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Hi David, In one of your numerous min-screencasts, I remember you mentioning some risk measure -- that is conceptually at least the reverse of RAROC. You called it the "return adjusted measure...." of something.... And you mentioned how it was like the reverse of the risk-adjusted return on...

That clears it up, thanks...Another related quesry: If I've a question that asks to calculate D_modified of a 5 year zero-coupon bond, priced to yield 5%, (without any further info), do I do: D_modified = D_mac / (1 + 0.05/2) --sridhar

David: There is a (1 + yield/2) factor in both D_mod and D_mac. Is the "yield / 2" applicable even to ANNUAL bonds and not just to semi-annual bonds. In other words, the formula: D_mod = (1/P) * (1 + y/2) * (sum of time-weighted cash flows) applicable to computation of duration of...

I am sort of struggling with understanding the difference between the two... Both are measures of percentage change in the the bond price for a given change in the yield. What exactly is the difference -- I am sort of tiptoeing on something related to the fact that in one case we are...

Thanks for the explanation...What I learned from your response is this: 1. You can regress the bond price against spot rate and YTM -- but because the bond price may also be affected by other variables not modeled in the regression eqn, the market (or observed) price could be different from...

I refer to your examples in Mkt Risk Study Notes: page 112/192 -- where you have two YTM examples. In both cases, when I did: CPT i/Y I was getting 4.22% and 2.88% instead of half that amount. I am using TI BA II Plus Professional. I screwed around for a bit and then found: [2nd] P/Y...

David: Can you shed light on these terms? If a bond is trading rich -- it means what? For example, let's say we are talking about a 2-year bond...If we say that this bond is trading rich, are we making a comment on the comparison between the 2-year spot-rate and the YTM of the bond...

David: Is there is a straightforward "English language" interpretation for the BSM-related probabilities N(d1) and N(d2) -- for example, since N(d1) seems to be "linked" to S (current stock price) and N(d2) to the PV of the strike price, is there a simple way to understand the meaning of...

Thought I'd share something that some may find as a nit...I came across a question like this: "The current price of XYZ is $20. In each of the next two years you expect the stock price to either move up 20 percent or down 20 percent. The probability of an upward move is 0.65 and the...

Topic: Computing call option using 2-period binomial trees David: If a question on this topic says: ".A stock is priced at 40 and the periodic risk-free rate of interest is 8 percent. What is the value of a two-period European call option with a strike price of 37 on a share of stock using...

"For example, assume a porfolio value of $10 million. The manager hedges with Tbond futures (each contract delivers $100,000) with a current price of 98. She thinks the duration of the portfolio at hedge maturity will be 6.0 and the duration of futures contract with be 5.0. How many futures...

Thanks David. Your example -- I understand. If you fast forward to the delivery date -- Sept 2009 -- the maturity date -- will the spot price and the futures prices converge...The "futures" is now -- so even calling it a futures price is awkward. Correct? How should one think about this -- what...

David: Couple of nagging ones (for me): 1. Does basis risk apply only in a cross-hedge? When the hedging asset (e.g. crude oil) is different from the underlying asset (e.g. jet fuel?) 2. I am a little confused about some of the prices used in the illustration of the basis risk. May I...

Thanks David...I will need to study the EditGrid computations to finally "get it." I've agonized on this a lot. BTW, do old FRM questions ask about valuing swaps? In which case, it seems like the "bond approach" would be faster (during the test) than the FRA approach. Because we can avoid...

David, Yes it was an old question and they (incorrectly in my view as well) compute the population covariance... --sridhar

"You observe the following pairs of annual returns on two stocks: [(0.03, 0.01), (0.06, 0.06), (0.02, 0.05), (0.13, 0.08)]. Assuming that each pair of observations is equally likely, the covariance of the returns on the two stocks is closest to: ....." When you see a question like this...

David: I understand the mechanics of calculating the value of a interest-rate swap, when viewed as an exchange of fixed-rate and floating-rate payments. I also understand the cash-flows coming out of the fixed-rate payer. Using the Example 7.2 in Hull's book: every 6 months, discount the...

http://www.bionicturtle.com/premium/editgrid/2008_frm_hull_derivatives_minimum_variance_hedge/ In re the above (I am looking at the XLS version...) You are trying to illustrate the efficacy of the hedge by wondering what happens if the jet price increases by $1.00. You compute that the...

"What is the covariance and correlation between these two sets: {4,7,9,11} and {2,3,10,5}? The (population) standard deviation of set A is 2.6 and the (population) standard deviation of B is 3.1." I noticed that you solve this from first principles. The first time, I tried this -- I simply...

PS to my own post.... I said: Var(x) = 130b - 160b^2 we get the value of b from the fact that sigma(f(x)) = 1, i.e. 15b = 1 and b = 1/15 plugging this into the above, I get VaR(x) = 7.96 and SD(x) = 2.82 I am still persuadable to your answer, if only you tell me why:-)