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Got it. Very helpful explanation. Thank you. So the duration of floating leg should be 0 right before the reset/interest payment, right?

Got it. Thanks a lot!

http://forum.bionicturtle.com/threads/question-9-value-at-risk-var-of-interest-rate-swap.1113/ Hi David, I am looking at the question in the above link. In this question, I understand that right after the reset the value of the floating leg is the notional. Then should not its duration be 0...

I see. Thanks. I agree. It should be a short call at 60 instead of a long put.But why does the senior tranche holder have two options, short call and long call, instead of one short call only? Where is the long call from?

Hi David, I am confused. For the senior tranche holders, I think they believe the senior tranche would not be affected by loss, that is, the loss would be below 60 and the portfolio value would be above 940?

Thank you, David. I think about this again. 940 is not a correct strike either if it's long a put. I understand the answer better now. You are always helpful!

I see! Thank you!

Thanks a lot! I am afraid the FRM in November will have quite a few mean questions since I heard the exam in May is not so hard....

David, thanks a lot! I see your point. I don't quite understand "the short option payoff is still skewed as the upside is capped at the preimum". I think the payoff of selling short option has a large downside and capped upside at the premium while long short option position has a large upside...

Hi David, could you please help me with this problem? Synthetic collateralized debt obligation (CDO) tranches are structured securities whose performance depends on the number of defaults in a portfolio of credit default swaps (CDS) .A typical synthetic CDO with an equity, mezzanine, senior...

Hi David, Could you help with my question below? Question: Which of the following statements about the ordinary least squares regression model (or simple regression model) with one independent variable are correct? i. In the ordinary least squares (OLS) model, the random error term is assumed...

Hi David, I found an explanation of this question here http://www.bionicturtle.com/wiki/FRM2009.L1.14/. My questions are: 1. In the hedge ratio formula, 0n the top, the duration of portfolio is its duration at maturity. Is the duration in the denominator also the duration of futures at...

Thanks for the detailed answer. I see why we rule out b and c. I don't quite understand a and c. The graph of short option payoff is two straight lines. (X-S when S<X and 0 when X<S) Where is the left tail? The call option graph is also two straight lines. Why do we rule out a?

Hi David, Could you answer my following question? This is the handbook question 4.9. A risk manager has been requested to provide some indication of the accuracy of a Monte Carlo simulation. Using 1000 replications of a normally distributed variable S, the relative error in the one-day 99% VAR...

Thanks for detailed answer. The quote is from your FRM notes of financial markets and products, under the AIM of describe what is meant by “rolling the hedge forward” and discuss some of the risks that arise from such a strategy.

Hi David, I have a question about rollover basis risk. "Rolling the hedge is exposed to: basis risk from the original hedge and basis risk from each new hedge". The original hedge is closed out when we roll into a new one. Why do we still have the basis risk from the original hedge? Thanks.

Ganish, I am a bit confused about the relative price and absolute price. For this problem, I agree with your comments below. Also, OAS does not account for option risk. Thus, the compensation for bearing credit and liquidity risk in X is 100 bp, however, the compensation for bearing the same...

Thank you for your help, Ganish! I have a question for your first statement. The buyer of callable bonds shorts the call option. Should it be the higher the option cost, the cheaper the bond?

Oh, I forgot the maximum gain is the strike in put. Thanks! In regards to the lookback put, I think its profit can be unlimited since its strike price can be floating, right?

Thanks. In d, it doesn't specify it's a call. What if it's an up-and-out with rebate barrier put option? Then it can give an unlimited profit, right?