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Hi David, In your topic review for credit risk, you have a practice question from the FRM Handbook where a Company buys a total return swap, the mtm value of the underlying drops, but they receive no compensation for the decrease in market value, only the standard LIBOR + spread payment. Is this...

(I'm not 1,000% on this, so take it with a grain of salt. To my credit, I've read the relevant pages a couple hundred times over the year) I was confused by usage of the single factor model presented in Malz (which by the way is called the Single Factor Vasicek Model - why some of the authors...

Hi, I thought the conditional probability of default (the probability of default in year T given survival up to that point) was hazard*e^(- hazard * time). Putting that to the test in GARPs practice question below yields a close but incorrect value. Question: Is the problem asking for...

Hi , In the practice questions for Tuckman chapter 9, the random normal in the short rate simulation models is scaled by sqrt(dt). In Tuckman's equation 9.2 (source page 252), the volatility is annual with a monthly time step, but he doesn't scale dw at all. Should we scale dw when the time step...

Hi, I think there is an error in the Meissner text and can't find an errata for this text to verify. On page 19 the foot note reads "10. Shorting the equity tranche means being short credit protection or selling credit protection, which means receiving the (high) equity tranche contract spread"...

Hi, I'm having trouble reconciling the effect of an increase in default correlation between the Meissner and Malz readings. To me they sound like they are saying the opposite of each other, so I must be missing something. Meissner figure 1.7 shows for the equity tranche as default correlation...

Hi, The study notes indicate a long option is broken down (mapped to) a long position in the underlying asset of asset price * delta and a short position in the underlying financed by the amount of long position - option cost. I'm a bit confused here, as I don't see how being both synthetically...

I can't find a suitable place for this, so I'll stick it here. I want to express what a great tool set you guys put together between the practice questions (which often give me a stronger understanding of the topic), spread sheets, videos (especially your free Youtube ones), notes and forum...

Hi, I hate to ask such an opened ended unspecific question, but I'm rather lost by this topic (Explain the relationship between risk and alpha in hedge funds). Reading the source and the Fung, Hsieh paper didn't help clarify. #1 I thought the relationship between risk and alpha was pretty cut...

Hi @David Harper CFA FRM CIPM , The Senior Supervisors Group paper describes a risk appetite framework that lays out the institutions approach to risk management in a very detailed way. Litterman describes a risk plan that sounds similar to the risk appetite framework (although potentially more...

I'm confused at the interpretation of Surplus at Risk. Does it tell us the worst expected deficit over the holding period for a given confidence level? That understanding seems to fit with Jorion's statement "Taking the deviation between the expected surplus and VAR, we find that there is a 1...

Hi @David Harper CFA FRM CIPM , The loss distribution for operational risk is not normal, it has a very heavy right tail for high severity low probability losses. In the topic review for operational risk, we see that when calculating a VaR for operational risk, we use a normal deviate for the...

Hi @David Harper CFA FRM CIPM , Little confused with terminology in the Hull reading on RWA. First Hull says The capital required is derived as the excess of 99.9% worst-case loss over the expected loss i.e ∑EADi∗LGDi∗(WCDRi−PDi) Then he gives us a means to calculate RWA for bank, sovereign...

When calculating economic capital, how can we underestimate risk by ignoring the diversification benefits? I can see how we can overestimate by ignoring the correlation between the risk types (credit, market, operational), but I don't see how we can underestimate. From the notes: Thanks in...

Hi @David Harper CFA FRM CIPM , After reading the notes for Tuckman Chapter 12, I'd like to recommend a couple of edits, that I believe aid in the understanding of the content. (Apologies if you've already made these updates, my copy is from the Spring when my membership was last active). AIM...

Malz lists causes of transaction liquidity risk, but I don't see how the factors he listed can affect the ability of buying or selling to move the price. He lists: Cost of trade processing Inventory management by dealers Adverse selection Differences of opinion Picking just one of these -...

Hi @David Harper CFA FRM CIPM ,. I'm a bit confused as to the difference between Operational Risk Categories (ORCs) and the standard seven operational risk event types. The Basel paper “Operational Risk—Supervisory Guidelines for the Advanced Measurement Approaches says banks can come up with...

If you want to drill down into more detail on a topic, a lot of the source texts are available free on Google Books. Entire books are not available as a whole, but if you are able to find the text, using the "search inside this book", you will likely find the piece you are looking for. This is...

Hi, I'm having trouble grasping this concept; I don't see the relevance of Gregory's explanation either. When expected exposure and probability of default are positively correlated (wrong way risk), the exposure conditional on default is higher than if the two were independent. This part makes...

Hi @David Harper CFA FRM CIPM , If CVA represents the risk to both parties, how come it is calculated (in Gregory 12.2) using the exposure of the firm to its counterparty (B) and counterparty B's PD ? Why don't we somehow incorporate both PDs ? I'm having a lot of trouble with the Gregory...