Week in Financial Education (June 7, 2021)

Welcome to another WIFE. We started a new series of practice questions (PQ) for Financial Markets and Products (P1.T3). Question 21.2.1 (Investment banks) reflects my style of packing three concepts (any one of which might be tested) into one question by using the Dutch auction’s answer to inform a comparison to the other approaches (best efforts, firm commitment). Although our reading refers to Google’s 2004 IPO, Dutch auctions continue to be popular in particular for tender offers; e.g., Box (NYSE: Box) announced one last week. We also finished the PQ set for Jorion’s Portfolio value at risk (VaR) and risk budgeting. Over the years, pension surplus at risk (SaR) has challenged candidates because GARP’s definitions have not been consistent. Question 21.8.1. covers all the bases by itemizing all three possible definitions (relative SaR, absolute SaR, and worst expected shortfall). See the solution for a further note. Have a great study week!

1. P1.T3.21.1. Risks faced by banks https://trtl.bz/2Rt2gVn

2. P1.T3.21.2. Investment banks https://trtl.bz/34UkCSk

3. P2.T9.21.7. Risk budgets in the investment industry https://trtl.bz/3uWD5YQ

4. P2.T9.21.8. Surplus at risk (SaR) https://trtl.bz/34TfUUO

1. Ongoing FRM Exam feedback: Part 1 (P1) at https://trtl.bz/3zam4xB and Part 2 (P2) at https://trtl.bz/3hwvL3b

2. [P1.T3] MilaBank improves on Hull’s solution to future price when the problem mixes a continuous riskfree rate with a discrete lumpy dividend (I never saw this time-saver!) https://trtl.bz/3po3xJS

3. [P1.T3] Why is convexity decreasing with yield https://trtl.bz/3wYFweU

4. [P1.T3] Exams like to assume flat rate curves because all rates (spot, forward, par) are equal to the yield and such a yield is conveniently invariant to the bond’s cash flows https://trtl.bz/34TgZfk

5. [P1.T3] Thank you Chris for explicating the life insurance assumptions: premiums paid in advance but benefit (contingent) payouts halfway through the year https://trtl.bz/3vYBMKo

6. [P1.T3] Thank you Meta for finding the bond pricing solution with non-integer years https://trtl.bz/34PnuzQ

7. [P1.T4] Eurodollar futures contracts do not borrow or lend; they cash settle and may hedge borrowing/lending https://trtl.bz/3fYgTJE

8. [P1.T4] Unexpected loss (UL) looks different than Portfolio UL because UL un-squares variance of a product but portfolio UL un-squares the variance of a sum https://trtl.bz/3fUN8Jz

9. [P1.T4] GARP’s EOC question (16.20) about a “synthetic put futures option” https://trtl.bz/3z0fdXw

10. [P1.T4] GARP’s EOC question (13.17) fundamentally misunderstands the key rate shift technique https://trtl.bz/3pv5dkW

11. [P1.T4] The calculus behind expected shortfall https://trtl.bz/3z87bf9

Interesting Links

1. The world needs a Chief Risk Officer (Axios Future) https://trtl.bz/3gcH7Ho Refers to Future Proof (pdf here)

2. Institutional Investor Survey 2021 https://trtl.bz/3fV6DBL (pdf here) Among 42 global institutional investors who manage ~$29.0 trillion in AUM, the engagement priorities are climate change (85%), board effectiveness (64%), human capital management (64%), executive pay (55%), COVID-91 (33%), supply chain (30%), cybersecurity (225). “TCFD was overwhelmingly the most popular ESG reporting framework, followed by SASB and then in-house proprietary frameworks focused on material topics.”

3. [GARP] The Archegos Collapse: Not Just a Family Office Affair https://trtl.bz/2T6bhUx; The Complexities of Modern Risk Forecasting: Anticipating the Anticipation Economy https://trtl.bz/2T1Ttdl; Term-Rate Turnabout: Multiple Choices Beyond Libor  https://trtl.bz/3v6wrzz

4. [BIS] Cyber resilience practice (Executive summary); Climate risks, guide for supervisors (Executive summary); Whom do consumers trust with their data? US survey evidence https://www.bis.org/publ/bisbull42.htm “A quarter of respondents say Covid-19 made them less willing to share data. In this group, nearly half became less willing to share with big techs. Concerns centered on identity theft and abuse of data”

5. [Interest rates] Financial Stability Board (FSB) issues statements to support a smooth transition away from LIBOR by end 2021 https://trtl.bz/3uXRTGD; Libor’s US replacements: no one rate to rule them all (ft.com) https://trtl.bz/3z09j8O; History of interest rates over 670 years (Visual capitalist) https://trtl.bz/3cn4OLV

6. [ESG] Top Five Insights from PIMCO’s 2021 ESG Investment Summit: Financing a More Sustainable Future https://trtl.bz/3gciPx2; Water shortages: an underappreciated risk (AXA XL) https://trtl.bz/34Ssy6n

7. Felix Salmon summarizes the inflation debate https://trtl.bz/3x3lr78 (and here https://trtl.bz/3gkgSyS)

8. Can we trust the experts during risk assessments? (Carol Williams) https://www.erminsightsbycarol.com/experts-differences/

9. The Risk Factor Summation Valuation Method (r/FluentInFinance) https://trtl.bz/3giMa9j

10. [Wow] Ape Armies and Investor Relations https://trtl.bz/3cmuGaW “When emojis and gorilla donations are a new form of investor communications, it’s understandable that traditional regulatory frameworks won’t be sufficient. But we need to catch up. This stuff isn’t going away.”

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