Bionic Turtle’s Week in Risk (ending February 25th)

Check out our newest practice questions, and read through some helpful and informative FRM discussions in our forum! This week, David has also provided links to some great articles around the web discussing banking, technology, cybersecurity and much more!

New Practice Questions

Value at Risk (VaR)

In the forum this week (selected only)

mimimum variance

bond duration

Banks and Banking

Political and regulatory risk, including Systemic Risk (including BIS)

  • There’s Still No Good Way to Let a Big Bank Fail (A new Treasury report shows why ample equity is so important)  http://trtl.bz/2sRFXf0
  • Washington’s $500 Million Financial-Storm Forecaster Is Foundering [WSJ on OFR] http://trtl.bz/2Ci3KbE

Technology, including FinTech and Cybersecurity

  • SEC Releases New Guidance on Cybersecurity Disclosures and Controls http://trtl.bz/2sWOi15 “The SEC is also encouraging, though not requiring, forward-leaning approaches, such as with respect to disclosures about the company’s cyber risk management programs and the engagement of the board of directors with management on cybersecurity issues. SEC Chairman Jay Clayton has also directed SEC staff to monitor corporate cyber disclosures.

Financial reporting, including Accounting and Audit

Case Studies and Companies, including Strategic or Reputation risk

Treading water

Untimely Buybacks

Risk Foundations (FRM P1.T1)

Quantitative Analysis (FRM P1.T2)

Bayes Rule

Financial Markets and Products, including Interest Rates, Commodity Risk, and Foreign Exchange (FX)(FRM P1.T3)

  • An illustrated guide to the yield curve https://policytensor.com/2018/02/17/an-illustrated-guide-to-the-yield-curve/ “Bond yields have two basic components. They reflect on the one hand the expected path of short-term rates and on the other the compensation for the risk they pose to the bondholder’s balance sheet. The latter component is called the term risk premium. In order to extract the expected path and risk premium from bond yield, we have to use a term structure model.
  • Streetwise Professor with a smart take on the short volatility trade http://streetwiseprofessor.com/?p=10833 “In equilibrium, this means that short volatility positions will earn a risk premium. Since short sellers of volatility futures will have to earn a return to compensate them for the associated risks, the VIX futures price will exceed the expected future value of VIX at futures expiration. Thus, VIX futures will be in a Keynesian contango (with the futures above the expected future spot). Given that VIX itself is a non-traded risk (one cannot buy or sell the actual VIX in the same way one can buy or sell a stock index), this means that the forward curve will also be in contango.
  • Dollar-Rate Breakdown Exposes Foreign-Exchange Mystery (The U.S. currency was expected to strengthen amid rising interest rates. Instead, it’s down 11% since late 2016) http://trtl.bz/2CnfedY

Operational risk, including Legal risk (FRM P1.T7)

  • Reinsurers Hit by Catastrophe Losses, Rising Competition (Loose monetary policy is opening up new ways for insurers to spread risk, pressuring renewal rates for reinsurers).
  • The main reason for reinsurers’ loss of pricing power is growing competition, which has come in part from insurance-linked securities such as catastrophe bonds. Such bonds essentially package insurance risk as debt that doesn’t have to be repaid in full or at all if a disaster stipulated in the bond’s contract strikes.”  http://trtl.bz/2CjEHFd

natural disaster insurance

Investment risk, including Pensions (FRM P1.T8)

world index

  • The Risk Pension Funds Can’t Escape http://trtl.bz/2F3KbEU
  • The Seven Kinds of Asset Owner Institutions https://blogs.cfainstitute.org/investor/2018/02/20/the-seven-kinds-of-asset-owner-institutions
  • Buffett’s Annual Letter was published yesterday (here is the pdf http://trtl.bz/buffett-2017-letter): “I must first tell you about a new accounting rule – a generally accepted accounting principle (GAAP) – that in future quarterly and annual reports will severely distort Berkshire’s net income figures and very often mislead commentators and investors.The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line … We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured losses is about 2%. No one, of course, knows the correct probability. We do know, however, that the risk increases over time because of growth in both the number and value of structures located in catastrophe-vulnerable areas.

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