From Kaplan's book 1, page 65, the buyer of correlation swap pays fixed and receives realized..
Aha. you're right. That makes it clearer. So answer would then be that the firm receives > 0.4m.
From Kaplan's book 1, page 65, the buyer of correlation swap pays fixed and receives realized..
Should we include recovery from insurance in calculating op loss?
Ya that's my hatch, but there might be a trap.. Everyone's answers diverge lolIf so, that means that the he will be receiving 0.4 mil more?
There was also a question on the shape of the implied volatility curve for options on a stock which is in an M&A process and is therefore expected to either go up by 25% or go down by 20%. This puzzled me for a while. Price jumps cause volatility frowns... but how about expected price jumps? I figured they do, because logically all known information should already be incorporated in the curve. But not sure.
For the netting question I picked 9 because net exposure after bilateral netting is 9
No, the bank will receive not pay, but amount is less than 0.4 millionAha. you're right. That makes it clearer. So answer would then be that the firm receives > 0.4m.
I beg to differ on that, the question specifically mentioned later that market has started to factor demand fot OTM call which would imply higher price for OTM calls and thus higher implied volatility. And thus my choice was upward shaping implied volatility curve with heavy right tails and light left tails. Hope I have got it right.Pretty sure that's effectively a price jump. Almost like the current price is away from the money once expectations are priced in. Regardless here's another good example of how its wordiness turned a simple gimme into a "the world is upside-down" question, when under the time pressure of the exam.
Why there would be demand for ITM calls as question is clearly saying market has started factoring demand forOTM call. So for equilibrium to maintain logically demand would shift to OTM call from ITM call. So heavy left tail makes little sense to me. Anyone would like to throw insight on this?Should be a volatility Frown (heavier right + left tails). See foreign currency options in Hull.
I agree with the vol. adjustment vor the LVaR: multiply the VaR with sqrt{(1+t)(1+2t)}/6t}.
Took CP Risk as well for the question with the pension fund.
I have just realized that i was wrong in this question, i can not remember the number but maybe answer is 5I answered 9 too but only because my full multi-netted answer wasn't there (and planned to revisit). I think "CCP novation" is multi, not just bilateral though.
i think u memorized the figure wrongly, the notional is 400 i think.. Or is that possible our testing qns is different ?No, the bank will receive not pay, but amount is less than 0.4 million
Amount receive = (rho realized - rho fixed)* notional of contract
I remember that rho realized is ~ 41%
Fixed 40%
Amt 300
It's my answer, hope I did not get mistake
I have just realized that i was wrong in this question, i can not remember the number but maybe answer is 5
Notional amount is 400. The question said that the correlation in table 2 is understated so which mean in reality the correlation is higher which lead to higher realized correlation. So bank as a buyer of the correlation swap will receive higher than 0.4m which is what it will receive if correlation is not understated.I am sure notional amount is 300
Take the systems offline and report the problem. That's what I put at least, I thought the other answers though plausible you would do in the next stagewhat was the answer to the cybersecurity question? so many questions seemed to have more than 1 possible answer.
Yes that's exactly right, it was an example in the GARP noteTake the systems offline and report the problem. That's what I put at least, I thought the other answers though plausible you would do in the next stage