividend yield = 1%
• N(d1) = 0.64
Calculate the delta of this option.
The delta of a...
I ran into the following question and think it is not fully worded. Would anyone care to comment?
Volatility is mean reverting daily. How does the daily volatility compare to weekly volatility? How does the daily volatility compare to weekly volatility in annualized terms?
I am not sure this is the question in its entirety... I think I have the answer although it would be good to double check.
You have a 5 year FX contract where you buy CAD and sell GBP. Calculate and determine the worst case scenario:
a. counterparty defaults in 1 yr & CAD depreciates to its...
In many of the practice tests there is one question relating to case studies. I found the following link to be helpful for preparing for the case study questions:
If the current USD/AUD rate is 0.6650 (1 AUD=0.6650USD) and the risk-free rates for the USD and AUD are 1.0% and 4.5% respectively, what is the lower bound of a 5-month European put option on the AUD with a strike price of 0.6880?
Which of the following options is strongly path-dependent?
a. An Asian option
b. A binary option
c. An American option
d. A European call option
‘A’ is correct. The payoff of an Asian option depends on the average price of the underlying asset. ‘B’...
With all other things being equal, a risk monitoring system that assumes constant
volatility for equity returns will understate the implied volatility for which of the following positions
by the largest amount:
a. Short position in an at-the-money call
b. Long position in an...
Please see attached for question 39. In the answer, then they calculate VaR they subtract the mean from the st. dev. When they calculate the liquidity adjustment or spread, they add the mean to the st. dev. Is this correct? Any insight much appreciated.
This question is phrased incorrectly. It is asking for the incorrect statement... Actually, the answer is incorrect, all three statements should be correct. Anyway, I simply care to understand better what 'Commercial Banking' refers to.
I have not found a good description for commercial...
The dividend yield of an asset is 10% per annum. What is the delta of a long forward contract on the
asset with 6-month to maturity?
d. Can not be determined without further information.
The value of a long forward contract