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Reading a bit further I found the extra example @David Harper CFA FRM CIPM worked up which for a surplus of $20 and SaR of $18 says "worst expected, surplus drops $18.1 ..worst expected, +$1.9 funded." This seems to tell us that with 1-alpha % probability we can expect the surplus to be...

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...

I was positive I saw this, but will double check and post back. Thanks!

Hi Shirley, That's a tough question to answer. It depends a lot on you and what you are trying to achieve. The FRM charter (which this site is dedicated towards) is a rather specific corse of study in risk; that said risk management is not an island and the course covers topics outside of risk...

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 Vijay, whereas I can't speak to what current material BT has, if you have a specific question about OIS discounting, I can try and answer it for you. I can't speak to it showing up on past exams, but the topic is an important one (in my opinion) and good to know.

@ShaktiRathore , great answer. Helped me a lot. Thanks.

I have the same questions about this reading. It seems to have come out of nowhere.

Coming back to this, I can see now that ∑EADi∗LGDi∗(WCDRi−PDi) is indeed the capital which = 8% of the RWA. A case of not being able to see the forest for the trees I'm afraid.

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...

Appreciate the very detailed answer! I'll look it over and digest it and post back if I have further questions.

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...

Basel is concerned with regulatory capital. RAROC, and this part of the reading, is concerned with economic capital. Hence the different measures.

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...

In this scenario, we are underestimating the liquidity risk in the market. By marking to model we are making liquidity assumptions that may not hold. As a result, if the model assumes a liquid market, it may spit out a better price than we can get in a market where liquidity is scarce. Here is...

Hi @Wanderer, they were attempting to create a straddle like position, similar to how you would with options. This strategy is used when you want to benefit from moves in the underlying, but are not sure what direction they will go. Here is a good definition of straddle...

@QuantMan2318 and @Matthew Graves , thanks for your help.

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 -...

Thanks David.

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...