@Varun Momaya If you immediately buy and sell an asset (aka, round trip) your loss the bid-ask spread, by definition. The cost of liquidation, however, assumes that you already own the asset such that your cost is one-half the round trip. Hope that's helpful!
Hi @chankiki23893 Personally I do not use foreign/domestic semantics because I find them confusing; e.g., your title mention of "base/foreign" is problematic to me. Rather, FX questions are always BASEQUOTE (aka, BASE/QUOTE) such that the first current ticker is the base, so it's always N quote...
Hi @SPate5068 The key idea to the solution is that the PV(expected premium payments by the insurance customer) = PV(expected payouts by the company). It's the same equality we find in credit defaults swaps (CDS): PV(expected payments) = PV(expected payouts). In addition to discounted each...
HI @ISiko1513 That's a fair precision TBH. "Market return" might refer to either expected (ex ante) or realized (ex post) and it's my opinion that neither is the default. Hopefully you understand it's an item for improvement ... Thanks for the feedback
Hi @BHeng9611
(1) The formula here is (4.0 - 6.75)*(3.0 - 4.00)*30% = 0.8250 which rounds to 0.83. It's contributing to a summation: 0.83 + -0.41 + -0.45 + 0.79 = 0.75 because covariance is the expected cross product. Instead of summing and dividing by (n), we're just multiplying by the...
HI @AUola2165
@Nicole Seaman do you happen to know the answer to this ...
The PQs (including Mock) are always written against the then-prevailing assigned material. If a PQ was written in 2019 but GARP switched authors/assignments, some terminology will "leak". All EPPs have this problem, but...
Hi @TG2323 The FRM exam does like Bayesian problems, although the one you cite is a notch (or two notches) more difficult than you can expect on the exam. The exam has a time limit is one factor. But that question was inspired by previous author Miller, and it was among a set that was closely...
HI @gsarm1987 Not overthinking it, to me! I agree 100% with what you wrote, and with your spreadsheet. It really is the difference between an ex post versus ex ante tracking error. In my opinion, TE is truly meant to be an ex post measure. The ex ante version is just if you aren't able to (i.e...
Hi @BHeng9611 We clearly could have done a better job in that transition (apologies) but it's a common problem with TRS. Here is why:
Typically, the "buyer" of the TRS is buying the credit risk which is the same as selling credit protection: they are making the period fixed/floating payments...
Hi @AUola2165 As I mentioned, because N(.) is a cumulative standard normal distribution function, both N(d1) and N(d2) are instances of N(Z); i.e., both d1 and d2 are quantiles of a cumulative standard normal. For example, as N(2.33) = 99%, the 2.33 is a Z-value (i.e., a quantile on the standard...
Hi @AUola2165 The d1 is effectively a standardized Z such that N(d1) is the CDF for a standard normal distribution. Like the d2 (which has a more intuitive direct interpretation: d2 is the normalized distance-to-strike price or, in the Merton model, distance-to-default). Both d1 and d2 have in...
Hi @AUola2165 I must have replied (effectively) prior to your edit. To respond to
The question only specifies to key rates:
For the 1.0 year KR: shift from 0 to 1.0 year; then interpolate down to 2.5 because it is the nearest neighbor
For the 2.5 year KR: interpolate up from 1.0 because it is...
Hi @AUola2165 It's on the next page. I think it would be better if the solution showed a single graph with two lines, where the span from 1.0 year to 2.5 years ( = 30 months) showed the overlapping lines. But those lines do look correct to me. A way to "check" the solution is to verify that any...
Hi @AUola2165 You aren't confused, you are observant and I agree with you. How GARP can get the first wrong is beyond me. Briefly:
The zero duration position implies approximately zero value change for a small parallel shift per the definition of duration. The correct answer to 12.6 is...
Learning objectives: Explain the role of linear regression and logistic regression in prediction. Understand how to encode categorical variables.
Questions:
23.6.1. Darlene is a risk analyst who evaluates the creditworthiness of loan applicants at her financial institution. Her department is...
@AUola2165 I moved your query to this thread, see above (and my reply) at https://forum.bionicturtle.com/threads/bond-prices-and-forward-rate.23417/post-83349
Hi @JLim3856 In the exam, you will not be required to "calculate" the p-value (beyond scope of a calculator). At most, you may need to interpret it or refer to an obvious p-value per header in a lookup table snippet (the exam provides a Z lookup which--I think you understand--implicitly has...
Hi @AUola2165
GARP is wrong on both 2.4 and 2.5. ES is a conditional average and has only one answer, ever (regardless of continuous or discrete). It has one answer for the same reason that there is always and only one sample mean for any given sample. In the case of 2.5, the 99% ES is the...
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