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    Currency Swaps

    Hi David, Got stuck in this problem: A US bank has hedged exposure to euro appreciation with a fixed for fixed currency swap. What is the value of swap to the US bank? - $130M notional value, semi annual payments, 2 years remaining - Interest rates: EU, 2.7%; US 2.5% at all...
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    The Greeks

    Hi David, Got difficulty analyzing these problems: If risk is defined as a potential for unexpected loss, which factors contribute to the risk of a (1) long put option position: (2) short call position: (3) long at the money straddle: a. delta, vega, rho b. vega, rho c. delta...
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    Weibull vs. Frechet

    Hi David, In the EVT distribution of market risk, fat tails are referred to as the "frechet" (shape of the distribution). However, in the LDA distribution, fat tails are referred to as the "Weibull" (which has "thin tails" shape from our quanti readings). Both are referring to extreme...
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    Jorion's Practice Questions

    Hi David, I have a few questions on the FRM Handbook practice questions: 1. A question on Chapter 9 (page 233): The spot price of the corn on April 10 is 207 cents/bushels. The futures price of the September contract is 241.5 cents/bushels. If hedgers are net short, which of the...
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    Long Position in an Asset

    Hi David, I read from the FRM handbook, page 128 that "A long position in an asset is equivalent to a long position in a European call with a short position in an otherwise identical put, combined with a risk-free position." I understand that the combination of a long call and a short put on...
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    Securitization in Basel II

    Hi David, According to your post entitled Securitization in Basel II, "if an asset is securitized through a so-called "true sale", the securitized exposure is recast from a single risk-weighted exposure into a set of "blended" risk weights that reflects the sub-divided risks that accompany...
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    The small b in the IRB approach

    Hi David, In the formula K = LGD X f(PD) X f(M,b) You mentioned in your Basel Primer that the small b in the maturity adjustment f(M,b) incorporates both maturity and probability of default. Does it mean that, aside from the impact on asset's PD as incorporated in the f(PD), there is also...
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    Tier 3

    Hi David, According to the Basel readings, Tier 3 capital is used to meet market risk capital requirements only. How then we compute for capital adequacy ratio with the inclusion of Tier 3 capital? If we are asked, what is the total capital per Basel II, do we automatically include Tier 3...
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    Maximizing Value Creation

    Hi David, According to the Stulz readings, in order to maximize value creation, we have to determine the optimal level of firm’s debt to equity ratio, so as to benefit optimally from leverage (through tax shields) at the “optimal” level of financial distress cost (such that the benefit of tax...
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    Expected Loss

    Hi David, In Ong’s reading, it says that the expected loss of the portfolio is just the sum of the individual expected loss of all the assets in the portfolio. What if the assets are correlated, would it still be the same? Thanks.
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    Question on RAROC numerator

    Hi David, In the RAROC formula (and in Crouhy’s example): RAROC numerator = Loan revenue (on the $1,000) + Return on EC (on the $75) – Interest Expense, i.e. cost of fund [on the $925 i.e. $1,000 (loaned) - $75 (required buffer)] – Operating Costs – Expected Loss I just can’t get the...
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    Cumulative probability of default

    Hi David, I have questions regarding the probability of default. First, regarding your screencast on the cumulative probability of default, why don't we use the 2-year spot rates for the treasury and corporate instead to compute for the 2-yr cumulative probability of default, i.e. 1-{1+(2-yr...
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    Inverse and Reverse Floaters

    Hi David, I really appreciate your screencast tutorials. This is great especially to those reviewees who are also busy working just like me. :-) Jorion's Handbook has few practice questions about inverse and reverse floaters, mostly relating it to duration (please see page 179 of the...
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