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# Errors Found in Study Materials P1.T4. Valuation & Risk Models (OLD thread)

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#### Nicole Seaman

##### Chief Admin Officer
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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 P1.T4. Valuation & Risk Models. 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 errors that you find. The new forum threads are for any other materials (notes, spreadsheets, videos,etc.) where you might find errors.

Information needed for us to correct errors:

• Page number
• Error

Last edited:

#### Deepak Chitnis

##### Active Member
Subscriber
Hi David,
Got little confused in P1.T4. Valuation & Risk Models Gerhard Schroeck, Risk Management and Value
Creation in Financial Institutions in page no. 6 there is calculation of unexpected loss. Like below

in the equation we are taking the square that is the variance of the LR and then square of the LR and the variance of the probability default but in the example shown on the page we just taking the standard deviation not the variance and only the LR not the square of LR. Aren't we suppose to take the variance and square of LR instead of standard deviation and just LR. Correct me if I am wrong and please also explain if possible. Sorry for the trouble.
Thank you

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
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Hi @Deepak Chitnis You are correct: the example is broken. This whole page needs to be edited, I apologize, it contains several errors (uggh). The formula given for UL is correct (although the squared terms should be explained as "Variance of ..." given they are squared sigmas). So, with the assumptions given the correct UL should be:

UL = $1.0 million * sqrt[0.05 * 0.08^2 + 0.10^2*0.03^2] =$1.0 mill * 0.01814 = $18,138 but another problem with the example is that it does not need to give the standard deviation of the PD, because we know the variance of PD = PD*(1-PD) = 5%*95%, so the standard deviation of variance = sqrt(5%*95%) = 21.79%, not 3%. So really it should be: UL =$1.0 million * sqrt[0.05 * 0.08^2 + 0.10^2*0.95*0.05] = $1.0 mill * 0.0282 =$28,196

Please note the formula for UL(portfolio) on this page is also incorrect; it omits the sigmas. Sorry for all of the confusion on this page.

#### Numerical Wizard

##### New Member
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Hi @Nicole Manley

I think there is an error on page 3 of the Study Notes for Chapter 18 in Valuation & Risk Models - Operational Risk:

The Study Notes say the following on page 3:
" 2. Standardized Approach

Capital calculation for a year by business line = (year 1 gross revenue from business line 1 x beta of business line 1) + (average of 3-year gross revenue from business line 2 x beta of business line 2) ….. + (average of 3-year gross revenue from business line 1 x beta of business line n)"

Comment:
In the standardized approach, the average gross income over the last three years for each business line is multiplied by a beta factor for that business line and the result summed to determine the total capital.

Suggestion:
I suggest that the text of the study notes should be changed and read as follows:
" 2. Standardized Approach

Capital calculation for a year by business line = (average of 3-year gross revenue from business line 1 x beta of business line 1) + (average of 3-year gross revenue from business line 2 x beta of business line 2) ….. + (average of 3-year gross revenue from business line n x beta of business line n)"

#### seidu

##### Member
Hi @Nicole Manley an error was reported by @Deepak Chitnis in 2015 and I was about to re-post the same. I think it has not been edited as @David Harper CFA FRM rightly did correct above.
Also, on the same reading, page 8 the statement ;
" Typically in case of credit portfolio, the profit for bank is limited because of direct linkage between profit & interest rate charge and the maximum profit can be realized by timely & full
repayment by the moreover (<-- should be borrower(s)), I think

Hope it will be edited after your vacation vacation.

#### Nicole Seaman

##### Chief Admin Officer
Staff member
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Hi @Nicole Manley an error was reported by @Deepak Chitnis in 2015 and I was about to re-post the same. I think it has not been edited as @David Harper CFA FRM rightly did correct above.
Also, on the same reading, page 8 the statement ;
" Typically in case of credit portfolio, the profit for bank is limited because of direct linkage between profit & interest rate charge and the maximum profit can be realized by timely & full
repayment by the moreover (<-- should be borrower(s)), I think

Hope it will be edited after your vacation vacation.

View attachment 694

Hello @seidu

Thank you for pointing this out. I have reviewed most of the errors from these threads and corrected them in the study planner, but the remaining errors will need David's review. We will make sure to get to these as soon as possible.

Thanks,

Nicole

#### rajivpro

##### New Member
Hi @Nicole Seaman and @David Harper CFA FRM,

Chapter 13: Binomial Trees, Page 8, Hull Example 12.8. Should the question not read as "American put option" instead of "European put option" as one of the nodes has been solved using max(intrinsic value,discounted value) of 2 subsequent nodes?

Thanks,
Rajiv

Edited by Nicole to add image for reference

Note: This was corrected in the updated version of notes.

Last edited by a moderator:

#### Roberto Hernández

##### Member
Hi Team,

I hope you're having a great weekend. Please find below an error found in page 30 R25.P1.T4.Allen. The power should be directly on top of the 0.9 rather than outside the parenthesis.

Thank you Team!
-Roberto

#### Roberto Hernández

##### Member
Hi Team,

Happy start of the week. Please find below another notation error within R.26.P1.T4.Dowd. On the weighting function for the VaR special case, the alpha should be = 1, to denote a single quantile. It is found in page 18.

Thank you Team,
-Roberto

#### Nicole Seaman

##### Chief Admin Officer
Staff member
Subscriber
Hi Team,

I hope you're having a great weekend. Please find below an error found in page 30 R25.P1.T4.Allen. The power should be directly on top of the 0.9 rather than outside the parenthesis.

View attachment 1104

Thank you Team!
-Roberto
@David Harper CFA FRM

AYC, can you confirm this error? Thank you!

#### Nicole Seaman

##### Chief Admin Officer
Staff member
Subscriber
Hi Team,

Happy start of the week. Please find below another notation error within R.26.P1.T4.Dowd. On the weighting function for the VaR special case, the alpha should be = 1, to denote a single quantile. It is found in page 18.

View attachment 1105

Thank you Team,
-Roberto
@David Harper CFA FRM

Can you also confirm this is an error? Thank you!

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
Thank you @Roberto Hernández for your care in detail and great attitude (sorry for the mistakes)! @Nicole Seaman Yes, he is correct on both:
• Allen should be sqrt(1+b^2)*σ = sqrt(1 + 0.9^2)*σ; i.e., the square root contains "1+0.9^2" but does not extend all the way to include to the σ. Because variance = (1+0.9^2)*σ^2 and we take the square root such that volatility is sqrt[(1+0.9^2)*σ^2] = sqrt[(1+0.9^2)*sqrt(σ^2) = sqrt[(1+0.9^2)*σ
• Re: Dowd, yes that should be "p = α" instead of "p - α". Thank you!

#### Roberto Hernández

##### Member
Hi @David Harper CFA FRM, no problem at all I'm glad indirectly I can support what you guys have dedicated so many efforts on.

-Thanks,
-Roberto

#### Roberto Hernández

##### Member
Hi Team,

I hope you're having a great weekend. I believe the below idea is inverted. On R30.P1.T4 page 10. If we refer to the below snippet it mentions the relationship of bond prices and ratings upgrade downgrades.

The idea on the first bullet is correct, however the highlighted idea on the second bullet is inverted. The evidence is stronger on the price relationship (price decrease) when a downgrade situation happens, but the evidence is weaker when we refer to upgrades.

Per de Servigny on page 36.

Thanks!
-Roberto

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
HI @Roberto Hernández Yes, I agree, our mistake. Thank you very much! I hope you are having a great weekend also

#### Roberto Hernández

##### Member
@David Harper CFA FRM, no problem at all and thank you for the kind words, enjoy the rest of the weekend!

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
Hi @sharman.jamie Yes, you are absolutely correct. It is my mistake. It is exactly what you say, see Hull below. We are going to be updating this video set soon, so we will fix this. Thank you!

Hull, The Black-Scholes-Merton (Chapter 15, 10th edition):
"Assumptions:
The assumptions we use to derive the Black–Scholes–Merton differential equation are as follows:
1. The stock price follows the process developed in Chapter 14 with µ and σ constant.
2. The short selling of securities with full use of proceeds is permitted.
3. There are no transaction costs or taxes. All securities are perfectly divisible.
4. There are no dividends during the life of the derivative.
5. There are no riskless arbitrage opportunities.
6. Security trading is continuous.
7. The risk-free rate of interest, r, is constant and the same for all maturities." -- Hull, John C.. Options, Futures, and Other Derivatives (Page 329). Pearson Education. Kindle Edition.

#### sharman.jamie

##### Member
No problem, the video's are very helpful, thank you!

Given you are updating, I also think there is a very minor typo in the equation on log-normal price levels at 23:24. Missing a *T for the mean and vol^2 in variance.

Last edited:

#### JulioFRM

##### Member
Hello I just wanna check something from Study Notes - Hull Chapter 13 - Binomial Trees. In the example on page 6, is it ok that p=65% as it says in the explantation? because if you find the up probability (e^(rt) -d)/u-d I think you get 35%, so that the probability of a down move is 65%. Or not? Thanks.

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