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  1. gsarm1987

    Science of Term Structure- Arbitrage pricing multiple periods

    @Shau_2207 please allow me to answer: P(1,1) = from next two branches (Up & down) Expected value is being discounted by the rate prevalent at the node This is better understood if we use a binomial tree diagram. See page 22, Reading 5 in BT notes. For exam you may be given info such as: The...
  2. gsarm1987

    Credit Valuation Adjustment vs Expected Loss

    @enjofaes Book says ENE = expected negative exposure, notes say NEE (Negative expected exposure) , interestingly Wiley also uses NEE. See page 252 of the book you will see it says "sometimes known as negative expected exposure (NEE) NEE (Negative Expected Exposure) & EE (Expected exposure)...
  3. gsarm1987

    F- Statistic Formula Variations

    @yLam4028 if one independent variable, t^2 = F, but when more non zero independent variables then this won't hold. Formula for F-test = Regressed sum of squares / Sum of squared Errors
  4. gsarm1987

    Credit Valuation Adjustment vs Expected Loss

    @enjofaes when doing bilateral valuation of counterparty credit risk. Insertion of DVA will increase the value of the risky position. Also, DVA has funding benefit. by defining defining lets see how we find the relationship: EE and NEE are used to calculate CVA and DVA. CVA is a prediction of...
  5. gsarm1987

    Science of term structure CMT swap

    @enjofaes The example on page 27 in the notes, shows real-world probabilities on the tree (50/50) but if its risk neutral probability, then you may need to calculate the p and q (page 28). Just sharing for info, RN probability = (1 + rf - down)/(up - down). up for higher rate, down for lower...
  6. gsarm1987

    Basis Change

    @YCHEN7458 spot on!
  7. gsarm1987

    Basis Change

    @YCHEN7458 full hedge with futures cut out upside gains and any downside loss. They just lock you to one place. If you are long or short only the future and no asset to hedge then comes the topic of gain/loss on rollover or assigning of the future. Say you buy a future 100$ if spot falls to 90...
  8. gsarm1987

    Optimal hedge rations and tailing the hedge

    @json5137 beta is the regression coefficient of performance of an asset against the border market performance. one way to write it is : Beta = Corr*StdevAssetreturns/StdevMarketreturns. beta is related as sensitivity to market factor. In anycase, the quants reading will help you understand it...
  9. gsarm1987

    Basis Change

    @YCHEN7458 basis risk implies under/over hedging. underhedging exposes us to the uncovered risk and overhedging is inefficient. in context of a short hedge (aka shorting the future), if futures price increases, he is in a loss with respect to that hedge. remember the future has not been assigned...
  10. gsarm1987

    Optimal hedge rations and tailing the hedge

    @JSING5137 you have a stock $100, its beta with a broad market (eg. S&P500) is 0.7, if S&P is down 2% your stock should be down 1.4%. The futures available say SP500 future (futures are standardized by size and may not be a perfect fit) may have beta 1 with that broad market. When it comes to...
  11. gsarm1987

    Comparing Rates Of Different Maturities

    @JMars7424 looks correct. annualized, continuously compounded yields are calculated correctly. About steepness, we take the spread between longer and shorter term. Correct
  12. gsarm1987

    Study Notes and Vital Source

    Prep material where ever it may be, is always a supplement to the main meal (GARP). i think BT appears bulkier because of the font size and page layout. If you arrange GARP books in same format, you will realise what i mean. I'd say focus more on practice questions given in vital source and pay...
  13. gsarm1987

    P2 Instructional Video: Bodie, Chapter 24

    @Shau_2207 This expression is a result of simplification. Please see David's comment above (april 17 and 18, 2014). In short, equity is a call option on asset. starting point: S(V,F,T,t) = VN(d1) - Pt(T)FN(d2). on page 238/340 of your ebook (BT notes), you will see it is using an analogy that...
  14. gsarm1987

    Probability - Conditional Independence

    @RChow4139 see the diagram at bottom A = 15+1+3+1 =20, B = 15+1+3+1 = 20. Re: 50%. P(A|C) = P(A&C)/P(C) = (3%+1%)/(3%+1%+1%+3%)=50%. P(B|C) = P(B&C)/P(C) = (1%+3%)/(3%+1%+1%+3%) =50%. Hint: pay attention to the rectangles
  15. gsarm1987

    P2 Instructional Video: Bodie, Chapter 24

    @Shau_2207 which example?
  16. gsarm1987

    Delta of a forward chart

    @mbbx5va2 Unlike options, the Delta of forwards stays constant. forwards and futures have a linear payoff, unlike options. OTM is when you are losing and ITM is when you are gaining as a counterparty. The payoff would be an upward-sloping line if you are long, the left side would be negative...
  17. gsarm1987

    Contango/backwardation/expected future spot price/roll yield

    @GEBEN9829 welcome to the Forum. For info, upward slope implies negative roll, i.e buying longer term futures at higher price and selling shorter term futures at lower price. Under backwardation, it would be a downward slope, that implies a positive roll. Notice, the horizontal axis is time...
  18. gsarm1987

    RAROC Tax rate

    @mbbx5va2 , tax is an expense so that is why needs to be subtracted from the numerator. Note, the tax to be used is the effective tax rate. this is the one that's applied to profit before tax. when you multiply tax rate with the values in numerator, you are finding the effective tax. (Revenue...
  19. gsarm1987

    YouTube T3-06: Minimum variance hedge

    we cannot interchangeably use these formulas, because: When completely hedged, any change in market would bring about zero change in the Asset position. This is the case with the minimum variance porfolio. However, the question is not related to that Efficient frontier thing. Instead its about...
  20. gsarm1987

    YouTube T3-06: Minimum variance hedge

    No worries, your first expression looks like beta between a and b, the second expression appears to be variance of B over variance of entire portfolio. the negative sign before 2, implies opposite positions or negatively correlated positions. Looks like a hedging scenario. It resonates with...
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