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Hello, What exactly is meant by "illiquidity premia are generally high and significant"? Does this mean that illiquid investments are worth more? Worth less? Seem to provide higher returns, lower returns? If so, over (or under) what? Logically, it would seem like more liquidity would make...

Hello, The literature on this topic is very confusing. It seems easy enough, but many times the text seems to say two contractory things or has a graph that does exactly the opposite that the text says should be happening. For instance, Veronesi says that the price of the PAC tranche does not...

Hello, I read something in Hull that I just cannot wrap my head around and I was hoping you may have an easy way of clearing this up. When talking about the greek letters, it says: "The volatility smile complicates the calculation of the Greek letters. Assume that the relationship between...

It certainly does. Thanks! Shannon

Hello, In the text, it says that using KR01s to hedge will approximately immunize the portfolio against any combination of key rate movements. Then it mentions a couple of particular instances where it would work. I understand that it will only work for small moves and if the intermediate...

Hello, I am sorry for the dumb question, but what exactly is a credit conversion factor? Is this just like a risk weight as shown in p 81 of the operational risk notes? Thanks! Shannon

Certainly does. Thanks again! Shannon

Very helpful, as always. The unpredictability makes me a little afraid to take this thing but I think some fear is a good motivator. Thanks again, Shannon

Hello, After looking through your list of questions concerning the Ashcroft reading, it is almost as if we should be reading this as a case study. What I mean by this is that many of your questions ask about specific details of the actual securitization that was discussed in the chpater. Are we...

:(PLEASE forgive me for this additional follow-up but I think the critical point that I am missing is exactly why the OAS is going down. Does all of this analysis mean that the price of the security, along with the z spread would be staying constant? If so, your argument makes perfect sense...

Thank you. I think I get the idea of OAS a lot better now, but the idea that it gets smaller as volatility increases is still a mystery. As you said, when volatility increases the option cost would certainly increase, as would the Z spread, and therefore the price of the bond would decrease...

Hello, The assigned reading seemed to make a distinction between these two concepts, but in the notes the Z spread is often used in lieu of the zero vol OAS. Is there a difference between these two concepts? If so, what is it? Are there times when both mean the same thing? Also, the idea...

Hello, I read the chapter and the notes on this topic and and had a couple of questions. The pure math of it makes sense, (just partial derivatives) but what do these terms (p 30 and 32) mean in the real world and how exactly are they used for hedging? I read that the cross gamma term has to...

Thanks again. Shannon

Thank you for the extremely detailed explanation. If I may ask a VERY brief followup question: you mention "absolute CVaR" above and I do not believe I have seen that expression before. Is this kind of like absolute VaR where we need to include the drift (EL in this case, possibly)? If so...

Hello, I am reading the Crouhy chapter now. It makes a lot of sense and reads really well. The only problem I have had so far is with the jargon. At one point (figure 14.12 on p 545) there is a graph showing "the poorer the quality of credit, the larger the Expected Loss ans attributed...

Nice! Thanks, Shannon

Hello, This may be another dumb question, but the Chaudhury reading in the aims says something about pp 37-66 and the paper that is posted here is pp 1-40. Is this the same paper that the aims are referring to? Thanks, Shannon

No way! You are awesome! Some of these authors, on the other hand... Thanks again, Shannon

Thank you so much for clearing that up! I also like (please excuse the sarcasm) how this author classifies lognormal as a light tailed dist when in part 1 it was usually referred to as a heavy tailed dist. As you mention, it is the excess kurtosis that gave it that distinction, but this...