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with regard to CoCo's: this is a term enshrined in the Basel III regulation since many years and everyone who wants to become a FRM should at least know what a CoCo is, irrespective of whether CoCo's are dealt with in great detail in the AIM. I fully agree that the question around (CoCo's effect...

well, the overwhelming fact in favour of Incremental VaR is that it was a NEW trade (Jorion: 'evaluate the total impact of a proposed trade on portfolio p. The before and after comparison is informative. If VaR is decreased, the new trade is risk reducing and vice versa. See Jorion Figure 7-3...

it was definitely Incremental VaR as the position he wanted to add was quite large about ($25M). And Jorion says 'The change in VaR owing to a new position. It differs from marginal VaR in that the amount added/subtracted can be large, in which case VaR changes in a nonlinear fashion'.

well but I appreciate that the level of difficulty is that high, otherwise everyone would take it and the FRM credentials will very soon lose its shine. It should remain an elite certificate for only those who are willing to dig deep. In short, there is nothing wrong increasing the bar from year...

apparently there have been different figures at different exam sites. I think the VaR was about 2.2 and the they wanted to have the LVaR for 10 days. 2.2 x sqrt {(10+1)*(1+2*10)}/6*10 = LVaR ~ . 4.3

Should be a volatility Frown. See foreign currency options in Hull. I agree with the vol. adjustment vor the LVaR: multiply the VaR with sqrt{(1+t)(1+2t)}/6t}. Took CP Risk as well for the question with the pension fund.

exceptionally hard. Many hazard rate questions, CoCo's (it's effect on capital requirements) have been tested in 2 or 3 questions, strange example with Tracking Error and table with different benchmarks. Many questions about Central Counterparties.

I want to contribute to this topic with the following (perhaps to avoid future headaches): Even if the idea how Malz derives this is still not really clear to me, let me share this with you: David gave us an excellent indicator how this works: variance[A(T)] = variance[B*m + SQRT(1-B^2)*e] =...

Hi David, I got a solution to this (but perhaps it is simply a coincidence): 1. I took Jorion's equation 7.35 and divided the total Portfolio VAR ($ 257,738) for each currency (CAD and EUR) by their respective wealth (or call it money invested in each currency) termed 'W' which is (CAD = $ 2M...

Hi David, Hi All, I am referring to Jorion Chapter 7 (Portfolio Risk), 3rd edition: Perhaps this one is straightforward, but I can't solve for the changed weights (final positions) for the CAD and EUR (85.21% and 14.79% respectively). I got the marginal VaR (CAD = 0.0528) and (EUR = 0.1521)...

Hi David, thanks for your immediate reply and your explanation!

Hi All, Can someone please explain where the initial short rate (5.121%) in equation 9.11 (Tuckman,page 264) is coming from? I can't see any derivation nor I can't get to this myself. Equation 9.10 stipulates how to get the long-run value of the short- rate, but the initial short-rate (5.121%)...

Hi David, I would like to raise this topic once more for two reasons. 1.) I just got through Fabozzi's book 'Collateralised Debt Obligations' and perhaps unsurprisingly (to your above comment about how many authors got it wrong) he says (page 221): 'the protection seller under a CDS is LONG...

I would like to quote J. James book 'FX Option Performance' here - she mentions the following: 'We have already suggested that very sharp downward moves are more likely than very sharp upward moves in the index. The shape of the volatility skew for equity index options simply confirms that...

I got an answer to this myself in Jorion's handbook where he says: For equity index options, the effect is more asymmetrical, with very high ISDs for low strike prices. Because of the negative slope, this is called a volatility skew. A skewed smile is sometimes called a smirk. In other words...

Hi All, perhaps quite a simple question. I just read through the following CFA article http://www.cfapubs.org/doi/full/10.2469/dig.v41.n1.2 and now I am wondering whether Vol. Skew and Vol. Smirk can be used 1:1 interchangeably? Is there any difference between these two terms? Vol Skew = Vol...

Dear David, I came across the following statement in Dowd's book: 'the LaR can be much greater than the VaR or much less than it, depending on the circumstances' What does Dowd mean by 'depending on the circumstances' and are there any examples for narrowing down the term 'circumstances'...

Excellent explanation, David! In particular, the details about Chebyshev's inequality. Again and again surprised how much subtleties are in and around one single concept like LVaR. Need some time to digest now.

I would like to add the following: apparently 'k' stands for kurtosis here and 3 is chosen to simulate a normal distribution. But how can this be compared to the normal deviate in Bangia's equation? It would make sense if we say the spread is around 3 standard deviations away from it's mean...

Hi David, I stumbled over the following two (confusingly) different calculations for the cost of liquidity (CoL): comparing the BIS equation (original paper: BCBS_wp19) on page 14 (http://www.bis.org/publ/bcbs_wp19.pdf) for exogenous liquidity and the formula used by K. Dowd (and in your...