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Thanks again @David Harper CFA FRM It makes sense, but I ran into a diagram you created that shows a CDS payment being made. Is this a different structure?

Thanks @David Harper CFA FRM , this is extremely helpful!!! I just noticed that the diagram is missing a key component: the payment on the CDS. So the 100bps the bank is technically receiving is actually less (or even negative) since they are buying credit protection on the CDS

Thanks @David Harper CFA FRM this is very helpful Now, if the bank wanted to transfer the entire $105MM in credit risk, the entire L + 250 would pass through the investors? If so, how is there any yield enhancement for the investors if they are purchasing the entire amount?

Hi, I tried to search Model 3 but the search didn't come up with anything meaningful. Models 3 and 4 both have an alpha factor in them, yet the text doesn't define what alpha is. So what does this alpha factor represent and are we expected to derive it on the exam or will it be provided...

Hi @ashanks I think in your third point, the CLN buyer receives the RR not 1-RR

Hi @David Harper CFA FRM Going back to the reading, it seems like the bank is actually making 100bps off this transaction However, I still don't understand it. The investor pays $15MM for the CLNs, then the trust stores that money in T-notes paying 6.5%. The bank purchases $105MM in...

My intuition tell me that credit rating affects PD and not EE

But EE is based on counterparty risk, I don't think you can separate the 2 entirely. If we enter a swap contract and in year 1 it's in my favor, then I incur the CCR because of +ve MTM hence +ve EE If that reverses in year 2, then you incur the CCR because your EE is now +ve

So another question I have is this - the motivation of the CLN issuer is to offload risk because they fear the reference asset will default, yes? So , in these transactions are they (CLN issuers) actually losing money because they are paying the higher spread in exchange for protection from a...

Greetings all, I updated the graph from above for better clarity and added a green line that shows the hump above the one way CSA -does anyone know the impact if EE > NEE instead? It would be interesting to model but the Jon Gregory spreadsheets don't have a threshold variable In addition...

Hi, If I am interpreting this diagram correctly, the CLN buyer receives the recovery rate if there is a default but I don't understand why? Aren't they the credit protection seller?

Hi @David Harper CFA FRM Thanks for the explanation above, I don't really see why a bank would want to enter such a transaction unless the odds are the bonds will default or they want to maintain a client relatioinship.

Hi, Does anyone know of the CVA will display a similar blip for a low threshold vs 0 threshold if EE>NEE??

Yeah my bad I meant to go down by 5 I don't think the +ve initial MTM matters as much

Hi, I will add one other question: If EE ends up being more than NEE w/ a 2 way CSA, do we get a reverse effect similar to the red line below? Or is it a steeper line but same shape as the one way CSA?

Let's say we have 2 contracts worth 5 If correlation = 1 and contract 1 goes up by 5, contract 2 goes up by 5 If correlation = -1 and contract 1 goes up by 5, contract 2 goes up by 5 So with full correlation you are exchanging like amounts so there's minimal counterparty risk. With...

ES is used as a prime example of a spectral risk measure, but what are some of the others?

I have a few questions related to the following section: "In the case of a two-way CSA the behavior is not completely monotonic with respect to an increasing threshold such that a (two-way) threshold of $1m appears slightly more beneficial than a zero-threshold CSA. It is interesting to explain...

Hi all, I have a few questions myself on this chapter. Specifically the notes state: "Simple HS only allows VaR estimate at discrete confidence levels." What is meant by this statement? In addition, we are shown how to perform a bootstrap HS, what is the advantage to using this method over...

After reading this old WSJ article http://web.stanford.edu/class/msande247s/2008/first week/WSJ 0912 2005 How a Formula Ignited Market That Burned Some Big Investors.pdf I think the author is wrong - hedge funds were purchasing the equity tranche which implies selling credit protection. I...