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Based on how this question is presenting this information, this is what I get: EL = .04*1000000*500 = 20000000 25 losses = 25*1000000 = 25000000 CVaR = 25000000 -20000000 = 5000000 Is there any official guidance from GARP?

Ah yes I see that now. Thanks !

There is an error on securitization example in the Topic 6 review video: It is actually question 9 from that practice test and the answer is A. I am in agreement with GARP

Mezz tranche is convexity can vary because it can take on characteristics of senior debt or equity depending on circumstances, and equity is positive convex. So, traders assumed they were hedged w/ the mezz. It is similar to contango and backwardation effects on hedging from Part 1

Thanks! @Ali Ehsan Abbas tagging for reference

So this was part of a question posted in the WhatsApp group. It says 7% is the SD of the "default indicator"? Are we supposed to assume default indicator = PD? Because I have not encountered that wording before

You solve for rho since portfolio SD is given: EDIT: I am actually getting a correlation of .5126

I took a look at the spreadsheet. If you look at the formula in column F, he is using 201 and subtracting from that. So. instead of using n-1 denominator, you just assume n is +1 larger beforehand. Meaning, there are 200 observations and he is subtracting from 201 which accounts for 1 less...

It is because you are cutting up the tail into n-1 # of slices If I have 100 observations and use 95% cutoff as my VaR, then there are 4 observations in the tail Maybe it is due to the fact that there are 2 different definitions for VaR, based on the author I can't really explain why that is...

Gregory credit chapters giving me a headache

Thanks, that's helpful. So how do we calculate it for the exam? Is it as a described above? We are given this formula with E(1/1+r)>1/E(1+r)=1/1+E(r) but not sure how to apply it...

Hi, Is Jensen's inequality just the difference between the value of a bond discounted with risk neutral probabilities vs. real world (50%)?

@David Harper CFA FRM I kind of understand what you're saying about the NPV value = 0, but how are you expecting to receive higher coupons? Look at the spreadsheet I laid out below: If you are paying 10 to me for the life of the swap and I am paying 5, my EE is higher isn't it?

Let's say we both enter a swap with notional 100 You pay 10% rate I pay 5% rate Who has the higher exposure? I think it is the swap party paying the lower rate, because their EE is higher

Huge thank you for this!!!! It is interesting to see there's no pricing change for extended periods, due to the constant hazard rate assumption I suppose. It's also cool to play around with the inputs and see how much the spread goes up and down

The formula posted above is the same as in the problem solution, but what does the 1st term represent? And how do you extend this past 1 year?

Hi, I have seen the Merton value of equity formula given as: However in the text, it is provided as follows: What is the significance of the Pt(T) variable? It is defined as the price of a $1 0 coupon bond that matures at time T. Does it act as some kind of discount factor?

There is a better explaanation of what occurred in the Ops Risk Malz Ch 12 reading, much better than Meissner

Thanks again @David Harper CFA FRM ! Another important insight gained where the text simply mentions CDS with no further detail - it is only for the $15 million equity piece as opposed to the entire portfolio of the bonds