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Hi Gyilmaz, I went back and double checked the notes and can see that, as you said, CVaR= Unexpected Loss= Loss at (alpha or significance level) - Expected Loss. I guess it was a typo in the practice question answers. Given that CVaR = UL - EL, I'm assuming it's incorrect / imprecise to state...

Sorry to be that guy who keeps posting questions, this really is by far the best resource out there. The answer to practice question 305.3 for Malz says the following statement is true: CVaR (alpha) = Unexpected loss (alpha), where alpha is a significance or confidence level Q: if CVaR is...

HI @ShaktiRathore , can you walk me through your steps? Thanks

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Hi, The equation Malz gives to set the PV of expected value of both legs of a CDS equal to eachother is below. Can someone offer an explain as to why we divide by 4*10^4 ? Prior to this, when Malz introduces just the portion to calculate the PV of the expected value of the fixed leg (without...

Thanks for clearing that up.

Hi, I don't understand the way Malz states the future value of the debt; it seems counter-intuitive and contrary to what I read in de Sevigny and Stulz. We know the Value of the debt can be modeled as a simultaneous position in a risk-less bond with face value of the risky debt discounted using...

@sneakyplacebo , I'm also a bit confused about CDS compression. The below description from ISDA along with ShatkiRathore's examples have helped me out (emphasis is mine) Not sure how this has an effect on the level of counterparty risk though.

Hi, what makes a model (ie: credit risk +) portfolio based ? What are the alternatives to portfolio based ?

Hi, Can you expand a bit further on these relationships laid out in the notes on Stulz ? Thanks Increase in the positive correlation between firm value and interest rate shocks (what shocks ?) causes a decrease in debt value. Increase in rate volatility and decimal level of interest rates...

Thanks David, I understand it now. Much appreciated.

Thanks for the detailed answer David. So when investors are risk neutral, risk neutral probabilities = real world probabilities and they only differ if the investor is risk averse? I'm having difficulty understanding why, in general, real world probabilities are 50/50 but in a risk neutral...

Thanks for the detailed reply; makes sense now. One more quick question, what does Tuckman mean by a "factor structure"; from the context I'm assuming he's talking about the term structure of rates. Am I correct ?

Hi, I'm having trouble understanding the arguments against time dependent volatility models to value and hedge fixed income instruments. Tuckman says: "The downward-sloping factor structure and term structure of volatility in mean reverting models capture the behavior of interest rate...

I'm having trouble with the Ho-Lee model for short rates and differentiating between how to find the values for the free parameter λ versus using the model to predict future rates. The Ho-Lee model for each step in a binomial tree: λtdt+σ sqrt(dt) I've read that to set the free parameter at...

Thanks.

Hi, In Tuckman chapter 8 (risk premium subsection) he calculates the price of a two year zero using the up and down probabilities of 50% and says this is how the zero would be priced by risk neutral investors. Are these not the real world probabilities? Thanks

@ami44 thanks very much.

Hi @ami44, I must have missed that. Needed more PCs to explain the the variance of the very short term makes sense. Thanks so much.