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Week in Financial Education (June 21, 2021)

Welcome to the latest WIFE. For Part 1, we have a new practice question (PQ) set for the insurance chapter (FMP-2). I have a question about the combined ratio after dividends (CRAD). This CRAD measure is interesting because some sources subtract the dividend, CRAD = CR – D, while others (like GARP) add per CRAD = CR + D. Adding the dividend seems more logical to me and is corroborated by the Triple-I. For the new dollar/time-weighted return PQ, I think I wrote my best question so far: it extends to three periods and provides the holding period returns (HPR) so the user can focus on the essential calculation (rather than the tedious HPR and net cash flows). A warning: these dollar/time-weighted returns tend to elicit questions about the timing of the dividends! In regard to the curated links, the #rstats time series introduction is simply excellent. And I discovered a new source: https://future.a16z.com/ features an amazing cast of authors (e.g., stripe founder Patrick Collison). I’ve included an update from their Scott Kupor (MP at a16Z and author) on Direct Listings (which is a concept in the FRM.P1.FMP-1). Have a good study week!

New Practice Questions

1. P1.T3.21.4. Ratios for Property-Casualty (P&C) Insurance Companies https://trtl.bz/35G4apc

W21.4.3 Acme is a large, diversified insurance company with a AA+ rating and a complex capital structure owing to its size. This year Acme will issue two debt instrument. One is regular corporate bond that pays a 6.0% per annum coupon. The other is a CAT (catastrophe) bond triggered by Florida hurricane event(s). Given Acme's strong credit rating and financial cushion. the probability of a hurricane event is significantly greater than Acme's default probability. Of course, a CAT bond has unique features that suggest the motivations, for the issuer (aka Acme) and its investors, will differ from the motivations related to a regular bond. In regard to these motivators and the advantages/disadvantages of a CAT bond. which of the following statements is TRUE?

  1. To the issuer (Acme), an advantage of the CAT bond is that is can be offered a lower yield (i.e., cost of capital) than Acme's regular bond
  2. To the issuer (Acme), a disadvantage of the CAT bond is the counterparty (risk) exposure to the investors who might default in the event the CAT bond is triggered.
  3. To the investors, an advantage of the CAT bond is that yield will be higher will probably be higher than Acme's regular bond
  4. To the investors, a disadvantage of the CAT bond is that its high idiosyncratic risk (aka, specific risk) will confer poor diversification benefits.

2. P2.T9.21.10. Time- versus dollar-weighted returns and risk-adjusted measures https://trtl.bz/3wKE0NJ

Forum News

1. [P1.T1] Relative versus absolute VaR is a fundamental distinction https://trtl.bz/3qeSO4F

2. [P1.T1] How many years of alpha are needed for significance (skill)? https://trtl.bz/35BNbV1

3. [P1.T3] Impact of correlation between interest rate and spot price on the futures price https://trtl.bz/3gMuuD3

4. [P1.T4] Price change as bond matures (coupon versus forward rate) https://trtl.bz/3qaVsIZ

Forum Response

5. [P1.T4] Solution to prior exam’s VaR and ES question https://trtl.bz/3cVTA1d

6. [P1.T4] Plot of full-versus-flat bond price over time https://trtl.bz/2TRB6bj

7. [P2.T6] Can bilateral CVA adjustment artificially inflate the value of an asset? https://trtl.bz/3gI7ncO

8. [personal] Advisability of mortgage refinance https://trtl.bz/3wLd6VU

Curated Links (items you might like)

1. RISK, REGULATION, AND BANKING

Business Risks and Banking graph
  • Prove your value to the CEO: Focus more on big picture issues, less on process (Carol Williams) https://trtl.bz/3gLEIU7
  • In conversation: Managing in extreme uncertainty https://trtl.bz/3qhm6zJ “This requires accepting that in extreme uncertainty, there is no such thing as a forecast; there are only scenarios.”
  • Ransomware claims are roiling an entire segment of the insurance industry https://trtl.bz/2TNivxo
  • The Promises and Pitfalls of the SFDR https://trtl.bz/3qaMGdY
Company and climate graph

2. DATA, TECH, CYBER AND DEFIBANKING

Bitcoin community engagement by age graph

3. MATH & CODE

Coupon Rate Graph

4. INVESTING & FINANCE

Average size of forecasts errors and actual CPI inflation graphs

5. OTHER

US Unemployment Graph

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