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It is also unfortunate that Meissner uses the following language: "...the correlation of the bonds in CDOs that referenced investment grade bonds decreased..." I think he should have stated this more clearly as follows (assuming I am interpreting it correctly, which is open to question): The...

This is a bit confusing to me too. A CDO manager buys, for example, bond A to put in the CDO's collateral pool. The CDO is taking the credit risk in this asset. The CDO could also sell protection on the asset to achieve the same risk profile but in the former, the CDO would receive interest...

That is exactly right @Jayanthi! If you can make to the end of the Messages in Academic Literature reading.....which is a tremendous challenge, the last section is absolutely fascinating! It addresses the idea of Active Portfolio management actually magnifying systemic risk, i.e., the notion...

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Looks like we're asking the right questions. Here is an excerpt from the Messages in Academic Literature.... reading.

This is naive of me, I know, but it is interesting to note that attention given to diversification. It is a pillar of modern portfolio theory, yet a primary area of focus in risk management is the degree to which correlations approach 1 in extremely stressful times.... Isn't it interesting to...

This is not really a calculator type problem - you need to know how to integrate the function which is something that you need to be able to using calculus. (Although you could probably pass this exam without any calculus, in other words, I wouldn't spend time reviewing calculus instead of...

No, I haven't looked at it Jayanthi....or at least I don't remember looking at it. Thanks for sharing.

Although, after looking at Jorion's Mapping chapter again, and also at BT question P2.T5.62.1, it looks like "credit ratings" can be used as risk factors. This is a bit nebulous for me since credit ratings should fall under the "credit risk" umbrella no? Sure, credit rating changes have a...

These readings are PAINFUL! I guess they are trying to weed out the quasi-committed.....

I am unclear on what you are asking exactly. My impression is that there is some confusion between what is meant by a "yield" or "yield-to-maturity" and return, or realized return, or price.

It also occurred to me that these "factors" are "market risk" factors. This should be obvious, I suppose, since it is in the Market Risk arena, but when I was thinking about, i was considering other risk factors, like Credit Risk, etc. For example, how could a Ba rated bond and a AAA rated...

Here is the passage:

We have some smart people on this forum! @QuantMan2318 @ami44 - I am looking at you two! :)

Going through some questions now @Kavita.bhangdia - if you look at the question set for Dowd, question 74.2's solution mentions that SKEW CAN BE VISUALIZED AND MANIFESTS AS AN ARCHED PATTERN.

To answer your question, the top expression is the forward price at time t=T and the bottom expression is the forward price at time t=0.

It is also important to be very clear on what you are contemplating. I provided "pricing" formulas for the prices of forwards at forward inception. The "value" of a forward can change over time as the stock price and forward price change.

Consider a forward on a nondividend stock entered into at time 0. This forward provides for transferring of the stock at time T. Let St by the price of the stock at time t. There are two ways you could own the stock at time T: 1) Buy stock at time t=0 and hold it to time T. 2) Buy forward...

Hi @bpdulog I find it easiest to think of PREPAID forwards. Just memorize the handful of Prepaid Forward rules and the rest is easy. The prepaid forward is the time=0 value of a time=t forward. There a few scenarios: 1) Stock with no dividends. Prepaid Forward = S0 Forward = S0e^rt...

Sure - do you have the GARP books? This information is in chapter one of topic 5, market risk.