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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!

New Practice Questions

1. P1.T3.21.1. Risks faced by banks

2. P1.T3.21.2. Investment banks

3. P2.T9.21.7. Risk budgets in the investment industry

Employee Retirement Fund Table

4. P2.T9.21.8. Surplus at risk (SaR)

Forum News

1. Ongoing FRM Exam feedback: Part 1 (P1) at and Part 2 (P2) at

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!)

3. [P1.T3] Why is convexity decreasing with yield

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

Forum Response

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

6. [P1.T3] Thank you Meta for finding the bond pricing solution with non-integer years

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

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

9. [P1.T4] GARP’s EOC question (16.20) about a “synthetic put futures option”

10. [P1.T4] GARP’s EOC question (13.17) fundamentally misunderstands the key rate shift technique

11. [P1.T4] The calculus behind expected shortfall

Forum Response

Curated Links (items you might like)

1. The world needs a Chief Risk Officer (Axios Future) Refers to Future Proof (pdf here)

2. Institutional Investor Survey 2021 (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.”

Indicators of misalignment of pay and performance model

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

4. [BIS] Cyber resilience practice (Executive summary); Climate risks, guide for supervisors (Executive summary); Whom do consumers trust with their data? US survey evidence “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”

Respondents sharing data during pandemic model

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

6. [ESG] Top Five Insights from PIMCO’s 2021 ESG Investment Summit: Financing a More Sustainable Future; Water shortages: an underappreciated risk (AXA XL)

7. Felix Salmon summarizes the inflation debate (and here

8. Can we trust the experts during risk assessments? (Carol Williams)

9. The Risk Factor Summation Valuation Method (r/FluentInFinance)

10. [Wow] Ape Armies and Investor Relations “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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