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Hi David, On page 159 of the BT notes on Market Risk - could you please elaborate on how do we decide on which asset are we long on and which asset do we short ? I have not quite understood this eg:- how do I know for a currency forward I should short a T-bill or short a 12 month bill in...

David - Many thanks for the explanation. Some bits on Credit are still unclear, I will go through the notes and come back with any questions. Regards, Ashim

Hi David - another question. For the CDS valuation example, I don't see why do we have the accrual part - is it because the seller can invest the premium at the risk free rate? and why is that we have mid year time periods for the accrual, with the first accrual starting at 0.5 before the 1st...

Hi David, On the screen cast on basket of default swaps (Hull) could you please explain why an increase in correlation leads to a lower value for a 1st or a 2nd to default. I would think that if we have two situations- a 1st to default and 99th to default, then if correlation is zero...

Thanks for the reply David. I will learn the formula. Ashim

Hi David, Could you please explain the derivation of the Unexpected Loss formula - I simply don't understand where all the terms are coming from. My guess is that this is based on the technical definition of UL i.e 1 s.d. event, so we are applying the variance formula to the terminal...

Thanks David for the clarifications. I will continue to post queries on Part A -2 as and when they come up. Ashim.

David - many thanks for the reply. Cleared many mental blocks. However, couple of queries still remain. First Post 1) Could you please explain why one should expect convergence between future and spot prices at expiration? is this something to do with mark to market feature of the futures...

Hi David, I have some additional questions on Part1 -Eurodollar futures :- 1) Both the Eurodollar future and the eurodollar deposit effectively derive value from the Libor rate. But isn't there a mismatch as if Libor increases the underlying will increase in value = principal + higher...

Hi David, I have some questions/clarifications required on Part 1 of the above screencast. 1) Reason for deduction of any income from future's price formula- is this because as we are entering into a derivative contract instead of holding the underlying asset we do not actually get the...

David - thanks. That was a great post. It took me some time to get my head around everything - but I think I have understood what you have written. Allen has turned out to be a very a dense and a challenging reading. Any other readings you would recommend is a must within the Quant...

Thanks a lot David. These clear my doubts on EVT. If I have any more I will drop in a post. Thanks Ashim

Hi David - thanks for the reply. On the shape parameter - I had thought that since we are fitting a distribution on the tails - a higher shape parameter would have implied fatter tails in the child not the parent distribution. On the spreadsheet - I think I have not understood what...

Hi David - I have a couple of questions on EVT. - In the Quant notes, page 110, under GEV - there is a sentence underneath the formula -"In this expression, a lower tail index corresponds to a fatter tail". I understand that the tail index, epsilon, is a measure of the "fat-tailness" of the...

Hi David - I have a question on mean reversion and its impact on LR vol. Both in your lecture slides and Allen, there is a table which summarizes the impact of mean reversion on LR vol. The table splits the issue into :- 1) Mean reversion in returns 2) Mean reversion in return volatility...

David - thanks I have now understood this. The diagram in Allen showing how weights are applied to squared returns under high and low lamda, along with re-reading your posts above have cleared the doubt. You were right the confusion was coming from the use of the word observation to mean...

David - Thanks for the reply. I think I have understood what you posted. I need to re-read Allen again just to make myself comfortable with the interpretation of lamda. Thanks Ashim

Hi David - I have question on EWMA. While on page 42 Allen quotes “a lambda parameter closer to unity exhibits a slower decay in information’s relevance with less weight on recent observations” I have now understood this with the example you have given above. However, on page 45...