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Thanks David. Yes it clarifies in detail (Single Factor Vs multiple buckets, Convexity, basis risk) and also needs dynamic hedging as the factors change.

Thanks Matthew . 1. Hedge Market risk : by shorting T-Bond 2. Hedge Credit Risk : by buying CDS protection. Is there any problem with using futures ? (any basis risk?)

Hi David, All the while I thought it would be fine to hedge Risky bond with T-bond : (eg.., Long Corp Bond and Short T-bond) My Concept : Market Risk (i.e Interest Rate) would be reduced. because with rate increase --> both the bonds will move and hence it is hedged. Q1) : If there is an...

Hi David, I follow Linda Allens autocorrelation in returns (1) Mean Reversion : Negative correlation in returns : end up Overestimating by using square root rule. (2) Auto Correlation in Returns : end up underestimating Var. Can you clarify w.r.t to "Time Varying Volatility". Where i am...

Hi David, I am not able to follow how the CVA/Notional is converted into Credit Spread just by dividing by Duration. is there any Conceptual reason or logical way of thinking through this?

Hi David, I am getting very confused with the impact of the factors on CDS minus Bond basis (especially positive basis and negative basis as described below). I feel like i am missing something extremely basic causing all the factors influence to be illogical in sign.. I would sincerely...

Hi David, In Malz material Example 7.7 - the material reads "We assume a flat swap curve for all maturities : with a continuously compounded spot rate of 4.5%" so the swap rate is assumed to be close to spot rate and hence it is 4.5% in the below equation : how do you easily spot whether this...

Hi David/Nicole, I thought that Only Volatility Frown would result by jumps in the underlying asset price, but the answer to 20.3 states otherwise.. Kindly confirm ?

Hi David, Wow : such a complex topic involving Correlation, (PD, Spread) and Equity Value. After reading all the details in that forum : I am now fine with 1. Equity Tranche : falling in value (Increasing spread, Increasing P.D.) with decreasing correlation. 2. Senior Tranche : Increasing in...

Hi David, I am struggling to understand this concept of loss occurring (i.e Spread change in Equity Tranche and Mezzanine Tranche). 1) Why does Equity Tranche spread increases if the correlation decreases as shown in the graph below. (eg. If correlation is high in the equity tranche - the...

Hi David, I believe the below SD formula should not multiply by sqrt(n). Meissner material page 6.

Also the Marginal Var calculation - I couldn't understand how it is calculated. Thanks for your patience in explaining the basics.

Hi David, I am missing some basic matrix multiplication - I could never get the component Var and the Diversified Var. Would you be kind enough to show the workout please? (i couldn't find the spread sheet either)

Hi David, Ref : Jorion ValueAtRisk - Ch6 : Figure : Model Evalution - Bankers Trust I am not able to follow this example : Kindly Explain the graph if possible (my questions below). 1) The graph is plotted between Daily P&L against 99% VaR. Isn't VaR a single number representing limit. I...

Credit Risk Measurement and Management

Hi David, Thanks for the detailed explanation : Ofcourse the duration is extending because of hte delayed payments.. I didn't correlate that Duration increase (delay in payments) will decrease the cost of the bond. Now i am able to correlate. Thanks. Source : Financial Risk Manager Handbook...

Hi David, I am not able to understand why the Expected Credit loss is not dependent on Default Correlation? Eg., If the default events between A and B are correlated then.. E[A and B] = E[A] * E [ B ] + Correlation[A,B] * SD[A] * SD [ B ] From this formula the Expected Credit Loss for 2...

Hi David, Question regarding the highlighted statement in the attachment: When PSA reduces from 165 PSA to 150PSA on a rate increase situation --> my understanding is that the prepayment cash flow decreases and the bond should be valued more just using the cash flow pricing approach. (i.e. More...

Market Risk : Mortgage based Securities : OAS