correlation

Hi, re the discussions on CDO tranche spreads with respect to correlation between the assets in the CDO, I am referring to page 125 of Chapter 7 of Market Risk Measurement & Management 2022 edition, it states: "Importantly, the correlation of the bonds in CDOs (which originally were only...

Hi Fellow Risk Managers and Aspiring Risk Managers The most recent event that has highlighted the importance of sound risk management at Banks is Archegos Capital. It was a classic case of Banks not focusing too much on Concentration, Collateral, Correlation and Counterparty Risk The other one...

@David Harper CFA FRM Hey David. I am having difficultly in understanding the formula for calculating the Covariance of Assets with the Portfolio i.e. Cov(i,p). As per your example in the study notes, you have shown the formula for COV(euro, portfolio) which is confusing. What if the...

Hi all, There is a concept that I am not able to grasp properly, in Topic1.Ch5.VidLecture#2 it was stated that: in a well diversified portfolio the Correlation between Portfolio and the Market is +1 which means that the movement of the Market and the Portfolio are synonymous Can somebody...

Session 2, Reading 9 (Part 2): This video reviews portfolio variance and covariance, where covariance is the expected cross-product. We look at correlation, which is given by the covariance divided by the product of standard deviations, and therefore standardizes the covariance into a unitless...

hi, please explain related to Paying fixed in a variance swap on an index and receiving fixed on individual what does the following statement mean: If correlation increases, so will the variance. As a consequence, the present value for the variance swap buyer, the fixed variance swap payer...

Covariance is a measure of linear co-movement between variables. Independence implies zero covariance, but the converse is not necessarily true (because variables can be dependent in a non-linear way). Here is David's XLS: http://trtl.bz/2B9nqdO

Variables are independent if and only if (iff) their JOINT probability is equal to the product of their unconditional (aka, marginal) probabilities; i.e., if and only if Prob(X,Y) = Prob(X)*Prob(Y). Further, if variables are independent then their covariance (and correlation) is equal to zero...

Can someone explain how mean & variance have been calculated in this example?

Hi @David Harper CFA FRM, I had to think about it myself for some minutes: just wanted to share this with the community here. Let's say we have 18 assets. How many correlation pairs would we have? We could go the long road writing: Asset (A,B) Asset (A,C) Asset (A,D) ... ... Asset (B,C) etc...

Hi David, In our notes (Correlation Risk Modeling and Management), we are told that another way of buying correlation is to buy call options on an index and sell call options on individual stocks of the index. I haven't quite understood this concept - i.e why it should result in a positive...

We are big fans here at BT of Gunter Meissner who is a perennial FRM author. Before his latest book was added to the syllabus (Correlation Risk Modeling and Management), his previous book Credit Derivatives: Application, Pricing, and Risk Management was assigned for several years and it's a...

Hello. I wonder if my understanding is correct with regards to the impact of intra-tranche default correlation on value of different CDO tranches. 1. Equity tranche: when correlation increases, the value of the tranche increases because now there is higher chance of the underlying assets...

Hi, I have a doubt about the meaning of the hedge ratio. Hedge ratio = ρ * σ_spot / σ_fut Number of contracts = HedgeRatio * PortfolioValue / ValueFuturesContract Therefore, the lower the correlation, the lower the number of contracts. So, let's say that I have a portfolio of $ 1.000.000 of...

Dear David I have attached a spreadsheet in which I have calculated copula correlations for a Bi Variate Normal distribution and have inserted a chart on the same. I would be extremely happy if you could have a look at the same and tell me if my understanding is correct. I have used the same...